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OBLIGATIONS AND CONTRACTS 2011 CAVEAT LECTOR: If something is erroneously written, please consult the textbooks written by authorities like Tolentino, De Leon, Jurado and Paras. I created and used this material, and fortunately passed the subject. I found some errors before but was not able to correct them due to the loss of my hardcopy. Use it at your own discretion.

OBLIGATION Is a juridical necessity to give, to do or not to do. Is a juridical relation whereby a person (creditor) may demand from another (debtor) the observance of a determinate conduct, and, in case of breach, may obtain satisfaction from the assets of the latter. Correlative right: Credit: the right to demand the object of the obligation Debt: the duty to give, to do or not to do Classification of Obligations: 1. Civil Obligations Obligation which if not fulfilled when it becomes due or demandable may be enforced in court through an action. 2. Natural Obligations Obligation which cannot be enforced by court action but which are binding on the party who makes them, in conscience and according to equity and natural justice. i.e. if prescriptive period lapses, the voluntary payment of the debtor and retention of payment by the creditor 3. Moral Obligations Duties of conscience completely outside of the field of law Civil and natural obligations, distinguished: Civil obligations derive their binding force from positive law, while natural obligations derive their binding effect from equity and natural justice. Civil obligations can be enforced by court action or the coercive power of public authority, while the fulfillment of natural obligation cannot be compelled by court action but depends exclusively upon the good conscience of the debtor. Natural obligation distinguished from: Moral obligation: natural obligation produces juridical effects such as the right to retain what has been voluntarily paid by the debtor. Civil obligations: natural obligation does not give rise to an action to compel its performance Obligation enforceable by: Civil: action Moral: conscience Natural: obligation without sanction ELEMENTS/REQUISITES OF CIVIL OBLIGATIONS 1. Subjective Elements: active subject, passive subject 2. Objective Elements: prestation, efficient cause/legal tie or vinculum juris Subjective Elements: 1. Active Subject: who has the power to demand the prestation, known as the obligee or creditor 2. Passive Subject: who is bound to perform the prestation, known as the obligor or debtor Objective Elements: 1. Prestation: the subject matter of the obligation Requisites of Prestation:

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a. It must be possible, physically and juridically b. It must be determinate, or, at least, determinable according to pre-established elements or criteria c. It must have a possible equivalent in money Kinds of Prestation: a. Real obligation: The obligation to give Is one in which the prestation consists in delivery of 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, or in order to return it to its owner. Examples are the obligations to deliver the thing in contracts of sale, deposit, lease, antichresis, pledge, and donation. b. Personal obligation: the obligation to do or not to do 1. Positive personal obligation: - obligation to do - includes all kinds of work or services - in some cases, it may involve some work on the part of the debtor, whether it be physical or mental, such as in contracts of employment or professional services; but in other cases, the essence of the act may not be such, but merely the necessity of concluding a juridical operation, such as, when a person promises to give a bond. 2. Negative personal obligation: - obligation not to do - consists in abstaining from some act, such as the duty of a person not to create a nuisance on his property. - it includes prestation not to give, both being negative obligations. Efficient cause: (vinculum juris or juridical tie) the reason why the obligation exists Creates the obligation itself between debtor and creditor, and define the object/prestation demandable from one another 1. By law: such as relation of husband and wife giving rise to the obligation to support 2. By bilateral acts: such as contracts giving rise to obligations stipulated therein 3. By unilateral acts: such as crimes and quasi-delicts

SOURCES OF OBLIGATIONS (efficient cause): 1. Law The law cannot exist as a source of obligations, unless the acts to which its principles may be applied exist. But once those acts or facts exist, the obligations arising therefrom by virtue of express provisions of the law are entirely independent of the agreement of the parties. Such obligations and their correlative rights are governed by the law by which they are created. 2. Contracts Meeting of minds between two parties whereby one is bound to do, to give, not to do or not to give. Created by mutual consents, without such no contract exists. The terms of the contract should not be contrary to law, morals, good customs, public policy, or public order. If the contract does not violate any of the aforementioned limitations, it should be given effect, notwithstanding the absence of any legal provision at the time it was entered into which governs it.

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Quasi-Contracts Is a juridical relation which arises from certain lawful, voluntary, and unilateral acts, to the end that no one may be unjustly enriched or benefited at the expense of another. Kinds of Quasi-contract: a. Negotiorum gestio (unauthorized management) When a person voluntarily takes charge of another’s abandoned business or property without the owner’s authority. Reimbursement must be made to the gestor for necessary and useful expenses, as a rule. The gestor must continue in managing the business or property until he is fired or officially appointed by the owner of property. The gestor is not entitled to use the property personally but entitled for reimbursement. b. Solutio indebiti (undue payment) When something is received when there is no right to demand it, and it was unduly delivered thru mistake. The recipient has the duty to return it. Delicts Criminal (public aspect), civil (private aspect) Twin liability except for victimless crimes How civil liability is enforced: a. Restitution: restoration of the thing itself b. Reparation: reparation of the amount of damage, considering its price and sentimental value c. Indemnification: giving compensation for loss or for consequential damages caused to the injured party and his family or even a third person. Criminal Liability Civil Liability RPC Conviction Yes Yes, through reparation, restitution or indemnification Acquittal Reasonable doubt No Yes, through preponderance of evidence Innocence/NonNo No authorship Justifying circumstance No No, except avoidance of greater evil Exempting circumstance No Yes, through guardian or person exercising parental authority Dismissal due to violation No Yes, either dependent or of rights i.e. double independent civil action jeopardy Quasi-Delicts Art. 2176, whoever by act or omission causes damage to another, there being fault or negligence, is obliged to pay for the damage done. Such fault or negligence, if there is no pre-existing contractual relation between the parties, is quasi-delict. Damnum absque injuria (loss without injury): i.e. self inflicted damages such as when plaintiff cannot attribute damages to anyone except himself because the injury is self-inflicted. 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, whereby such other person suffers injury. Test of Negligence:

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A duty on the party of the defendant to protect the plaintiff from the injury of which the latter complains. b. A failure to perform that duty. c. An injury to the plaintiff through such failure. Requisites of Liability for Quasi-delict: a. That there exists a wrongful act or omission imputable to the defendant by reason of his fault or negligence b. That there exists a damage or injury, which must be proved by the person claiming recovery c. That the negligence or fault is the proximate cause of the damage or injury. Liability of employer for quasi-delict or crime of employee: 1. The liability of the employer for the fault or negligence of his employee on quasi-delict is PRIMARY, he can be sued directly by the injured party, and after he has paid the damages to such injured party he can in turn recover from his employee the amount paid by him. Liability based on Art 103 of RPC is SUBSIDIARY; that is, the employee must have first been convicted and sentenced to pay a civil indemnity, and it must be shown that he is insolvent in order that the employer may be held liable. 2. In case of quasi-delict of an employee, the employer can avoid liability by proving that he exercised the diligence of a good father of a family to prevent damage. While in the case of crime committed by an employee, the subsidiary liability of the employer is absolute and cannot be avoided by proof of such diligence. 3. In quasi-delicts, all employers whether they are engaged in some enterprise or not, are liable for the acts of their employees including household helpers While in crimes, the employer is liable only when he is engaged in some kind of business or industry. Quasi-contract distinguished from other sources: Delict: The act giving rise to quasi-contract must be lawful, thereby distinguishing it from crime in which the act or omission is unlawful. Quasi-delict: Quasi-contract must be voluntary unlike in quasi-delict which is based on fault or negligence or mere lack of foresight. Contract: Quasi-contract must be unilateral, unlike in contract in which there are two parties who come to an agreement. Quasi-delict and crime, distinguished: 1. As to the nature of the right violated: The right violated in quasi-delict is a private right; in a crime, the right violated is a public right. Quasi-delict is a wrong against the individual, while crime is a wrong against the state. 2. As to the condition of the mind Criminal intent is necessary for the existence of the criminal liability because without the same there can be no crime; In quasi-delict criminal intent is not necessary. 3. As to legal basis of the liability Crimes are not as broad as quasi-delicts, because an act can be punished as a crime only when there is a penal law clearly penalizing it, while there is quasi delict in any act or omission wherein fault or negligence intervenes. 4. As to liability for damages Every quasi-delict gives rise to liability for damages to the injured party, but there are crimes from which no civil liability arises such as in contempt, gambling, violations of ordinances and jaywalking. 5. As to the form of redress In crime, because the offense is against the state, the form or redress is fine or imprisonment, or both.

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In quasi-delicts, because the offense is against the individual, the form of redress is reparation of the injury suffered by the injured party. As to the amount of evidence In crimes the proof of guilt must be beyond reasonable doubt whereas in quasi-delict the proof of negligence need be only by preponderance of evidence. As to compromise Criminal liability can never be compromised, but liability from quasi-delict can be compromised as any other civil liability.

