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CIVIL LAW O BLIG ATIONS A juridical necessity to give, to do, or not to do (Art. 1156). A legal relation established between one party and another whereby the latter is bound to the fulfillment of a prestation which the former may demand of him (8 Manresa 13). Juridical necessity In case of noncompliance, there will be legal sanctions. (Pineda, Ernesto L., Obligations & Contracts, 2000 ed., p.1]). Prestation Not the thing or object, but the particular conduct of the debtor which may consist in giving, doing, or not doing something. Elements of Obligation: 1.Active Subject -- one who can demand the fulfillment of the prestation; he who in his favor, the obligation is constituted or created. He is called the obligee/creditor. Note: The active subject may be TEMPORARILY indefinite, as in the case of a negotiable instrument payable to bearer (Tolentino, Arturo M., Commentaries and Jurisprudence on the Civil Code of the Philippines, 1991 ed., Vol. 4, p. 57). 2.Passive Subject -- one bound to perform the prestation. He is called the obligor/debtor. Note: Subjects pertain to both natural and juridical persons. They need not be determined in the act constituting the obligation, but they MUST be determinable in some manner. When either subject cannot be determined the obligatory tie can have no effect.

EXECUTIVE COMMITTEE IAN MICHEL GEONANGA overall chairperson, JOSE ANGELO DAVID chairperson for academics, RUTH ABIGAIL ACERO chairperson for hotel operations, ALBERTO RECALDE, JR. vice-chairperson for operations, MARIA CARMELA HAUTEA vice-chairperson for secretariat, MARK EMMANUEL ABILO vice-chairperson for finance, RYAN LIGGAYU vice-chairperson for electronic data processing, JOMARC PHILIP DIMAPILIS vicechairperson for logistics

OBLIGATIONS & CONTRACTS 3.Juridical Tie or Vinculum Juris -- the efficient cause which creates the relation between the obligor/debtor and obligee/creditor and is established by: a. Law b. Bilateral Acts (Contracts giving rise to the obligations stipulated therein) c. Unilateral Acts (Crimes & Quasi-Delicts) 4. Prestation/ Object – see above definition Kinds: a. To give -- obligation to deliver a movable or an immovable thing in order to create a real right, or for the use of the recipient or for its simple possession (e.g. sale, deposit, pledge, donation) b. To do -- covers all kinds of works or services whether physical or mental. It may involve some work on the part of the debtor such as in contracts of employment or professional services, but in other cases, it may be merely the necessity of concluding a juridical operation, such as, when a person promises to give a bond. c. Not to do -- consists in abstaining from doing some act. This obligation includes the obligation “not to give.” Requisites of Prestation: a. Physically and Juridically possible; b. Determinate or at least determinable according to pre-established elements or criteria; c. Must be within the commerce of man; d. Must be licit; and e. Possible equivalent in money. Note: Pecuniary interest need not be for the benefit of one of the parties, it maybe for the benefit of a 3rd person. It is a generally established principle that the prestation should be susceptible of pecuniary appreciation. However, it need not be of an economic character to have pecuniary value, because all interests, even moral ones in view of the protection given to them by law,

SUBJECT COMMITTEE JHOY PALLONES subject chair, MICAELA KRISTINA GALVEZ assistant subject chair, PIA ISABEL CO edp, FRANCIA ROMLINA RODRIGUEZ persons and family relations, JENNETH CAE CAINDAY property, IRENE ALCOBILLA wills and succession, JOSE AMELITO BELARMINO II and ROWNEYLIN SIA obligations and contracts, SAMANTHA GRACE MANALO sales and lease, LAUREN GAIL DIVINO partnership, agency and trusts, MABEL BUTED credit transactions, JULIUS CEASAR BALBUENA torts and damages, KATHLEEN VALERIO land titles and deeds, ILLAC BOHOL conflict of laws

MEMBERS Phoebe Alhambra, Diana Bartolome, Jesus Paolo Borlagdan, Darniel Bustamante, Jamela Jane Caringal, Ma. Criselda Correa, Reynaldo Dalisay, Kristine Lara Defensor, Carel Brendth Dela Cruz, Regine Estillore, Anne Clarisse Guzman, Aziel Guzman, Martin Michael Hatol, Maria Emma Gille Mercado, Richmond Montevirgen, Astrid Ong, Ruth Ann Ong, Rodel James Pulma, Dan Bernard Sabilala, Jeth Lester Tan, Maria Anne Cyra Uy

OBLIGATIONS & CONTRACTS have some pecuniary value (Tolentino, Arturo M., Commentaries and Jurisprudence on the Civil Code of the Philippines, 1991 ed., Vol. 4, p. 57). Note: FORM is sometimes added as a sixth requisite but as a general rule however, it cannot be considered as essential. An obligation arising from law can be said to have no form at all. Primary Classifications under the New Civil Code: 1. Pure & Conditional (Arts. 1179-1192). a. Pure -- demandable at once b. Conditional -- fulfillment or extinguishment depends upon a future and uncertain event 2. With a Period or Term (Arts. 1193-1198). Its fulfillment or extinguishment depends upon a future and certain event 3. Alternative & Facultative (Arts. 1199-1206). a. Alternative -- involves multiple prestations but debtor will only perform one or some but not all, depending whose choice it is b. Facultative -- multiple prestations with a principal obligation and substitute prestations, choice is generally given to the obligor 4. Joint & Solidary (Arts. 1207-1222). a. Joint -- each can be made to pay only his share in the obligation b. Solidary -- one can be made to pay for the whole obligation subject to reimbursement 5. Divisible & Indivisible (Arts. 1223-1225) Performance of the prestation, not to thing, whether it can be fulfilled in parts of not 6. With a penal clause (Arts. 1226-1230). Accessory undertaking to assume greater liability in case of a breach. 7. Individual and collective (Arts. 1207, 1223). a. Individual -- involves only one subject b. Collective -- involves several subjects 8. Accessory and principal (Arts. 1166, 1226). a. Accessory -- existence depends upon a principal obligation (e.g. pledge, mortgage) b. Principal -- exist without depending upon another obligation Secondary Classifications under the New Civil Code: 1. Legal (Art. 1158) -- arises from Law 2. Conventional (Art. 1159) -- arises from Contracts

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CIVIL LAW 3. Penal (Art. 1161) -- arises from commission of crime 4. Real and Personal (Art. 1163-1168). 5. Determinate and generic (Arts.1163-1166). 6. Positive and negative (Arts. 1167-1168). 7. Unilateral and bilateral (Arts. 1169-1191). a. Unilateral -- only one party is bound to perform an obligation (e.g. simple donation, to give support) b. Bilateral -- also known as synallagmatic contracts where two parties are reciprocally bound (e.g. purchase and sale). Kinds of Obligations: It may also be classified as A. Viewpoint of Sanction 1. Civil Obligations -- an obligation, which if not fulfilled when it becomes due and demandable, may be enforced in court through an action. 2. Natural Obligations -- not 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 retention of what has been delivered or rendered by reason thereof. Civil Obligation Article 1156 Based on positive law

Natural Obligation Article 1423 Based on equity and natural law

Enforceable by court Not enforceable by court action or coercive action power/authority 3. Moral Obligations -- those that cannot be enforced by action but which are binding on the party who makes it in conscience and natural law. B. Viewpoint of Performance 1. Positive Obligation -- to give; to do 2. Negative Obligation -- not to do C. Viewpoint of Subject Matter 1. Personal Obligation -- to do or not to do 2. Real Obligation -- to give a. Determinate or specific -- one that is individualized and can be identified or distinguished from others of its kind; its loss extinguishes the obligation b. Indeterminate or Generic -- indicated merely by its class or genus without being designated or distinguished from others of the same kind; its loss does not extinguish the obligation for genus never perishes (genus nunquam perit). c. Limited generic thing -- when the generic objects are confined to a particular class, e.g. an obligation to deliver one of my horses (Tolentino,

CIVIL LAW Arturo M., Commentaries and Jurisprudence on the Civil Code of the Philippines, 1991 e., Vol. 4, p. 91). D. Viewpoint of Person Obliged 1. Unilateral -- only one party is bound 2. Bilateral -- both parties are bound Sources of Obligations (Art 1157): 1. Law 2. Contracts 3. Quasi-contracts 4. Delicts 5. Quasi-delicts Note: The list of sources is EXCLUSIVE (Sagrado Orden vs. Nacoco, G.R. No. L-3756, June 30, 1952). HOWEVER, Tolentino gives another source: unilateral promise. It may be based on (1) contract or (2) law. It may be said that customs sanction its validity 1. LAW (Ex-Lege) Obligations derived from law are NOT PRESUMED. Only those EXPRESSLY DETERMINED in the New Civil Code or in Special Laws are DEMANDABLE, and shall be REGULATED by the PRECEPTS OF THE LAW which establishes them (Art. 1158). In case of conflict between NCC and a special law, the latter prevails unless the contrary has been stipulated. In obligations arising from law, the law creates obligation and the act upon which it is based is nothing more than a mere factor for determining the moment when it becomes demandable. (Pineda, Ernesto L., Obligations & Contracts, 1991 ed., p.10). Note: In the other sources of obligation, there is always some individual act which gives rise to the obligation, the law intervenes only to provide a sanction or to prevent injustice. To say that the law is an independent source of obligation, it does not mean that law and human acts exclude each other completely. Once such human acts exist, the obligations arising therefrom by virtue of the express provisions of the law are entirely independent of the will of the parties. 2. CONTRACTS (Ex-Contractu) Obligations arising from contracts have the FORCE OF LAW between the contracting parties and should be complied with in GOOD FAITH (Art. 1159).

OBLIGATIONS & CONTRACTS Contract is the MEETING OF THE MINDS between TWO PERSONS whereby one binds himself, with respect to the other, to give something or to render some service (Art. 1305). Note: Compliance in good faith is performance in accordance with the stipulation, clauses, terms and conditions of the contract. The terms of the contract determine the respective obligations of the parties thereto. If the terms of a contract are clear and leave no doubt upon the contracting parties’ intention, such terms should be applied in their literal meaning (Sps. Dumlao vs. Marlon Realty Corp., G.R. No. 131491, August 17, 2007) Pre-Contractual Obligations Can damages suffered by a party during the period of negotiations be recovered, if the contract is not finally perfected? Yes. Should the offer be clear and definite and leads the offeree in good faith to incur expenses in the expectation of entering into the contract; and the withdrawal of the offer is without legitimate cause, if offeror: a. Is guilty of fault or negligence, the liability would be based on Quasi-Delict b. Is not guilty of fault or negligence but the withdrawal was based in abuse of right, the liability would be based on Art. 19 of the NCC 3. QUASI-CONTRACTS (Quasi Ex-Contractual) Juridical relations arising from LAWFUL, VOLUNTARY, UNILATERAL ACTS, by virtue of which the parties become bound to each other, based on the principle that no one shall be unjustly enriched or benefited at the expense of another (Art. 2142). Kinds: a. Negotiorum Gestio (Officious Management) Whoever voluntarily takes charge of the agency or management of the business of property of another, WITHOUT ANY POWER from the latter, is OBLIGED to CONTINUE the same until the TERMINATION of the affair and its incidents, or to REQUIRE the person concerned to SUBSTITUTE him, if the owner is in a position to do so (Art. 2144). Note: This juridical relation DOES NOT arise in either of these instances: i. when the property or business is not NEGLECTED or ABANDONED. ii. if in fact the manager has even TACITLY (implied from actions or statements) authorized by the owner.

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OBLIGATIONS & CONTRACTS b.Solutio Indebiti (Payment Not Due) If something is RECEIVED when there is NO RIGHT to DEMAND it, and it was UNDULY delivered through MISTAKE, the OBLIGATION TO RETURN it arises (Art. 2154). c.Other Quasi-Contracts (also known as support given by strangers) Articles 2144, 2154, 2167, 2174, 2150, 2164, 2168, 2169, 2170, 2171, 2172, 2173, 2174, 2175 Note: A quasi-contract is a UNILATERAL contract created by the sole act or acts of the gestor; no express consent given by the other party. The consent needed is provided by LAW through PRESUMPTION (Pineda, Ernesto L., Obligations & Contracts,2000 ed., p.14).

CIVIL LAW Note: The civil liability for crimes is extinguished by the same causes provided by the Civil Code for the extinguishment of other obligations. Such liability continues notwithstanding the fact that the offender has served his sentence or has not been required to serve the same by reason of amnesty, pardon etc. Rule 111 of the Criminal Procedure provides that: “When a criminal action is instituted, the civil action for the recovery of civil liability arising from the offense charged shall be DEEMED INSTITUTED with the criminal action UNLESS the offended party WAIVES THE CIVIL ACTION, RESERVES THE RIGHT TO INSTITUE IT SEPARATELY or INSTITUTES THE CIVIL ACTION PRIOR THE criminal action.”

This consent is referred to as presumptive consent. It gives rise to multiple juridical relations which result in obligations for the delivery of the thing or rendition of service (Perez v. Pomar, 2 Phil. 682).

5. QUASI-DELICT (Quasi Ex-Delicto) Fault or negligence of a person who by his acts or omissions, connected or unconnected with, but independent from, any contractual relation, causes damage to another person. The equivalent of the term “tort” in Anglo-American law.

4. DELICT (Ex-Delictu, Culpa Criminal) Civil obligations arising from CRIMINAL OFFENSE shall be governed by the PENAL LAWS (Art. 1161).

Whoever by act or omission causes damage to another, there being FAULT or NEGLIGENCE, is OBLIGED to pay for the damage done (Art. 2176).

Every person criminally liable for a felony is also civilly liable (Art. 100, Revised Penal Code).

Art. 2176, where it refers to fault or negligence, covers not only acts not punished by law but also acts criminal in character, whether intentional or voluntary or negligent (Elcano vs. Hill, G.R.No. L-24303, May 26, 1977).

Civil liability may be in the form of Restitution, Reparation of damage caused, or Indemnification for consequential damages. General rule: Civil liability is a NECESSARY CONSEQUENCE of criminal liability. Reason: The commission of a crime causes not only moral evil but also material damage. Exception: Treason, Rebellion, Gambling Article 12 of the Revised Penal Code, provides for exempting circumstances and as such the perpetrator do not incur CRIMINAL LIABILITY but is NOT EXEMPT from civil liability. These are: 1. Imbecile or insane person (unless acting in lucid interval 2. Person below 18 years old 3. Acting under compulsion of an irresistible force 4. Acting under the impulse of an uncontrollable fear of an equal or greater injury.

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It is based on the undisputed principle of equity that fault or negligence cannot prejudice anyone else besides its author and in no case should its consequences be borne by him who suffers the harm produced by such fault or negligence. Note: It has been ruled that tort liability can exist even if there are already contractual relations, but this should be interpreted to mean that the tort liability itself does not arise because of the contract, but because of some other fact (Paras, Edgardo L., Civil Code of the Philippines Annotated V, 2008 ed., p.1102). Fault or Negligence Negligence is the failure to observe for the protection of the interests of another person, that degree of care, precaution and vigilance which the circumstances justly demand (US vs. Barrias, 23 Phil. 434). Test of Negligence: Would a prudent man, in the position of the person to whom negligence is attributed,

CIVIL LAW foresee harm to the person injured as a reasonable consequence of the course about to be pursued? If so, the law imposes a duty upon him to refrain from that course or take precautions, and failure to do so constitutes negligence. Elements of Negligence: 1.The fault or negligence of the defendant; 2.The damage suffered or incurred by the plaintiff; and 3.The relation of cause and effect between the fault or negligence of the defendant and the damage incurred by the plaintiff. A single act or omission can give rise to different causes of action, subject to the prohibition against double recovery under the Rules of Court. Obligations arising from quasi-delict are demandable not only from the person directly responsible for the damage incurred, but also against the persons mentioned in Art. 2180. Kinds of Negligence: 1. Culpa Aquilana -- quasi-delict; negligence as a source of obligation 2. Culpa Contractual -- negligence in the performance of a contract 3. Culpa Criminal -- criminal negligence Distinctions between Culpa Aquilana & Culpa Contractual Culpa Aquilana Culpa Contractual Negligence as a source of Negligence in the obligation performance of a contract Fault or negligence which Fault or negligence of the constitutes an independent debtor as an incident in source of obligation the fulfillment of an between parties not existing obligation previously bound

OBLIGATIONS & CONTRACTS Distinction between delict & quasi-delict Delict Quasi-delict Public Right: against the State Criminal intent necessary for existence of liability

wrong Private Right: wrong against the individual Criminal intent is not is necessary for it is possible the that there is NO criminal charge but only civil liability for damages

Not as broad as quasi- Actionable in any act or delict, can be punished omission wherein fault or only when there is a penal negligence intervenes law clearly penalizing it Form of redress is either Either by compensation or fine or imprisonment or indemnification both Must be proven beyond Requires preponderance reasonable doubt of evidence Can never compromised

be Can be compromised as any other civil liability

Employer’s liability is subsidiary. The employee must have first been convicted and sentenced to pay civil indemnity and it must be shown that he is insolvent.

Employer’s liability is primary can be sued directly by the injured party and may recover from his employee

Employer is liable only when he is engaged in some kind of business or industry

All employers whether they are engaged in some enterprise or not are liable, this includes house helpers.

N ATURE AND E FFECTS O BLIG ATION

OF

I. OBLIGATION TO GIVE (REAL) DETERMINATE OR SPECIFIC THING DUTIES OF THE OBLIGOR 1. Deliver the thing itself General rule: 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 which is due (Art. 1244 Par. 1).

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OBLIGATIONS & CONTRACTS Exceptions: a. By agreement or consent, the debtor may deliver a different thing or perform a different prestation in lieu of that stipulated (either a Dation in Payment or Objective Novation) b. Waiver of defect, the creditor with knowledge of defect accepts the thing without protest or disposes it. 2. Preserve the thing with due care General rule: 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 (Art. 1163). Exception: The LAW or the STIPULATION of the parties requires another standard of care (Art. 1163).

CIVIL LAW Difference between Accessions and Accessories Accessions/Accession Accessories Continua Destined for Includes everything which embellishment, use or is produced by a thing, or preservation of another which is incorporated or thing or have for their attached thereto, either object the completion of naturally or artificially. another thing Includes: Fault or negligence of the 1. Accesion Natural- e.g. debtor as an incident in alluvion the fulfillment of an 2. Accesion Industrial- e.g. existing obligation building, planting

Basis: Absence of the duty of obligor to take care of the thing, the obligation to deliver would be illusory.

4. Deliver the fruits The creditor has a RIGHT to the FRUITS of the thing from the TIME the obligation to deliver it arises. However, there is NO real right UNTIL the same has been delivered to him (Art. 1164 Par. 1).

Also, failure to preserve the specific thing would give rise to liability for damages unless due to a FORTUITOUS EVENTS/ FORCE MAJEURE.

Note: The ownership of things is transferred not only by mere agreements but by delivery (Non Nudis Pactis, Sed Traditione Domina Rerum Transferentur).

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 (Art. 1173 Par 2).

When does the obligor’s obligation to deliver arise? a. If obligation is based on law, quasi-delict, quasicontract or crime, the specific provisions of applicable law shall determine when the delivery shall be effected. b. If obligation is subject to a suspensive condition, it arises from the happening of the condition. c. If obligation is subject to a suspensive term or period, it arises upon the lapse of the term. d. If obligation is not subject to any of the foregoing, it arises from the constitution or perfection of the obligation.

Diligence It is the attention and care required of a person in a given situation and is the opposite of negligence. Kinds: a. Simple diligence b. Extraordinary Diligence c. Diligence of a good father of a family/Bonos Pater Familia -- measure of prudence or activity as is properly to be expected from, and ordinarily exercised by a reasonable and prudent man under the particular circumstances (Black’s Law Dictionary, 6th Ed., p.457). 3. Deliver the ACCESSIONS and ACCESSORIES General rule: Obligation to give a determinate thing includes that of DELIVERING ALL its ACCESSIONS & ACCESSORIES, even though they may not have been mentioned (Art. 1166). Exceptions: By contrary intention of the parties

Principle of Balancing of Equities as Applied in Actions for Specific Performance In specific performance, equity requires that the contract be just and equitable in its provisions, and that the consequences of specific performance likewise be equitable and just. The general rule is that this equitable relief will not be granted if the result of the specific performance of the contract would be harsh, inequitable, oppressive or result in an unconscionable advantage to the plaintiff (Agcaoili vs. GSIS, G.R. No. 30056, August 30, 1988). Kinds of Fruits 1. Natural -- spontaneous products of the soil, the young without intervention of human labor.

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CIVIL LAW 2. Industrial -- those produced by lands of any kind through cultivation brought by intervention of human labor. 3. Civil -- those derived by virtue of juridical relation (e.g. rents of building) CORRELATIVE RIGHTS OF THE OBLIGEE: 1. Right to specific performance 2. Right to rescission or resolution 3. Right to damages due to the following (DeDeNeFraCo): a. failure to deliver General rule: If due to fortuitous even, obligor is not liable Exceptions: i. Law (e.g. Articles 1942, 2001,2147, 1993) ii. Stipulation to the contrary iii.Nature of the obligation requires assumption of risk iv.Fraud or malice (bad faith)- such as obligor delivers to two or more persons having different interest (Art. 1165 Par. 3). v.Debtor was already in delay when the fortuitous even took place b. Delay or default c. Negligence in the performance of the obligation d. Fraud e. Any manner in contravention of the tenor of obligation Indeterminate/Generic Thing 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 can the debtor deliver a thing of INFERIOR quality. The PURPOSE of the obligation and other CIRCUMSTANCES shall be taken into consideration (Art. 1246). Note: If the debtor can no longer perform the principal obligation, the creditor may ask for compliance by a 3rd person at the debtor’s expense (Art. 1165). DUTIES OF THE OBLIGOR: 1. To deliver the thing of the quality intended by the parties, taking into account the purpose of the obligation, intent of the parties and other circumstances; 2. To be liable for damages in case of breach due to delay, fraud, negligence or contravention of the tenor thereof (Art. 1170). CORRELATIVE RIGHTS OF THE OBLIGEE: 1. Right to ask for rescission 2. Right to damages due to: a. failure to deliver

OBLIGATIONS & CONTRACTS b. fraud c. negligence d. delay e. any matter in contravention of the tenor of the obligation II. OBLIGATION TO DO (PERSONAL) General rule: 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 (Art. 1244 Par. 2). Exception: In facultative obligation where the debtor reserves the right to substitute another prestation. Note: If a person is obliged to do something and fails to do it, the same shall be EXECUTED at his COST. The same rule may be observed if he does it in CONTRAVENTION of the tenor of the obligation. Furthermore, it may be decreed that what has been poorly done be undone (Art. 1167). DUTIES OF THE OBLIGOR: 1. To do it (Art. 1167). 2. To shoulder the cost if someone else does it (Art. 1167). 3. To undo what has been poorly done (Art. 1167). 4. To pay damages (Arts. 1170-1172, 2201-2202). III. OBLIGATIONS NOT TO DO 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 (Art. 1244 Par. 2). Note: Performance cannot be delegated or be performed by an agent. No legal accessory obligations arise as compared to obligation to give. When the obligation consists in not doing, and the obligor does what has been forbidden him, it shall also be undone at his expense (Art. 1268). DUTIES OF THE OBLIGOR: 1. Not to do what should NOT be done 2. To shoulder the cost to UNDO what should not have been done 3. To pay damages

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CIVIL LAW

OBLIGATIONS & CONTRACTS RIGHTS OF A CREDITOR IN PERSONAL OBLIGATIONS: “TO DO OR NOT TO DO” (Arts. 11671168) Positive Personal Negative Personal Obligations Obligations (Art. 1167) (Art. 1168) The obligee can: If the obligor does what 1. Have the obligation has been forbidden him, performed or executed the obligee shall have the at the expense of the following remedies: obligor (EXCEPT when 1. Have it undone at the the prestation consists of expense of the obligor; an act where the and personal and special 2. To ask for damages qualification of the obligor is the principal motive for the establishment of the obligation. In such case the remedy is an action for damages under Art. 1170) 2. Ask that what has been poorly done be undone 3. Recover damages because of breach of the obligation In negative obligations delay or mora is not possible unlike in positive obligations (Jurado, Desiderio, Comments and Jurisprudence on Obligations and Contracts,2010 ed., p.55). Cases Where the Remedy Granted under Article 1168 is NOT available: 1. Where the effects of the act which is forbidden, are definite in character - even if it is possible for the obligee to ask that the act be undone at the expense of the obligor, consequences permanent in character and contrary to the object of the obligation will be produced For instance, should a TV star be absolutely prohibited by his contract with his home station to appear in programs of other TV stations, the effects of the breach thereof can no longer be undone. 2. Where it is physically or legally impossible to undo what has been undone because of the very nature of the act itself or of a provision of law, or because of conflicting rights of third persons Note: In either case, the only feasible remedy is indemnification for damages.

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BREACH OF OBLIGATION may be: 1. Voluntary -- arises either by fraud, negligence, delay, and in any manner contravene to the tenor of the obligation (Art. 1170). 2. Involuntary -- arises due to fortuitous events OR 1. Substantial -- amount to non-performance which is the basis for rescission and payment of damages 2. Casual -- a part of the obligation has been performed and gives rise to liability for damages Note: Rescission will not be permitted for a slight or causal breach of the contract, but only for such breaches which are substantial as to defeat the intention of the parties in making the agreement. The Supreme Court said that Hawaiian-Philippine Co. does not have the right to rescind the contract. It should be noted that the time of payment stipulated for in the contract should be treated as of the presence of the contract. There was only a slight breach of contract when the payment was delayed for 20 days after which Hawaiian-Philippine Co. accepted the payment of the overdue accounts and continued with the contract, waiving its right to rescind the contract. The delay in the payment of Song Fo & Co. was not such a violation for the contract. (Song Fo v. Hawaiian Phils, 47 SCRA 821). Different Modes of Breach 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 (Art. 1170). 1. FRAUD (Dolo) -- is the voluntary execution of a wrongful act, or a willful omission which prevents the normal realization of the prestation, knowing, and intending the effects which naturally and necessarily arise from such act or omission. Implies some kind of malice or dishonesty and cannot cover cases of mistake and errors in judgment made in good faith. In such case obligor can be held liable for damages. Test: The element of INTENT and not the HARM done. Effect of Fraud: Liability for damages. Waiver of Fraud Responsibility arising from fraud is DEMANDABLE in ALL OBLIGATIONS. Any waiver of action for FUTURE FRAUD is VOID.

CIVIL LAW Note: The law prohibits the renunciation of action for damages on the ground of future fraud but it DOES NOT prohibit fraud ALREADY COMMITTED. Kinds of Fraud: 1. Fraud in the performance of the obligation (Art.1171). 2. Fraud in the execution/ creation/ birth of contract a. Dolo Causante (Art. 1344). b. Dolo Incidente (Art. 1338). 2. NEGLIGENCE (Culpa) The fault or negligence of the obligor consists in the OMISSION OF THAT DILIGENCE which is required by the NATURE of obligation and corresponds with the circumstances of the persons, of the time and place (Art. 1173 Par 1). In case of fraud, bad faith, malice or wanton attitude, the obligor shall be responsible for ALL DAMAGES which may be REASONABLY ATTRIBUTED to the nonperformance of the obligation (Art. 2201 Par 2). Negligence Any voluntary act or omission, there being no malice, which prevents the normal fulfillment of an obligation Effects of Negligence: a. Damages are demandable which the court may regulate according to circumstances; and b. Invalidates defense of fortuitous event. Kinds of Negligence: a. Civil Negligence i. Culpa contractual -- fault or negligence of obligor by virtue of which he is unable to perform his obligation arising from a pre-existing contrac ii. Culpa aquiliana/quasi-delict -- fault or negligence of a person, whose failure to observe the required diligence to the obligation causes damage to another The negligence of the defendant in both cases is characterized by the omission of that 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. b.Culpa Criminal -- fault or negligence which results in the commission of a crime.

OBLIGATIONS & CONTRACTS Culpa contractual Negligence is merely incidental to the performance of an obligation already existing because of a contract

Culpa aquiliana

Culpa criminal

Negligence is Negligence direct, is direct, substantive, substantive, and and independent independent

There may or There is always may not be a a pre-existing pre-existing contractual contractual relation relation Source of Source of obligation: obligation: breach or defendant’s nonfulfillment of negligent act contract or omission Requires proof Requires proof by by preponderance preponderance of evidence of evidence

No preexisting contractual relation Source of obligation: defendant’s criminal act Requires proof beyond reasonable doubt Defense of a good father of a family in the selection and supervision of employees is NOT proper. The employee’s guilt is automatically the employer’s guilt if the former is insolvent.

Defense of a good father of a family in the selection and supervision of employees is NOT a proper or complete defense, though it may mitigate damages

Defense of a good father of a family in the selection and supervision of employees is a proper and complete defense

Proof of existence of a contract and breach thereof gives rise to a presumption of fault

Accused is Plaintiff has to presumed prove innocent until negligence of the contrary the defendant is proved

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OBLIGATIONS & CONTRACTS Difference between fraud (dolo) and negligence (culpa) Fraud (dolo)

Negligence (culpa)

Mere want of care or Willfulness or deliberate diligence and not the intent to cause damage or voluntariness of act or injury to another omission Liability cannot be mitigated Liability may be mitigated by by courts courts Waiver for future fraud is VOID

Waiver for future negligence VALID if SIMPLE VOID if GROSS

Presumed from the breach Must be clearly proved of a contractual obligation Standard of Diligence Required If 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 is required. Note: When the negligence is so gross that it amounts to wanton attitude on the part of the obligor, the laws in case of fraud shall apply. If the obligor acted in good faith, he shall be liable only for natural and probable consequences of the breach of obligation and which the parties have foreseen or could have reasonably foreseen at the time the obligation was constituted. If the obligor acted in bad faith, the boundaries between negligence and fraud disappear altogether. Obligor can be held responsible for all damages which may be reasonably attributed to the nonperformance of the obligation. Any waiver or renunciation which is made in anticipation of such liability is null and void. If there was contributory negligence of the obligee, the effect is to reduce or mitigate the damages which he can recover. If the negligent act or omission of the obligee was the proximate cause of the event which led to damage or injury complained of, he cannot recover. Robbery, per se, like carnapping, does NOT foreclose the possibility of negligence. It is not a fortuitous event (Sicam, et al. vs. Jorge, GR No. 159617, August 8, 2007).

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CIVIL LAW 3. DELAY (Mora) Those obliged to DELIVER or TO DO something incur DELAY from the time the obligee JUDICIALLY or EXTRAJUDICIALLY DEMANDS from them the fulfillment of their obligation (Art. 1169). Delay Non-fulfillment of obligation with respect to time. Note: There is SIMPLE delay as one fails to perform the obligation and this delay is converted to a LEGAL DELAY which arises when the obligee judicially or extrajudicially demands their fulfillment. The delay which the law speaks about is one that is LEGAL. Delay in the performance of the obligation, however, must be either malicious or negligent. If delay is only due to inadvertence without any malice or negligence, the obligor cannot be liable under Art. 1170 (RCBC vs. CA, G.R. No. 133107, March 25, 1999). General rule: There must be demand in order for the debtor to incur delay. Exceptions: a. When the obligation or law expressly so declares. b. When from the nature and circumstances of the obligation it appears that the DESIGNATION OF THE TIME when the thing to be delivered or the service is to be rendered was a controlling motive for the establishment of the contract. c. When demand would be USELESS: i. Caused by some act or fault of the debtor ii. Impossibility caused by fortuitous event Purpose of the Demand: The presumption of good faith. Note: There can only be delay in obligations “to give and to do” (positive obligations) and not in obligations “not to give or not to do” (negative obligations) (Tolentino, Arturo M., Commentaries and Jurisprudence on the Civil Code of the Philippines, 1991 ed., Vol. 4, p.101). In RECIPROCAL obligations, neither party incurs 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.

CIVIL LAW Requisites in order to consider the obligor in default: (SSS vs. Moonwalk Development and Housing Corpoation, G.R. No. 73345, April 7, 1993) 1. Obligation is demandable and already liquidated 2. The obligor/debtor delays performance 3. The creditor requires performance judicially or extrajudicially A grace period is not an obligation of the debtor but a right. It must not be likened to an obligation the nonpayment of which under Art. 1169 would generally still require judicial or extrajudicial demand before default can arise. When unconditionally conferred, it is effective without need of demand either for the payment of the obligation or for the honoring of the right (Bricktown Dev’t. Corp. vs. Amor Tierra Devt. Corp., G.R. No. 112182, December 12, 1994). KINDS OF DELAY: 1. Mora Solvendi -- delay on the part of the debtor and may either be: a. Ex Re -- obligations to give b. Ex Persona -- obligations to do Requisites: i. Prestation is demandable and already liquidated Note: There is no delay in natural obligations for the performance of such is optional and voluntary. ii. The debtor is in delay of the performance due to causes imputable to him and not by acts such as fortuitous events iii. The creditor requires or demands the performance judicially or extrajudicially. If extrajudicial: date of demand If uncertain: date of filing of complaint Note: A mere reminder cannot be considered a demand for performance, because it must appear that the tolerance or benevolence of the creditor must have ended (Tolentino, Arturo M., Commentaries and Jurisprudence on the Civil Code of the Philippines, 1991 ed., Vol. 4, p 102). Commencement of a suit is sufficient demand (Palmares vs. CA, G.R. No. 126490, March 31, 1998) But even without demand, debtor incurs delay if he acknowledges his delay such as requesting for an extension of time for payment.

OBLIGATIONS & CONTRACTS Effects of Mora Solvendi Debtor is liable for interest in obligations to pay money, or damages. In the absence of extra-judicial demand, the interest shall commence from the filing of the complaint. Interest to be paid as indemnity for damages is based on what has been agreed upon by the parties, in the absence thereof, the legal interest (Art. 2209). Debtor is liable even for fortuitous event when the obligation is to deliver a specific thing. But court may equitably mitigate damages if debtor proves that the loss would have still resulted even if he had not been in default. For generic things, debtor may still be compelled to deliver a thing of the same kind or be held liable for damages. 2. Mora Accipiendi -- delay in the performance based on the omission by the creditor of the necessary cooperation, especially acceptance on his part. Requisites: a. Offer of performance by the debtor who has the required capacity; b. Offer must be to comply with the prestation as it should be performed; c. Creditor refuses the performance without just cause. Effects of Mora Accipiendi: a. Responsibility of the debtor for the thing is reduced and limited to fraud and gross negligence. b. Debtor is exempted from the risks of loss of the thing, which automatically passes to the creditor. c. All expenses incurred by the debtor for the preservation of the thing after the delay shall be chargeable to the creditor. d. The creditor becomes liable for damages. e. The debtor may relieve himself of the obligation by consignation of the thing. f. If the obligation bears interest, the debtor does not have to pay from the moment of the mora; Remedy: a. Consign it in court b. Keep it to himself (he’s not liable for damages) 3. Compensation Morae -- delay of the parties in a reciprocal obligation

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OBLIGATIONS & CONTRACTS General rule: Parties in a bilateral contract can REGULATE the ORDER in which they shall comply with their reciprocal prestations. Otherwise, the fulfillment must be SIMULTANEOUS and RECIPROCAL. Exception: Contrary stipulation (e.g. installment basis) Effects of Compensation Morae: a. Delay of the obligor cancels delay of the obligee and vice versa. b. No actionable default on the part of both parties. c. If delay of one party is followed by that of the other, the liability of the first infractor shall be equitably balanced by the courts. If it cannot be determined which of the parties is guilty of delay, the contract shall be deemed extinguished and each shall bear his own damages (Art. 1192). Cessation of the Effects of Delay (mora) The benefits arising from default or delay may cease upon (1) renunciation by the creditor, express or implied and (2) prescription. 4. Contravention of Tenor Under Art. 1170, the phrase “in any manner contravene the tenor” of the obligation includes not only any illicit act which impairs the strict and faithful fulfillment of the obligation, but also every kind of defective performance. Unless excused in proper cases by fortuitous event Note: The following do not excuse fulfillment: a. Increase in cost of performance b. Poverty c. War between the subjects of a neutral country REMEDIES OF CREDITOR IN CASE OF BREACH Primary Remedies: 1. Action for Performance (Specific Performance or Substituted Performance) 2. Action for Damages (exclusively or in addition to action for performance) 3. Action for Rescission Subsidiary Remedies: 1. Accion Subrogatoria 2. Accion Pauliana 3. Other Specific Remedies

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CIVIL LAW PRIMARY REMEDIES 1. ACTION FOR PERFORMANCE a. Action for Specific Performance (in obligation to give a determinate thing) When what is to be delivered is a DETERMINATE THING, the creditor, in addition to his right for indemnification of damages, may COMPEL the debtor to MAKE THE DELIVERY (Art. 1165 Par 1). Note: This remedy implies that the basis is a contractual relation between the creditor and debtor. b. Action for Substituted Performance (in obligation to given indeterminate thing) If the thing is indeterminate or generic, he may ASK the obligation be COMPLIED with at the EXPENSE of the DEBTOR (Art. 1165 Par. 2). Note: Debtor cannot avoid obligation by paying damages if the creditor insists on the performance. c. Action for Substituted Performance or Undoing of Poor Work (in obligation to do) If a person obliged to do something fails to do it, the SAME shall be executed at HIS COST. This same rule shall be observed if he does it in CONTRAVENTION OF THE TENOR of the obligation. Furthermore, it may de decreed that what has been done poorly be UNDONE (Art. 1167). d. Action for Undoing (in obligation not to do) General rule: When the obligation consists in NOT DOING, and the obligor does what has been forbidden him, it shall be UNDONE at his EXPENSE (Art. 1168). Exceptions: When the only feasible remedy is indemnification for the damages cause by reason that: i. it has become impossible to undo the thing physically or legally. ii. if the act is definite and will not cease even if undone. 2. ACTION FOR DAMAGES Recoverable damages include ANY and ALL damages that a human being may suffer. Responsibility for damages is INDIVISIBLE.

CIVIL LAW

OBLIGATIONS & CONTRACTS

3. ACTION FOR RESCISSION The POWER to RESCIND obligation is IMPLIED in RECIPROCAL OBLIGATIONS, in case one of the obligors should not comply with what is incumbent upon him (Art. 1191).

patrimony of the debtor the product of such action, and then obtain therefrom the satisfaction of his own credit.

The injured party may choose between FULFILLMENT and RESCISSION of the obligation, with the payment of damages in either case.

Note: The creditor is entitled only to so much as is needed to satisfy his credit and any balance shall pertain to the debtor.

Should he choose fulfillment and the same should become impossible, the injured party may still seek for rescission.

RIGHTS OF THE CREDITOR: a. Levy by attachment and execution upon all the property of the debtor, except such as exempt by law from execution. b. Exercise all the rights and action of the debtor, except such as inherently personal to him. c. To ask for rescission of the contracts made by the debtor in fraud of their rights.

Note: The court SHALL decree the rescission claimed UNLESS there be a just cause authorizing the fixing of the period. BREACH BY BOTH PARTIES: 1. If first infractor can be determined, his liability shall be EQUITABLY TEMPERED by the courts (Art. 1192). 2. If the first infractor cannot be determined, the obligation shall be EXTINGUISHED and EACH shall bear his own damages (Art. 1192). Note: The remedy under Art. 1191 is ALTERNATIVE. Party seeking rescission can only elect one between fulfillment and rescission. There can be no partial performance and partial rescission. The remedy only applies to RECIPROCAL OBLIGATIONS as when there is reciprocity between the parties. Rescission required JUDICIAL APPROVAL to produce LEGAL EFFECT Effects of Rescission 1. Extinguishes obligatory relation as if it had never been created; extinction has a retroactive effect. 2. Mutual restitution SUBSIDIARY REMEDIES: 1. To exhaust the property in possession of the debtor generally by attachment, subject to exemptions provided by law Note: Correlate with Art 2236 which states that the debtor is liable with all his property, present and future, for the fulfillment of his obligations subject to exemptions provided by law. 2. Accion Subrogatoria (Subgratory Action) Action which the creditor may exercise in place of the negligent debtor in order to preserve or recover for the

Right to be subrogated to all the rights and actions of the debtor save those which are inherent in his person.

Requisites: a. Debtor to whom the right of action properly pertains must be indebted to the creditor b. Creditor must be prejudiced by the inaction or failure of the debtor to proceed against the third person c. Creditor must have first pursued or exhausted all the properties of the debtor which are not exempted for execution. There is no change of creditor in accion subrogatoria. The creditor merely acts in the name and for the account of the debtor after exhausting all of the assets of the latter. In order to exercise the accion subrogatoria, a previous approval of the court is not necessary (Tolentino, Arturo M., Commentaries and Jurisprudence on the Civil Code of the Philippines,1991 ed., Vol. 4, p.138). EXCEPTIONS TO ACCION SUBROGATORIA: a. Inherent rights of the debtor i. Right to existence ii. Rights or relations of a public character iii. Rights of an honorary character iv. Rights consisting of powers which have not been used (i.e., the power to carry out an agency or deposit) v. Non-patrimonial rights (i.e., the action for legal separation or annulment of marriage) vi. Patrimonial rights not subject to execution (i.e., right to a government gratuity or pension) vii.Patrimonial rights inherent in the person of the debtor (i.e., right to revoke a donation by reason of ingratitude)

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OBLIGATIONS & CONTRACTS

CIVIL LAW

b. Only those who at the time of the donor’s death have a right to the legitime and their and successors in interest may ask for the reduction or inofficious donations (Art. 772).

liabilities are not (4 Tolentino p. 140). Ruggiero, however, maintains that the accion pauliana covers also acts of the debtor which tend to make his economic condition more serious, such as when he contracts new obligations.

3. Accion Pauliana - creditors have the right to set aside or revoke acts which the debtor may have done to drefaud them.

Note: 2nd and 3rd remedies are subsidiary to the 1st. It can only be availed of in the absence of any other legal remedy to obtain reparation for the injury.

Note: All acts of the debtor which reduce his patrimony in fraud of his creditors, whether by GRATUITOUS or ONEROUS title, can be revoked by this action.

Take note of the cases of accion directa under the Civil Code in which a person may directly sue another even if there is no privity of contract between them (Arts. 1652, 1608, 1729, 1893)

BUT Payments of PRE-EXISTING OBLIGATIONS which are already DUE, whether NATURAL or CIVIL, cannot be impugned by this action. Requisites: a. Creditor has a credit prior to the alienation by the debtor, although demandable later. b. Debtor has made a subsequent contract , giving advantage to a 3rd person. c. Creditor has no other remedy but to rescind the debtor’s contract to the 3rd person. d. Act being impugned is fraudulent. Note: Presumption of fraud may be found in Art. 1387 (gratuitous transfer without leaving sufficient funds for obligations or gratuitous transfer by judgment debtor). 4. Third person who received the property is an accomplice in the fraud. Difference between Accion Subrogatoria & Accion Pauliana Accion Subrogatoria

Accion Pauliana

1.Credit must have existed 1.Not essential that credit before debtor’s is prior to the acquisition fraudulent act. of debtor’s right. 2. Intent to defraud creditor 2. Intent to defraud creditor is required. is not required. 3. Action prescribes within 3.No period of prescription. four years from the discovery of the fraud. New debts contracted by an insolvent debtor are NOT included within the scope of accion pauliana because only acts which impair the assets of the debtor are covered by the provision and those which merely increase his

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TRANSMISSIBILITY OF RIGHTS Transmissibility of Rights Acquired by Virtue of an Obligation (Art. 1178) General Rule: Rights acquired by virtue of an obligation are transmissible in character. Exceptions: 1. When prohibited by LAW which are purely personal in character. 2. When prohibited by PERSONAL QUALIFICATION or circumstances of the transferor which is material ingredient attendant in the obligation. 3. When prohibited by STIPULATION of the parties. EXTINGUISHMENT OF LIABILITY IN CASE OF BREACH DUE TO FORTUITOUS EVENT Except in cases EXPRESSLY specified by law, or when it is otherwise declared by stipulation, or when the NATURE of the obligation requires the ASSUMPTION OF RISK, NO PERSON shall be RESPONSIBLE for those events which COULD NOT be FORESEEN or which, THOUGH foreseen, were INEVITABLE (Art. 1174). Fortuitous Event (Force Majeure/Caso Fortuito) 1. By Nature or Acts of God (i.e., earthquakes, storms, floods etc.) -- absolutely independent of human intervention. 2. By the act of man or force majeure (i.e., armed invasion, attack by bandits, robbery etc.) -- an event which arises from legitimate or illegitimate acts of persons other than the obligor. Requisites: 1. Event must be independent of the will of the obligor; 2. It must be either unforeseeable or inevitable; 3. Must be of such a character as to render it impossible for the obligor to fulfill his obligation in a normal manner; and

CIVIL LAW 4. Obligor must be free from any participation in the aggravation of the injury resulting to the obligee. Note: It must not only be the proximate cause but it must be the ONLY and SOLE CAUSE. Note: Fortuitous event includes unavoidable accidents, even if there has been an intervention of human element, provided fault or negligence cannot be imputed to the debtor. Contributory negligence of the debtor renders him liable despite the fortuitous event; courts may equitably mitigate damages. If the negligence was the proximate cause, the obligation is not extinguished. It is converted into a monetary obligation for damages. Liability in case of fortuitous event: General Rule: No liability in case of fortuitous event. Exceptions: 1. When expressly declared by law e.g. Article 552(2), 1165(3), 1268, 1942, 2147, 2148, 2001, 1198 and 2159 of the Civil Code. 2. When expressly declared by stipulation or contract 3. When the NATURE of the obligation requires the assumption of risk Note: The principle is based on social justice. 4. When the object of the prestation is generic Note: Fluctuation of currencies is not considered as a fortuitous event since the fluctuation rate is foreseeable. If considered fortuitous, it will set a precedent such that there will be a shift of burden to banks. The general rule in Art. 1174 can be applied only to obligations to give determinate things and not to generic ones. Where the contract stipulated that in case of a fortuitous event, the period provided in the contract for delivery shall be suspended, the period of time when the contract was suspended CANNOT be deducted from the term of the contract because to add the said years upon the resumption of the contract would in effect be an extension of the contract (Victorias Planters Assoc, Inc vs. Victorias Milling Co, G.R. No. L-6648, July 25, 1955).

OBLIGATIONS & CONTRACTS Principle of Assumed or Created Risk Based on the doctrine of volenti non fit injuria -- no wrong is done to one who consents. As applied to obligations, it refers to situations in which the obligor, with full knowledge of the risk enters into some relation with the obligee (Jurado, Desiderio P., Comments and Jurisprudence on Obligations and Contracts, 2010 ed., p.98). The event which produces loss may be fortuitous event typical of a particular kind of business, such as derailment of a train; it is only just that those who are injured thereby be indemnified by the transportation company. This liability, however, cannot extend to dangers which are not typical of the business such as lightning or earthquake (Tolentino, Arturo M., Commentaries and Jurisprudence on the Civil Code of the Philippines, Vol. 4, p 134 [1991]). Extinguishment of Interest and Prior Installments (Art. 1176) Receipt of the principal (or later installment) without reservation as to the interest (or prior installment) shall give rise to a disputable presumption that the interest (or prior installment) has been paid. The presumptions in Art.1176 do not apply 1. When there is a reservation made orally or in writing 2. If the receipt does not recite that it was issued for a particular installment due as when the receipt is only dated 3. To payment of taxes 4. Where non-payment of the prior obligations has been proven

D IFFERENT K INDS O BLIG ATIONS

OF

Pure Obligations Obligations whose performance DOES NOT depend upon a FUTURE or UNCERTAIN event or upon a past event UKNOWN to the parties is DEMANDABLE AT ONCE (Art. 1179 Par 1). Obligations which contains no terms or conditions whatever upon which depends the fulfillment of the obligation contracted by the obligor. Note: Though demandable at once, the debtor should be given a reasonable period to perform the obligation depending on the nature and complexity of such.

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OBLIGATIONS & CONTRACTS A demand note is subject to neither a suspensive condition nor a suspensive period. The demand is not a condition precedent, since the effectivity and binding effect of the note does not depend upon the making of the demand. It follows therefore, that a demand note is strictly a pure obligation, and payment therefore is immediately demandable in the absence of other restrictions. Conditional Obligations Obligations in which 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 (Art. 1181). Characteristics of Conditional Obligations: 1. Every future and uncertain event upon which an obligation or provision is made to depend. 2. Even though the event is uncertain, it should be POSSIBLE. 3. The condition must be imposed by the WILL of the party and NOT a necessary legal requisite. 4. Past event but unknown to parties (the knowledge to be acquired in the future of a past event which at that moment is unknown to parties interested - it is only in that sense that the event is be deemed uncertain). Note: 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 (Article 1180). In this case, the creditor must first ask the court to fix the period, otherwise the action to collect the debt would be premature. Effects of Failure to Comply with Condition: 1. If condition is imposed on the PERFECTION of a contract -- results in the failure of the contract 2. If condition is imposed on the PERFORMANCE of the obligation -- gives the other party an option either to refuse to proceed with the compliance of the obligation or to waive the condition. Classifications of Conditions: 1. As to the effect of obligation a. Suspensive -- the obligation arises, but if the condition DOES NOT happen, the obligation does not come into existence. Principle of retroactivity in suspensive condition (Art. 1187) The principle of retroactivity, under Art. 1187, is limited to the effects of the obligation. The cause of action for the enforcement of the obligation accrues

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CIVIL LAW and the prescription of the action must still be computed from the moment of the happening of the suspensive condition. In obligations to give Ratio: the condition is only an accidental element of a contract. An obligation can exist even without being subject to a condition Rule on retroactivity has no application to: i. Real contracts; they are perfected only by delivery of the object of the obligation; principle only applies to consensual contract ii. Contracts in which the obligation arising therefrom can only be realized within successive periods or intervals (e.g. lease, hire of service, life annuity). Retroactive effect as to the fruits and interests in obligations to give: i. In Reciprocal Obligations: no retroactivity -mutually compensated (fruits may be natural, industrial or civil ii. In Unilateral Obligations: no retroactivity, debtor appropriates the fruits and interests received because it is usually gratuitous unless intention was otherwise, as inferred from nature and circumstances In obligations to do or not to do (personal obligations): No fixed rule; Courts are empowered to determine the retroactive effect of the suspensive condition. Note: This rule also applies to an obligation w/ resolutory condition (Art. 1190, par. 3). b. Resolutory - fulfillment of the condition results in extinguishment of rights arising out of the obligation. 2. As to the origin of condition a. Potestative - one which depends upon the will of one of the contracting parties; it is in the power of one of the parties to realize or to prevent. Kinds: i. Simple Potestative -- presupposes not only a manifestation of will but also the realization of an external act of a 3rd party. Note: Does not prevent formation of a valid obligation because in part it depends on contingencies over which the debtor has no control.