NATURE AND EFFECT OF OBLIGATIONS Fundamental Rights: No need for statutory law to enforce such right Statutory Rights: Either created by law or recognized by law a. Created by law: duty and obligation of other party is derived from the law itself b. Recognized by law: provisions of law merely supplement the original source of rights such as those conferred by stipulations of contracts Either real rights or personal rights a. Real rights: enforceable and demandable against the whole world the power belonging to a person over a specific thing, without a passive subject individually determined, against whom such right may be personally exercised. b. Personal rights: enforceable and demandable against a particular person the power belonging to one person to demand of another, as a definite passive subject, the fulfillment of a prestation to give, to do or not to do. REAL OBLIGATIONS (to give/deliver) The creditor may demand from the debtor transfer or conveyance of ownership or merely possession of a thing or where the performance of prestation creates real rights or right to return. Need of Tradition or Delivery: From the time the obligation to deliver a determinate thing arises, the creditor has only a personal right to the thing itself and to the fruits thereof. The ownership of things is transferred not by mere agreements but by delivery. The creditor, therefore, does not acquire any real right over the thing except from the time it is delivered to him. Modes of Delivery: 1. Actual Delivery: Physical transfer of the thing from the creditor to the debtor Where physically, the property changes hands 2. Constructive Delivery: Where the physical transfer is implied. a. Symbolic Delivery: as when the keys of the car are given as graduation gift. b. Formal Delivery: execution of public instrument selling land. c. Traditio Longa Manu: delivery by mere consent or pointing out of the object d. Traditio Brevi Manu: delivery by the short hand; the kind of delivery whereby a possessor of a thing not as an owner, becomes as owner

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e.g. When a tenant already in possession buys the house he is renting. e. Traditio Constitutum Possessorium: the opposite of brevi manu; thus, the delivery whereby a possessor of a thing as an owner, retains possession no longer as an owner, but in some other capacity e.g. When a house owner, who sells a house, but remains in possession as tenant of the same house. Generic Real Obligation/Indeterminate Thing: thing to be delivered must be consistent with the intent/purpose of the parties; neither superior nor inferior in quality. Generic Thing: one that is indicated only by its kinds, without being designated and distinguished from others of the same kind. In the obligation to deliver a generic thing, the object due is DETERMINABLE; the moment it is delivered, it becomes determinate. Limited Generic Obligation: when the generic objects are confined to a particular class. Specific Real Obligation/Determinate Thing: Determinate or specific thing: one that is individualized and can be identified or distinguished from others of its kind a. To Preserve: Bonus Pater Familias b. To Deliver the Thing Itself c. To Deliver the Fruits d. To Deliver Accessories and Accessions To Preserve: - In preserving the thing, the law requires the debtor to exercise the diligence of a good father of a family. - Ordinary diligence unless other degree of diligence is required in contract. - In depositum, commodatum, and common carrier, extra-ordinary degree of diligence is required. In this case, simple negligence already amounts to breach of contract. - The law prohibits stipulations that no diligence will be provided at all. To Deliver the Thing Itself: The thing to be delivered is not susceptible to substitution, even if the substitute is greater in value, unless the parties agree to the same. To Deliver the Fruits: The creditor or obligee, in an obligation to deliver a determinate thing, is entitled to the fruits from the time the obligation to deliver arises. Moment when obligation arises: a. In obligation arising from law, quasi-delicts, quasi-contracts, and crimes, the specific provisions of law applicable to the obligation determine when the delivery should be made. b. In obligations which are subject to a suspensive condition, the obligation to deliver arises from the moment the condition happens. c. When there is a suspensive term or period for the performance of the obligation, the obligation to deliver arises upon the expiration of the term or period. d. When there is neither term nor condition, the obligation to deliver arises from the perfection of the contract or the constitution or creation of the obligation. To Deliver Accessories and Accessions: Accessories: those joined to or included with the principal for the latter’s better use, perfection, or enjoyment. Accessions: additions to or improvements upon a thing. This includes alluvium (soil gradually deposited by the current of a river on a river bank) and whatever is built, planted or sown on a person’s parcel of land.

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Everything that is attached, naturally or artificially, to the principal thing, as well as that which serves to complete it, even if not attached to it, must be delivered together with it. Even when the accessions and accessories have been temporarily separated, they must be delivered, such as when doors or windows of a house are removed for repairs The aforementioned rule is qualified by the contrary intention of the parties. When to deliver: 1. In cases of law, quasi-delict, quasi-contract and delict: time specified by law or final judgment 2. In contracts: a. Pure obligation: immediately upon demand b. Suspensive condition: when condition is fulfilled c. Suspensive period: upon arrival of the said period Parties to Delivery: a. Creditor (party to contract, party who received): The creditor may not be the same identical persons b. Debtor (party to contract, party who delivers): Successors-in-interest, heirs, assignees PERSONAL OBLIGATIONS 1. Positive Personal Obligation (to do) 2. Negative Personal Obligation (not to do) Positive Personal Obligation: When the debtor does not comply with an obligation to do, the creditor is entitled to have the thing done in a proper manner, by himself or by a third person, at the expense of the debtor. The court has no discretion to merely award damages to the creditor when the act can be done in spite of refusal or failure of the debtor to do so. The debtor cannot be subjected to force on his person to compel him to perform his obligation. There is no imprisonment for debt. If only debtor can do: damages, indemnification If others can do the same: others will do in expense of the debtor Negative Personal Obligation: Aside from undoing what is done in violation of the prohibition (Art. 1168), the debtor can be held liable for damages. In other cases, it is impossible to undo the thing, either physically or legally, or because of the rights of third persons, or for some other reason. In these cases, the only feasible remedy is INDEMNIFICATION for the damages caused. BREACH OF OBLIGATIONS I. II. III. IV.

DEFAULT (MORA) FRAUD (DOLO) NEGLIGENCE (CULPA) CONTRAVENTION OF THE TERMS

DEFAULT (MORA): Delay in the fulfillment of obligations; it is non-fulfillment with respect to time. There can be delay only in positive obligations; but there can be no delay in negative obligations. Begins from the moment the creditor demands the performance of the obligation

Kinds of Mora: 1. Mora solvendi: default on the part of the debtor a. Mora solvendi ex re: debtor’s default in real obligations (to give) b. Mora solvendi ex persona: debtor’s default in personal obligations (to do) There is no mora solvendi in negative obligations (one cannot be late in not doing or giving) There is no mora in natural obligations There is legally no delay (mora solvendi) if this is caused by factors not imputable to the debtor Requisites for mora solvendi: a. That the obligation be demandable and already liquidated b. That the debtor delays the performance c. That the creditor requires the performance judicially or extra-judicially Need for Demand: Default generally begins from the moment the creditor demands the performance of the obligation. Without such demand, judicial or extra-judicial, the effects of default will not arise. Demand is generally necessary even if a period has been fixed in the obligation. Demand is also required on contracts of loan, mortgage and sale. When Default Begins: Extra-judicial demand before filing of complaint: from the date of such extra-judicial demand. No evidence of extra-judicial demand: from the filing of complaint. Nature of Demand: the demand must refer to the prestation that is due and not to another Demand Not Required: a. Where there is an express stipulation to that effect The intent of the parties to constitute the debtor in delay upon the maturity of the obligation even without demand, must clearly appear in the agreement. b. Where the law so provides c. When the period is the controlling motive or the principal inducement for the creation of the obligation Making of wedding dress, if the wedding is scheduled at the time the dress is due. Agricultural contracts where implements are needed at a particular time. d. Where demand would be useless When the impossibility is caused by some act or fault of the debtor, such as when he is absent or is in hiding, or has already disposed of the thing which is to be delivered. When the impossibility is caused by fortuitous event, but the debtor has bound himself to be liable in cases of such events. e. When the obligor has expressly acknowledged that he really is in default There must, however, be an express recognition of the default and not merely requests for extension of time to perform. In (a) and (b), it is not sufficient that the law or the obligation fixes a date for performance; it must further state expressly that after the period lapses, default will commence. Effects of mora solvendi: a. When it has for its object a determinate thing, the delay places the risks of the thing on the debtor b. He becomes liable for damages for the delay Interest on liability: If based on contract: interest should be based on stipulations as long as the same is not unconscionable If based on judgment: based on legal rate 12% or 6% (other monetary obligation) per annum

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Mora accipiendi: default on the part of the creditor The delay in the performance based on the omission by the creditor of the necessary cooperation, especially acceptance on his part. Requisites of mora accipiendi: a. An offer of performance by the debtor who has the required capacity b. The offer must be to comply with the prestation as it should be performed c. The creditor refuses the performance without just cause Effects of mora accipiendi: a. The responsibility of the debtor for the thing is reduced and limited to fraud and gross negligence b. The debtor is exempted from the risks and loss of the thing, which automatically pass to the creditor c. All expenses incurred by the debtor for the preservation of the thing after the mora shall be chargeable to the creditor d. If the obligation bears interest, the debtor does not have to pay the same from the moment of the mora e. The creditor becomes liable for damages f. The debtor may relieve himself of the obligation by the consignation of the thing 3. Compensatio morae: when in a reciprocal obligation both parties are in default; here it is as if neither is in default Applicable only on reciprocal obligation; both parties are required to perform prestation with one another. If one party complied, then compensatio morae is converted to mora solvendi or mora accipiendi If just MUTUAL obligation, then only mora solvendi or mora accipiendi can occur. Reciprocal obligations: The fulfillment by the parties should be simultaneous unless otherwise provided. Reciprocal obligation is bilateral obligation based on SAME source whereas mutual obligation is bilateral obligation based on DIFFERENT sources. The fulfillment of one party is conditioned in the fulfillment of the other party. Where both are in default, their respective liability for damages shall be offset equitably. Cessation of Mora: 1. Renunciation by the creditor a. Express b. Implied, when after delay has been incurred, the creditor grants an extension of time to the debtor or agrees to a novation of the obligation 2. Prescription FRAUD (DOLO): The deliberate and intentional evasion of the normal fulfillment of obligations. Fraud, as ground for damages under Article 1170, implies some kind of malice or dishonesty and it cannot cover cases of mistake and errors of judgment made in good faith. The element of intent, and not degree of actual harm done is the test. Dolo Incidente Causes breach of obligation and committed in non-performance of pre-existing obligations Dolo Causante Involves fraud in obtaining consent of one party and results to a VOIDABLE contract Liability based on fraud cannot be extinguished by both party, but it can be mitigated.