CIVIL LAW ii. Purely Potestative -- if it depends solely and exclusively upon the will of the debtor, it is VOID for the debtor cannot fulfill an obligation arising from his own choice. BUT It is valid if depends on the will of the creditor. Note: Applicable only to suspensive conditions and not to resolutory. Hence, resolutory potestative conditions are valid even if made to depend upon the debtor since the obligation is already in force. iii. Casual - depends exclusively upon chance, will of a third person, or partially by chance and partially by will of a third person, or other factors and not upon the will of the contracting parties. iv. Mixed - depends upon the will of one of the contracting parties and other circumstances, including the will of third persons or chance. 3. As to possibility - impossible conditions, those contrary to good customs or public policy and those prohibited by law shall ANNUL the obligation which depends upon them (Art. 1183). a. Impossible - may either be PHYSICAL (contrary to law of nature) or LEGAL (contrary to law, morals, public policy, good customs). Note: The impossible condition must exist at the time of the creation of the obligation otherwise that would fall under Art. 1266 (Subsequent Impossibility). General rule: Impossible conditions annul the obligations dependent upon them Exceptions: i. Pre-existing obligation ii. Divisible obligation iii. Negative Impossible Things iv. Testamentary deposition Note: If the obligation is divisible, that part not affected by the impossible or unlawful condition shall be VALID. Principle of Indivisibility of Conditions The indivisibility of the condition passes to the heirs of the debtor: hence, some heirs cannot demand partial performance of the obligation by offering to fulfill part of the condition corresponding to them. Exception: The condition may de divisible:

OBLIGATIONS & CONTRACTS i. By nature of the condition ii. By stipulation iii. By law 4. As to mode a. Positive -- condition that some event happen at a determinate time shall EXTINGUISH the obligation as soon as the time expires or become indubitable that the event will not take place (Art. 1184). b. Negative -- the condition that some event WILL NOT HAPPEN at a determinate time shall render the obligation EFFECTIVE from the moment the TIME has elapsed of it has become EVIDENT that the event CANNOT occur (Art. 1185) . Note: If there is no period fixed in the foregoing, Art. 1185 Par. 2 shall apply. Intention of the parties is controlling and the time shall be that which the parties may have probably contemplated, taking into account the nature of the obligation. Effects of suspensive, resolutory, potestative, mixed, casual condition (Art. 1181-1182): 1. Suspensive condition -- obligation shall only be effective upon the fulfillment of the condition; upon constitution of obligation, before fulfillment, obligee acquires a mere hope or expectancy, protected by law. a. Before fulfillment - Demandability and the acquisition of the rights arising from the obligation is suspended. Obligation of obligor to comply with the prestation is held in suspense until fulfillment of condition. Anything paid by mistake during such time may be recovered b. After the fulfillment - The obligation arises or becomes effective; obligor can be compelled to comply with what is incumbent upon him. If it becomes certain that the condition will not be fulfilled, the conditional creditor loses all hope of becoming a real creditor, and likewise loses the power to exercise the actions granted by Art. 1188 for the preservation of his rights. 2. Resolutory condition – obligation becomes demandable immediately after its constitution and rights are immediately vested in the obligee, but such rights are always subject to the threat or danger of extinction. Principle of retroactivity applies (Art. 1190 par. 1). a. Before fulfillment - right recognized in Art. 1188, par. 1 in case of a suspensive condition should likewise be available in obligations with a resolutory condition. b. After fulfillment - Whatever may have been paid or delivered by one or both of the parties upon the constitution of the obligation shall have to be returned

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OBLIGATIONS & CONTRACTS upon the fulfillment of the condition. There is a return to the status quo. Aside from the actual things received, the fruits or the interests thereon should also be returned after deducting the expenses made for their production, gathering and preservation. When condition is not fulfilled, rights are consolidated and they become absolute. 3. Potestative condition a. When it depends exclusively upon the will of creditor –- condition and obligation is valid. b. When it depends exclusively upon the will of debtor in case of a suspensive condition – condition and obligation are void; to allow such condition would be to sanction illusory obligation, in direct contravention of the principle announced in Art. 1308. c. When it depends exclusively upon the will of debtor in case of a resolutory condition – condition and obligation is valid; the position of the debtor is exactly the same as the creditor in a suspensive condition and does not render the obligation illusory. Note: If the obligation is a pre-existing one, and does not depend for its existence upon the fulfillment by the debtor of the potestative condition, only the condition is void leaving unaffected the obligation itself. Here, the condition is imposed not on the birth of the obligation but on its fulfillment (valid obligation). If condition is declared void but the obligation is still valid, in converting the obligation into a pure and demandable one, an arrangement may be enforced which is not within the contemplation of the parties. 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, G.R. No. L-4433, May 29, 1953). 4. Casual condition - the obligation and condition shall take effect. 5. Mixed condition - the obligation and condition shall take effect. Effects of impossible conditions (Art. 1183): 1. Conditional obligation is void -- both obligation and condition are void. 2. Conditional obligation is valid -- if condition is negative, it is disregarded and obligation is rendered pure and valid.

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CIVIL LAW 3. Only the affected obligation is void -- if the obligation is divisible, the part not affected by the impossible condition shall be valid. 4. Only the condition is void -- if obligation is pre-existing, not depending on fulfillment of the condition which is impossible for its existence, only the condition is void. 5. Condition considered not imposed if impossible/unlawful condition is attached to a simple or remuneratory donation as well as to a testamentary disposition, condition is considered not imposed while the obligation is valid. Note: The impossibility of the condition must exist at the time of the creation of the obligation; a supervening impossibility does not affect the existence of the obligation. Effects of positive and negative condition (Art. 11841185): In positive condition, obligation is extinguished as soon as the time expires or if it becomes indubitable that the event will not take place. In negative condition, the obligation is effective from the moment the time indicated has lapsed, or if it has become evident that the event cannot occur, although the time indicated has not yet lapsed. The intention of the parties, taking into consideration the nature of the obligation, shall govern if no time has been fixed for the fulfillment of the condition. Doctrine of constructive fulfillment of suspensive condition (Art. 1186) 1. Condition is deemed fulfilled when the obligor actually prevented the obligee from complying with the condition; prevention must have been voluntary or willful in character. Reason: One must not profit by his own fault. 2. Doctrine applies only to suspensive condition. It can have no application to an external contingency which is lawfully within the control of the obligor (Taylor vs. Uy Tieng Pao, GR No. L-16109, October 2, 1922). 3. The mere intention of the debtor to prevent its happening or the mere placing of ineffective obstacles to its compliance, without actually preventing fulfillment is not sufficient (Manresa). Note: When the voluntary act of the debtor did not have for its purpose the prevention of the fulfillment of the

CIVIL LAW condition, it will not fall under constructive fulfillment. The same is true when the debtor acts pursuant to a right (Tolentino, Arturo M., Commentaries and Jurisprudence on the Civil Code of the Philippines, Vol. 4, p 161 [1991]). Requisites of Constructive Fulfillment: 1. Condition is suspensive 2. Debtor actually prevents the fulfillment of the condition 3. He acts voluntarily Rights of the Creditor before the fulfillment of the condition: 1. The creditor, may, before the fulfillment of the obligation, bring the appropriate action for the PRESERVATION of his right (Art. 1188). Note: No preference of credit is granted to the creditor. Right of the Debtor before the fulfillment of the condition: 1. The debtor may recover what he paid by mistake BEFORE the happening of the suspensive condition. 2. If the payment was for a determinate thing, debtor may file an accion reivindicatoria. 3. If the payment was for an indeterminate thing, there is solution indebiti. 4. If payment was made with knowledge of the condition, debtor impliedly waives the condition and cannot recover. 5. If payment was with knowledge but the condition did not happen, the debtor can recover lest the creditor will be unjustly enriched. Note: Art. 1188 does not provide for recovery of the fruits or interest by the debtor who has paid before the happening of the condition. However, the silence of the law should not bar the recovery of fruits or interest by the debtor (Jurado, Desiderio, Comments and Jurisprudence on Obligations and Contracts [2010]). LOSS, DETERIORATION OR IMPROVEMENT PENDING THE HAPPENING OF THE CONDITION Loss A thing is lost when it: (1) Perishes; (2) Goes out of the commerce of men; and (3) Disappears in such a way that its existence is unknown or it cannot be recovered. Deterioration Any reduction or impairment in the substance or value of a thing which does not amount to loss; the thing is less than when the obligation was constituted.

OBLIGATIONS & CONTRACTS Improvement Anything added to, incorporated in, or attached to the thing that is due. In Obligations to give: The thing, pending the happening of the condition, in case of improvement, loss or deterioration, the following rules shall be observed: 1. If loss without fault of debtor, OBLIGATION IS EXTINGUISHED. 2. If loss through the fault of the debtor, OBLIGED TO PAY DAMAGES. 3. If thing deteriorates without fault of the debtor, IMPAIRMENT TO BE BORNE BY THE CREDITOR. 4. If thing deteriorates through the fault of the debtor, CREDITOR MAY CHOOSE BETWEEN FULFIMMENT OR RESCISSION WITH DAMAGES IN EITHER CASE. 5. If improvement is through the nature or time, INURES TO THE BENEFIT OF CREDITOR 6. If improvement is at the expense of the debtor, RIGHTS SIMILAR TO THAT GRANTED TO THE USUFRUCTUARY (see Arts. 579 and 580). Note: Consequently, the debtor cannot ask reimbursement for the expenses incurred for useful improvements of for improvements for mere pleasure (Art. 579). He can only ask reimbursement for necessary expenses (Art. 546). The above rules apply to the following: 1. Determinate things only because the genus of a thing never perishes (genus nun quam peruit) 2. Obligation with a period 3. Those who have a duty to return in case of loss, deterioration or improvement of the thing in an obligation with a resolutory condition (Art. 1190, par. 2). The happening of a resolutory condition does not ipso jure re-vest ownership in the original debtor; he merely becomes entitled to the delivery which would give him ownership anew. The original debtor merely has a personal right which is enforceable only against his creditor who has become a debtor obliged to make restitution. Expenses incurred by the person obliged to make restitution relating to the production, gathering, and preservation of the fruits should be deducted from the gross value of the fruits to be returned.

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OBLIGATIONS & CONTRACTS

CIVIL LAW

In Obligations to do or not to do: The provision of Art. 1187 Par.2, in which the courts shall determine, shall be observed as regards the effect of the extinguishment of the obligation.

Requires restitution or bringing parties back to original status prior to the contract (Unlad Resources Dev. Corp., et al. vs. Renato Dragon, et al., G.R. No. 149338, July 28, 2008).

RESCISSION OF RECIPROCAL OBLIGATIONS IN GENERAL (Art. 1191)

Requisites: 1. One of the parties failed to comply with what is incumbent upon him. 2. The injured party chose rescission over fulfillment or performance is no longer possible. 3. The breach is substantial so as to defeat the object of the parties in making the agreement.

Reciprocal obligations Those which are created or established at the same time, out of the same cause, and which result in mutual relationships of creditor and debtor between the parties. General Rule: If one of the parties fails to comply with what is incumbent upon him, there is a right on the part of the other to rescind (or resolve) the obligation (tacit resolutory condition). Implied in reciprocal obligations and is more appropriately referred to as RESOLUTION. Based on breach of faith, violative of reciprocity between the parties, committed by the person who is supposed to comply with the obligation as compared to the rescission referred to in Art. 1380 which involves damage or lesion, or injury to the economic interest of a person. Permitted only for such breaches as are substantial and fundamental as to defeat the object of the parties in making the agreement (Universal Food Corp. vs. CA, G.R. No. L-29155, May 13, 1970). Can be demanded only if the plaintiff is ready, willing, and able to comply with his own obligation and the other is not (Seva vs. Berwin, G.R. No. L-24321, January 11. 1926), and the party who has not performed his part of the agreement is not entitled to sue/ rescind; the right belongs to the injured party. A right which belongs to the injured party alone (Mateos vs. Lopez, 6 Phil. 206). Must be invoked judicially UNLESS contract contains a facultative resolutory provision, in which case, judicial permission to cancel or rescind the contract is no longer necessary – act of rescission must be communicated to other party (Jison vs. CA, G.R. No. L-45349, August 15, 1988). Mere failure of a party to comply with what is incumbent upon him does not ipso jure produce the rescission or resolution of the obligation.

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Right to Rescind NOT Absolute The court is given discretionary power to fix a period within which the obligor in default may be permitted to comply with what is incumbent upon him (Art. 1191 par. 3). But the discretionary power of the court cannot be applied to reciprocal obligations arising from a contract of lease because they are governed by Art. 1659. The termination of a contract must not be contrary to law, morals, good customs, public order or public policy. Waiver of Right The right to rescind may be waived, expressly or impliedly (Sps. Francisco vs. DEAC Construction, Inc., et al, G.R. No. 171312, February 4, 2008). Effects: 1. If there is a stipulation granting the right of rescission on the part of the aggrieved party and he validly rescinds the contract pursuant to such express grant, any court decision adjudging the propriety of the rescission extrajudicially made is NOT the REVOCATORY act of rescission but merely DECLARATORY or an affirmation of the revocation (De Luna vs. Abrigo, G.R. No. 57455, January 18, 1990). 2. The decree of rescission shall be without prejudice to the rights of third persons who have acquired the thing in accordance with Arts. 1385 and 1388 and Mortgage Law (Art. 1191 par. 4). Art. 1191 does NOT apply to the following: 1. Contracts of partnership where a partner fails to pay the whole amount which he has bound to contribute to the common fund (see Arts. 1786 and 1788). 2. Sales of real or personal property by installments. The first being governed by Recto Law while the latter is governed by Maceda Law. 3. Action for rescission is not required upon breach of compromise agreement; Article 2041 confers upon the party concerned the authority to regard it as rescinded and to insist upon the original demand.

CIVIL LAW Alternative remedies of injured party (Art. 1191, par. 2): 1. Fulfillment of the obligation with damages Even after the injured party has chosen fulfillment and such fulfillment should become impossible, he can still seek the rescission of the obligation. 2. Rescission of the obligation with damages Note: An alternative prayer for fulfillment or rescission in the complaint is not incompatible. The presumption is that he is leaving the matter to the sound discretion of the court. Effects of Rescission: 1. Duty upon the court to require the parties to surrender whatever they may have received from the other (without prejudice to the obligation of the party who was not able to comply with what is incumbent upon him). 2. Can no longer be demanded when he who demands is no longer in the position to return whatever he may be obliged to restore; neither can it be demanded when the thing which is the object of the contract is already in the possession of a third person who obtained it in good faith Remedy: proceed against the party responsible for the transfer or conveyance for damages. If the thing is acquired in bad faith, the injured party can still go after the property. If the thing can no longer be recovered, the only remedy is to proceed against the third person who acted in bad faith for damages. Note: There can be partial rescission or fulfillment under Art. 1191 (Central Bank vs. CA, G.R. No. L-45710, October 3, 1985). Effects of breach by both parties (Art. 1192): 1. The liability of the first infractor shall be equitably tempered by the courts; 2. 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. OBLIGATIONS WITH A PERIOD Obligations whose fulfillment a DAY CERTAIN has been fixed, shall be DEMANDABLE only when that day COMES. Obligations with a RESOLUTORY PERIOD takes effect at once but terminate upon the ARRIVAL of the day certain (Art. 1193).

OBLIGATIONS & CONTRACTS Note: A DAY CERTAIN is understood to be that which must necessarily come, although it may not be known when. If the uncertainty consists in WHETHER THE DAY will COME or NOT, the obligation is a conditional one. When the debtor bind himself to pay WHEN his MEANS PERMIT him, the obligation shall be deemed to be one with a period (Art. 1180). Term/Period Interval of time, which, exerting an influence on an obligation as a consequence of a juridical act, either suspends its demandability or produces its extinguishment. Requisites: 1. Future; 2. Certain; and 3. Possible, legally and physically. When the period is too short for the prestation, as when Atoy is to build a ten-story building in 24 hours, the obligation is void (See Tolentino Vol. IV, p 188). Note: What is suspended by the term is not the acquisition of the right or the effectivity of the obligation but its demandability. When Period of Prescription Begins It commences from the time the term in the obligation arrives, for it is only from that date that it is due and demandable (Ullman vs. Hernaez, G.R. No. L-9816, March 10, 1915). Term/Period and Condition Distinguished Term/Period Condition Interval of time which is future and certain

Fact or event which is future and uncertain

Must necessarily come, although it may not be known when

May or may not happen

Exerts an influence upon the Exerts an influence upon the time of demandability or very existence of the extinguishment of an obligation itself obligation No retroactive effect unless there is an agreement to the Has retroactive effect contrary When it is left exclusively to the will of the debtor, the existence of the obligation is not affected; empowers the

When it is left exclusively to the will of the debtor, the very existence of the obligation is affected

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OBLIGATIONS & CONTRACTS court to fix the duration of the obligation Must be possible, otherwise, Must be possible, otherwise, obligation is void obligation is void Kinds of Period/Term: 1. As to Effect a. Suspensive (Ex Die) -- Obligations whose fulfillment a DAY CERTAIN has been FIXED, shall be DEMANDABLE only when that day comes (Art. 1193 Par. 1). Thus, the period must lapse before the performance of the obligation can be demanded. Note: If a fortuitous event supervenes, the obligor is merely relieved of the obligation to fulfill at that time and does NOT stop the running of the period because in effect that would be an extension of the term of the contract (Victoria’s Planters vs. Victorias Milling Co., G.R. No. L-6648,nJuly 25, 1955). Fortuitous event does NOT interrupt the running of the period. b. Resolutory (In Diem) -- Obligations with a resolutory period take effect AT ONCE but TERMINATE upon arrival of the day certain (Art. 1193, Par 2). Thus, the arrival of the period terminates the obligation. 2. As to expression a. Express -- when specifically stated. b. Implied -- when it can be deduced that the parties intended a period such as in the case of Art. 1180 when one promises to pay when able. 3. As to definiteness a. Definite -- refers to a FIXED known date or time b. Indefinite -- even which will necessarily happen but the date of its happening is unknown Note: The uncertainty of the date of occurrence DOES NOT convert into a condition so long as there is no uncertainty whether the event WILL HAPPEN or NOT. 4. As to source a. Conventional - made by agreement of the parties b. Legal - period fixed by law such Articles 1682 and 1687

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CIVIL LAW c. Judicial - set my courts in case of implied and indefinite period Note: In case of loss, deterioration or improvement the same rules as discussed under conditional obligations apply. EFFECT OF PAYMENT IN ADVANCE Effect of Advance Payment or Delivery In obligations to give, the obligor can recover what he has paid or delivered with fruits and interests (Art. 1195). Note: There can be no right of recovery if the obligor delivers the thing voluntarily or with the knowledge of the period or term or the fact that the obligation has not yet become due and demandable Period for whose benefit (Art. 1196) General Rule: For the benefit of both parties in the absence of stipulation or in case of doubt. Exception: If it can be shown that the period has been established in favor of the creditor or of the debtor. Period for the Benefit of the Creditor Creditor may demand the fulfillment of the obligation at any time but the obligor cannot compel him to accept payment before the expiration of period (e.g. “on demand”). Period for the Benefit of the Debtor Debtor cannot be compelled to perform obligation prematurely, but he can do so if he desires. Judicial Term/Period When fixed by a competent court in accordance with the causes expressly recognized by law. Once fixed, the period can no longer be judicially changed. When Court May Fix Period General Rule: Courts are WITHOUT power to fix period. Exceptions: 1. If the obligation does not fix a period, but from its nature and circumstances it can be inferred that a period was intended (Art. 1197).; 2. If the duration of the period depends upon the will of the debtor (Art. 1197, Par. 2).; 3. If under the circumstances the parties have contemplated a period (Art. 1197, Par. 3).

CIVIL LAW 4. If the debtor binds himself when his means permit him to do so (Art. 1180). Note: The remedy cannot be applied to contract of services and pure obligations. The period of employment is understood to be implicitly fixed, in default of express stipulation, by the period for the payment of the salary of the employee in accordance with customs. Applies to a lease agreement where a contract of lease clearly exists. The fulfillment of the obligation cannot be demanded until after the court has fixed the period and such period has arrived. Such technicality need not be adhered to when a prior and separate action would be a mere formality and would serve no other purpose than to delay (Borromeo vs. CA, G.R. No. L-22962, September 28, 1972). There can be no possibility of any breach of contract or failure to perform the obligation unless the period is fixed by courts. It is NOT necessary that the creditor, in his complaint, must expressly ask the court to fix the duration of the term or period, such may be granted although the complaint does not ask for such relief where the essential allegations of the pleadings describe an obligation with an indefinite period. Once fixed by court, the period can no longer be judicially changed. However, Art. 1197, par. 3 does not prohibit parties to set a different period than that fixed by court. When Debtor Loses Right to Make Use of Period (Art. 1198): 1. He becomes insolvent, unless he gives a guaranty or security for the debt (the insolvency need not be judicially declared). 2. He does not furnish to the creditor the guaranties or securities which he has promised. 3. If, after their establishment, the guaranty or security is impaired through the fault of the debtor, he shall lose his right to the benefit of the period; however, if it is impaired without his fault, he shall retain his right. Note: Impairment need not be total. 4. If the guaranty or security disappears through any cause, even without the fault of the debtor. 5. He violates any undertaking, in consideration of which the creditor agreed to the period (i.e. if an employee commits a substantial breach of his employment contract, the employer may terminate the employment).

OBLIGATIONS & CONTRACTS 6. He attempts to abscond. It is not essential that there be actual absconding. Note: If IMPAIRMENT is without the fault of the debtor, he shall retain the right. When obligations comprehend several objects it may be: 1. Conjunctive - when all the objects or prestations are demandable at the same time. 2. Distributive- when only one is demandable. It may either be alternative or facultative. ALTERNATIVE AND FACULTATIVE OBLIGATIONS 1. Conjunctive - all prestations must be performed to extinguish the obligation; or 2. Disjunctive - one or some prestations must be performed to extinguish the obligation a. Alternative b. Facultative ALTERNATIVE OBLIGATION: The debtor must perform one of several obligations, the choice belongs to the debtor UNLESS expressly given to the creditor (Art. 1200). Limitation: 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 (Art. 1200, Par. 2). Note: Grant of choice to creditor cannot be implied. Also, right of choice may be entrusted to a third person. A person ALTERNATIVELY BOUND by different prestations shall completely perform one of the (Art 1199, Par. 1). Limitation: The creditor cannot be compelled to receive part of one and part of the other undertaking (Art. 1199, Par. 2). Effect of Notice of Choice: 1. Limits the obligation to the object or prestation selected with all the consequences which the law provided. 2. The obligation is converted to a simple obligation to perform the prestation chosen. 3. Once the selection has been communicated, it becomes irrevocable.

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OBLIGATIONS & CONTRACTS When Notice Produces Effect: The CHOICE shall PRODUCE effect EXCEPT from the TIME it has been COMMUNICATED (Art. 1201). Notice of selection may be in any form provided that it is sufficient to make the other party know that the election has been made. It may be: 1. Orally 2. In Writing 3. Tacitly a. Performance by the debtor who has the right to choose or in the acceptance of a prestation by the creditor when he has a right of selection. b. When the creditor sues the debtor for the performance of one of the prestation. Note: The law does not require the other party to consent to the choice made by the party entitled to choose UNLESS the debtor has chosen a prestation which could not have been the object of the obligation and the creditor consents thereto which amount to a novation. The right to choose is not lost by the mere fact that the party entitled to choose delays in making his selection. In case the person entitled to choose, does not make his selection, the other party can ask the court for a 3rd party to choose. Effect of Loss or Impossibility of One or All Prestations: The debtor shall LOSE the RIGHT of CHOICE, when among the prestations whereby he is alternatively bound, only one is practicable (Art. 1202). Note: The obligation then is converted to a SIMPLE and PURE obligation. If the debtor cannot make a choice according to the terms of the obligation through the creditor’s act, the former may rescind the contract with damages (Art. 1203). When creditor is entitled to indemnity for damages (Art. 1204): When through the fault of the debtor: 1. All the things which are alternatively the object of the obligation have been lost; OR 2. Compliance of the obligation has become impossible unless due to fortuitous event. Note: The indemnity shall be fixed based on the value of the LAST THING which disappeared OR that of the

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CIVIL LAW SERVICE which LAST became IMPOSSIBLE (Art. 1204, Par. 2). Damages other than the above-mentioned may also be rewarded (Art. 1204, Par. 3). When Alternative Obligation Cease to be such: When the CHOICE has been EXPRESSLY given to the CREDITOR, the obligation shall CEASE to be alternative from the day when the SELECTION has been communicated to the debtor (Art. 1205 Par. 1). Effects of Loss of Objects of Alternative Obligation (Art. 1204- 1205): A.When choice belongs to debtor: 1. Due to Fortuitous Event a. All are lost – debtor is released from the obligation b. Some but not all are lost – deliver that which he shall choose from among the remainder c. Only one remains – deliver that which remains 2. Debtor’s fault a. All are lost – creditor shall have a right to indemnity for damages based on the value of the last thing which disappeared or service which become impossible b. Some but not all are lost – deliver that which he shall choose from among the remainder without damages c. Only one – deliver that which remains B.When choice belongs to creditor: 1. Due to Fortuitous Event a. All are lost – debtor is released from the obligation b. Some but not all are lost – deliver that which he shall choose from among the remainder c. Only one remains – deliver that which remains 2. Debtor’s fault a. All are lost – creditor may claim the price/value of any of them with indemnity for damages b. Some but not all are lost – creditor may claim any of those subsisting without a right to damages OR price/value of the thing lost with right to damages FACULTATIVE OBLIGATION (Art. 1206) An obligation wherein only one object or prestation has been agreed upon by the parties to the obligation, but which may be complied with by the delivery of another or the performance of another prestation in substitution.