FRAUD (DOLO) There is a DELIBERATE intention to cause damage. Liability arising from dolo CANNOT be mitigated or reduced by the courts. Waiver of an action to enforce liability due to FUTURE FRAUD is VOID.

NEGLIGENCE (CULPA) Although VOLUNTARY (that is, not done thru force) still there is NO DELIBERATE intention to cause damage. Liability due to negligence may be reduced in certain cases. Waiver of an action to enforce liability due to FUTURE CULPA may in a certain sense be allowed.

NEGLIGENCE (CULPA): Is simply the absence of due care required by the obligation Negligence as Question of Fact: No fixed standard of diligence applicable to each and every obligation. Each case must be determined upon its particular facts and circumstances, and the degree of diligence required for the performance of an obligation must depend upon the circumstances of the particular obligation. Diligence: Required by the nature of obligation and corresponds with the circumstances of the persons, of the time and of the place. Degrees of Diligence: 1. Extra-ordinary diligence (at most diligence) Applicable to common carriers, commodatum, banks in handling money and property, and public utility such as telecommunications SLIGHT NEGLIGENCE will already result to breach of obligation 2. Ordinary diligence Common standard ORDINARY NEGLIGENCE will result to breach of obligation 3. Simple or slight diligence No provision of law to support such but it can be stipulated EXTRA-ORDINARY NEGLIGENCE will result to breach of obligation Kinds of Negligence: 1. Culpa Contractual Is the fault or negligence of the debtor as an incident to the fulfillment of an existing obligation. Negligence in the performance of pre-existing obligation from a perfected contract. Only the parties of the contract may be liable for negligence Action is purely civil in character If other party is a juridical person, apply the principle of agency, “employee is the agent of principal, negligence of the employee is negligence of the principal.” Respondiat superior (master servant): negligence of the employer is the negligence of employee since the former has control to the latter. Defense of a good father is not a valid defense. Only proof needed is the breach of contract; the defense of diligence may mitigate 2. Culpa Aquiliana Is the fault or negligence which constitutes an independent source of obligation between parties not previously bound. Quasi-delict founded on negligent act or omission The party who committed the negligent act will be solely and principally liable.

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The employer is primarily liable to the impaired party upon proof of the negligence (negligence in supervision and selection). 3. Culpa Criminal Negligence punishable by law as crime: a. Reckless imprudence b. Simple negligence If there are several accused, the liability is solidary. Writ of execution must be issued to satisfy the civil liability attached to a property of party. If the accused has no property, the guardian/employer will be liable civilly. (subsidiary liability for employer under RPC) Even if the employer is not himself the accused, upon insolvency of the employee, the former is liable. Defenses for Employers: a. Absence of employer-employee relationship b. Crime was not committed by the accused-employee in the discharge of his function. c. Prove that employee is not insolvent CCon, CAqu, CCrim, Distinguished: In CAqu and Ccon, the negligence is direct, substantial and independent cause CCrim, reasonable doubt; CAqu and CCon, preponderance of evidence CAqu, defense of diligence; CCrim and CCon, such is not valid. Negligence, illustration: VL Bus No 1234, Driver X; Victims: Passenger A, Pedestrian B For A: a. Pp v. X (reckless imprudence resulting to physical injuries) b. Pp v. VL (contract of common carrier) c. Pp v. VL & X (culpa aquiliana) For B: a. Pp v. X (reckless imprudence resulting to physical injuries) b. Pp v. VL & X (culpa aquiliana) Subsidiary liability of VL is applicable when the employee is convicted Action against VL is preferable due to its solvency compared to X. CONTRAVENTION OF THE TERMS Examples: Prestation to do: not done or poorly done Delay by a month in the delivery of cargo REMEDIES IN CASE OF BREACH I. SPECIFIC PERFORMANCE II. RESOLUTION/RESCISSION III. DAMAGES IV. EXHAUSTION OF ALL PROPERTIES OF DEBTOR V. ACCION SUBROGATORIA VI. ACCION PAULIANA

SPECIFIC PERFORMANCE Through actions. Not all obligations are covered, like in prestation to do because the same will amount to involuntary servitude. Whether the object of the obligation is determinate or generic, the creditor has the right to ask that the same be performed. In case of generic objects, the delivery of any thing belonging to the species stipulated will be sufficient; hence, if the debtor does not make the delivery, the creditor can demand that things of the kind agreed upon be delivered to him at the expense of the debtor, and the latter cannot avoid the obligation by paying damages if the creditor insists on the performance. An action for specific performance implies that its basis is a contractual relation between plaintiff and defendant. RESOLUTION/RESCISSION Rescission under Art. 1191 of the Civil Code is an action for resolution and not in a sense as it is used in defective contract. Applicable only in reciprocal obligations i.e. negotiorum gestio, contract of lease, contract of sale. The right to rescind is inherent to parties in reciprocal obligations because the performance of prestation by one party is contingent/dependent to the performance of other party. The power to rescind is given to the injured party. When one party fails to comply with his obligation under a contract, the other party has the right to either demand performance or ask for the resolution of the contract. Where both parties have committed a breach of obligation and it cannot be determined who was the first infractor, the contract shall be deemed extinguished and each shall bear his/its own damages. Declaration of Rescission: If the obligation has not yet been performed, extra-judicial declaration of resolution or rescission by the party who is ready and willing to perform would suffice; he can refuse to perform if the other party is not ready and willing to perform. If the injured party already performed such as the property has already been delivered to the other party, he cannot by his own declaration rescind the contract and reacquire title to the property, if the other party opposes rescission. In such case, court action must be taken, and function of the court is to declare the rescission as properly made, or to give a period to the debtor in which to perform. Hence, if the debtor impugns the declaration of extra-judicial declaration of rescission, it shall be subject to judicial determination. But where the other party does not oppose or impugn the extra-judicial declaration of rescission, such declaration will produce legal effect. Not Absolute Right: The right to resolve or rescind is not absolute. The court is given a discretionary power to allow a period within which a person in default may be permitted to perform the stipulation upon which the claim for rescission of the contract is based. Requisite for Action for Resolution 1. Reciprocal obligation Reciprocal obligations are those which arise from the same cause, and in which each party is a debtor and a creditor of the other, such that the obligation of one is dependent upon the obligation of the other. They are to be performed simultaneously, so that the performance of one is conditioned upon the simultaneous fulfillment of the other. 2. Complete performance of the aggrieved party or at least substantial compliance 3. The other party committed substantial breach, not trivial or slight only like 10-day delay of delivery

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There is substantial breach if the non-performance of obligation defeats the very rights of the other party for which the obligation is based. Rescission will not be permitted for a slight or casual breach of the contract, but only for such breaches as are so substantial and fundamental as to defeat the object of the parties in making the agreement. 4. The plaintiff, for the action to prosper, should not be guilty of breach 5. The subject matter of the obligation is not yet passed to an innocent third person Purpose of action for resolution: status quo ante The exercise of the power to rescind extinguishes the obligatory relation as if it had never been created, the extinction having a retroactive effect. The rescission is equivalent to invalidating and unmaking the juridical tie, leaving things in their status before the celebration of the contract. Where a contract is rescinded, it is the duty of the court to require both parties to surrender that which they have respectively received and to place each other as far as practicable in his original situation. Rescission not possible: If restitution and restoration to status quo ante is not possible because it will prejudice the rights of third party, the only remedy left is damages or specific performance. Restitution and specific performance are alternative remedies, only one can be chosen. Even if the aggrieved party chose restitution but the same is impossible, the court can still order specific performance. DAMAGES Action for damages may be separate or independent action, or a conjunctive action to the other remedies. Damages must be proved except in MORAL DAMAGES on rape cases and CIVIL INDEMNITY on death cases. Types of Damages (MENTAL): 1. Moral damages: to compensate victim for mental anguish, sleepless nights, anxiety, etc. 2. Exemplary damages: punitive damages, set the defendant as example to society and serve as a deterrent for the performance of similar act. 3. Nominal damages: awarded for breach of right, when the right is known and established. 4. Temperate damages: awarded when amount of damages cannot be determined but the injury is obvious. 5. Actual damages: all necessary related expenses and lost or foregone income 6. Liquidated damages: arise from contractual relations which are agreed upon by both parties. No need to prove damages as long as contract is clear. EXHAUSTION OF ALL PROPERTIES OF DEBTOR Applicable only when the obligation is originally monetary or pecuniary in nature (money or property) The creditor has the right to look at the asset of the debtor for the satisfaction of the debt The property of the debtor is subject to liability for his obligations (Art. 2236 of NCC) Ways: 1. Execution: Subject to exempted property i.e. family home, support, 2. Attachment: Property of debtor is reserved for satisfaction of pending judgment. Only applicable if there is a pending litigation. Writ of attachment can be issued by the court even before final judgment.

ACCION SUBROGATORIA The action which the creditor may exercise in the place of his negligent debtor in order to preserve or recover for the patrimony of the debtor the product of such action, and then obtain therefrom the satisfaction of his own credit. The creditor shall be substituted to all the rights the debtor has as against third person. To exercise accion subrogatoria, a previous approval of the court is not necessary. Ways: 1. Assignment i.e. repudiated share in inheritance If repudiation (debtor refuses to accept his inheritance) prejudices rights of third person, accion subrogatoria can be filed by the third person. If the inheritance is repudiated and the same was used to fulfill the obligation of the debtor, in case there is excess, the same cannot be recovered by the heir. 2. Garnishment Bank pays the debt of the depositor to the creditor, the debt paid will be subtracted to the deposit of the depositor. ACCION PAULIANA Action for rescission of a rescissible contract is different from that contemplated in Art 1191. Action to rescind or revoke acts which the debtor may have done to defraud them or acts which are considered as fraudulent reductions of the properties of the debtor which constitute the guaranty for his debts. 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. Revocable actions: Alienations of property Payments of debts which are not due Renunciations of rights such as the right of usufruct or an inheritance Assignments of credit Remission of debts Renunciation of a prescription which has already been acquired. Judicial acts such as when the debtor, in connivance with another, permits the latter to bring an action against him and obtain a judgment by default or confession and such judgment is enforced against the debtor’s property. Exception: Payment of pre-existing obligations already due, whether natural or civil, cannot be impugned by this action. CASO FORTUITO (FORTUITOUS EVENT) An event which takes place by accident and could not have been foreseen. It includes unavoidable accidents, even if there has been an intervention of human element, provided fault or negligence cannot be imputed to the debtor. Remedies in case of breach are not available if non-performance is due to fortuitous event. There is no essential difference between fortuitous event and force majeure; they both refer to causes independent of the will of obligor. Force Majeure (fuerza mayor): Inevitable accident or casualty; an accident produced by any physical cause which is irresistible.

OBLIGATIONS AND CONTRACTS 2011 The event which we could neither foresee nor resist. The term generally applies, broadly speaking, to natural accidents. Types of Caso Fortuito: 1. Ordinary: by Nature, such as earthquakes, storms, floods, epidemics and fires 2. Extra-ordinary: by the act of man, such as an armed invasion, attack by bandits, governmental prohibitions, robbery, etc. For an act of man to constitute fortuitous event, it is necessary that they have the force of an imposition which the debtor could not have resisted. Requisite of a fortuitous event to exempt a man from liability: 1. The cause of the unforeseen and unexpected occurrence, or the failure of the debtor to comply with his obligations, must be independent of human will. 2. It must be impossible to foresee the event which constitutes the caso fortuito, or if it can be foreseen, it must be impossible to avoid. 3. The occurrence must be such as to render it impossible for the debtor to fulfill his obligation in a normal manner. 4. The obligor must be free from any participation in the aggravation of the injury resulting to the creditor. Jurisprudence on fortuitous events: Employee strike on manufacturing companies is a fortuitous event. Tire blowout is not a fortuitous event if: 1. Driver is over-speeding. 2. Common carrier accepted passengers beyond normal capacity. Tire blowout is a fortuitous event if: 1. Tires installed are new; in this case the product manufacturer should be blamed. Typhoon is not a fortuitous event especially for maritime vessels if: 1. Despite warning, vessels continues journey; in this case, it is negligence. Instances where debtor is still liable despite fortuitous event: 1. Express stipulation between parties The parties may expressly stipulate in their contract that the debtor shall be liable to the creditor, even if the performance is rendered impossible by fortuitous event of force majeure. The provision in a contract imposing liability even in case of fortuitous event should be clearly expressed. 2. Expressly imposed by law Article 1169 par 2, where the debtor promises to deliver same subject to two parties then there is breach of contract. Hence, even if there is fortuitous event, debtor is still liable. Contract of depositum to innkeepers or hotel owners, the general rule is that they are not liable for robbery. However, they can be liable if the robbery is committed by their employee. Robbery in this case is a fortuitous event. Contract of deposit of baggage on bus compartment, liable if the same is lost due to fortuitous event. 3. The nature of the obligation of the debtor requires the assumption of risk (aliatory contracts) a. Governed by happening of future contingent event such as insurance to take care of contents of a warehouse. If the warehouse and the contents from the creditor are burned due to fortuitous event, the creditor is liable. b. Forward or Commodities contract such as when debtor ordered 100 metric tons of sugar to creditor to be delivered next year, the creditor must deliver whether or not there is fortuitous event like pestilence. In case there is fortuitous event, creditor must outsource sugar to deliver. Doctrine of Created or Assumer Risks: Those who benefit from the maintenance or operation of dangerous machineries or facilities must indemnify for the injuries or damages that they may cause.

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Exception: Unless the injury is caused by the inexcusable fault or negligence of the victim.

TRANSMISSIBILITY OF RIGHTS AND OBLIGATIONS Rights and obligations are transferrable to heirs, assignees, and successors-in-interest. Exceptions: depending on the nature of the rights or obligations, some of them may be intransmissible. 1. Expressly stipulated in contract If promissory note is negotiable in nature then it may be transferred to others upon endorsement and negotiations, but not if it states “pay to X only.” 2. Expressly stated in law a. In partnership, the death of a partner extinguishes the partnership since the same is purely personal and based on trust and confidence. b. In agency, the death of principal or agent extinguishes the agency. c. In usufruct, death of usufructuary extinguishes the usufruct. Usufruct: real right whereby the right to possess, use and derive benefits and fruits of the property is given to one person while the naked ownership belongs to the other. d. In commodatum, the death of the borrower extinguishes the commodatum. The same cannot be passed to the heirs and other successors. The obligation to pay on part of the heirs now becomes a natural obligation. Exception: Immediate member of the family 3. Nature of obligation makes it personal (personal in character or personal qualification) In succession, the monetary obligation of the deceased is personal; heirs cannot be compelled to pay because debt is chargeable only to the estate of the deceased. Heirs are only liable for the said debts if they divide the estate of their parents without paying the debts first. Transfer of public office or other position which requires personal qualification is also not allowed. KINDS OF OBLIGATIONS Classification of Obligations (Civil Code) (1) pure, (2) conditional, (3) with a term, (4) alternative, (5) joint or mancommunada, (6) solidary or several or in solidum, (7) divisible, (8) indivisible, and (9) with a penal clause. PURE OBLIGATIONS When the obligation contains no term or condition whatever upon which depends the fulfillment of the obligation contracted by the debtor. Application: When the period originally given has been cancelled by mutual agreement of the parties, or the non-fulfillment of a condition resolves the period stipulated, the obligation must be considered as pure. Limitation on immediate demandability: The immediate demandability of a pure obligation, should not lead to absurd interpretations or requirements impossible of instantaneous compliance. Immediate demandability shall be based on purpose of obligation; creditor shall not abuse the same and shall not defeat the intent of the obligation. Court fixes reasonable period: The concept of pure obligations is not violated when the court fixes a reasonable period within which the debtor should pay, inasmuch as this does not alter the character of the obligation as pure and immediately demandable. The creditor may resort to court action to fix a time for the performance, in case the debtor refuses on extra-judicial fixing of definite period.

OBLIGATIONS AND CONTRACTS 2011 Demand note as pure obligation: 1. A demand note is subject neither a suspensive condition nor a suspensive period 2. 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: the note is binding even before the demand is made. 3. Neither does the demand constitute an implied suspensive period, since there is nothing to prevent the creditor from making a demand at any time. CONDITIONAL OBLIGATIONS It is one which is subject to a condition. Condition, defined: Every future and uncertain event upon which an obligation or provision is made to depend. It is a future and uncertain event upon which the acquisition or resolution of rights is made to depend by those who execute the juridical act. Types of Condition: 1. Future and uncertain event Futurity and uncertainty must concur as characteristics of the event Death is not a condition: Although it is in future, the certainty of its happening makes it a term not a condition. Condition by will of party: The condition must be imposed by the will of a party and must not be a necessary legal requisite of the act e.g. a promise to give a donation propter nuptias if the donee gets married cannot be considered conditional. 2. Past event unknown to the parties What can be a condition is the future knowledge or proof of a past event unknown to the parties, but not to the event itself. The contract or obligation arises, not when the event happened or the fact came into existence, which would be in the past, but when the proof of such fact or event is presented, which would be in the future. Classification of Conditions: 1. Suspensive and resolutory: the happening of the former gives rise to an obligation, while the happening of the latter extinguishes rights already existing. 2. Potestative, casual and mixed: according as to whether it depends upon the will of the party to the juridical relation, or upon chance, or partly upon the will of the former and partly upon chance or the will of a third person. 3. Divisible and divisible: according as to whether by its nature, by agreement or under the law, it can be performed in parts. 4. Conjunctive and alternative: according as to whether, when there are several, all of them or one must be performed. 5. Positive and negative: depending whether it is an act or omission. 6. Express and implied: according as to whether they are stated or merely inferred. 7. Possible and impossible: depending upon whether they can be fulfilled or not, the impossibility in the latter case being either physical or legal. IMPOSSIBLE CONDITIONS The condition must not be impossible because impossibility annuls the entire obligation. Exception: if the condition is impossible but the prestation is not to do, then the same is valid. The impossibility of condition may either be physical or juridical.