CIVIL LAW Art. 1201 can be applied by analogy with respect to the time/moment when the substitution will take effect. Communication is necessary to make substitution effective. Effect of Loss of Substitute in Facultative Obligation (Art. 1206): Loss of the thing intended as substitute 1. Before substitution is made: a. If due to bad faith or fraud of obligor – obligor is liable b. If due to the negligence of the obligor – obligor is not liable Note: According to Jurado: “It is submitted that whatever may be the cause of the loss/deterioration of the thing intended as a substitute, such loss or deterioration shall not render the debtor liable.” 2. After substitution is made: The loss or deterioration of the substitute on account of the obligor’s delay, negligence or fraud – obligor is liable because once substitution is made, the obligation is converted into a simple one with the substituted thing as the object of the obligation. Note: Creditor cannot be compelled to receive part of one and part of another undertaking. Difference between Alternative and Facultative Obligations Alternative

Facultative

1. Various prestations all of which constitute parts of the obligation. 2. Nullity of one of the prestation does not invalidate the obligation which is still in force with respect to those which have no vice. 3. Right to choose may be given to the creditor. 4. Only the IMPOSSIBILITY OF ALL the prestations due WITHOUT the fault of the debtor extinguished the obligation.

1. Only the principal prestation constitutes the obligation, the accessory being only a means to facilitate payment. 2. Nullity of the principal prestation invalidates the obligation. 3. Only the debtor can choose the substitute. 4. Impossibility of the principal prestation is sufficient to extinguish the obligation, even if the substitute is possible.

OBLIGATIONS & CONTRACTS JOINT AND SOLIDARY OBLIGATIONS Joint Obligation (Obligación Mancomunada) The whole obligation is to be paid or fulfilled proportionately by different debtors or demanded proportionately by different creditors. Solidary Obligation (Obligación Solidaria) Each one of the debtors is bound to render, and/or each one of the creditors has a right to demand entire compliance with the prestation. Nature of a Collective Obligation (Art. 1207) General Rule: Obligation is presumed joint if there is concurrence of several creditors OR of several debtors OR of several creditors and debtors in one and the same obligation. Exceptions: 1. The obligation expressly states that there is solidarity (i.e. “jointly and severally”, “individually and collectively”, “I promise to pay” followed by the signatures of two or more persons;) 2. The law requires solidarity ex. tort, quasi- contracts, liability of principals, accomplices and accessories of a felony, obligations of devisees and legatees, bailees in commodatum. Our law recognizes solidary responsibility for wrongful acts whether they are crimes or quasi-delicts. A moral wrong cannot be divided into parts; hence the liability for it must be solidary. 3. Nature of the obligation requires solidarity. 4. When a charge or condition is imposed upon heirs or legatees, and the testament expressly makes the charge or condition in solidum (Manresa). 5. When a solidary responsibility is imputed by a final judgment upon several defendants. Principal Effects of Joint Liability: 1. Vices of each obligation arising from the personal defect of a particular debtor or creditor does not affect the obligation or right of the others 2. Insolvency of one debtor does not make others responsible for his share. 3. Demand by the creditor on one joint debtor puts him in default, but not the others since the debts are distinct. 4. When the creditor interrupts the running of the prescriptive period by demanding judicially from one, the others are not affected.

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OBLIGATIONS & CONTRACTS 5. Defenses of one debtor are not necessarily available to the others. Note: Even if the parties stipulated in their contract that the obligation of the debtor is solidary, but such contract was superseded by a JUDICIAL DECISION declaring the obligation to be merely joint, the said decision must be enforced in a joint manner (Oriental Philippines Company vs. Abeto, G.R. No. L-4239, October 10, 1934). Solidary liability is determined by the tenor of the contract, NOT by judicial admission by the party. Joint Divisible Obligation (Art. 1208) Each creditor can demand only for the payment of his proportionate share of the credit; each debtor can be held liable only for the payment of his proportionate share of the debt.

Credit or debt shall be presumed to be divided into as many equal shares as there are creditors or debtors, the credits or debts considered distinct from one another subject to the Rules of Court governing multiplicity of suits. In case of breach of obligation by one of the debtors, damages due must be borne by him alone; if there is any defense purely personal to one of the debtors, he alone can avail himself of such defense. Note: The co-creditors or co-debtors may regulate their rights or liabilities in their internal relations with each other. Joint Indivisible Obligation (Art. 1209) Midway between joint and solidary obligations, preserving the two characteristics of the joint obligation, in that no creditor can do an act prejudicial to others, and no debtor can be made to answer for others. Characteristics: 1. No creditor can act in representation of the other; If not all of the creditors demand the prestation, the debtor may legally refuse to deliver to them or he can insist that all the creditors together receive the thing, and if any of them refuses to join the others, the debtor may deposit the thing by way of consignation. 2. No debtor can be compelled to answer for the liability of others;

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CIVIL LAW If there are two or more debtors, the fulfillment of or compliance with the obligation requires the concurrence of all the debtors, although each for his own share In case of insolvency of one of the debtors, the others shall not be liable for his shares. To hold otherwise would destroy the joint character of the obligation. Breach of Joint Indivisible Obligation (Art. 1224) Obligation can be enforced only by proceeding against all of the debtors. If anyone of the debtors should fail or refuse to comply with the obligation, it is converted into one of indemnity for damages. Debtors who may have been ready to comply with what is incumbent upon them 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. The debtor who failed or refused to comply with the prestation shall bear the burden of paying all of the damages to the creditor/s and shall indemnify the other debtors for damages suffered as a result of the transformation of the obligation into one of indemnity. Interruption of Period of Prescription Two Views: 1. The act of one joint creditor beneficial to others, as for instance the interruption of period of prescription, is sufficient since Art. 1209 merely provides that the right of creditors may be prejudiced only by their collective acts (Manresa). 2. The act of a joint creditor which would ordinarily interrupt the period of prescription would not be valid because the indivisible character of the obligation requires collective action of the creditors (De Buen). Note: Both Jurado and Tolentino are inclined with the view of De Buen. Indivisibility and Solidarity Distinguished (Art. 1210) Indivisibility Solidarity Refers to the legal tie or Refers to the prestation that vinculum juris, and is not capable of partial consequently to the subjects performance. or parties of the obligation. Exists only if there is more Exists even if there is only than one creditor or more one creditor and one debtor. than one debtor (plurality of subjects).

CIVIL LAW Each creditor cannot demand more than his share and each debtor is not bound to pay more than his share.

Each creditor may demand the entire prestation and each debtor is bound to pay the entire prestation.

Effect of breach: obligation is converted into indemnity Effect of breach: solidarity for damages; indivisibility is remains terminated Only the debtors guilty of All the debtors are liable for breach of obligation is liable the breach of the obligations for damages. committed by a debtor. All debtors are Other debtors are not liable proportionately liable for the if one debtor is insolvent. insolvency of one debtor. In case of non-performance by the debtors, the obligation to pay the damages arises. With respect to the damages, the prestation becomes divisible and each creditor can recover separately. The debtors who may have been ready to fulfill or perform what was incumbent upon them 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 (Art. 1224). SOLIDARITY (Art. 1211) Solidarity may exist although creditors and debtors may not be bound in the same manner and by the same periods and conditions. Kinds of Solidarity 1. As to source a. Legal – imposed by law b. Conventional – agreed upon by the parties c. Real – imposed by the nature of the obligation 2. As to parties bound a. Active – solidarity on the part of the creditors, where any one of them can demand the fulfillment of the entire obligation. Effect: Mutual representation among the solidary creditors with powers to exercise the rights of others in the same manner as their rights. b. Passive – solidarity on the part of the debtors, where any one of them can be made liable for the fulfillment of the entire obligation.

OBLIGATIONS & CONTRACTS c. Mixed – solidarity on the part of the debtors and creditors, where each one of the debtors is liable to render, and each one of the creditors has a right to demand, entire compliance with the obligation. 3. As to uniformity a. Uniform – parties are bound by the same stipulations. b. Non-uniform or Varied – parties are not subject to the same stipulations. Effect: Creditor can commence an action against anyone of the debtors for compliance with the entire obligation minus the portion or share which corresponds to the debtor affected by the condition or period. Distinguished from a surety (fiador in solidum) Passive Solidary Surety (Solidary Debtor Guarantor) Both are solidarily liable to the creditor for the payment of the entire obligation Liable not only for the Liable only for the debt payment of the debt of of another another, but also for the payment of a debt which is properly his own Has a right to demand Acquires a right of reimbursement from his reimbursement from the co-debtors of their principal debtor of the shares, if he pays the entire amount he has entire amount of the paid obligation An extension of time An extension of time granted by the creditor granted by the creditor to one of the solidary to the principal debtor debtors without the would release the surety knowledge of the other from the obligation solidary debtors would not have the effect of releasing the latter from obligation Effects of Prejudicial and Beneficial Acts (Art. 1212): 1. Each one of the solidary creditors may do whatever may be useful or beneficial to the others, but not anything which may be prejudicial to the latter. 2. As far as the debtor/s is/are concerned, a prejudicial act performed by a solidary creditor is valid and binding; as between the solidary creditors, the creditor who performed such act shall incur the obligation of indemnifying the others for damages (Castan).

Effect: Mutual guaranty relationship is created.

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OBLIGATIONS & CONTRACTS Reason: Art. 1212 must be harmonized with Art. 1215. Art. 1215 expressly recognizes the effectiveness of acts of extinguishment by a solidary creditor. Effects of Assignment of Rights in Solidary Obligations (Art. 1213) General Rule: A solidary creditor CANNOT assign his right as it is predicated upon mutual confidence, i.e., personal qualification of each creditor had been taken into consideration. Exceptions: 1. Assignment to a co-creditor 2. Assignment is with consent of co-creditor To Whom Payment Made in Solidary Obligation (Art. 1214) General Rule: Payment may be made to any of the solidary creditors Exception: If demand, judicial or extra-judicial, has been made by one of them, payment should be made to him. Reason: When one creditor makes an extrajudicial or judicial demand for payment, the tacit representation by the other creditors is considered revoked and during the pendency of the action, the creditors who did not sue lose their representation of the others. As to the effect of res judicata to the other creditors. Under Art. 1214, once an action is filed by a solidary creditor, he represents all the others and payment can be made only to him. If the filing of the action consolidates in the plaintiff creditor all the rights of the other co-creditors, the latter must benefit from the favorable results and suffer from the adverse consequences of such action. However the other creditors will not be adversely affected, if the judgment is based on a cause personal to the plaintiff in the first action (Tolentino, Arturo M., Commentaries and Jurisprudence on the Civil Code of the Philippines, Vol. 4, p 242 [1991]). EFFECT OF NOVATION, COMPENSATION, CONFUSION, AND REMISSION IN SOLIDARY OBLIGATIONS (Art. 1215, Arts. 1219-1220) Novation 1. If prejudicial, the solidary creditor who effected the novation shall reimburse the others for damages incurred by them;

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CIVIL LAW 2. If beneficial and the creditor who effected the novation is able to secure performance of the obligation, such creditor shall be liable to the others for the share which corresponds to them, not only in the obligation, but also in the benefits; 3. If effected by substituting another person in place of the debtor, the solidary creditor who effected the novation is liable for the acts of the new debtor in case there is deficiency in performance or in case damages are incurred by the other solidary creditors as a result of the substitution; 4. If effected by subrogating a third person in the rights of the solidary creditor responsible for the novation, the obligation of the debtor or creditors is not in reality extinguished; the relation between the other creditors not substituted and the debtor/s is maintained; 5. If the novation is effected by subrogating a third person in the rights of all the solidary creditors, the creditor responsible for such novation is liable to the other creditors for the share which corresponds to them in the obligation. Compensation and Confusion 1. PARTIAL: rules on application of payment shall apply, without prejudice to the right of other creditors who have not caused the confusion or compensation to be reimbursed to the extent that their rights are diminished or affected; 2. TOTAL: obligation extinguished, what is left is the ensuing liability for reimbursement within each group – the creditor causing the confusion or compensation is obliged to reimburse the other creditors; the debtors benefited by the extinguishment of the obligation are obliged to reimburse the debtor who made the confusion or compensation possible. Remission 1. ENTIRE OBLIGATION: obligation is totally extinguished but the solidary debtor who obtained it does not entitle him to reimbursement from his co-debtors; Reason: Said debtor gives or loses nothing 2. For the benefit of one of the debtors covering his entire share: he is completely released from the creditor/s; 3. For the benefit of one of the debtors and it covers only part of his share: his character as a solidary debtor is not affected. 4. Total or partial remission: Creditor/s responsible for the remission are liable to reimburse others for the share in the obligation corresponding to them. 5. Total or partial remission: if the creditor/s proceed against any one of the solidary debtors for the payment

CIVIL LAW

OBLIGATIONS & CONTRACTS

of the entire obligation, such debtor can always avail himself of the defense of partial remission (Art. 1222)

found by the court as proper (Inciong vs. CA, G.R. No. 96405, June 26, 1996).

The above rules cannot be applied in case the debt has been totally paid by anyone of the solidary debtors before the remission was effected (Art. 1219).

Effect of Payment by a Debtor (Art. 1217 and Art. 1218) Payment made by one of the solidary debtors either totally or partially extinguishes the obligation depending upon whether the entire amount of debt is paid or only a part thereof.

Effect of Death of Principal Debtor Under the law and jurisprudence, the creditor may sue, separately or together, the principal debtor and the surety, in view of the solidary nature of their liability. The death of the principal debtor will not work to convert, decrease or nullify the substantive right of the solidary creditor. Evidently, despite the death of the principal debtor, the creditor may still sue the surety alone in accordance with the solidary nature of the latter’s liability under the performance bond (Stronghold Insurance Co. vs. Republic – Asahi Glass Corp., G.R. No. 147561, June 22, 2006).

If two or more solidary debtors offer to pay, the creditor may choose which offer to accept. Solidary debtor who made the payment merely entitles him to claim from his co-debtors the share which corresponds to them with interest from the time of payment; does not create a real case of subrogation; if payment was made before the debt is due, no interest for the intervening period may be demanded.

Effect of Payment to a Creditor If one of the solidary creditors is able to collect the entire amount of the debt from one or some or all of the solidary debtors, the obligation is totally extinguished, although there arises a consequent obligation on his part to render an account to his co-creditors (Art.1215, par.2).

Reason: The right of the paying co-debtor to be reimbursed is not based on the original obligation but upon the payment made by him.

Effect of Demand upon a Solidary Debtor (Art. 1216) 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.

Share of the insolvent solidary debtor shall be borne by ALL his co-debtors, in proportion to the debt of each.

The creditor may proceed against any one of the solidary debtors or against all of them simultaneously. A creditor’s right to proceed against the surety exists independently of his right to proceed against the principal (Palmares vs. Court of Appeals, G.R. No. 126490, March 31, 1998). Because of the unity of the legal tie in solidarity, although the solidary debtors may be individually distinct from each other, they constitute legally one and the same party (Tolentino, Arturo M., Commentaries and Jurisprudence on the Civil Code of the Philippines, Vol. 4, p 243 [1991]). Note: If a claim from one of the solidary debtors has been dismissed by a court on grounds other than the extinguishment of the whole obligation or that the claim has prescribed, it does not necessarily mean that the solidary indebtedness cannot be claimed against the other solidary debtors who were not impleaded in the case or against those who were impleaded but whose liability was

No reimbursement if payment is made after the obligation has prescribed or has become illegal.

Computation of Interest Two Views: 1. From the time payment was made 2. From the time the debt became due Effect of Loss or Impossibility of Performance in Solidary Obligation (Art.1219-Art. 1221): 1. If it is not due to the fault and before delay of the solidary debtors, the obligation is extinguished. 2. If the loss or impossibility is due to the fault of one of the solidary debtors OR due to a fortuitous event after one of the solidary debtors had already incurred in delay, the obligation is converted into an obligation of indemnity for damages but the solidary character of the obligation remains. Defenses Available to a Solidary Debtor (Art. 1222): 1. Defenses derived from the nature of the obligation – total defense; all the solidary co-debtors are benefited. Example: Payment or performance, res judicata, prescription, those that causes defects in the contracts and others of similar nature

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OBLIGATIONS & CONTRACTS 2. Defenses personal to him – constitutes total defense and partial defense. Example of total defense: Minority, insanity, and other defenses that causes the annulment of consent

CIVIL LAW In obligations to give, even though the object may be physically divisible, the obligation is still indivisible if it is provided by law or it is so intended by the parties (Art. 1225, par. 3).

3. Defenses pertaining to his own share – constitutes a partial defense; only the debtor is benefited.

In obligations to do, the obligation shall be considered divisible when it has for its object (Art. 1225, par. 2): 1. The execution of a certain number of days of work 2. The accomplishment of work by metrical units 3. The accomplishment of analogous things which by their nature are susceptible of partial performance.

Example: Share of debtor is not yet due, the creditor can only compel the share of other co-debtors

In obligations not to do, it depends upon the character of the prestation in each particular case (Art. 1225, par. 3).

4. Defenses personal to the others, but only as regards that part of the debt for which the latter are responsible – constitutes partial defense only for the debtordefendant.

Effect of Divisible or Indivisible Obligation (Art. 1223) Divisibility/indivisibility is of little significance as implied under Art. 1223

Example: The co-debtor’s share is not yet due, so the creditor can only compel the debtor to give his share.

General Rule: Creditor cannot be compelled partially to receive the prestation in which the obligation consists; neither may the debtor be required to make partial payments

Example of partial defense: Special terms or conditions affecting his part of the obligation

Divisible Obligations Those which have as their object a prestation which is susceptible of partial performance without the essence of obligation changed. Indivisible Obligations Those which have as their object a prestation which is not susceptible of partial performance, otherwise, the essence of the obligation will be changed. Three Kinds of Division 1. Quantitative- the thing can be materially divided into parts and such parts are homogenous to each other. Movable- parts are actually separated from each other. Immovable- the limits of the parts are fixed by metes and bounds. 2. Qualitative- the thing can be materially divided but the parts are not exactly homogenous (i.e., inheritance) 3. Ideal/Intellectual- the thing cannot be separated into material parts (i.e., co-ownership) Test of Divisibility: Whether the prestation is susceptible of partial compliance or not (Art. 1225, par. 1). The susceptibility of partial compliance should be understood in the sense of the possibility of realizing the end or purpose which the obligation seeks to attain (Sanchez Roman).

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Exceptions: 1. When the obligation expressly stipulates the contrary 2. When the different prestations constituting the objects of the obligation are subject to different terms and conditions 3. When the obligation is in part liquidated and in part unliquidated Whether a contract is entire or severable depends in general upon the consideration to be paid, not upon its object. If the consideration is single, the contract is entire, but if the consideration is expressly or by implication apportioned, as when the part to be performed by one party consists in several and distinct items, and the price is apportioned to each of them, the contract is severable. Note: When there is plurality of debtors and creditors, the effect of divisible /indivisible character of the obligation depends on whether the obligation is joint or solidary. If solidary – Arts. 1211 to Art. 1222 apply If joint divisible – Art. 1208 is applicable If joint indivisible – Art. 1209 and 1224 apply Art. 1224: Breach of Joint Indivisible Obligation. See previous discussion on joint indivisible obligation (p. 184). OBLIGATION WITH A PENAL CLAUSE An obligation to which an accessory undertaking (penal clause/ penalty) is attached for the purpose of insuring its

CIVIL LAW performance by virtue of which the obligor is bound to pay a stipulated indemnity or perform a stipulated prestation in case of breach. Penal Clause and Condition Distinguished Penal Clause Condition Does not constitute an Constitutes an obligation obligation May become demandable upon default of the Never demandable unperformed obligation and sometimes jointly with it Purpose of Penalty: 1. Función coercitiva o de garantia - to insure the performance of the obligation; 2. Función liquidatoria - to liquidate the amount of damages to be awarded in case of breach of the principal obligation (compensatory) 3. Función estrictamente penal - in certain exceptional cases, to punish the obligor in case of breach of the principal obligation (punitive). Does not resolve the question of damages A penal clause is attached to an obligation in order to insure performance and has a double function: (1) to provide for liquidated damages, and (2) to strengthen the coercive force of the obligation by the threat of greater responsibility in the event of breach (Filinvest Land, Inc. vs. Court of Appeals, G.R. No. 138980, September 20, 2005). Kinds of Penalty: 1. As to origin a. Legal – constituted by law b. Conventional – constituted by parties 2. As to purpose a. Compensatory or Reparatory – indemnity for damages b. Punitive – punishment for breach 3. As to effect a. Subsidiary – only penalty may be demanded b. Joint or Complementary – both penalty and principal obligation may be demanded

OBLIGATIONS & CONTRACTS Obligations with a Penal Clause Distinguished from Other Obligations A. As against a conditional obligation Obligation with a Conditional Obligation Penal Clause There is already an No obligation before the existing obligation from suspensive condition the very beginning happens Penalty is dependent Principal obligation itself upon the nonis dependent upon the performance of the uncertain event principal obligation B. As against an alternative obligation Obligation with a Alternative Obligation Penal Clause There is only one Two or more obligations prestation are due The impossibility of one, Impossibility of the without the fault of the principal extinguishes debtor, leaves the other also the penalty subsisting The obligor cannot choose to pay the penalty to relieve Debtor can choose himself of the principal, which prestation to fulfill unless this right is expressly granted to him C. As against a facultative obligation Obligation with a Facultative Obligation Penal Clause Payment of the penalty in lieu of the principal Power of the debtor to obligation can be made make the substitution is only by express absolute stipulation The creditor can The creditor can never demand both demand both prestations prestations D.

As against a guaranty Obligation with a Guaranty Penal Clause Object of the obligations Obligation to pay the of the principal debtor penalty is different from and the guarantor is the the principal obligation same Principal obligation and Principal debtor cannot the penalty can be be the guarantor of the assumed by the same same obligation person

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OBLIGATIONS & CONTRACTS Obligation with a Penal Clause

Guaranty

Guaranty subsists even As a rule, penalty is when the principal extinguished by the obligation is voidable, nullity of the principal unenforceable or a obligation natural one Effect of Penalty (Art. 1226, par. 1) General Rule: The penalty shall substitute the indemnity for damages and payment of interest in case of noncompliance Exceptions: 1. When there is a stipulation to the contrary 2. When the obligor refuses to pay the penalty 3. When the obligor is guilty of fraud Note: See Art. 1170 Enforceability of Penalty (Art. 1226 par. 2) Penalty, as a stipulation in a contract, is demandable only if there is a breach of the obligation and it is not contrary to law, morals, good customs, public order or public policy. Where both of the contracting parties are unable to comply with their respective obligations, although the breach is not willful or culpable, the penal clause cannot be invoked by anyone of them to the prejudice of the other (Reyes vs. Formoso, CA, 46 Off. Gaz. 5621). Limitation upon the Right of the Debtor in Obligations with a Penal Clause (Art. 1227) General Rule: Debtor cannot exempt himself from the performance of the principal obligation by paying the stipulated penalty Exception: Unless this right has been clearly and expressly granted to him. Limitations on the Right of the Creditor in Obligations with a Penal Clause (Art. 1227) General Rule: Creditor cannot demand the fulfillment of the principal obligation and demand the satisfaction of the penalty at the same time. Exception: Unless the right has been clearly granted to him If creditor has chosen fulfillment of the principal obligation and performance thereof became impossible without his fault, he may still demand satisfaction of the penalty.

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CIVIL LAW If there was fault on the part of debtor, creditor may demand not only satisfaction of penalty but also the payment of damages. Proof of Actual Damages (Art. 1228) The rule that proof of actual damages is not necessary; it is applicable only to the general rule stated in Art. 1226 and not to the exceptions. Penalty is exactly identical with what is known as “liquidated damages” under Art. 2226. When Penalty May Be Reduced (Art. 1229): 1. If the principal obligation has been partly complied with; 2. If the principal obligation has been irregularly complied with; and 3. If the penalty is iniquitous or unconscionable even if there has been no performance. The power of a judge to reduce the penalty refers only to penalties prescribed in contracts. Effect of Nullity of Obligation or Penalty (Art. 1230) If principal obligation is void, penal clause shall also be void because the penalty is merely an accessory obligation. But if penal clause is void, principal obligation is NOT affected.

E XTINGUI SHMENT O BLIG ATIONS

OF

Extinguishment of Obligations (NoCoMeRePaLo Pre Re Ful An) 1. Payment/performance 2. Loss of the thing due 3. Condonation or remission of debt 4. Confusion or merger 5. Compensation 6. Novation 7. Annulment 8. Rescission 9. Fulfillment of a resolutory condition 10.Prescription Note: Enumeration under Art. 1231 is NOT exclusive. Other Forms of Extinguishment Not Under (Art. 1231) 1. Death (for personal or intransmissible obligation) 2. Mutual desistance or withdrawal 3. Arrival of resolutory period 4. Compromise

CIVIL LAW 5. Impossibility of fulfillment of condition 6. Fortuitous event Payment or Performance Fulfillment of the prestation due. A fulfillment that extinguishes the obligation by the realization of the purposes for which it was constituted. JURIDICAL ACT which is VOLUNTARY, LICIT, and MADE with the INTENT to EXTINGUISH the obligation. Requisites: 1. Person who pays 2. Person to whom payment is made 3. Thing to be paid 4. Manner, time, and place of payment Kinds of Payment: 1. Normal- when the debtor voluntarily performs the prestation as agreed upon 2. Abnormal- when debtor is forced by means of a judicial proceeding either to comply with the prestation or pay indemnity Characteristic of a valid payment: 1. Identity – only the prestation agreed upon and no other must be complied with 2. Completeness – the thing or service must be completely delivered or rendered 3. Indivisibility – payment or performance must be indivisible. Note: As a general rule, the above characteristics must concur. Principle of Integrity (Art. 1233) General Rule: 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. Exceptions: 1. When the obligation has been substantially performed in good faith (Art. 1234) less damages suffered by the oblige 2. When the obligee accepts performance, knowing its incompleteness or irregularity and without expressing any protest or objection; based on the principle of estoppel (Art. 1235). Who must pay? A. In general 1. Debtor 2. Anyone acting on the debtor’s behalf

OBLIGATIONS & CONTRACTS a. Duly authorized agent or representatives b. Heirs (provided that the debtor is already dead for otherwise they are considered as third persons interested in the obligation) c. Successors-in-interest and assignees Note: The creditor cannot refuse valid tender of payment from the abovementioned individuals. B. Third person who is an INTERESTED PARTY Interested party One who has an interest in the extinguishment of the obligation such as: 1. Co-debtors 2. Sureties 3. Guarantors 4. Owners of mortgages property or pledge Note: Even without the knowledge of the debtor, a person interested in the fulfillment of the obligation can pay (Art. 1302 ,Par. 3). Effects of Payment: 1. The obligation is extinguished. 2. The debtor is to fully reimburse the third person interested. 3. The third person interested is subrogated to the rights of the creditor. Note: The creditor cannot refuse valid tender of payment from the abovementioned individuals. C. Third person who is NOT an INTERESTED PARTY but with DEBTOR’s CONSENT General Rule: The creditor is NOT BOUND to accept payment or performance by a third person who has NO interest in the fulfillment of the obligation (Art. 1236, Par. 1). Exception: Unless there is a stipulation to the contrary. Effects of Payment 1. Third person is entitled to full reimbursement. 2. There is legal subrogation as the third person into the shoes of the creditor.

steps

Note: The creditor may refuse to accept payment. D. Third person who is NOT an interested party and WITHOUT knowledge or AGAINST the will of the debtor General Rule: Whoever pays for another may demand from the debtor what he has paid (Art. 1236, Par. 2).

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OBLIGATIONS & CONTRACTS

CIVIL LAW

Exception: If payment was made without the knowledge or against the will of the debtor.

2. Payment to the possessor of the credit, made in good faith (Art. 1242)

In such case, he can only recover insofar as the payment has been beneficial to the debtor.

This refers to the possession of credit not the document evidencing it.

Effects of Payment: 1. Third person can only be reimbursed insofar as payment has been beneficial to the debtor.

Note: In obligations to give, payment to incapacitated person is valid when: a. The incapacitated has kept the amount or thing paid or delivered . b. Payment has been beneficial to the incapacitated person Art. 1241.

Benefit to the creditor is presumed in the following cases (Art. 1241): RES a. If the creditor ratifies the payment to the third person (ratification); b. If by the creditor’s conduct, the debtor has been led to believe that the third person had authority to receive the payment (estoppel); c. If after the payment, the third person acquires the creditor’s rights (subrogation). Art. 1237 states that 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. To Whom Payment Must Be Made (Art. 1240) 1. The person in whose favor the obligation has been constituted. 2. His successor in interest. 3. Any person authorized to receive it – by law or by the creditor at the time when payment is due and not when the obligation was constituted. Effect of payment to unauthorized persons in obligation to give: General Rule: It shall NOT be valid, even though made in good faith. Exceptions: 1. Payment made to a third person, provided that it has redounded to the benefit of the creditor. Benefit to the creditor is presumed in the following cases (Art. 1241): (RES) a. If the creditor ratifies the payment to the third person (ratification); b. If by the creditor’s conduct, the debtor has been led to believe that the third person had authority to receive the payment (estoppel); c. If after the payment, the third person acquires the creditor’s rights (subrogation);

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Payment made to the creditor by the debtor after the latter has been judicially ordered to retain the debt shall NOT be valid (Art. 1243); UNLESS otherwise stipulated, extrajudicial expenses required by the payment shall be for the account of the debtor (Art. 1247). Rule in monetary obligations (Art. 1249) 1. Must be made in the currency stipulated; if it is not possible to deliver such currency, then in the currency which is legal tender in the Philippines. 2. Delivery of promissory notes payable to order or bills of exchange or other mercantile documents shall not produce the effect of payment except: a. When they have been cashed or credited; or b. When through the fault of the creditor they have been impaired. Note: The impairment of the negotiable instrument through the fault of the creditor contemplated by Art. 1249 is applicable ONLY to a document executed by a THIRD PERSON and delivered by the debtor to the creditor and does not apply to instruments executed by debtor himself and delivered to the creditor. Pending the cashing of the mercantile document, the creditor cannot bring an action against the debtor during the intervening period as “the action derived from the original obligation shall be held in abeyance.” Legal Tender: Such currency which may be used for the payment of all debts, whether private or public. Its significance is manifested by the fact that it is such which the debtor may compel a creditor to accept in payment of the debt. Legal tender in the Philippines would be all NOTES AND COINS issued by the Bangko Sentral (Circular No. 537): 1. 1-Peso, 5-Pesos and 10-Peso coins: in amounts not exceeding P1,000.00 2. 25 centavo coin or less: in amounts not exceeding P100.00

CIVIL LAW Take note that bills, regardless of denomination, are legal tender up to whatever amount. R.A. 8183 provides that all monetary obligations shall be settled in the Philippine currency which is legal tender in the Philippines. The parties may agree that the obligation or transaction be settled in other currency at the time of payment. Extraordinary inflation or deflation (Art. 1250) Requisites: 1. There must be a decrease or increase in the purchasing power of the currency which is unusual or beyond the common fluctuation in the value of the currency; 2. Such decrease or increase could not have been reasonably foreseen or which was manifestly beyond the contemplation of the parties at the time the obligation was established. Take note that that Art. 1250 mentions “in the currency STIPULATED. Thus, it applies ONLY to contractual obligations. Value of currency at the time of the establishment of the obligation shall be the basis of payment. The law does not say it should be the amount paid (Jurado & Desideri, Comments and Jurisprudence on Obligations and Contracts, 2010 ed., p.263). Note: Even if the price index of the goods and services may have risen during the intervening period (Sangrador vs. Valderrama, GR No. 79552, November 29, 1988), this increase, without more, cannot be considered as resulting in “extraordinary inflation” as to justify the application of Article 1250 (Telengtan & Sons, Inc. vs. United States Lines, Inc., et. al., G.R. No. 132284, February 28, 2006).

OBLIGATIONS & CONTRACTS Note: If the debtor changes his domicile in bad faith or after he has incurred in delay, the additional expenses shall be borne by him. Art. 1251 governs unilateral obligations. obligations are governed by special rules.

Reciprocal

Special Forms of Payment: A.Application of Payment – Designation of the debt to which the payment must be applied when the debtor has several obligations of the same kind in favor of the same creditor. Requisites: 1. There must be only one debtor and only one creditor; Under Art. 1792, application of payment may be had even if there are two creditors -- the partnership and the managing partner (Jurado, p. 265), but the law allows such application in favor of the managing partner only if the personal credit of the partner should be more onerous to him. Neither the requirement that there must be only one debtor militates against the possibility of extending the rules on application of payment to solidary obligations. The solidary debtor who paid may have other obligations in favor of the creditor. 2. There must be two or more debts of the same kind; The fact that the debts are of the same kind is reckoned from the time of the application of payment, not from the time of constitution of the obligation. A non- monetary obligation, for instance, may be converted into one of damages at the time of application of payment.

There must be a declaration of such extraordinary inflation or deflation by the Bangko Sentral. Without such declaration, the creditors cannot demand an increase, and debtors a decrease, of what is due to or from them (Ramos vs. CA, GR No. 119872, July 7, 1997 and Mobil Oil Phils. vs. CA, GR No. 103072, August 20, 1993).

3. All the debts must be due except if there is stipulation to the contrary OR application of payment is made by the party for whose benefit the term has been constituted (Art. 1196); and 4. Amount paid by the debtor is insufficient to cover the total amount of all the debts.

Place of Payment (Art. 1251) 1. Place stipulated by the parties. 2. If there is no stipulation and the obligation is to deliver a determinate thing, payment shall be made at the place where the thing might be at the time the obligation was constituted. 3. In any other case, the payment shall be made at the domicile of the debtor.

Rules on Application of Payment: 1. The right to designate the debt to which the payment shall be applied belongs primarily to the debtor. 2. If the debtor does not apply, the creditor may designate which debt is paid by specifying in the receipt. 3. If the creditor did not apply or if application is void, debt which is the most onerous, is the one satisfied. It

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OBLIGATIONS & CONTRACTS is evident in the circumstances laid by Art. 1254, that it is the law which makes the application. Why the most onerous debt? In making the application of payments, the law considers particularly the interest of the debtor. It is assumed that if the debtor had chosen the debt to be paid, he would have relieved himself first of the most burdensome debt. Which is more onerous? 1. OLDEST debts are more onerous than more recent ones; 2. INTEREST BEARING debts are more onerous than those which do not, even if the latter were incurred at an earlier debt; 3. A SECURED debt is more onerous than that which is not; 4. A debt in which the is PRINCIPALLY bound is more onerous than that which he is merely a guarantor or surety; 5. A debt in which he is solidarily bound is more onerous than that which he is only a sole debtor; 6. Within a solidary obligation, the share which corresponds to a solidary debtor would be most onerous; 7. An obligation for INDEMNITY is more onerous than that which is by way of penalty; 8. LIQUIDATED DEBTS are more onerous than unliquidated ones. No hard and fast rule, however, can be put up. As a last resort, when it cannot definitely be determined whether one debt is more burdensome than the other, the abovementioned rules may be applied. Debts due of the same nature, payment shall be applied proportionately. Must conform to the general rules on payment (Arts. 1232-1251). Applying both rules, should a debtor have two debts of the same nature and burden amounting to P100 and P200 and he pays only P100, the same shall not be applied proportionately as the creditor cannot be compelled to accept partial payment. Consequently, his payment shall be fully applied to the debt amounting to P100. Note: If the debt produces interests, payment of the principal shall not be deemed to have been made until the interests have been covered (Art. 1253); applies only in the absence of an agreement to the contrary

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CIVIL LAW and is merely directory and not mandatory. It means that the benefits of Art. 1253 may be waived by way of stipulation. B.Dation in Payment (Dacion en pago) – Delivery and transmission of ownership of a thing by the debtor to the creditor as an accepted equivalent of the performance of the obligation. Requisites: 1. Existence of a money obligation; Take note, however, that it is precisely in obligations which are not money debts, in which the true juridical nature of dation in payment becomes manifest. The fact that there must be a prior agreement of the parties on the delivery of the thing in lieu of the original prestation shows that there is a novation which extinguishes the original obligation, and the delivery is a mere performance of the obligation (Tolentino, Arturo M., Commentaries and Jurisprudence on the Civil Code of the Philippines, 1991 ed., Vol. 4, p.294). Thus, if the creditor is evicted from the thing given in dation in payment, the original obligation is not revived. It is submitted that the question of whether the preexisting obligation in dation in payment is in money has significance only in determining whether the resulting contract is that of sale and not whether the original obligation has been extinguished. 2. Alienation to the creditor of a property by the debtor with the consent of the former; and 3. Satisfaction of the money obligation of the debtor. C.Payment by Cession (Art. 1255) - special form of payment whereby the debtor assigns/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 credits. Requisites: 1. Plurality of debts; 2. Partial or relative insolvency of the debtor; and 3. Acceptance of the cession by the creditors. Kinds of Payment by Cession: 1. Contractual (Art. 1255) 2. Judicial (governed by Insolvency Law) a. Voluntary b. Involuntary

CIVIL LAW Dation in Payment and Payment by Cession Distinguished Dation in Payment Payment By Cession One creditor

Plurality of creditors

Debtor not necessarily in Debtor must be partially state of financial difficulty or relatively insolvent Thing delivered is Universality of property of considered as equivalent debtor is what is ceded of performance Extinguishes obligation to the extent of the value of the thing delivered as agreed upon, proved or implied from the conduct of the creditor

Merely releases debtor for net proceeds of things ceded or assigned, unless there is contrary intention

Does not involve all Involves all the properties properties of debtor of the debtor Creditor does not Creditor becomes owner become the owner. of property of debtor Possession is only transmitted. D.Tender of Payment and Consignation (Art. 1256) Tender of Payment Manifestation of the debtor to the creditor of his decision to comply immediately with his obligation; preparatory act and extrajudicial in character. Consignation 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; principal act and judicial in character. Consignation, being a form of payment, presupposes that there must be a debt that must be paid. Tender of payment ALONE would be sufficient to preserve the right of the redemptioner or the vendee a retro. In case of exercise of right of repurchase by tender of check, such tender is valid because it is an exercise of a right and not made as mode of payment of an obligation. Article 1249 is not applicable (Adelfa Properties, Inc. vs. CA, G.R. No. 111238, January 25, 1995).

OBLIGATIONS & CONTRACTS Special Requisites of Consignation: 1. Existence of a valid debt which is due. 2. Tender of payment by the debtor; creditor’s refusal without just cause to accept it or any of the cases provided in Art. 1256 par. 2 exists. a. Tender must precede consignation; b. It must have been unconditional c. Refusal must be without just cause At the time of deposit, however it is not necessary for the debtor to show want of cause for the refusal of the creditor; this fact may be established during the hearing of the case. 3. Previous notice of consignation to person interested in the fulfillment of the obligation, in order to give the creditor the opportunity to reconsider his unjustified refusal and to accept payment to avoid consignation and the subsequent litigation. Lack of previous notice does not invalidate the consignation, but simply makes the debtor liable for the expenses occasioned thereby (Tolentino, Arturo M., Commentaries and Jurisprudence on the Civil Code of the Philippines,1991 ed., Vol. 4, p.324) With respect to the creditor, this notice can be made simultaneously with the tender of payment (i.e. by way of warning that should the payment be not accepted the thing will be deposited in court). Separate notices must be given to other interested parties such as guarantors. (Id.) 4. Consignation – amount or thing due placed at the disposal of the court 5. Subsequent notice of consignation to enable the creditor to withdraw the goods or money deposited. It would be unjust to make the creditor suffer the risk of deterioration, depreciation or loss of such goods or money by reason of lack of knowledge of the consignation Note: Since consignation is a special form of payment. It must conform not only with the special requirements prescribed by law, but also with all the requisites of a valid payment. Instances where consignation shall produce the effects of payment without prior tender of payment (Art. 1259, par. 2): 1. Creditor is absent or unknown, or does not appear at the place of payment.

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OBLIGATIONS & CONTRACTS Absence need not be judicially declared. He must however, have no legal representative to accept the payment. 2. Creditor is incapacitated to receive the payment at the time it is due. 3. When without just cause, the creditor refuses to give a receipt. It appears in this case that the refusal to issue a receipt preceded the tender of payment. 4. When two or more persons claim the right to collect (as in the case of interpleader). 5. When the title of the obligation has been lost. The list is not exclusive. The rule also applies if the creditor, prior to the tender of payment, intimated that he will not accept the debtor’s payment. Effects of consignation: 1. If the creditor accepts the thing or amount deposited without contesting the validity or efficacy of the consignation, the obligation is cancelled/extinguished. 2. If the creditor contests the validity of the consignation or if the creditor is not interested or unknown or is absent, the result is litigation. If during the trial, the plaintiff-debtor is able to establish that all the requisites of consignation have been complied with, the obligation is extinguished. Effects of withdrawal of the object/ amount deposited: 1. Before creditor accepted consignation or judicial declaration of consignation (Article 1260, par. 2) Obligation remains in force. Withdrawal by the debtor at this stage is a matter of right because he still owns the thing. Should the debtor opt not to withdraw the thing at this stage, can another creditor attach the same property since the debtor still owns the thing? No. Property deposited with court is exempt from attachment and not subject to execution; it is said to be in custodia legis and cannot be withdrawn without an express order from the court. 2. With consent of the creditor (Art. 1261) a. Creditor loses every preference which he may have over the thing.

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CIVIL LAW b. Solidary co-debtors, guarantors and sureties are released. c. Solidary debtors are released only from their solidary liability but not from their shares of their obligation. d. The obligation is revived, but without prejudice to other interested parties. Withdrawal by the debtor at this stage is a matter of privilege Note: To have the effect of payment, the law requires the twin acts of tender of payment and consignation. Tender of payment without consignation only frees the debtor from the obligation to pay interest on the outstanding amount from the time the unjustified refusal takes place (Go Sinco vs. CA, et. al., GR No. 151903, October 9, 2009). Creditor can be held liable for damages under Article 19 for unjustified refusal to accept payment (Go Sinco vs. CA, Ibid). The expenses of consignation, when properly made, shall be charged against the creditor (Art. 1259). LOSS OF THE THING DUE Effects of Loss in Determinate Obligation to Give (Art. 1262): Obligation is extinguished if the thing is lost or destroyed without the fault of the debtor and before he has incurred in delay. General Rule: Loss of a determinate thing through fortuitous event shall extinguish the obligation. Exceptions: 1. When the law so provides; 2. When the stipulation so provides; 3. When the nature of the obligation requires an assumption of risk; 4. Loss of the thing is partly due to the fault of the debtor; 5. Loss of the thing occurs after the debtor incurred in delay; 6. When the debtor promised to deliver the same thing to two persons who do not have the same interest; 7. When the obligation to deliver arises from a criminal offense; and 8. When the obligation is generic. If the loss is through theft the debtor is considered negligent having placed the thing within the reach of thieves and not in a secure and safe place. In theft, taking is accomplished without the use of violence or force.

CIVIL LAW

OBLIGATIONS & CONTRACTS

Effect of Partial Loss (Art. 1264) General Rule: Partial loss does not extinguish the obligation.

under Art. 1267. In the latter case, the fact that the prestation later becomes possible does not revive the obligation.

Exception: When the partial loss or destruction of the thing is of such importance that would be tantamount to a complete loss or destruction.

Effect of Relative Impossibility Doctrine of Unforeseen Events (Art. 1267) When the service has become so difficult as to be manifestly beyond the contemplation of the parties, the court should be authorized to release the obligor in whole or in part. (This is also referred to as the Doctrine of Frustration of Enterprise)

Rule if the thing is in debtor’s possession (Art. 1265) General Rule: If it is lost while in the possession of the debtor, it is presumed that the loss was due to his fault, unless there is proof to the contrary. Exception: No such presumption in case of earthquake, flood, storm or other natural calamity. Effect of impossibility of performance in obligation to do (Art. 1266): When the obligation becomes legally or physically impossible without the fault of the debtor, obligor is released from the obligation. Take note that the provision mentions that the prestation BECOMES impossible and thus, would contemplate subsequent impossibility. The legal and physical impossibility must have occurred after the constitution of the obligation. Note: Does not apply to obligations to give. Natural Impossibility and Impossibility In Fact Distinguished Natural Impossibility Impossibility In Fact In the absence of inherent Must consist in the nature impossibility in the nature of the thing to be done and of the thing stipulated to be not the inability of the party performed, which is only to do so improbable or out of the power of the obligor Does not render the Renders the contract void contract void Natural impossibility is reckoned from the time of constitution of the obligation. Thus, the obligation remains void even if the prestation subsequently becomes possible. In case of subsequent partial impossibility the rule in Art. 1264 may be applied. Temporary impossibility does not extinguish the obligation but merely delays its fulfillment. This presupposes that the duration of impossibility has been contemplated by the parties; otherwise, the same may extinguish the obligation

The intention of the parties should govern and if it appears that the service turns out to be so difficult as to have been beyond their contemplation, it would be doing violence to the intention to hold the obligor still responsible. It will be noted that Art.1267 speaks of a “service,”- a personal obligation. Thus, real obligations are not within its scope (Paras Edgardo L. Civil Code of the Philippines Annotated IV,2008 ed., p.439). Jurado however is of the opinion that the word “service” should be understood as referring to the “performance” of the obligation (p.293). It is not a requirement under Art. 1267 that the contract be for future service with future unusual change. The impossibility is RELATIVE because the difficulty of performance triggers a manifest disequilibrium in the prestations, such that one party would be placed at a disadvantage by the unforeseen event. Principle of Subjective Impossibility When there is no physical or legal loss but the object of the obligation belongs to another, the performance by the debtor of the obligation undoubtedly becomes impossible. Failure of performance is imputable to the debtor. Thus, the debtor must indemnify the creditor for the damages suffered by the latter (Tolentino, Arturo M., Commentaries and Jurisprudence on the Civil Code of the Philippines, 1991 ed., Vol. 4, p.336). Effect of Loss on Reciprocal Obligations First view – If an obligation is extinguished by the loss of the thing or impossibility of performance through fortuitous events, the counter-prestation is also extinguished. The debtor is released from liability but he cannot demand the prestation which has been stipulated for his benefit. He who gives nothing has no reason to demand (Tolentino, Arturo M., Commentaries and Jurisprudence on the Civil Code of the Philippines, 1991 ed., Vol. 4, p.337-338). Second View – The loss or impossibility of performance must be due to the fault of the debtor. In this case, the

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OBLIGATIONS & CONTRACTS

CIVIL LAW

injured party may ask for rescission under Article 1191 plus damages. If the loss or impossibility was due to a fortuitous event, the other party is still obliged to give the prestation due to the other (J.B.L. Reyes).

debtors, the presumption of remission can refer only to the portion of the debtor who is in the possession of the instrument. If the obligation is solidary, Articles 1215, 1219 and 1220 shall apply.

Rule if obligation arises from criminal offense (Art. 1268) General Rule: Debtor shall not be exempted from the payment of the price whatever may be the cause for the loss.

If the remission refers to the principal obligation, all the accessory obligations are extinguished. However, if remission refers only to the accessory obligation, the principal obligation continues to subsist (Art. 1273).

Exception: When the thing having been offered by the debtor to the person who should receive it, the latter refused without justification. Note: The offer referred in Art. 1268 should not be confused with consignation; the latter refers only to the payment of the obligation, the former refers to the extinguishment of the obligation through loss by fortuitous event. CONDONATION OR REMISSION OF THE DEBT An act of liberality by virtue of which the obligee, 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; a form of donation. Requisites of remission: 1. It must be gratuitous; 2. It must be accepted by the obligor; 3. The obligation must be demandable; 4. Parties must have the capacity; 5. Not inofficious; and 6. Must comply with the forms of donation SHOULD IT BE EXPRESS (Arts. 748 and 749). Note: Whether express or implied, the extent of remission or condonation shall be governed by the rules regarding inofficious donation. If the creditor voluntarily delivers the private document evidencing the credit to the debtor, there is a presumption that he renounces his right of action against the latter for the collection of the said credit (Art. 1271). When such private document is found in possession of the debtor, it shall be presumed that the creditor delivered it voluntarily, unless the contrary is proved (Art. 1272). When the obligation is joint, and the private document evidencing a debt is found in the possession of one of the

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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 (Art.1274). The provision presupposes that the accessory contract of pledge has been perfected. CONFUSION It is the merger of the characters of the creditor and the debtor in one and the same person by virtue of which the obligation is extinguished. Example: Atoy makes a check payable to bearer, and hands it to Joey, who hands it to Kaye who finally hands it to Atoy. Here Atoy owes himself and thus, his obligation is extinguished. If however, the reason for the confusion ceases, the obligation is revived. Thus, should Kaye deliver the note to Atoy in the performance of a void obligation, Atoy’s obligation is recreated. But the time intervening between the merger and its revocation is not to be computed in the determination of the period for prescription. Requisites of Merger 1. Merger of the characters of the creditor and debtor must be in the same person; 2. Must take place in the person of either the principal creditor or the principal debtor; and 3. Whether the merger refers to the entire obligation or only part thereof, there must be complete and definite meeting of all qualities of creditor and debtor in the obligation or in the part thereof affected by the merger. Effects of confusion/ merger (Arts. 1276-1277) 1. If confusion takes place in the person of either the principal creditor or principal debtor – extinguishment of entire obligation. 2. If confusion takes place in the person of a subsidiary creditor or subsidiary debtor (e.g. guarantor) – no extinguishment of principal obligation; only substitution of creditor or debtor

CIVIL LAW 3. If confusion takes place in one of the joint debtors – principal obligation is extinguished up to the share which corresponds to him. 4. If confusion takes place in one of the solidary debtors – entire obligation is extinguished. However, the debtor in whom confusion took place may claim reimbursement from co-debtors for the shares which correspond to them. COMPENSATION Mode of extinguishing in the concurrent amount of the obligation of those persons who are reciprocally debtors and creditors of each other. Most Fundamental Effect: It extinguishes both debts to the extent that the amount covered by the amount of the other. Compensation and Confusion; Distinguished Compensation Confusion Two persons who, in their Only one person in whom own right, are creditors and the qualities of debtor and debtors of each other creditor are merged There must be at least two There is only one obligation obligations Compensation and Payment; Distinguished Compensation Payment The requisites prescribed by law for compensation are different from those prescribed by law for payment. Takes effect by operation of Takes effect by act of the law parties Capacity to give and to acquire is not necessary

Capacity to give and to acquire is essential

As a rule, law permits partial extinguishment of obligation

As a rule, complete and indivisible

Compensation and Counterclaim; Distinguished Compensation Counterclaim Requires that two debts must consist in money or if Not necessary fungibles, same kind and quality As a rule, both debts must be liquidated

Does not require that debts be liquidated

Need not be pleaded; takes Must be pleaded to be effect by operation of law effectual

OBLIGATIONS & CONTRACTS Kinds of Compensation: 1. As to cause a. Legal- takes effect by operation of law from the moment all of the requisites are present. b. Voluntary -- when parties who are mutually creditors and debtors agree to compensate their respective obligations, even though all of the requisites for compensation may not be present. c. Judicial -- takes effect by judicial decree. d. Facultative 2. As to effect a. Total –- debts to be compensated are equal in amount. b. Partial –- debts to be compensated are not equal in amount. Requisites of compensation (Art. 1279) 1. There must be two parties, who, in their own right, are principal creditors and principal debtors of each other except in case of a guarantor (Art. 1280); 2. Both debts must consist in sum of money, or if the things due are fungibles (consumables), they must be of the same kind and quality; General Rule: Compensation is not possible in obligations to do because of the difference in the respective capacities of the obligors (Jurado, Desiderio, Comments and Jurisprudence on Obligations and Contracts,2010 ed., p.317). 3. Both debts must be due; EXCEPTION: Voluntary compensation (Article 1282) 4. Both debts must be liquidated and demandable; 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; 6. The compensation must not be prohibited by law. Right of guarantor to set-up compensation (Art. 1280) The guarantor, in case the payment of the debt is demanded from him, may set up compensation, not only for what the creditor owes him, but also for what the creditor owes the principal debtor. Rule in case of rescissible or voidable debts (Art. 1284) Rescissible or voidable obligations may be compensated against each other before they are judicially rescinded or avoided.