1. Physical impossibility: The condition is physically impossible if it is contrary to the law of nature E.g. I will pay you if you can fly using your hands. 2. Juridical impossibility: The condition is juridically impossible if it is contrary to law, morals, good customs, and public policy. It is juridically impossible or illicit, not only when the act is prohibited by law, but also when it restricts certain essential rights which are necessary for the free development of human activity, such as political rights, family rights, and constitutional rights. Examples: 1. The condition not to change domicile 2. The condition to change or not to change religion 3. The condition that a person shall not contract marriage Illicit conditions: Illicit character: The illicit (juridical impossible) character of the act is not determined by the act or fact in itself, but by its effects upon one of the parties. It is not the act, but the intention and its effect that determine whether the condition is illicit. Example: 1. It is immoral to open a house of prostitution; but if a person sells a house under the resolutory condition that the vendee shall not open a house of prostitution, there is nothing immoral in the contract, which is valid. 2. If a house is leased to a tenant for P100 a month, with the condition that if the tenant reunites with his wife he shall pay three times as much as rent, the obligation is annulled. Reason behind the Law: One who promises something under a condition that is impossible or illicit knows that it cannot be fulfilled, and, manifests that he does not intend to be bound. Hence, the effect is the nullity of the promise. -

Scope of the Law: Applicable: Impossible or illicit conditions annul the obligations dependent upon them only when the conditions are positive or suspensive. Non-applicable: If the impossible or illicit condition is negative, it is simply considered as not written, and the obligation is converted into a pure and simple one. Applies only to contracts: The principle of the nullity of the obligation itself due to the impossibility or illicit character of the condition, applies only to contracts. It has no application to simple and remuneratory donations (to give something for reward of past or future services) and to testamentary dispositions. Time of Impossibility: In order that an impossible condition may annul the obligation, the impossibility must exist at the time of the creation of the obligation; the supervening impossibility does not affect the existence of the obligation. On the same principle, if the condition was impossible when the obligation was constituted, the obligation remains void even if such condition subsequently becomes possible, unless the parties later agree again. Illogical conditions: Logical impossibility in an obligation, although the obligation itself is not impossible, is void. The impossibility is in the obligation itself, which is affected by an intrinsic absurdity; hence, the obligation is void. E.g. I will deliver to you my house if it is totally destroyed.

OBLIGATIONS AND CONTRACTS 2011 Divisible Obligations: When the obligation is divisible, that part which is not affected by the impossible or unlawful condition shall be valid. E.g. X promises to pay Y the sum of P100 if Y locates Z and another sum of P500 if Y kills Z. In here, only the second part is void since it is the only one affected by the illicit condition. SUSPENSIVE CONDITIONS If the suspensive condition happens, the obligation arises; thus, if the condition does not happen, the obligation does not come into existence. Also known as condition precedent or antecedent. When contract is perfected: the contract is not perfected unless the condition is first complied with; thus, if the right to rescind a contract is given to one of the parties within a certain period after the happening of a condition, the right of rescission cannot be exercised if the condition does not happen. If condition does not happen: if it becomes certain that the condition will not be fulfilled, the conditional creditor loses all hope of becoming a real creditor and he likewise loses the power to exercise the actions granted in Art. 1188 for the preservation of his rights. Purpose for actions for preservation of the creditor’s rights 1. To prevent the loss or deterioration of the things which are the objects of the obligation by enjoining or restraining acts of alienation or destruction by the debtor himself or by third persons. 2. To prevent concealment of the debtor’s properties which constitute the guaranty in case of nonperformance of the obligation. 3. To demand security if the debtor becomes insolvent 4. To compel the acknowledgment of the debtor’s signature on a private document, or the execution of the proper public documents for registration so as to effect third persons. 5. To register the deeds of sale or mortgages evidencing the contract. 6. To set aside fraudulent alienations made by the debtor. 7. To interrupt the period of prescription, by actions against adverse possessors of the things which are the objects of the obligation. Kinds of Suspensive Conditions 1. Positive Suspensive Conditions Condition that some event will happen at a future determinate time. Where no period stated: The 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. E.g. I will give you my car if he resigns from office at the end of the year. 2. Negative Suspensive Conditions Condition that some event will not happen at a future determinate time. Where no period stated: same as positive suspensive conditions E.g. I will give you my car if he does not resign from office at the end of this year. Constructive Fulfillment: Principle: A party to a contract may not be excused from performing his promise by the non-occurrence of an event which he himself prevented. Requisites: 1. Intent of the obligor to prevent fulfillment of the condition 2. Actual prevention of compliance

Intent to Prevent Compliance: Any act imputable to the debtor, whether done with or without fraud or malice will suffice; in both cases the debtor is responsible for his act. Examples: 1. X promises to pay Y a certain sum if the latter, within a month, makes dikes. When work is started by Y, X deviates the flow of the water to enable Y to make dikes. But before Y has finished the work, X allows water to run again through the canal, thus preventing Y from finishing the work in the time agreed upon. The condition is deemed to be fulfilled in this case. 2. X ordered Y to stop working on the construction of the road, thus preventing the latter from fulfilling his part of the contract; the condition was deemed fulfilled because the obligor voluntarily prevented compliance therewith. When the act does not have the purpose to prevent: Where the act of the debtor, although voluntary, did not have for its purpose the prevention of fulfillment of the condition, it will not fall within the scope of this principle. Example: A prosecutes B for a crime committed against him, resulting in imprisonment of B and the nonfulfillment of condition by the latter. There is no constructive fulfillment in this case. In Exercise of Right: If in preventing the fulfillment of the condition the debtor acts pursuant to a right, the condition will not be deemed as fulfilled. Example: If the condition is to construct a building within one year, and the debtor stops the construction because it is in violation of the city ordinances, the condition is not deemed fulfilled. Actual Prevention Compliance: There is constructive fulfillment of the condition only if the act of the debtor had in fact prevented compliance with the condition. Example: If the condition consists in Pedro making a piece of work according to specifications and delivering it to Juan, and Juan destroys the work after it has been finished but before delivery to him, there is no constructive fulfillment of the condition if it can be shown that the thing was not made in accordance with the specifications of the contract. Effects of Non-fulfillment of Suspensive Condition: If suspensive condition is not fulfilled, the very existence of the obligation of parties shall be eliminated. Effects of Fulfillment of Suspensive Condition: If condition is fulfilled, obligation is effective, enforceable and binding between parties, however the happening of the suspensive condition does not dispense the requirement of demand. The cause of action for the enforcement of the obligation accrues, and te period of prescription of the action has to be computed from that moment. Effects: 1. Retroactivity 2. As to Fruits 3. As to Loss 4. As to Deterioration 5. As to Improvement Retroactivity of Obligation: The effects of the obligation retroact to the moment when such obligation was constituted or created. Juridical reason for retroactivity: The condition is only an accidental, and not an essential element of the obligation. The obligation is constituted when the essential elements which give rise thereto concur. Principle of retroactivity: A fiction is created whereby the binding tie of the conditional obligation is produced from the time of its perfection, and not from the happening of the condition.

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Limitations of retroactivity: The application of retroactivity of conditional obligations is not absolute. It is subject to certain limitations dictated by justice and required by practicability or convenience e.g. if the thing is lost due to fortuitous event before the happening of the condition, then the debtor shoulders the loss because he is still the owner.

Contracts of Debtor: If the conditional obligation has for its object the delivery of a determinate thing, the debtor cannot, before the happening of the suspensive condition, make contracts disposing of or alienating or encumbering the thing, or otherwise creating a real right over the thing incompatible with the right of the creditor. In case of breach: If he does so, then all such contracts are abrogated and cease to have any effect upon the happening of the suspensive condition. Principle: Because of the retroactivity of the obligation, the creditor retains a superior right. When third person acted in good faith: If the third person with whom the debtor has made a contract pendente conditione acted in good faith, and the thing has been delivered to him, the happening of the suspensive condition will not serve to defeat his right of ownership. Accion reivindicatoria not applicable: When the third person is in good faith, the creditor cannot recover the thing by an accion reivindicatoria, because, there being no delivery to him, he does not have ownership over the thing. The debtor will be liable for damages to the creditor. When third person in bad faith: He may be compelled to deliver the thing to the creditor. Contracts of Creditor: If the creditor, before the happening of the condition, has already disposed of his expected right, such as a mortgage over the property to be delivered to him, the happening of the suspensive condition consolidates or makes effective the act performed pendente conditione. Obligations to Do, Not to Do: Judicial determination: In obligations to do and not to do, the courts based on their sound discretion, shall determine the retroactive effect of fulfillment of the condition. To allow or not: The court may determine to what date the retroactivity shall be allowed, or it may even refuse to permit retroactivity, depending upon the circumstances of each case. The intent of the parties should be taken into account. As To Fruits and Interests: Not required: For reasons of practicability or convenience, the law does not require the delivery or payment of fruits or interests accruing before the happening of the suspensive condition. No retroactivity to right to fruits: The right to the fruits of the thing, therefore, is not within the principle of retroactivity of conditional obligations. When reciprocal obligations: Rule: The fruits and interests pending the happening of the condition are deemed to mutually compensate each other. Example: X agrees to sell his land and Y promises to pay P20,000, and the agreement is subject to a suspensive condition. Upon happening of condition: X will only sell his land (the fruits that X may have received before the happening of the condition will not be delivered) and Y will pay the P20,000 (the interest that could have accrued on the sum of P20,000 is not to be paid) Conclusion: The fruits and the interests are considered as equivalent to and are made to offset each other. When unilateral obligations:

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Rule: The fruits received by the debtor before the happening of the condition, are kept by him and are not delivered together with the thing upon the fulfillment of the condition. Reason: This is because the debtor does not receive anything from the creditor in a unilateral obligation. Exception to Rules: This rules with respect to the retention of the fruits and interests by the parties, must yield to the contrary intent or agreement of the parties themselves. As to Loss: When it is lost: 1. When it perishes, such as when animal dies, or a house is destroyed completely by fire, or a crop is washed away by flood, or fruits rot. 2. When it goes out of the commerce of man, such as when private land belonging to a municipality is converted into a public plaza, or a thing is declared by law as contraband. 3. When it disappears in such a manner that its existence is unknown or it cannot be recovered, such as when a ship sinks in the middle of the ocean, or a thing is stolen by unknown persons or is dropped somewhere in a forest and cannot be found. If debtor’s fault: If the lost is due to the fault of the debtor, he becomes liable for damages to the creditor upon the fulfillment of the condition (value of property + damages because of negligence or fraud). If not debtor’s fault: If the debtor is without fault, the obligation is extinguished, unless there is a stipulation in contrary As to Deterioration: Definition: Deterioration is any reduction or impairment in the substance or value of a thing which does not amount to a loss. Application: The thing still exists at the time the condition is fulfilled, but it is no longer intact, or is less than what it was when the obligation was constituted. Example: Where a house is partly damaged, or part of a herd should die, or a portion of a stock of fruits should rot, there is deterioration. If deterioration debtor’s fault: If the deterioration is due to debtor’s fault then the creditor may either demand the thing or ask for rescission, with damages in either case. If deterioration not debtor’s fault: If the deterioration is not imputable to the debtor, he is not liable for any damages for such deterioration, and the creditor must accept the thing in its impaired condition. When considered as total loss: Under the Insurance Code, if the deterioration is ¾ or more to its total value, it is considered as total lost. As to Improvement: Definition: Anything added to, incorporated in, or attached to the thing that is due, is an improvement. Caused by nature or time: If improvement is caused by the nature of the thing or by time, such as alluvion or deposits of soil on the edge of land bordering a river, or the natural growth of trees or plants on a piece of land, the improvement shall inure to the benefit of the creditor. This is in conformity with the principles of retroactivity of the effects of conditional obligations. At the expense of the debtor: If the improvement was at the expense of the debtor, he shall have the same rights as a usufructuary. 1. On necessary improvements: such as the expenses incurred for the preservation of the thing or property, the debtor is entitled to reimbursement.

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On useful improvements: such as those for the better use of the principal, the same may be appropriated by the creditor thus the he has the obligation to reimburse; but if not appropriated by the creditor, debtor shall remove and he will shoulder the expense of the removal. 3. On ornamental improvements: such as those for mere embellishment, the debtor has the right of removal and it is up to his decision as long as the removal will not destroy the principal or accessory. Removal does not cause injury: If the improvement, whether useful or for mere pleasure, can be removed by the debtor without damage to the thing due, then he may remove the same Removal causes injury: if the removal cannot be made without substantial injury to the thing due, then the improvement must be delivered together with the thing to the creditor without the latter paying any indemnity to the debtor. When both improved and deteriorated: If the debtor has caused deteriorations to the thing, which he has also improved at his expense, then the value of the improvements maybe set off against the damages for deteriorations.

Rights Pending Condition: Between the moment of the creation of the conditional obligation and the fulfillment of the suspensive condition, the creditor cannot enforce the obligation; his right during that period is a mere expectancy. On creditor: The creditor may file action in court to preserve contingent right such as filing an injunctive relief, to enjoin or stop any action of the debtor that will deprive the right of the creditor to the property. On debtor: The debtor may recover whatever he prematurely paid or delivered. Suspensive conditions in reciprocal obligations: In reciprocal obligations, the compliance of respective prestation is the suspensive condition of other’s performance unless there is stipulation that the performance will be at a specific time. If neither performs, no one can be held liable because they are both guilty. If time of performance is not coincidence with another, then non-performance of one will lead to mora solvendi or accipiendi. POTESTATIVE CONDITION One which depends upon the will of one of the contracting parties. It is one which is in the power of one of the parties to realize or prevent. E.g. I promise to pay P100, if you build a house for me in three months. Other types of conditions: 1. Casual condition: One which depends exclusively upon chance or other factors, and not upon the will of the contracting parties. E.g. I will give you my land if war breaks out next month. A condition dependent upon the will of a third person is also included in this class. E.g. I will give you P500, if I win the case which I have before the Supreme Court. 2. Mixed Condition: One which depends upon the will of one of the contracting parties and other circumstances, including the will of a third person. E.g. I will give you a house, if you marry Maria. Kinds of Potestative Condition 1. Simple Potestative Condition It presupposes not only a manifestation of will but also the realization of an external act, such as “if you sell your house.”

2. Purely Potestative Condition It depends solely and exclusively upon the will, such as “if I like it” or “if I deem it proper.” Effects of Potestative Condition: 1. It is only when the potestative condition depends EXCLUSIVELY upon the will of the debtor that the conditional obligation is void. 2. When it depends partly on the will of the debtor and partly upon chance or the will of a third person (mixed) the conditional obligation is valid. 3. When the fulfillment of the condition depends on the exclusive will of the creditor, it is valid. Condition and obligation is void: In cases falling under this article, it is not only the condition that is void; the whole obligation is void. Applicable only to suspensive condition: The provision is applicable only when the condition is suspensive, and cannot apply to resolutory conditions. Potestative and resolutory condition is valid: A condition that is both potestative and resolutory may be valid, even though the condition is made to depend upon the will of the obligor. The obligation in such case arises immediately, but the party who has made the reservation may resolve it when he wishes to. Mixed Conditions: When the condition depends, not only upon the will of the debtor, but also upon chance or the will of others, the obligation is valid. When fulfillment depends on third party: When the fulfillment of the condition does not depend upon the will of the obligor, but on that of a third person who can in no way be compelled to carry it out, and it is found by the court that the obligor has done all in his power to comply with the obligation, the other party may be ordered to comply with his part of the contract. RESOLUTORY CONDITIONS It extinguishes rights and obligations already existing; thus, the obligations and rights already exist, but under the threat of extinction upon the happening of the resolutory condition. Also known as condition subsequent. If condition does not happen: the creditor’s rights become absolute. Provoking Resolutory Condition: When the condition is resolutory but not dependent on the will of the debtor, and he unjustifiably provokes or produces the condition, which would not have happened without his doing so, it will be considered as not having been fulfilled, and there will be no extinguishment of rights. Principle: Debtor cannot be excused from compliance by the occurrence of an event which he himself brought about, unless such possibility is clearly permitted by the contract. OBLIGATIONS WITH SEVERAL OBJECTS 1. Conjunctive obligation 2. Alternative obligation 3. Facultative obligation CONJUNCTIVE OBLIGATIONS Is one where the debtor has to perform several prestations; it is extinguished only by the performance of all of them. ALTERNATIVE OBLIGATIONS Is that, several objects being due, the fulfillment of one is sufficient, determined by the choice of the debtor who generally has the right of election.