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OBLIGATIONS & CONTRACTS Effects of assignment of rights (Art. 1285) 1. If with consent of debtor – debtor cannot set-up compensation unless he reserved his right to compensation. 2. If with knowledge but without consent of debtor – debtor may set-up compensation prior to the assignment but not subsequent ones 3. If without knowledge of the debtor – may set-up compensation of all credits which he may have against the assignor and which may have become demandable, before he was notified of the assignment. Debts Which Cannot Be Compensated (Arts. 1286-1287): 1. Debts arising from contracts of depositum 2. Debts arising from contracts of commodatum 3. Claims for support due by GRATUITOUS title Take note that the law did not limit itself to legal support and thus would include other rights which have for their purpose the subsistence of the debtor, such as pensions. 4. Obligations arising from criminal offenses (Art. 1288) 5. Certain obligations in favor of government (e.g. taxes, fees, duties, and others of a similar nature). But when the debts are purely contractual and are not of public interest, compensation can take place. Facultative Compensation Compensation which can be set up only at the option of the creditor when legal compensation cannot take place because of want of some legal requisites for the benefit of the creditor. The latter can renounce his right to oppose the compensation and he himself can set it up. It differs from conventional compensation because it is unilateral while the latter depends upon the agreement of both parties (Tolentino, Arturo M., Commentaries and Jurisprudence on the Civil Code of the Philippines, 1991 ed., Vol. 4, p.367). NOVATION It is the substitution or change of an obligation by another, resulting in its extinguishment or modification, either by changing its object or principal conditions, or by substituting another in place of the debtor, or by subrogating a third person in the rights of the creditor. Requisites of Novation: 1. Previous valid and existing obligation; A new contract, recognizing and assuming a prescribed debt, would be valid and enforceable. The prescription,

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CIVIL LAW being available to the debtor, can be waived by him. The novation of a prescribed debt is thus valid. 2. Capacity of the contracting parties (to the new contract); 3. Animus novandi or intent to novate (especially for implied novation and substitution of debtors); 4. Substantial difference between the old obligation and the new obligation (especially for implied novation),consequently, extinguishment of the obligation; and 5. Validity of the new obligation. Two-fold Purpose of Novation: 1. Original obligation is extinguished 2. A new obligation is created Kinds of Novation 1. As to its essence a. Objective/Real b. Subjective/Personal -- substitution of debtor or by subrogation. c. Mixed – change in the object or principal condition and change in the persons of either creditor and debtor of an existing obligation. 2. As to its form/ constitution a. Express – when it is declared in unequivocal terms that the old obligation is extinguished by a new one which substitutes the same. b. Implied – when the old and new are incompatible with each other on every point. Test of Incompatibility: Whether or not the old and new obligations can stand together, each having its own independent existence. If they can stand together, there is no incompatibility hence, no novation. If they cannot stand together, there is incompatibility; consequently, there is novation. Changes that breed incompatibility must be essential in nature and not merely incidental. 3. As to extent/effect a. Total b. Partial Note: Novation is never presumed. Unless it is clearly shown either by express agreement of the parties or by acts of equivalent import, this defense will never be allowed (Ong vs. Bogñalbal, G.R. No. 149140 September 12, 2006). Objective Novation (Art. 1291, par.1) According to Castan, objective novation is effected by: 1. Changing the cause of the obligation

CIVIL LAW 2. Changing the object of the obligation 3. Changing the principal or essential conditions of the obligation. Requisites: a. New obligation expressly declares that the old is extinguished or b. New obligation is on every point incompatible with the old one (Ajax Marketing & Development Corp. vs. CA, G.R. No. 118585, September 14, 1995) Note: A change in the rate of interest is merely a collateral agreement between the creditor and principal debtor that did not affect the surety. The agreement to pay the additional interest was an additional burden upon the debtor only. It did not in any way affect the original contract. Thus, despite the compounding of the interest, the liability of the surety remains only up to the original uncompounded interest (Garcia, Jr. vs. CA, G.R. No. L80201, November 20, 1990). The grant of a 45-day credit extension does not novate the contract as it merely modifies the contract by extending the time for payment. The obligation to pay a sum of money is not novated by an instrument that expressly recognizes the old, changes only the terms of the payment, adds other obligations not incompatible with the old ones or the new contract merely supplements the old contract (Sps.Reyes vs. BPI Family Savings Bank, GR No. 149841-41, March 31, 2006). If a subsequent contract is designed to novate a previous contract and not all parties to the original contract consented to or are made parties in the subsequent contract, there can be no novation Novation by substitution of debtors (Art. 1293) A subjective/personal novation consists in the substitution of a new debtor in place of the original debtor. Forms of novation by substitution of debtors: 1. Expromisión – effected with the consent of the creditor at the instance of the new debtor even without the consent or even against the will of the old debtor (beneficial reimbursement). Requisites: a. Initiative for substitution must emanate from the new debtor; b. Consent of the creditor to the substitution; and c. Old debtor must be released from obligation.

OBLIGATIONS & CONTRACTS Example: Atoy owes Eugene 1K. Joey, a friend of Atoy approaches Eugene and tells him: “I will pay you what Atoy owes you. From now on, consider me your debtor. Atoy is to be excused.” Take note that in this example, there is an agreement that Atoy will be released from the obligation. Sans such agreement, there is no novation and the creditor (Eugene) can still enforce the obligation against the original debtor (Atoy). Kinds of Substitution by Expromisión 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. 2.Delegación – effected with the consent of the creditor at the instance of the old debtor (delegante), with the concurrence of the new debtor (delegado) (reimbursement and subrogation). Requisites: a. Initiative for substitution must emanate from the old debtor; b. Consent of the new debtor; c. Acceptance by the creditor; and d. Old debtor must be released from his obligation Example: Atoy owes Eugene 1K. Atoy texted Eugene that his friend Joey will pay the debt, and he wishes to be released from the obligation. Both Joey and Eugene agreed to such terms. Take note again that the substitution must be made with the intention to release the original debtor. Parties in delegacion Delegante- original debtor (Atoy) Delegatorio- the creditor (Eugene) Delegado- the new debtor (Joey) Rights of New Debtor: 1. Expromisión a. Substitution with knowledge and consent of original debtor and payment made by new debtor with or without knowledge and consent of original debtor: i. Reimbursement from the original debtor of the entire amount paid ii. Subrogation in all the rights of the creditor b. Substitution without the knowledge and consent of the original debtor, and payment is made by the new debtor without the knowledge and consent of the original debtor:

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OBLIGATIONS & CONTRACTS i. Reimbursement from the original debtor only insofar as the payment has been beneficial to such debtor ii. No subrogation 2. Delegación – Since substitution was effected with the consent of all the parties, the new debtor can demand reimbursement from the original debtor of the entire amount which he has paid as well as compel the creditor to subrogate him to all of his rights.

CIVIL LAW Effects of novation upon accessory obligations (Art. 1296) When the principal obligation is extinguished in consequence of a novation, accessory obligation may subsist only insofar as they may benefit third persons who did not give consent. Art. 1296 has no application to novation effected by subrogating a third person to the rights of the creditor. Such novation is regulated by Arts. 1303-1304.

Note: The mere fact that the creditor receives a guaranty or accepts payment from a third person who agrees to assume the obligation, when there is no agreement that the first debtor shall be released from responsibility, does not constitute novation, and the creditor can still enforce the obligation against the original debtor. If the older debtor is not released, there is no novation; the third person becomes merely a co-debtor, surety or co-surety (Mercantile Insurance Co., Inc. vs. CA, GR No. 85647, April 22, 1991).

Effects of condition in novation: 1. If the original obligation was subject to suspensive/ resolutory condition, the new obligation shall be under the same condition, unless otherwise stipulated (Art. 1299). 2. If the new obligation and the old obligation are subject to different conditions: a. If the conditions can stand together -i. If both are fulfilled -- the new obligation becomes demandable

Effect of insolvency or non-fulfillment by new debtor (Arts. 1294-1295) 1. Expromisión --

ii. If only the condition affecting the old obligation is fulfilled -- old obligation is revived while the new obligation loses its force.

Tolentino: it shall not revive the original debtor’s liability to the creditor whether the substitution is effected with or without the knowledge or against the will of the original debtor.

iii. If only the condition affecting the new obligation is fulfilled -- there is no novation since the requisite of a previous valid and effective obligation would be lacking. b. If the conditions are incompatible – the effect is to extinguish the old obligation so that only the new obligation remains and whose demandability/effectivity depend upon the fulfillment/non-fulfillment of the condition affecting it.

Jurado: If the substitution was effected with the knowledge and consent of the original debtor, it shall revive the original debtor’s liability to the creditor. 2. Delegación –- The right of the creditor can no longer be revived EXCEPT in the ff. cases: a. Insolvency already existing and of public knowledge at the time when the original debtor delegated his debt b. Insolvency was already existing and known to the original debtor when he delegated his debt It is submitted that ACTUAL knowledge of the creditor that new debtor was insolvent at the time of delegation, will bar him from recovering from the old debtor. He must bear the consequences of his acts knowingly done. Note: A change in the incidental elements of, or an addition of such elements to an obligation, unless otherwise expressed by the parties, will not result in its extinguishment.

Novation by Subrogation (Art. 1300) A personal novation effected by subrogating a third person in the rights of the creditor. Forms of novation by subrogation: 1. Conventional –- takes place by agreement of the original creditor, the third person substituting the original creditor, and the debtor (Art. 1301). 2. Legal –- takes place by operation of law Conventional Subrogation and Assignment of Rights; Distinguished Conventional Subrogation Assignment of Rights Governed by Arts. 13001304

Governed by Arts. 16241627

Debtor’s consent is required Debtor’s consent is not

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CIVIL LAW Conventional Subrogation

Assignment of Rights required

Has the effect of Has the effect of transmitting the rights of the extinguishing the obligation creditor to another person and giving rise to a new without modifying/ one extinguishing the obligation Defects/ vices in the old obligation are cured

Defects/ vices in the old obligation are not cured

The effects arises from the As far as the debtor is moment of novation/ concerned, arises from the subrogation moment of notification Legal subrogation (Art. 1302) General Rule: Legal subrogation is not presumed. Exceptions: 1. When a creditor pays another creditor who is preferred, without debtor’s knowledge; Example: Atoy has two creditors, Mhik who is a mortgage creditor for P15K and Jerome who is an ordinary creditor for P6K. Jerome paid Atoy’ debt of P15K to Mhik. Jerome will be subrogated to the rights of Mhik. This means that Jerome will now be a mortgage creditor for P15K and an ordinary creditor for 6K. 2. When a third person, not interested in the obligation, pays with the express or tacit approval of the debtor; or Example: Atoy owes Joey 10K secured by mortgage. Eugene, a classmate of Atoy, and having no connection with the contract paid Joey with Atoy’s approval. Subrogation takes place and Eugene becomes a mortgage creditor.

OBLIGATIONS & CONTRACTS subrogated in Cath’s place. By reason of confusion, or by reason of the fact that Atoy became a guarantor and a creditor at the same time, the guaranty is extinguished. STRICTLY SPEAKING, there is no legal subrogation when a solidary debtor pays the entire obligation. Solidarity terminates upon the payment of the whole obligation. Thus, the paying debtor DOES NOT COMPLETELY step into the shoes of the creditor, as he cannot demand from any of his co-debtors the compliance of the entire obligation but only the proportion which pertains to each. Effects of Subrogation (Arts. 1303-1304) 1. Total subrogation -- Transfers to the person subrogated the credit with all the rights the original creditor had against the debtor or third persons. Accessory obligations are not extinguished; the person subrogated acquires all the rights the original creditor had against third persons and the rule is absolute with respect to legal subrogation. In conventional subrogation, accessory obligations may be increased or reduced upon agreement of the parties. 2. Partial subrogation -- A creditor, to whom partial payment has been made, may exercise his right for the remainder, and he shall be preferred to the person who has been subrogated in his place. Example: Atoy owes Eugene P4K. With the consent of both Joey pays Eugene P2K. Now Eugene and Joey are the creditors of Atoy to the amount of P2K. By reason of the preferential right to the remainder, Eugene is to be preferred in case Atoy has only P2K. The preference, however, enjoyed by Eugene is only in the assets remaining with the debtor (Atoy) and not those already transferred to others.

If Eugene pays without the knowledge or against the will of Atoy, he is only entitled to demand reimbursement as to the extent that Atoy has been benefited by the payment. There is no subrogation in this case.

A compromise is a contract whereby the parties, by making reciprocal concessions, avoid litigation or put an end to one already commenced (Art. 2028).

3. When, even without 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.

Requisites: 1. Uncertainty of juridical relation; 2. An agreement to eliminate the uncertainty through reciprocal concessions (5 Tolentino, p.485)

Example: Joey owes Cath P10K secured by a mortgage and by a guaranty of Atoy. If Atoy even without Joey’s knowledge pays Cath, Atoy will be

C OMPROMISE

Kinds: 1. Judicial-end a pending litigation

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OBLIGATIONS & CONTRACTS 2. Extra-judicial- to prevent a litigation from arising. Characteristics: 1. Consensual 2. Reciprocal 3. Onerous 4. Nominate 5. Accessory (in the sense that a prior conflict is presupposed) 6. Once accepted, binding upon the parties except if consent is vitiated. 7. Principally, settlement of controversy; Incidentally, settlement of claim Questions on Which There Can be NO Valid Compromise 1. The civil status of persons; 2. The validity of a marriage or a legal separation; 3. Any ground for legal separation; 4. Future support; 5. The jurisdiction of courts; 6. Future legitime (Art. 2035). Effects of Compromise A compromise has upon the parties the effect and authority of res judicata; but there shall be no execution except in compliance with a judicial compromise (Art. 2037). If one of the parties fails or refuses to abide by the compromise, the other party may either enforce the compromise or REGARD it as rescinded and insist upon his original demand (Art. 2041). A compromise extinguishes the rights and actions which gave rise to it and new obligations are created in substitution of those extinguished (Tolentino, Arturo M., Commentaries and Jurisprudence on the Civil Code of the Philippines,1991 ed., Vol. 5, p.492). If a writ of execution is issued to enforce a judgment based on compromise, the writ cannot be enforced against a person who although a party to the case, was not a party to the compromise agreement, and who in fact was absolved from liability (Paras Edgardo L. Civil Code of the Philippines Annotated, 2008 ed.,Vol. V, p.994). (See discussions in Remedial Law)

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CIVIL LAW C ONTR ACTS Contract 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. ELEMENTS OF CONTRACTS: 1. Essential – those without which there can be no contract (Art. 1318) a. Common elements -- present in all contracts i. Consent ii. Object or Subject Matter iii. Cause or Consideration b. Special elements -- present only in certain contracts. (e.g., delivery in real contracts or form in solemn ones) c. Extraordinary elements – peculiar to specific contract. (e.g., price in a contract of sale.) 2. Natural -- 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. 3. Accidental -- those which exist only when the parties expressly provide for them for the purpose of limiting or modifying the normal effects of the contract. (e.g. conditions, terms or modes) CLASSIFICATION OF CONTRACTS: 1. According to their relation to other contracts a. Preparatory – preliminary step towards the celebration of another subsequent contract b. Principal – can subsist independently from other contracts c. Accessory – can exist only as a consequence of, or in relation with, another prior contract 2. According to their perfection a. Consensual – perfected by mere agreement of the parties b. Real – requires consent of the parties and delivery of the object for their perfection 3. According to their form a. Common or informal – requires no particular form b. Special or formal -- requires some particular form Take note of Arts. 748, 749, 1771, 1773, 2134, 1874, 1956, 1744 4. According to their purpose a. Transfer of ownership – e.g. sale b. Conveyance of use – e.g. commodatum c. Rendition of service – e.g. agency 5. According to their subject matter a. Things – e.g. sale, deposit, pledge b. Services – e.g. agency, lease of services

CIVIL LAW 6. According to the nature of the vinculum which they produce a. Unilateral – e.g. commodatum, gratuitous deposit b. Bilateral – e.g. sale, lease 7. According to their cause a. Onerous – e.g. sale b. Gratuitous – e.g. commodatum 8. According to the risk involved a. Commutative – e.g. lease b. Aleatory – e.g. insurance 9. According to their names or norms regulating them a. Nominate – have their own individuality; regulated by special provisions of law b. Innominate – lack individuality; not regulated by special provisions of law Kinds of Innominate Contracts: i. Do ut des - I give that you give ii. Do ut facias - I give that you do iii. Facio ut des - I do that you give iv. Facio ut facias - I do that you do Note: Innominate contracts shall be regulated by: 1. The stipulations of the parties, 2. The general provisions of the Civil Code on obligations and contracts, 3. The rules governing the most analogous nominate contracts and 4. The customs of the place (Art. 1307). According to some authorities, do ut des is no longer an innominate contract. It has already been given a name of its own, i.e. barter or exchange (Art. 1638). Auto-Contract A kind of contract in which one person acted in behalf of the other party and himself or another person in another capacity to establish a contract. Take note however of the situations involving conflict of interest under Art. 1491 and Art. 1890. Collective Contracts Those where the law authorizes the will of the majority to bind a minority to an agreement notwithstanding the opposition of the latter when all have a common interest in the juridical act (i.e. collective bargaining by labor organizations). Reason: Co-ownership is legally presumed among the persons having a common interest; rule of the required majority is imposed upon the minority.

OBLIGATIONS & CONTRACTS Contracts of Adhesion Contracts in which one of the parties imposes a readymade form of contract, which the other party may accept or reject, but which the latter cannot modify (PCIB vs. CA. G.R. No. 97785 March 29, 1996). Contract implied in fact/ Implied-in-fact Contract It is a contract, the existence and terms of which are manifested by conduct and not by direct or explicit words between parties but is to be deduced from conduct of the parties, language used, or things done by them, or other pertinent circumstances attending the transaction (UP vs. Philab, G.R. No. 152411. September 29, 2004). Stages of Contracts: 1. Generation – comprehends the preliminary or preparation or conception. It is the period of negotiation and bargaining. 2. Perfection – the moment when the parties come to agree on the terms of the contract 3. Consummation – it is the fulfillment or performance of the terms agreed upon in the contract. CHARACTERISTICS OF CONTRACTS (OMARC): 1. Obligatory force of contracts 2. Mutuality 3. Autonomy 4. Relativity 5. Consensuality Obligatory Force of Contracts It is a rule that once the contract is perfected, it shall be of obligatory force upon both of the contracting parties. This principle is explicitly recognized in Arts. 1159, 1308, 1315, and 1356. Mutuality (Art. 1308) The contract must bind both parties. Note: The validity or fulfillment of a contract cannot be left to the will of one of the contracting parties. Validity or fulfillment may be left to (1) the will of a third person, whose decision shall not be binding until made known to both the contracting parties (Art. 1309) or (2) chance. The determination shall not be obligatory if it is evidently inequitable. In such case, the courts shall decide what is equitable under the circumstances (Art. 1310). Autonomy (Art. 1306) The contracting parties may establish such stipulations, clauses, terms and conditions as they deem convenient.

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OBLIGATIONS & CONTRACTS Limitation to the Principle of Autonomy: Stipulations should not be contrary to law, morals, good customs, public order, or public policy. Relativity (Art. 1311) General Rule: Contracts take effect only between parties, their assigns and heirs. HOWEVER with respect to assignees or heirs, the general rule under Art. 1311 is not applicable if the rights and obligations arising from the contract are not transmissible or purely personal. Exceptions: 1. Beneficial Stipulation/ Stipulation pour autrui - A stipulation in favor of a third person. Requisites: a. There must be a stipulation in favor of a third person; b. The stipulation must be a part, not the whole of the contract; c. The contracting parties must have clearly and deliberately conferred a favor upon a third person, not a mere incidental benefit or interest; d. The favorable stipulation should not be conditioned or compensated by any kind of obligation whatever; e. The third person must have communicated his acceptance to the obligor before its revocation; and f. Neither of the contracting parties bears the legal representation or authorization of the third party. Test of Beneficial Stipulation: It must be the purpose and intent of the parties to benefit the third person. The test is whether or not the parties deliberately inserted terms in their agreement with the avowed purpose of conferring a favor upon such third person (Uy Tam vs. Leonard, GR No. 8312, March 29, 1915). 2. When the third person comes into possession of the object of a contract creating real rights (Art. 1312). 3. Where the contract is entered into in order to defraud a creditor(Art. 1313); Here, the creditor may ask for its rescission. 4. Where the third person induces a contracting party to violate his contract (Art. 1314). Such third person can be held liable for damages. Requisites: a. The existence of a valid contract; b. Knowledge on the part of the third person of the existence of the contract; and

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CIVIL LAW c. Interference by third person without legal justification or excuse. Consensuality of Contracts (Art. 1315) General Rule: Contracts are perfected by mere consent and from that moment, the parties are bound to the fulfillment of what has been expressly stipulated and to all consequences which, according to their nature may be in keeping with good faith, usage and law. Exception: Real contracts (e.g., deposit, pledge and commodatum) are not perfected until the delivery of the object of the obligation.

E SSENTI AL R EQUI SI TES C ONTR ACT

OF A

There is no contract unless the following requisites concur (COC): 1. Consent of the contracting parties; 2. Object certain which is the subject matter of the contract; 3. Cause of the obligation which is established (Art. 1318). CONSENT It refers to the conformity of the parties to the terms of the contract; meeting of the minds between the parties on the subject matter and cause of the contract. Requisites: 1. Must be manifested by the concurrence of the offer and acceptance (Arts. 1319-1326); 2. Parties must possess the necessary legal capacity (Arts. 1327-1329); and 3. Must be intelligent, free, spontaneous, and real (Arts. 1330-1346). The fact that the signatures of the witnesses and the notary public were forged does not negate the existence of the contract for as long as the parties consented to it. The signatures of the witnesses and the notary public are necessary simply to make the contract binding on the third person (Soriano vs. Soriano, G.R. No. 130348, September 3, 2007). Offer Unilateral proposition which one party makes to the other for the celebration of a contract. It exists only if the contract can come into existence by the mere acceptance by the offeree, without any further act on the offeror.

CIVIL LAW Requisites (DICD): 1. It must be definite. 2. It must be intentional. 3. It must be complete. 4. It must be directed to person or persons with whom the offeror intends to enter into a contract except definite offers which are not directed to a particular person but to the public in general (i.e. public auction). Withdrawal of Offer: Offer/proposal may be withdrawn so long as the offeror has no knowledge of acceptance by offeree (Manresa, 5th Ed., Bk. 2, p. 373). Exception: Option Contract (Art. 1324) Counter-offer This refers to qualified acceptance; involves a new proposal; a rejection of the original offer. Complex offers When a single offer involves two or more contracts, the perfection, where there is only partial acceptance, will depend upon the relation of the contracts between themselves, whether due to their nature or due to the intent of the offeror (Tolentino, Arturo M., Commentaries and Jurisprudence on the Civil Code of the Philippines, 1991 ed., Vol. 4, p. 452). Rule on Complex offers: 1. Offers are interrelated – contract is perfected if all the offers are accepted. 2. Offers are not interrelated – single acceptance of each offer results in a perfected contract unless the offeror has made it clear that one is dependent upon the other and acceptance of both is necessary. Acceptance Must be certain or definite and absolute in character. A qualified acceptance constitutes a counter-offer (Art. 1319). It may be express or implied (e.g. failure on the part of the heir to reject the inheritance within 30 days from notice of the order of the court distributing the estate) (Art. 1320). Requisites of acceptance (ADIPC): 1. Absolute (no vitiation) 2. Directed to the offeror 3. Made with the intention to be bound 4. Made within the proper time 5. Communicated to the offeror and learned by him unless the offeror knows of the acceptance.

OBLIGATIONS & CONTRACTS Amplified Acceptance Under certain circumstances, a mere amplification on the offer must be understood as an acceptance of the original offer, plus a new offer which is contained in the amplification (Tolentino, Arturo M., Commentaries and Jurisprudence on the Civil Code of the Philippines, 1991 ed., Vol. 4, p.452). Withdrawal of Acceptance: First View (Manresa): “Although the offeror is not bound until he learns of the acceptance, the same thing cannot be said of the offeree who, from the moment he accepts, loses the power to retract such acceptance since the right to withdraw between the time of the acceptance and its communication is a right which is expressly limited by law to the offeror. Since the offeree is the first person who knows of the concurrence of wills of the parties, as a consequence, the obligation, as far as he is concerned, must also commence earlier. Second View (Tolentino): Acceptance may be revoked before it comes to the knowledge of the offeror because in such case there is still no meeting of the minds, since the revocation has cancelled or nullified the acceptance which thereby ceased to have any legal effect. Note: The offeror may fix the time, place, and manner of acceptance, all of which must be complied with (Art. 1321). Any act to the contrary is a counter-offer. An offer made through an agent is accepted from the time acceptance is communicated to him (Article 1322). Art. 1322 is not applicable when an intermediary who has no power to bind either the offerer or the offeree is NOT an agent. Thus, the communication of the acceptance to him does not perfect the contract. An offer becomes ineffective upon the death, civil interdiction, insanity or insolvency of either party before acceptance is conveyed (Art. 1323). Theories that determine the exact moment of perfection when acceptance is made by letter or telegram: 1. Manifestation Theory – perfected from the moment the acceptance is declared or made. This is adhered to by the Code of Commerce 2. Expedition Theory – perfected from the moment the offeree transmits the notification of acceptance to the offeror. 3. Reception Theory – perfected from the moment that the notification is in the hands of the offeror in such a manner that he can, under ordinary conditions, procure

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OBLIGATIONS & CONTRACTS the knowledge of its contents, even if he is not able to actually acquire such knowledge. 4. Cognition Theory – perfected from the moment the acceptance comes to the knowledge of the offeror. This is adhered to by the Civil Code. Note: The stipulation of the parties governs the manner and moment of acceptance as when they stipulate that it be expressly accepted. Silence can be construed as consent. Requisites for silence to be construed as consent: 1. There is a duty or possibility to express oneself; 2. The manifestation of the will cannot be interpreted in any other way; 3. There is a clear identity in the effect of the silence and the undisclosed will (Articles 1670, 1870 to 1873). Option Contract A preparatory contract is one in which one party grants to the other, for a fixed period and under specified conditions, to decide whether or not to enter into a principal contract. It binds the party who had given the option not to enter into the principal contract with any other person during the period designated, and within that period, to enter into such contract to whom the option was granted if the latter should decide to use the option. Requisites: 1. It is supported by an independent consideration; If the option is not supported by a consideration which is distinct from the purchase price, the offer may still be withdrawn even if the offeree has already accepted it (Jurado, Desiderio, Comments and Jurisprudence on Obligations and Contracts, 2010 ed., p. 413). 2. It is exclusive. Business Advertisements (Art. 1325) They are mere invitations to make an offer, and NOT definite offers, unless it appears otherwise. Advertisement for Bidders (Art. 1326) It is simply an invitation to make proposals. The advertiser is not bound to accept the highest or lowest bidder, unless it appears otherwise. Note: It is not applicable in judicial sales because the highest bid must necessarily be accepted.

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Persons incapacitated to give consent (Art. 1327): The capacity of the contracting parties is in effect, an essential element of a contract or to be more exact, it is an indispensable requisite of consent (Jurado, Desiderio, Comments and Jurisprudence on Obligations and Contracts, 2010 ed., p.417). 1. Minors Exceptions: a. When minor misrepresents his age. (It must be an active not merely constructive representation); The instant exception is based on estoppel. Estoppel presupposes capacity to misrepresent. The circumstances of the minor (i.e. he appears to be of legal age) must be of such nature that it could have been relied upon by the other party. Otherwise, the contract remains voidable. b. Contracts involving the sale and delivery of necessaries to minors (Art. 1489). c. Contracts by guardians or legal representatives. d. Upon reaching the age of majority, they ratify the same (Ibanez v. Rodriguez, 47 Phil 554). 2.Insane or demented persons, unless the contract was entered into during a lucid interval (Art. 1328). An insane or demented person includes any person, who, at the TIME OF THE CELEBRATION OF THE CONTRACT, CANNOT understand the nature and consequences of the act or transaction by reason of any cause affecting his intellectual or sensitive faculties whether permanent or temporary (Jurado, Desiderio, Comments and Jurisprudence on Obligations and Contracts, 2010 ed., p. 420). Take note that contracts agreed to in a state of drunkenness or during a hypnotic spell are VOIDABLE (Art. 1328). The same must be of a degree that obscures completely the faculties and almost extinguishes the consciousness of acts. There is a PRIMA FACIE presumption that every person of legal age possesses the necessary capacity to execute a contract (Jurado, Desiderio, Comments and Jurisprudence on Obligations and Contracts, 2010 ed., p. 423).

CIVIL LAW

OBLIGATIONS & CONTRACTS

3. Deaf-mutes who do not know how to read and write.

A. Mistake (Art. 1331)

Being deaf-mute is not by itself alone a disqualification for giving consent. The law refers to the deaf-mute who does NOT know how to write. If deaf-mute but knows how to write: Contract is VALID. If deaf-mute who knows how to read but not write: Contract is VALID because reading means that the person is capable of understanding. (See also Rule 93 Sec. 2 for other incompetent persons.) If both of the parties are incapable of giving consent, the contract is unenforceable (Art. 1403). Incapacity to give consent (Art. 1327) Disqualification to contract (Art. 1329) Article 1327 Article 1329

vs.

Restrains the exercise of the Restrains the very right itself right to contract. Based upon subjective Based upon public policy circumstances of certain and morality persons Voidable

Void

Vices of consent (Art. 1330): (VIMFU) 1. Vices of the will (vicios de la formacion de la voluntad) a. Violence b. Intimidation c. Mistake d. Fraud e. Undue influence 2. Vices of declaration (vicios de la declaracion) -- simulation of contracts. According to Manresa, Art. 1330 is a negative enumeration of the requisites of consent: (1) intelligent, or with an exact notion of the matter to which it refers, (2) it should be free; and (3) it should be spontaneous, and (4) real. In the absence of the first 3 requisites, the contract is voidable. In the absence of the fourth requisite, the contract may be either void ab initio or valid as far as the real agreement is concerned, depending upon whether the simulation is absolute or relative.

Requisites: 1. The error must be substantial regarding: a. the object of the contract (error in re) which may be: i. mistake as to the identity of the thing (error in corpore); ii. mistake as to the substance of the thing (error in substantia); iii. mistake as to the conditions of the thing provided; or iv. mistake as to the quantity of the thing (error in quantitate). b. the conditions which primarily moved or induces one of the parties c.identity or qualifications (error in persona), but only if such was the principal cause of the contract. 2. The error must be excusable. 3. The error must be a mistake of fact, and not of law. Not only wrong conception of the thing but also the lack of knowledge with respect to it (Manresa, 5th ed. Bk2, p. 395). Two General Kinds of Mistake Mistake of Fact Mistake of Law One or both parties arrive at an erroneous One or both contracting conclusion regarding the parties believe that a fact interpretation of a exists when in reality it question of law or legal does not or vice versa. effects of a certain act or transaction.

Vitiates consent

Does not vitiate consent except when it involves mutual error as to the effect of an agreement when the real purpose is frustrated.

Requisites of Art. 1334 which will vitiate consent: 1. It must be of a past or present fact; 2. It must not be imputable to the party mistaken, i.e. mistake is not inadvertent and excusable; Mistake must be with respect to the legal effect of an agreement; 3. It must be mutual; and 4. Parties’ real purpose must have been frustrated. Note: The obligation to show that the terms of the contract had been fully explained to the party who is unable to read

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CIVIL LAW

or understand the language of the contract, when fraud or mistake is alleged, devolves on the party seeking to enforce it (Art. 1332).

Note: 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 (Art. 1336).

Note: There is no mistake if the party alleging it knew the doubt, contingency or risk affecting the object of the contract (Art. 1333).

D. 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 (Art. 1337).

B. Violence When in order to wrest consent, serious or irresistible force is employed (Art. 1335). Requisites: 1. Must be serious or irresistible; 2. Must be the determining cause for the party upon whom it is employed in entering into the contract; 3. It is not justified; 4. It is sufficient. C. Intimidation (Art. 1335). Requisites: 1. One party is compelled to give his consent by a reasonable and well-grounded fear of an evil; 2. The evil must be imminent and grave; 3. The evil must be upon his person or property, spouse, descendants or ascendants; 4. It is the reason why he enters the contract. 5. The evil must be unjust. Violence Refers to physical compulsion External or prevents the will to manifest itself

Intimidation Refers to moral compulsion Internal or induces the performance of an act

Consent given through intimidation must be distinguished from consent given reluctantly and even against good sense and judgment. It is clear that one acts as voluntarily and independently in the eyes of the law when he acts reluctantly and with hesitation as when he acts spontaneously and joyously. Legally speaking, he acts voluntarily and freely when he acts wholly against his better sense and judgment (Jurado, Desiderio, Comments and Jurisprudence on Obligations and Contracts, 2010 ed., p. 437). If a contract is signed merely because of “fear of displeasing persons to whom obedience and respect are due,” the contract is still VALID, for by itself, reverential fear is not wrong (Paras, Edgardo L., Civil Code of the Philippines Annotated I, 2012 ed., p.639 2012).

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Requisites: 1. Improper advantage; 2. Power over the will of another; 3. Deprivation of the latter’s will of a reasonable freedom of choice. Undue influence must be distinguished from intimidation, in that in intimidation there must be an unlawful or unjust act which is threatened and which causes consent to be given, while in undue influence, there need not be an unjust or unlawful act (Tolentino, Arturo M., Civil Code of the Philippines, 1987 ed., Vol. 4, p 501). Test of undue influence: Whether or not the influence exerted has so overpowered or subjugated the mind of a contracting party as to destroy his free agency, making him express the will of another rather than his own (Coso vs. Fernandez Deza, G.R. No. 16763, December 22, 1921). Circumstances considered in determining whether the influence exerted is unreasonable: 1. Confidential relations 2. Family relations 3. Spiritual relations 4. Other relations between the parties By analogy, undue influence employed by a third person may annul the contract. E. Fraud When, through insidious words or machinations of one party, the other is induced to enter into a contract which, without them, he would not have agreed to (Art. 1338). Kinds of Fraud: 1. Fraud in the PERFECTION of the contract: a. Causal Fraud (Dolo Causante) b. Incidental Fraud (Dolo Incidente) 2. Fraud in the PERFORMANCE of an obligation (Art. 1170)

CIVIL LAW

OBLIGATIONS & CONTRACTS

Requisites of Fraud under Art. 1338: 1. One party must have employed fraud or insidious words or machinations 2. It must have been serious; 3. It induced the other party to enter into a contract; 4. It must have been employed by one contracting party upon the other and not employed by both contracting parties or by third persons; 5. Damage or injury resulted to the other party; 6. It must be made in bad faith, i.e. with knowledge of its falsity.

Fraud by third person does not vitiate consent and merely gives rise to an action for damages by the party injured against such third person UNLESS: a. It has created a substantial mistake and the same is mutual. b. Third person makes the misrepresentation with the complicity, or at least with the knowledge but without the objection, of the favored contracting party.

Dolo Causante and Dolo Incidente distinguished Dolo Causante Dolo Incidente (Art. 1338) (Art. 1344)

When two persons constitute one party of the contract with respect to another, the deceit exercised by one of them upon his co- party, is not a cause for annulment of the contract.

Refers to 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

Refers to those deceptions or misrepresentations which are not serious in character and without which the other party would have still entered the contract

Fraud which is serious in Fraud which is not character serious in character It is the cause which induces It is not the cause that the party to enter into a induced the party to contract enter into a contract Renders the contract voidable

Renders the party liable for damages

Bad faith and fraud are allegations of fact that demand clear and convincing proof. They are serious accusations that can be so conveniently and casually invoked, and that is why they are never presumed (Cathay Pacific Airways, Ltd vs. Spouses Vazquez,G.R. No. 150843. March 14, 2003). Note: Failure to disclose facts, when there is a duty to reveal them, constitutes fraud (Art. 1339). The usual exaggerations in trade, when the other party had an opportunity to know the facts, are not in themselves fraudulent (Art. 1340). This is known as “tolerated fraud” which includes minimizing the defects of the thing, exaggerating its good qualities, and giving it qualities that it does not have (Tolentino, Arturo M., Civil Code of the Philippines, 1987 ed., Vol. 4, p 510). A mere expression of an opinion does not signify fraud unless made by an expert and the other party relied on the former’s special knowledge (Art. 1341).

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

Simulation of Contracts (Arts. 1345-1346) It is the process of intentionally deceiving others by producing the appearance of a contract that really does not exist or which is different from the true agreement. Requisites (DAP): 1. A deliberate declaration contrary to the will of the parties. 2. Agreement of the parties to the apparently valid act. 3. The purpose is to deceive or to hide from third persons although it is not necessary that the purpose be illicit or for purposes of fraud. Kinds of simulation of contract: 1. Absolute (simulados) –parties do not intend to be bound by the contract at all. Status: VOID. 2. Relative (disimulados) –parties conceal their true agreement. It binds the parties to their real agreement, 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 (i.e. a deed of sale of a piece of land is executed by the parties to conceal their two agreement which is a donation). Two juridical acts in relatively simulated contracts: 1. Ostensible Act (Apparent or Fictitious) – pretended contract. 2. Hidden Act (Real) – true agreement. Should the hidden act or the concealed contract be lawful and does not prejudice a third person, it is absolutely enforceable. Its validity and effects will be governed by the rules applicable to it, and not by those applicable to the apparent contract. With respect to a third person acting in good faith, the apparent contract must be considered as the true

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OBLIGATIONS & CONTRACTS contract. The declaration that the contract is simulated does not prejudice him.

CIVIL LAW

Relative simulation is presumed by law in case of Art. 1602.

Exception to the exception: a. In case of marriage settlements under Art. 130 of the Civil Code; and b. In case of partition of properties inter vivos by the deceased under Art. 1080 of the Civil Code.

OBJECT The thing, right or service which is the subject matter of the obligation arising from the contract.

4. Services contrary to law, morals, good customs, public order or public policy; 5. Impossible things or services;

Requisites: 1. Must be within the commerce of man (Art. 1347); 2. Should be real or possible (Art. 1348); 3. Should be licit (Art. 1347); and 4. Should be determinate, or at least possible of determination as to its kind (Art. 1349).

Note: The law here pertains to ABSOLUTE impossibility and not relative impossibility.

The genus or kind of the object must be expressed. 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. Things which cannot be the object of contracts (Art. 1347-1349): General Rule: All things or services may be the object of contracts. This includes future things or rights which do not belong to the obligor when the contract was made. Exceptions: 1. Things outside the commerce of men; 2. Intransmissible rights; 3. Future inheritance, except in cases authorized by law;

expressly

Requisites of Future Inheritance: a. The succession has not yet been opened; b. The object of the contract forms part of the inheritance; and c. The promissor has an expectancy of a right which is purely hereditary in nature. After the death of a person, the properties and rights left by him by way of inheritance can be the subject matter of a contract among or by his heirs, even before a partition thereof has been made, because the rights of the heirs are transmitted to them from the moment of death of the predecessor (Tolentino, Arturo Commentaries and Jurisprudence on the Civil Code of the Philippines, 1991 ed., Vol. 4, p 524).

6. Objects not possible of determination as to their kind. Note: In order that a thing, right or service may be the object of a contract, it should be in existence at the moment of the celebration of the contract, or at least, it can exist subsequently or in the future. A future thing may be the object of a contract. Such contract may be interpreted in two possible ways: 1. Conditional contract – if its efficacy should depend upon the future existence of the thing. 2. Aleatory contract – if one of the contracting parties should bear the risk that the thing will never come into existence (Manresa). In case of doubt about the nature of the contract, it must be deemed conditional as doubt shall be resolved in favor of greatest reciprocity of interests. CAUSE It is the immediate, direct or most proximate reason which explains and justifies the creation of an obligation through the will of the contracting parties. Essential requisites of cause (ELT): 1. Existing at the time of the celebration of the contract; 2. Licit or lawful; and 3. True. Cause and Object; Distinguished Cause

The service or benefit which The thing which is given in is remunerated remuneration The liberality of the donor or The thing which is given or benefactor donated Prestation or promise of a The thing or service itself thing or service by the other Different with respect of each party

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Object

May be the same for both the parties

CIVIL LAW Cause Direct and most proximate reason of a contract

OBLIGATIONS & CONTRACTS

Motive Indirect or remote reason

The cause is contrary to law, morals, good customs, public order and public policy

Illegality of cause

Objective or juridical reason Psychological or purely of a contract personal reason Always the same for each contracting party

Differs for each contracting party

Its legality affects the existence or validity of the contract

Its legality does not affect the existence or validity of contract

Falsity of cause

The cause is stated but is not true

Note: Motive becomes causa when it predetermines the purpose of the contract (Jurado, Desiderio Comments and Jurisprudence on Obligations and Contracts, 2010 ed., p. 466). Cause in Onerous Contracts: The prestation or promise of a thing or service by the other.

Cause in Accessory Contracts: The cause in an accessory contracts (e.g. pledge) is the same as that of the principal contract. Moral obligation as cause Where the moral obligation arises wholly from ethical considerations, unconnected with any civil obligations, it cannot constitute a sufficient cause or consideration to support an onerous contract (Fisher vs. Robb, GR No.L46274, November 2, 1939). Where such moral obligation is based upon a previous civil obligation which has already been barred by the statute of limitations at the time when the contract is entered into, it constitutes a sufficient cause or consideration to support a contract (Villaroel vs. Estrada, G.R. No. 47362 Diciembre 19, 1940), it is then already a natural obligation. Effect of Lack of Cause, Unlawful Cause, False Cause and Lesion (Arts. 1352-1355) Cause Effect Lack of cause

The contract There is a total confers no right and lack or absence of produces no legal cause effect

The contract is void if it should not be proved that they were founded upon another cause which is true and lawful Shall not invalidate the contract, UNLESS: 1. There is fraud, mistake or undue influence; or 2. When the parties intended a donation or some other contract

Lesion or inadequac y of price

Cause in Remuneratory Contracts: Past service or benefit which by itself is a recoverable debt. Cause in Gratuitous Contracts: Mere liberality of the benefactor.

The contract is null and void

Presumption of lawful cause When the cause is not stated, it shall be presumed to be in existence and lawful unless proof to the contrary is shown (Art.1354)..

F ORM

OF

C ONTR ACTS

Form of Contracts Art. 1356 retained the “Spiritual System” of the Spanish Code by virtue of which the law looks more at the spirit rather than the form of contracts General Rule: Contracts shall be obligatory, in whatever form they may have been entered into, provided all the essential requisites for their validity are present (Art. 1356). Exceptions: 1. When law requires that the contract be in a certain form to be valid (Art. 1356); 2. When law requires that the contract be in a certain form to be enforceable (Statute of Frauds); 3. When required to make the contract effective as against third parties (Art.1357-1358) Where the validity of a contract is made to depend upon a particular formality, an action under Art. 1357 cannot be brought to compel the other party to execute such

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OBLIGATIONS & CONTRACTS formality. Article 1357 presupposes the existence of a valid contract and cannot possibly refer to the form to make it valid. Contracts which must appear in writing: 1. Donation of personal property whose value exceeds five hundred pesos (Art. 748); 2. Sale of a piece of land or any interest therein through an agent (Art. 1874); 3. Agreements regarding payment of interest in contracts of loan (Art. 1956); and 4. Antichresis (Art. 2134); and 5. Stipulation limiting common carrier’s duty of extraordinary diligence to ordinary diligence (Art. 1744) Contracts which must appear in a public document: 1. Donation of immovable properties (Art. 749); 2. Partnership where immovable property or real rights are contributed to the common fund (Arts. 1171 and 1773); 3. 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 is governed by Articles 1403, No. 2, and 1405 (Art. 1358, no. 1); 4. The cession, repudiation or renunciation of hereditary rights or of those of the conjugal partnership of gains (Art. 1358, no. 2); 5. 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 (Art. 1358, no. 3); and 6. The cession of actions or rights proceeding from an act appearing in a public document (Art. 1358, no. 4). With respect to those enumerated under Art. 1358 (items 3 to 6 in the preceding list), they are valid as between the contracting parties, the requirement that they be executed in a particular form is for the purpose of making them effective against third persons. However, with respect to items 1 and 2, formalities are required for the validity of the contract. Contracts which must be registered: 1. Chattel mortgages (Art. 2140) 2. Sale/transfer of large cattle (Cattle Registration Act). Note: Arts. 1357-1358 do not require the execution of the contract either in a public/private document in order to validate/enforce it but only to insure efficacy, so that after its existence has been admitted, the party bound may be compelled to execute the necessary document. When one of the contracting parties invokes Art. 1357 and 1358 by means of proper action, the effect is to place the

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CIVIL LAW existence of the contract in issue, which must be resolved by the ordinary rules of evidence; Actions to compel the execution of the necessary document and action upon the contract may be exercised simultaneously, unless it appears that the former action must precede the latter. Although Art. 1357, in connection with Art. 1358, do not operate against the validity of the contract nor the validity of the acts voluntarily performed by the parties for the fulfillment thereof, yet from the moment when any of the contracting parties invokes said provisions, it is evident that under them execution of the required document must precede the determination of the obligations derived from the contract (Jurado, Desiderio, Comments and Jurisprudence on Obligations and Contracts, 2010 ed., p. 484-485). R.A. 8792 (E- Commerce Act) provides that the formal requirements to make contracts effective as against third persons and to establish the existence of a contract are deemed complied with provided that the electronic document is unaltered and can be authenticated as to be usable for future reference.

R EFO RM ATION

OF I NSTRUMENTS

Reformation of Instruments Remedy through which a written instrument is made or construed so as to express or conform to the real intention of the parties when some error or mistake has been committed. Rationale: It would be unjust and inequitable to allow the enforcement of a written instrument which does not reflect or disclose the real meeting of the minds of the parties. The courts, by reformation, do not attempt to make a new contract for the parties, but to make the instrument express their real agreement. Requisites: 1. Meeting of the minds of the parties; 2. Their true intention is not expressed in the instrument; 3. Failure to express true intention is due to mistake, fraud, inequitable conduct or accident and 4. Clear and convincing proof of mistake, accident, relative simulation, fraud, or inequitable conduct.

CIVIL LAW

OBLIGATIONS & CONTRACTS

Reformation

Annulment

Presupposes that there is a valid contract but the document/instrument executed does not express their true intention

The contract was not validly entered into as when their minds did not meet or if the consent was vitiated

Gives life to the contract Involves a by making the instrument nullification conform to the true contract intention of the parties

complete of the

When can one party ask for the reformation of the contract (Arts. 1361-1365): 1. In case of mutual mistake of the parties (Art. 1361) Requisites: a. Mistake must be mutual. b. Mistake must be of a fact. c. There must be clear and convincing proof of the mutual mistake. 2. When one party was mistaken and the other party acted fraudulently (Art. 1362). 3. When one party was mistaken, the other knew or believed that the instrument does not show their real intent but concealed that fact to the former (Art. 1363). 4. In case of ignorance, lack of skill, negligence or bad faith on the part of the person drafting the instrument or the clerk or typist (Art. 1364). 5. When parties agree upon the mortgage or pledge of a real or personal property, but the instrument states that the property is sold absolutely or with a right of repurchase (Art. 1365). Instances when there can be no reformation (Art. 1366): 1. Simple donations inter vivos wherein no condition is imposed;

Rationale: An action to reform an instrument is in the nature of specific performance and requires a valuable consideration – an element lacking as between donor and done, and between testator and beneficiary. 2. Wills; Note: Only imperfect or erroneous descriptions of persons or property can be corrected; but the manner in which the testator disposes of his property cannot be changed by a reformation of the instrument (Tolentino, Arturo M., Civil Code of the Philippines, 1987 ed., Vol. 4, p 556). 3. When the real agreement is void (Art.1366) Note: Upon the reformation of an instrument, the general rule is that it relates back to and takes effect from the time of its original execution as between the parties. 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 (Art. 1359). Expediency and Convenience are not grounds for the reformation of an instrument (Multi-Ventures Capital and Management Corp., vs. Stalwart Management Services Corp., G.R. No. 157439, July 4, 2007). When one of the parties has brought an action to enforce the instrument, no subsequent reformation can be asked (Principle of estoppel). In case of mutual mistakes, reformation may be ordered at the instance of either parties or his successors in interest, otherwise it may only be brought by the petition of the injure party or his heirs and assigns (Art. 1365).

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CIVIL LAW

OBLIGATIONS & CONTRACTS C OMP AR ATI VE T ABLE Void

OF

Voidable

D EFECTI VE C ONTR ACTS Rescissible

Unenforceable

Defect is caused by lack of Defect is caused by injury/ Defect is caused by lack of Defect is caused by vice of form, authority, or capacity of damage either to one of the essential elements or illegality consent both parties not cured by parties or to a 3rd person prescription Valid and enforceable until Valid and enforceable until Do not, as a general rule Cannot be enforced by a annulled by a competent rescinded by a competent produce any legal effect proper action in court court court Corresponding action for Action for the declaration or recovery, if there was total or nullity or inexistence or Action for annulment or Action for rescission may partial performance of the defense of nullity or defense of annulability may prescribe unenforceable contract under inexistence does not prescribe No. 1 or 3 of Article 1403 may prescribe prescribe Not cured by prescription

Cured by prescription

Cured by prescription

Not cured by prescription except in case of Art. 1403 nos. 1 or 3

Cannot be ratified

Can be ratified

Need not be ratified

Can be ratified

Assailed by a contracting party and a third person Assailed only by a contracting whose interest is directly party affected

Assailed by a contracting party and a third person who Assailed only by a contracting is prejudiced or damaged by party the contract

Assailed collaterally

Assailed directly only

directly

or Assailed collaterally

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directly

or

Assailed collaterally

directly

or

CIVIL LAW R ESCISSIBLE C O NTR ACTS These are contracts which are valid but are defective because of 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. Resolution for Breach of Stipulation Rescission by Reason of Lesión or Damage Distinguished (Congregation of the Religious of the Virgin Mary, et.al., vs. Orola, et.al., G.R. No. 169790, April 30, 2008) Resolution for Breach of Rescission by Reason of Stipulation (Art. 1191) Lesión or Damage Principal action; retaliatory Subsidiary action and action against the other involves partial resolution party Based on lesion or economic prejudice, rendering the contract Based on breach of trust rescissible by law (Note: not all economic prejudices are recognized by law) Requires mutual restitution Requires mutual restitution as governed by Art. 1191 as governed by Art. 1381 Abrogation of the contract from the beginning and to restore the parties to their Termination of the relative positions as if no obligation and release of contract has been made the parties from further obligations form each other To declare the contract void at its inception and to put an end to it though it never was May be demanded by a May demanded only by a third party prejudiced in the party to the contract contract May be denied by court Extension of time does not when there is sufficient affect the right to ask for reason to justify the rescission extension of time Non-performance is the Various reasons of equity only ground for the right to are grounds for rescission rescission Applies whether reciprocal Applies only to reciprocal or unilateral obligations obligations where one and whether the contract party has not performed has been fully fulfilled Rescission shall be only to the extent necessary to cover the damages caused (Art. 1384).