OBLIGATIONS AND CONTRACTS 2011 The creditor cannot be compelled to receive part of one and part of the other undertaking. Alternative and facultative obligations, distinguished: 1. The loss of one of the things due affects the obligation in alternative obligations; but in facultative obligations, the loss of that which may be given as substitute does not affect the obligation. 2. In alternative obligations, the election may be granted to the creditor; in facultative obligations, never. 3. The loss of one of the things in alternative obligations does not extinguish the obligation; in facultative obligations, the loss of principal obligation, will extinguish the whole obligation. Right of Choice: General rule: In alternative obligations, the right belongs to the debtor. Exception: It may belong to the creditor when such right has expressly, never impliedly, been granted to him. The choice may also be expressly entrusted by the parties to a third person. Limitations: 1. The right to choose is indivisible. The debtor cannot choose part of one prestation and part of another. 2. The debtor cannot choose unlawful or impossible undertakings. The presence of such impossible undertakings does not annul the obligation provided that there are other lawful and possible objects. 3. The debtor cannot select prestations which could not have been the object of the obligation. Need for notification of choice: The debtor should notify the creditor of his choice and the same may be in any form provided it is sufficient to make the other party know that the election has been made. Without the notification, the creditor may not be liable for mora accipiendi. Purpose of notification: For creditor to check if the chosen prestation is in compliance of the obligation such as the same is one of the alternatives or not impossible. Effect of notification: Once choice is communicated and accepted, the same is irrevocable thus the obligation ceases to be alternative and the same becomes a SIMPLE obligation. Consent despite irregularity: When the debtor has chosen a prestation which could not have been the object of the obligation, the creditor’s consent would bring about a NOVATION of the obligation. Plurality of Subjects: If joint: The consent of all is necessary to make the selection effective. If solidary: Provided that there is not stipulation to the contrary, the choice by one will be binding personally upon him only but not as to the others. Error as to Obligation: Ignorance of alternatives: When the debtor performs one of the obligation, believing that he has a simple obligation, then there is not declaration of the selection, nor a binding performance of the obligation. Effect: There is a payment of what is not due, and the debtor can recover the same, in accordance with the provisions on quasi-contracts. But Delay in Making Choice: The right to choose is not lost by mere fact that the party entitled to choose delays in making his selection. No selection before filing of action: The law is silent. But applying the German theory, the debtor cannot paralyze the remedy of the creditor by refusing to make a selection. If he does not select, then the choice can be made for him by the creditor. Liability for Loss of Alternatives Obligation Becomes Simple: If all the prestations, except one, are impossible or unlawful, it follows that the debtor can choose and perform that only one. If impossibility due to creditor:

1. 2.

The debtor may elect to rescind the contract and recover damages. The debtor may elect to perform the prestations remaining because rescission does not take place automatically but at his option Illustration: The obligation is to build a house on the lot or construct a road. If the debtor sells the lot, thus making it impossible for the debtor to build the house then the debtor may construct the road or rescind the contract plus damages. Loss by Fault of Debtor: When ALL the prestations become impossible through the debtor’s fault, he will become liable for damages under Art. 1204. Effect of Fortuitous Event: All prestations become impossible due to fortuitous event: the obligation is extinguished and the debtor is not liable for any damages. One prestation left after fortuitous event: If all other prestations became impossible due to fortuitous event except for one, the debtor should perform the last remaining prestation. If this last one became impossible due to debtor’s fault, he will be liable for damages based on the value of the last prestation. Creditor’s Right of Choice: Until the creditor communicated his choice to the debtor, the responsibility of the debtor shall be governed by the following rules (Art. 1205); 1. If one of the things is lost through a fortuitous event, he shall perform the obligation by delivering that which the creditor should choose from among the remainder, or that which remains if only one subsists. 2. If the loss of one of the things occurs through the fault of the debtor, the creditor may claim any of those subsisting, or the price of that which, through the fault of the former, has disappeared, with a right to damages. 3. If all the things are lost through the fault of the debtor, the choice by the creditor shall fall upon the price of any one of them, also with indemnity for damages. Selection by Creditor: His selection takes effect from the moment it is communicated to the debtor. Modes of selection: expressly or tacitly Tacit selection: When the creditor accepts a prestation offered by the debtor, or brings an action for the enforcement of one of the prestations. FACULTATIVE OBLIGATIONS Is that, only one thing is due, but the debtor has reserved the right to substitute it with another. The right to substitute should be reserved by the debtor during the establishment of the principal obligation. The right to substitute cannot be exercised at sole will of the debtor. Distinguished from Alternative: 1. As to contents of obligation: In alternative, there are various prestations all of which constitute parts of the obligation; while in facultative, only the principal prestation constitutes the obligation, the accessory being only a means to facilitate payment. As such, before the debtor has made his choice, the creditor in an alternative obligation must demand all the prestations in the alternative, leaving the debtor to choose; but in facultative, the creditor can demand only principal prestation.

OBLIGATIONS AND CONTRACTS 2011 2. -

As to nullity: In alternative obligations, the nullity of one prestation does not invalidate the obligation, which is still in force with respect to those which have no vice; while in facultative, the nullity of the principal prestation (unlawful or outside the commerce of man) invalidates the obligation, and the creditor cannot demand the substitute even when this is valid. 3. As to choice: In alternative, the right to choose may be given to the creditor; while in facultative, only the debtor extinguishes the obligation. 4. As to effect of loss: In alternative, only the impossibility of all prestations without fault of the debtor extinguishes the obligation; while in facultative, the impossibility of the principal prestation is sufficient to extinguish the obligation, even if the substitute is possible. When Substitution Effective: It is effective from the time the debtor communicates to the creditor that he elects to perform the substitute prestation. When substitution communicated: From this moment, the substitute prestation becomes the only prestation that is due. Principal prestation becomes impossible after substitution is chosen and communicated: If the principal prestation thereafter becomes impossible, even by fortuitous event, the debtor would still need to perform the chosen substitution as his obligation became simple the moment he elected to perform the substitute. ALTERNATIVE (1) Various things are due, but the giving of one is sufficient. Obligation Due

Void Prestation

(2) If one of the prestations is illegal, the others may be valid and the obligation remains.

Impossibility of Prestation

(3) If it is impossible to give all except one, that last one must still be given.

Right to Choose

COLLECTIVE OBLIGATIONS 1. Joint Obligations 2. Solidary Obligations

(4) The right to choose may be given either to debtor or creditor.

FACULTATIVE Only one thing is principally due, and it is that one which generally is given, but the other (the substitute) may be given, to render payment or fulfillment easy. If the principal obligation is void, then there is no necessity of giving the substitute. “The nullity of the principal carries with it the nullity of the accessory or substitute.” If it is impossible to give the principal, the substitute does not have to be given; if it is impossible to give the substitute, the principal must still be given. The right of choice is given only to debtor.

JOINT OBLIGATIONS One in which each of the debtors is liable only for a proportionate part of the debt, and each creditor is entitled only to a proportionate part of the credit. Each creditor can recover only his share of the obligation, and each debtor can be made to pay only his part. Mancomunada, mancomunada simple, pro rata, “we promise to pay” with several signatures, proportionate Joint Character Presumed: When the persons are liable under a contract or judgment, and no words appear in a contract under the same, the presumption is that their obligation is joint. Effect of Joint Liability: 1. The demand by one creditor upon one debtor, produces the effects of default only with respect to the creditor who demanded and debtor whom the demand was made, but not with respect to the other debtors. 2. The interruption of prescription by the judicial demand of one creditor upon a debtor, does not benefit the other creditors nor interrupt the prescription as to other debtors. 3. A partial payment or acknowledgement made by one of several joint debtors does not stop the running of the statute of limitations as to the others. 4. The vices of each obligation arising from the personal defect of a particular debtor or creditor does not affect the obligation or rights of the others. 5. The insolvency of a debtor does not increase the responsibility of his co-debtors, nor does it authorize creditor to demand anything from his co-creditors. 6. In joint divisible obligation, the defense of res judicata is not extended from one debtor to another. 7. Defenses which are purely personal to a debtor cannot be availed by his co-debtors. Joint Obligations Created By: 1. Stipulations 2. Presumptions SOLIDARY OBLIGATIONS One which each debtor is liable for the entire obligation, and each creditor is entitled to demand the whole obligation. Each creditor may enforce the entire obligation, and each debtor may be obliged to pay it in full. Mancomunada solidaria, joint and several, in solidum, “I promise to pay” with several signatures, individually and collectively, individually liable, individually and jointly liable, juntos o separadamente, each will pay the whole value. Solidary Obligations Created By: 1. Express stipulations 2. Expressed by law a. Co-participants in a crime b. Captain and owner of a vessels operating common carrier c. Joint tortfeasors d. Officers of company for insider trading or manipulation of prices e. Directors or trustees for violation of rights of shareholder or member of corporation f. Insurance company and agent for fraudulent denial for just insurance claim 3. Expressed by final judgments 4. From nature of obligation i.e. Arts. 19-22 5. Jurisprudence

OBLIGATIONS AND CONTRACTS 2011 Solidarity and Indivisibility, distinguished: SOLIDARITY INDIVISIBILITY Refers to… (1) Refers to tie between Refers to nature of obligation parties Number of Creditor-Debtor (2) Needs at least two May exist even if there is only one debtors or creditors debtor and only one creditor Effect of Fault of One (3) The fault of one is the The fault of one is not the fault of fault of others. others. Indivisibility refers to the prestation which is not capable of partial performance, while solidarity refers to the legal tie or vinculum defining the extent of liability. Kinds of Solidarity: 1. Active Solidarity: one that exists among creditors or obligees 2. Passive Solidarity: one that exists among debtors or obligors 3. Mixed Solidarity: one that exists on the part of debtors and creditors ACTIVE SOLIDARITY OR MUTUAL AGENCY Essence: The essence of active solidarity consists in the authority of each creditor to claim and enforce the rights of all, with the resulting obligation of paying everyone what belongs to him. Only Mutual Representation: There is NO merger, much less a renunciation of rights, but only mutual representation. Purpose: Mutual agency extends ONLY to acts which are beneficial and NOT to those which are prejudiced. Extinguishment without consent: If extinguishment is made by a solidary creditor without consent or ratification from his co-creditors, the former is liable for the latter’s respective shares. Effects of Mutual Agency: 1. Since it is a reciprocal agency, the death of a solidary creditor does not transmit the solidarity to each of his heirs but to all of them taken together. 2. Each creditor represents the others in the act of receiving payment, and in all other acts which tend to secure the credit or make it more advantageous. Hence, if he receives only a partial payment, he must divide it among the other creditors. He can interrupt the period of prescription or render the debtor in default, for the benefit of all other creditors. 3. One creditor, however, does not represent the other in such acts as novation (even if the credit becomes more advantageous), compensation and remission. In this case, even if the debtor is released, the other creditors can still enforce their rights against the creditor who made the novation, compensation or remission. 4. The credit and its benefits shall be divided equally among creditors, unless otherwise stipulated. Hence, once the credit is collected, an accounting and distribution of the amount collected should follow. 5. The debtor may pay to any solidary creditor, but if a judicial demand is made on him, he must pay only to the plaintiff. If the debtor pays to another creditor, the debtor may pay again to the debtor who sue him and collect the previously paid amount from another debtor following the principle of solution indebiti. Or the creditor who made the demand, may acknowledge the payment of debtor to co-creditor; the obligation is then extinguished. 6. Each creditor may renounce his right even against the will of the debtor, and the latter need not thereafter pay the obligation to former.