OBLIGATIONS & CONTRACTS CHARACTERISTICS OF RESCISSIBLE CONTRACTS: 1. Its defect consists in injury or damage either to one of the contracting parties or to third persons. 2. Before rescission, it is valid, and therefore, legally effective. 3. It can be attacked directly only and not collaterally. 4. It can be attacked only by a contracting party or a third person who is injured or defrauded. 5. It is susceptible of convalidation only by prescription and not ratification. REQUISITES OF RESCISSION: 1. Contract must be rescissible under Articles 1381 and 1382; 2. Party asking for rescission must have no other legal means to obtain reparation for the damages suffered by him (Art. 1383); 3. Person demanding rescission must be able to return whatever he may be obliged to restore if rescission is granted (Art. 1385); 4. Things which are the object of the contract must not have passed legally to the possession of a third person acting in good faith (Art. 1385); and 5. Action must be brought within four years (Art. 1389). CONTRACTS THAT ARE RESCISSIBLE (Arts. 13811382): 1. Those entered into by guardians where the ward suffers lesion of more than ¼ of the value of the things which are objects thereof; 2. Those agreed upon in representation of absentees, if the latter suffer lesion by more than ¼ of the value of the things which are subject thereof; 3. Those undertaken in fraud of creditors when the latter cannot in any manner claim what are due them; 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 and the court; 5. All other contracts especially declared by law to be subject to rescission; and 6. Payments made in a state of insolvency for obligations whose fulfillment the debtor could not be compelled at the time they were effected. Examples of contracts declared to be subject to rescission: 1. Partition of inheritance where an heir suffers lesion of at least ¼ of the share to which he is entitled (Art. 1098) 2. Deterioration of the thing through the fault of the debtor, if the creditor chooses to rescind (Art. 1189 (4)); 3. Right of unpaid seller to rescind (Art. 1526(4)); 4. Deterioration of the object of the sale (Art. 1538);

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OBLIGATIONS & CONTRACTS 5. Sale of real estate with a statement of its area, at the rate of a certain price for a unit of measure or number and the vendor failed to deliver the area stated, the vendee may ask for rescission of the contract if the lack of area is not less than 1/10th of that stated. (Art.1539) 6. The vendee does not accede to the failure to deliver what has been stipulated (Art. 1542); 7. When through eviction, the vendee loses a part of the thing sold of such importance, in relation to the whole, that he would not have bought it without said part (Art. 1556); 8. If immovable sold is encumbered with any nonapparent burden or servitude of such nature that it cannot be presumed that the vendee could not have acquired it had he been aware thereof, the vendee may ask for rescission. (Art. 1560) 9. Election of the vendee to withdraw from the contract in the cases under Arts. 1561, 1562, 1564, 1565 and 1566 (Art. 1567); 10. Rescission by the aggrieved party in a contract of lease when the other party does not comply with Arts. 1654 and 1657 (Art. 1659) Requisites before a contract entered into in behalf of wards or absentees may be rescinded on the ground of LESION: Lesion The injury which one of the parties suffers by virtue of a contract which is disadvantageous for him. To give rise to rescission, the lesion must be known or could have been known at the time of making of the contract. 1. Contract was entered into by a guardian in behalf of his ward or by a legal representative in behalf of an absentee; 2. It was entered into without judicial approval; 3. Ward or absentee suffered lesion of more than ¼ of the value of the property which is the object of the contract; 4. There is no other legal means of obtaining reparation for the lesion; 5. Person bringing the action must be able to return whatever he may be obliged to restore; and 6. Object of the contract must not be legally in the possession of a third person who did not act in bad faith. Take note that a guardian is authorized only to MANAGE the estate of the ward; should he DISPOSE a portion thereof without authority from the court by way of a contract, the same is unenforceable under Art. 1403 (1), irrespective of whether there is lesion or not.

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CIVIL LAW Requisites before a contract entered into in FRAUD OF CREDITORS may be rescinded: 1. There is a credit existing prior to the celebration of the contract; 2. There is fraud, or at least, the intent to commit fraud to the prejudice of the creditor seeking rescission; 3. Creditor cannot in any legal manner collect his credit; and 4. Object of the contract must not be legally in the possession of a third person who did not act in bad faith. The action to rescind contracts in fraud of creditors is known as accion pauliana. Accion pauliana presupposes a judgment and unsatisfied execution which cannot exist when the debt is not yet demandable at the time the rescissory action is brought (Tolentino,Arturo, Commentaries and Jurisprudence on the Civil Code of the Philippines, 1991 ed., Vol. 4 p. 576). Even secured creditors are entitled to accion paulina (Tolentino,Arturo, Commentaries and Jurisprudence on the Civil Code of the Philippines, 1991 ed., Vol. 4, p. 579). Do all creditors benefit from the rescission of the contract? As a rule, the rescission should benefit only the creditor who obtained the rescission, because the rescission is to repair the injury caused to him by the fraudulent alienation. If a balance is left after satisfying the claim of the creditor who brought the action, other creditors who are qualified to bring an accion pauliana should be given the benefit of rescission, instead of requiring them to bring other rescissory actions. However, creditors who only became such after the fraudulent alienation, cannot benefit from the rescission (Tolentino, Arturo, commentaries and Jurisprudence of the Civil Code of the Philippines, 1991 ed., Vol. 4, p. 583). Presumption of Fraud (Art. 1387) Test of fraud: Does it prejudice the rights of the creditors? (Tolentino, Arturo, Commentaries and Jurisprudence on the Civil Code of the Philippines, 1991 ed., Vol. 4 p. 580) When Alienation of Property Presumed in Fraud of Creditors: 1. Alienation by gratuitous title if the debtor has not reserved sufficient property to pay all of his debts contracted before alienation;

CIVIL LAW 2. Alienation by onerous title if made by a debtor against whom some judgment has been rendered in any instance or some writ of attachment has been issued. Badges of fraud: 1. The fact of inadequate or fictitious cause or consideration of the conveyance; 2. Transfer by a debtor after suit has been begun and while it is pending against him; 3. Sale on credit by an insolvent debtor; 4. Evidence of large indebtedness or complete insolvency 5. Transfer of all or nearly all of debtor’s property by him, especially when insolvent or greatly embarrassed financially; 6. Transfer between father and son, where others of the above circumstances are present; 7. Failure of the vendee to take exclusive possession of all the property. Requisites before Payment Made by Insolvent can be Rescinded: 1. It was made in a state of insolvency; and 2. Obligation must have been one which the debtor could not be compelled to pay at the time such payment was effected. Apparent Conflict between Art. 1382 and Art. 1198 [1] if the Obligation is subject to Suspensive Period: Under Article 1382, payment made by an insolvent is rescissible. Under Article 1198 [1], a debtor can be compelled to pay by the creditor even before the expiration of the period since by his insolvency he has already lost his right to the benefit of such period. The conflict can easily be resolved by considering the priority of dates between the two debts. If the obligation with a period became due before the obligation to the creditor seeking the rescission became due, then the latter cannot rescind the payment even if such payment was effected before the expiration of the period; but if the obligation with a period became due after the obligation to the creditor seeking rescission became due, then the latter can rescind the payment.(Manresa) Parties who may institute action: 1. The creditor who is defrauded in rescissory actions on ground of fraud, and other person authorized to exercise the same in other rescissory actions. 2. Their representatives 3. Their heirs 4. Their creditors by virtue of the subrogatory action define in Art. 1177 of the NCC

OBLIGATIONS & CONTRACTS The action for rescission is SUBSIDIARY; it cannot be instituted except when the party suffering damage has no other legal means to obtain reparation for the same (Art. 1383). Rescission shall be only to the extent necessary to cover the damages caused (Art. 1384). EFFECT OF RESCISSION (Art. 1385): 1. As to the parties – mutual restitution together with the fruits and interest. Note: This is applicable only to rescissory actions on the ground of lesion and not to rescissory actions on the ground of fraud. 2. As to third person a. Bad faith or not legally in possession – obliged to return b. Legally in possession and not in bad faith – no rescission; however, indemnity for damages may be demanded from the person causing the loss PRESCRIPTIVE PERIOD FOR ACTION FOR RESCISSION (Art. 1389): 1. Under Art. 1381 no. 1 – within 4 years from the time of the termination of the incapacity of the ward 2. Under Art. 1381 no. 2 – within 4 years from the time the domicile of the absentee is known 3. Under Art. 1381 nos. 3 and 4 as well as Art. 1382 – within 4 years from the time of the discovery of fraud

V OID ABLE C O NTRACTS Voidable Contracts Voidable or annullable contracts are existent, valid, and binding, although they can be annulled because of want of capacity or vitiated consent of one of the parties; but before annulment, they are effective and obligatory between the parties. Hence, it is valid until it is set aside, and its validity may be assailed only in an action for that purpose. Characteristics of Voidable Contracts: 1. Its defect consists of the vitiation of consent of one of the contracting parties. 2. It is binding until it is annulled. 3. It is susceptible of convalidation by ratification or prescription. 4. Its defect or voidable character cannot be invoked by third persons. Voidable or Annullable Contracts:: 1. Those where ONE of the parties is incapable of giving consent to a contract;

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OBLIGATIONS & CONTRACTS 2. Those where the consent is vitiated by mistake, violence, intimidation, undue influence or fraud. (Art. 1390) Take note that Art. 1390 refers to a “proper action in court.” The validity of a voidable contract may only be attacked either by way of a direct action or by way of defense via a counterclaim, and not a special or affirmative defense. Even though there are no damages between the contracting parties, the contracts enumerated in Art. 1390 are still voidable. If the consent is absolutely lacking or simulated, the contract is inexistent. Modes to Extinguish an action for Annulment: 1. Prescription; 2. Ratification; and 3. Loss of the thing which is the object of the contract through fraud or fault of the person who is entitled to institute the action. Prescriptive Period: Action for Annulment (Art. 1391): 1. Contracts entered into by incapacitated person – within 4 years from the time guardianship ceases; 2. Where consent is vitiated by violence, intimidation or undue influence – within 4 years from the time such violence, intimidation or undue influence ceases; 3. Where consent is vitiated by mistake or fraud – within 4 years from the time of the discovery of such mistake or fraud. Note: These periods apply only to the parties to the contract and not to third persons. Discovery of fraud must be reckoned from the time the document was registered in the office of the register of deeds. Registration constitutes constructive notice to the whole world (Carantes vs. CA, GR No.L-33360, April 25, 1977). Ratification (Arts. 1392-1396): The act or means by virtue of which efficacy is given to a contract which suffers from a vice of curable nullity. Forms of Ratification: 1. Express ratification 2. Implied ratification – 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

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CIVIL LAW which necessarily implies an intention to waive his right (Art. 1393). Effects of Ratification: 1. Extinguish the action for annulment of a voidable contract. 2. Cleanses the contract of its defects from the moment it was constituted. Requisites of Ratification: 1. Contract is tainted with a vice susceptible of being cured; 2. Confirmation is effected by the person who is entitled to do so under the law; 3. It is effected with knowledge of the vice or defect of the contract; and 4. Cause of the nullity or defect have already disappeared Note: The right to ratify may be transmitted to the heirs of the party entitled to such right. It may likewise be exercised by the guardian of the incapacitated person having such right (Art. 1394). Ratification does not require the conformity of the contracting party who has no right to bring an action for annulment (Art. 1385). Who may institute action for Annulment (Art. 1397): General Rule: Action for annulment may be instituted by all who are thereby obliged principally or subsidiarily. Requisites: 1. Plaintiff must have interest in the contract; 2. The victim and not the party responsible for the vice or defect must assert the same. Exception: If a third person 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 (Teves vs. People’s Homesite & Housing Corp., GR No. 21498, June 27, 1968). Effects of Annullment: 1. If contract has not yet been consummated – parties shall be released from the obligations arising therefrom; 2. If contract has already been consummated – rules provided in Arts. 1398-1402 shall govern.

CIVIL LAW Effects of Annulment in cases of Consummated Voidable Contracts (Arts. 1398-1399): Obligation of Mutual Restitution: 1. Obligation to give – The parties shall restore to each other things which have been the subject matter of the contract with fruits and the price with interest, except in cases provided by law. 2. Obligation to do or not to do –There will be an apportionment of damages based on the value of such prestation with corresponding interests. 3. When the defect of the contract consists in incapacity of one of the contracting parties - the incapacitated person is not obliged to make restitution except insofar as he has been benefited by the thing or price received by him. It is presumed in the absence of proof that no such benefit has accrued to the incapacitated person (8 Manresa, 5th Ed., Bk. 2, p. 647).

OBLIGATIONS & CONTRACTS CHARACTERISTICS OF UNENFORCEABLE CONTRACTS: 1. It cannot be enforced by a proper action in court. 2. It susceptible of ratification. 3. It cannot be assailed by third persons. Statute of Frauds (Art. 1403, no. 2): 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 thereof, of the agreement cannot be received without the writing, or a secondary evidence of its contents: (OMG-DLC) a. An agreement that by its terms is not to be performed within one year from the making thereof; b. A special promise to answer for the debt, default or miscarriage of another;

Art. 1399 cannot be applied to those cases were the incapacitated person can still return the thing which he has received. (Jurado, Desiderio, Comments and Jurisprudence on Obligations and Contracts, 2010 ed., p. 554).

If the promise is an original one or independent one, that is, the promisor becomes thereby primarily liable for the payment of the debt, the promise is not within the statute. But on the other hand, if the promise is collateral to the agreement of another and the promisor, the promise must be in writing.

Effects of Failure to Make Restitution (Arts. 14001402):

c. An agreement made in consideration of marriage, other than a mutual promise to marry;

Where the thing is lost 1. Due to fault of defendant – he shall return the fruits received and the value of the thing at the time of loss, with interest from the same date 2. Due to fault of plaintiff – the action for annulment shall be extinguished 3. Due to fault of the incapacitated – whether the loss occurred during the plaintiff’s incapacity or after he had acquired capacity, the action for annulment would still be extinguished in accordance with Art. 1401, par. 1 4. Due to fortuitous event – contract can still be annulled, but the defendant can be held liable only for the value of the thing at the time of loss without interest thereon.

When the marriage is a mere incident, and to be the end to be attained by the agreement, the contract is not in consideration of marriage, and oral evidence can prove the agreement.

U NENFO RCE ABLE C ONTR ACTS Unenforceable contract Those which cannot be enforced by proper action in court unless they are ratified, because, either: 1. They are entered into without or in excess of authority (Art. 1403, no.1; Art. 1317); 2. They do not comply with the statute of frauds; 3. Both contracting parties do not possess the required legal capacity.

d. An agreement for the sale of goods, chattels or things in action, at a price not less than 500 pesos, unless the buyer accepted and received such goods and chattels or 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 sale, of the amount and kind of property sold, terms, price, names of the purchasers and persons to whose account the sale is made, it is a sufficient memorandum; Where there is a purchase of a number of articles which separately do not have a price of 500P each but has an aggregate sum exceeding P500, the statue is only applicable if the transaction is INSEPARABLE. e. An agreement for the leasing for a longer period than one year; or for the sale of real property or interest therein; and

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OBLIGATIONS & CONTRACTS f. A representation as to the credit of a third person. This serves as the basis for an action for damages against the party who made the representation, if it turns out to be false or incorrect. Rationale for the Statute of Frauds: To prevent fraud and perjury in the enforcement of obligations. The Statute of Frauds, however, simply provide for the manner in which contracts under it shall be proved. It does not attempt to make such contracts invalid if not executed in writing, but only makes ineffective the action for specific performance (Jurado, Desiderio, Comments and Jurisprudence on Obligations and Contracts, 2010 ed., p. 617). For a note or memorandum to satisfy the Statute, it must be complete in itself and cannot rest partly in writing and partly in parol. The note or memorandum must contain the names of the parties, the terms and conditions of the contract, and a description of the property sufficient to render it capable of identification. Such note or memorandum must contain the essential elements of the contract expressed with certainty that may be ascertained from the note or memorandum itself, or some other writing to which it refers or within which it is connected, without resorting to parol evidence. (Swedish Match, AB vs. CA, G.R. No. 128120 October 20, 2004) The statute of frauds applies only to EXECUTORY CONTRACTS, not to those that are partially or completely fulfilled. Further, the statue does not apply to actions which are neither for specific performance of the contract nor for the violation thereof. Take note that the provision mentions “unenforceable by action.” The prohibition, thus, applies on actions which spring from the enforcement of the contract. The Statute of Frauds is EXCLUSIVE, that is, it applies only to the agreements or contracts enumerated therein. Ratification of Contracts Infringing the Statute of Frauds (Art. 1405): Such contracts may be ratified by: 1. Failure to object to the presentation of oral evidence to prove such contracts; or 2. Acceptance of benefits under these contracts Note: The unenforceability of a contract can only be assailed by parties thereto (Art. 1408). This defense is personal to the party to the agreement.

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CIVIL LAW V OID OR I NEXISTENT C ONTR ACTS Void or Inexistent Contracts In general, they are those which lack absolutely either in fact or in law one or some of the elements essential for its validity. It has no force and effect from the very beginning, as if it has never been entered into, and which cannot be validated either by time or by ratification. Characteristics of Void Contracts: 1. It does not produce any legal effect; 2. It is not susceptible of ratification; 3. The right to set up the defense of inexistence or absolute nullity cannot be waived or renounced; 4. The action or defense for the declaration of their inexistence or nullity is imprescriptible; 5. The inexistence or absolute nullity of a contract cannot be invoked by a person whose interests are not directly affected. Note: The defense of illegality of contract is not available to third persons whose interests are not directly affected (Art. 1421). A contract which is the direct result of a previous illegal contract, is also void and inexistent (Art. 1422). Differences between Void and Inexistent Contracts Void Contracts Inexistent Contracts Those where all of 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 contract itself is prohibited or declared void by law.

Those where one or some or all of the requisites essential for the validity of a contract are absolutely lacking.

Principle of pari delicto is applicable

Principle of pari delicto is not applicable

May produce legal effects

Cannot produce any effect

Covers Art. 1409 nos. 1,3,4,5,6, and 7

Covers Art. 1409 nos. 2 and 3

Contracts which are inexistent and Void Ab Initio (Art. 1409): 1. Those whose cause, object or purpose is contrary to law, morals, good customs, public order or public policy;

CIVIL LAW 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; and 7. Those expressly prohibited or declared void by law. The following stipulations are void: 1. Pactum comissorium (Arts. 2088, 2130 and 1390 - a stipulation that allows the creditor to appropriate the things given by way of pledge or mortgage or dispose of them. 2. Pactum de non alienado (Art. 2130) - a stipulation forbidding the owner from alienating the immovable mortgaged. 3. Pactum leonina (Art.1799) - a stipulation which excludes one or more partners from any share of the profits or losses. Principle of In Pari Delicto (Arts. 1411-1419): When the defect of a void contract consists in the illegality of the cause or object of the contract and both of the parties are at fault or in pari delicto, the law refuses them any remedy and leaves them where they are. Exceptions: 1. Payment of usurious interest (Art. 1413); 2. 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 (Art. 1414); 3. Payment of money or delivery of property made by an incapacitated person (Art. 1415); 4. Agreement or contract not illegal per se but merely prohibited by law, and the prohibition is designed for the plaintiff’s protection (Art. 1416); 5. Payment of any amount in excess of the maximum price of any article or commodity fixed by law (Art. 1417); 6. Contract whereby a laborer undertakes to work longer than the maximum number of hours fixed by law (Art. 1418); 7. Contract whereby a laborer accepts a wage lower than the minimum wage fixed by law (Art. 1419); 8. In case of divisible contracts, the legal terms may be enforced separately from the illegal terms (Art. 1420); and 9. One who lost in gambling because of fraudulent schemes practiced on him. He is allowed to recover his

OBLIGATIONS & CONTRACTS losses [Art. 315, 3 (b), RPC] even if gambling is prohibited. Note: The principle of in pari delicto is applicable ONLY TO VOID CONTRACTS and not to inexistent contracts. Effects when both are at fault: 1. They shall have no action against each other. 2. Both shall be prosecuted. 3. The effects or instruments of the crime shall be confiscated in favor of the government. Effects when only one is at fault: 1. The guilty party will be prosecuted. 2. The instrument of the crime will be confiscated. 3. The innocent one may claim what he has given; or if he has not given anything yet, he shall not be bound to comply with his promise.

N ATUR AL O BLIG ATIONS Natural Obligations Those based on equity and natural law, which do not grant a right of action to enforce their performance, but after voluntary fulfillment by the obligor, authorize the retention of what has been delivered or rendered by reason thereof (Art. 1423). The binding tie of these obligations is in the conscience of man, for under the law, they do not have the necessary efficacy to give rise to an action. In order that there may be a natural obligation there must exist a juridical tie which is not prohibited by law and which in itself could give a cause of action but because of some special circumstances is actually without legal sanction or means of enforcing compliance by intervention of courts (Tolentino, Arturo, Commentaries and Jurisprudence on the Civil Code of the Philippines). TWO CONDITIONS NECESSARY FOR NATURAL OBLIGATIONS: 1. That there be a juridical tie between two persons; and 2. That this tie is not given effect by law. The promise to perform a natural obligation is as effective as performance itself and converts it into a civil obligation (7 Planiol and Ripert, page 307-308). A natural obligation may also be converted into a civil obligation by novation (5 Vera, page 51-52), or by confirmation or ratification (3 Salvat, page 160-161).

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OBLIGATIONS & CONTRACTS As a general rule, partial payment of a natural obligation does not make it civil; the part paid cannot be recovered but payment of the balance cannot be enforced (5 Vera 52). Natural Obligation

Moral Obligation

There is a juridical tie No juridical tie whatsoever. between the parties which is not enforceable by court action Voluntary fulfillment of such produces legal effects which the court will recognize and protect.

Voluntary fulfillment of such does not produce any legal effect which the court will recognize and protect.

Within the domain of law

Within the domain of morals

Examples of Natural Obligations: 1. Performance after the civil obligation has prescribed (Art. 1424); 2. Reimbursement of a third person for a debt that has prescribed (Art. 1425); 3. Performance after action to enforce civil obligation has failed (Art. 1428); 4. Payment by heir of debt exceeding value of property inherited (Art. 1429); and 5. Payment of legacy after will have been declared void (Art. 1430).

E STOPPEL Estoppel 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 (Art. 1431). Kinds of Estoppel: 1. Estoppel in pais or by conduct a. Estoppel by silence (e.g. Art. 1437) b. Estoppel by acceptance of benefits (e.g. Art. 1438) 2. Technical estoppels a. Estoppel by deed – a party to a deed is precluded from asserting as against the other party, material fact asserted therein. b. Estoppel by record – a party is precluded from denying the truth of matters set forth in a record whether judicial or legislative. 3. Estoppel by judgment – a party to a case is precluded from denying the facts adjudicated by a court of competent jurisdiction. 4. Estoppel by laches

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CIVIL LAW Examples of Estoppel: 1. If a person, in representation of another sells or alienates a thing, the former cannot subsequently set up his title as against the buyer or grantee (Art. 1435). 2. A lessess or bailee is estopped from asserting title to the thing leased or received, as against the lessor or bailor (Art. 1436). 3. 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 the following requisites are present: a. there must be fraudulent representation or wrongful concealment of facts known to the party estopped; b. the party precluded must intend that the other should act upon the facts as misrepresented; c. the party misled must have been unaware of the true facts; and d. the party defrauded must have acted in accordance with the misrepresentation. Note: Estoppel is effective only as between the parties thereto or their successors-in-interest. Note: The government is not estopped by mistake or error on the part of its officials or agents. Laches or “Stale Demands” 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 to assert it either has abandoned it or declined to assert it. Elements of laches: 1. 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; 2. 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; 3. Lack of knowledge or notice on the part of the defendant that the complaint would assert the right on which he bases his suit and 4. Injury or prejudice to the defendant in the event relief is accorded to the complainant, or the suit is not held to be barred.

CIVIL LAW

OBLIGATIONS & CONTRACTS

Prescription Laches Concerned with the fact Concerned with the effect of delay of delay Question of inequity of Question or matter of permitting the claim to be time enforced Statutory Not statutory Applies in law Applies in equity Cannot be availed of Being a defense in unless it is specifically equity, it need not be pleaded as an affirmative specifically pleaded allegation Based on a fixed time Not based on a fixed time

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