Creditor cannot assign his rights without other’s consent: Mutual agency implies mutual confidence which may take into account the personal qualifications of each other. Hence, it is only just to require consent of the others when one transfers his rights to another. Effect of Unauthorized Transfer: Since such assignment cannot be made, it produces no effect whatsoever; the co-creditors and the debtor or debtors are not bound thereby, and the assignee cannot be regarded as a solidary creditor. Example: A payment made by the debtor to such an assignee would be a payment to a third person and may not extinguish the obligation; and a suit filed by such assignee cannot interrupt prescription. Transfer to Co –creditor: The assignment would produce its effects if made to a co-creditor. To whom can the debtor pay: General Rule: The debtor may pay any one of the solidary creditors. Exception: If any demand, judicial or extrajudicial, has been made by any one of them, payment should be made to him. Effects of Judicial Demand: 1. When one creditor makes a 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 others. 2. Once action is filed against a debtor by one of the creditors, the debtor can only pay to plaintiffcreditor, and he can no longer be sued by others. 3. A payment to any of the creditors who did not sue would be a payment to a THIRD PERSON, and in so far as the shares of others in the credit are concerned. 4. If the payee does not turn over to the others their shares in the payment, the debtor can still be required to pay to the plaintiff the full amount minus the share of the creditor to whom payment is made. Effects of Extra-Judicial Demand: Art. 1214 has given to extra-judicial demand the same effect as judicial demand in terminating the mutual representation among the solidary creditors and concentrating the agency in the creditor who made the demand. Demand by Several Creditors: 1. If all or several solidary creditors demand payment separately, the debtor should pay to the one who first notified him. 2. If they all demand at the same time or collectively in a single action or written demand, the debtor preserves his right to choose and may pay anyone of those demanding payment. Demands on Mixed Solidarity: 1. When one creditor makes a demand upon one of the debtors, the latter cannot pay to any other creditor but the one who made the demand. 2. This prohibition, however, does not apply to the other debtors upon whom no demand has been made, and so they may pay to any creditor who may not be the one who made the demand. Effects of Novation, Compensation, Confusion or Remission of Debt: General Rule: Novation, compensation, confusion or remission of the debt, made by any of the solidary creditors or with any of the solidary debtors, shall extinguish the obligation subject to responsibility of that creditor towards his co-creditor. As between creditors and debtors: Any of these acts will extinguish the obligation, so that no creditor may thereafter sue any debtor, except in case of novation, where there may be no change or only a partial change of parties.

OBLIGATIONS AND CONTRACTS 2011 -

As among co-creditors: The act of any of them in extinguishing the obligation with respect to the debtor or debtors, does not prejudice the rights of the other creditors to recover their respective shares in the obligation from the creditor who effected the novation, compensation, confusion or remission. Illustration of Novation: A and B are solidarily liable to X and Y, solidary creditors, for the payment of P800,000. A and X agreed that instead of paying P800,000, A will just paint X’s house. Here the solidary obligation of paying P800,000 is extinguished but a new one, that of painting X’s house, has arisen. If B did not consent to the novation, B will not be bound to X and Y in any way, and moreover, will not be obliged to give A anything except insofar as he (B) has been benefited. On the other hand, only X will be allowed to prejudice his co-creditor Y, so Z must reimburse Y for P400,000 (which is really Y’s share of the credit). Other example: A and B are solidary debtors of X. If A is granted an extension of time within which to pay, is B released from obligation? No. Effects of extension of time granted to one solidary debtor: 1. If X sues B, B will pay the whole debt minus A’s share. 2. When the period terminates, X can demand the remaining balance (A’s share) from either A or B. And if B pays again, B will now have the right to collect reimbursement from A, for A’s share. Rule in suretyship: An extension of time to the principal debtor without the surety’s consent will release the surety from contract. Illustration of Compensation: Total Compensation with Solidary Obligation: A and B are solidary debtors of X and Y, solidary creditors to the amount of P400,000. But X owes A P400,000 on account of a different obligation. Here we have a case of AUTOMATIC EXTINGUISHMENT of the obligation by virtue of total compensation. But B should not benefit completely since it was A’s credit that was used to compensate. So B owes A P200,000 (his share of debt). On the other hand, Y should not be prejudiced, so Y can recover P200,000 (his credit) from X. Partial Compensation with Solidary Obligation: A and B are solidary debtors of C to the amount of P2,000,000 but C is indebted to A for P500,000. This is a case of PARTIAL COMPENSATION, and therefore the solidary obligation amounting to P1,500,000 still subsists. Illustration of Remission: Total Remission: A and B are solidary debtors of X and Y, solidary creditors to the amount of P4 million, X tells A that he was waiving the whole obligation. Here, the total remission completely extinguishes the whole obligation, without prejudice to Y collecting from X his(Y’s) share of the credit of P2 million, otherwise X’s remission would prejudice Y. On the other hand, B does not have to reimburse A for anything, for after all the remission was a gratuitous act, and A did not have to give anything to the creditors. Partial Remission: A, B and C are solidary debtors of X in the amount of P3 million. X then made a demand from A but collected only P2 million because he (X) was remitting A’s share (of P1 million). In this case, A can only recover from B and C P1 million each, because the solidary debt was reduced by partial remission to P2 million only. PASSIVE SOLIDARITY OR MUTUAL GUARANTY Essence: The essence is that each debtor can be made to answer for the others, with the right on the part of the debtor-payer to recover from the others their respective shares. 1. Each debtor can be required to pay the entire obligation; but after payment, he can recover from the co-debtors their respective shares.

2.

The debtor who is required to pay may set up by way of compensation his own claim against the creditor, in this case, the effect is the same as payment. 3. The total remission of the debt in favor of a debtor releases all the debtors; but when this remission affects only the share of one debtor, the other debtors are still liable for the balance of the obligation. 4. All the debtors are liable for the loss of the thing due, even if such loss is caused by the fault of only one of them, or by fortuitous event after one of the debtors has incurred in delay. 5. The interruption of prescription as to one debtor affects all others; but the renunciation by one debtor or prescription already had does not prejudice the others, because the extinguishment of the obligation by prescription extinguishes also the mutual representation among the solidary debtors. 6. The interests due by reason of delay of one of the debtors are borne by all of them. In case, a case is filed by the creditor against any or all of the debtors, the following defenses shall be considered: 1. Prescription, res judicata, prior payment in full, illegality of cause, vitiated consent on part of ALL debtors, novation, compensation, etc. These are considered as COMPLETE DEFENSES, which are beneficial to all debtors not only to the one who was sued. 2. Vitiated consent of the defendant ALONE. Obligation of the contract will be subtracted to the remaining obligation of the debtors. 3. Vitiated consent of non-defendant co-debtor This is a PARTIAL DEFENSE, if the same is proven, subtract from the total amount of the obligation the share of that co-debtor whose consent was vitiated. Payment by solidary debtors: If two or more solidary debtors offer to pay, the creditor may choose which offer to accept. Right to collect by the paying debtor to his co-debtors: He who made the payment may claim from his co-debtors only the share which corresponds to each, with the interest for the payment already made. Payment before debt is due: No interest for the intervening period may be demanded. Insolvency of one debtor: When one solidary debtor cannot reimburse his share because of insolvency, such share shall be borne by all his co-debtors, in proportion to the debt of each. Partial payment: Paying debtor can recover reimbursement from the co-debtors only in so far as his payment exceeded his share. E.g. if A and B are solidary debtors of P100, and A paid P70 then he can claim P20 from B. Effects of payment of entire obligation by one debtor: 1. When a solidary debtor pays the entire obligation, the resulting obligation of the co-debtors to reimburse him becomes joint. 2. Hence, if one, by insolvency, cannot pay his share in the reimbursement, the others (including the one who paid) shall bear such share proportionately. Payment by solidary creditor without reimbursement: Payment by a solidary debtor shall not entitle him to reimbursement from his co-debtors if such payment is made after the obligation has prescribed or become illegal. Remission of one solidary debtor after the full payment of his co-debtor: The remission made by the creditor of the share of a solidary debtor, after his co-debtor has paid the full amount due, does not release the said debtor from his responsibility to pay his co-debtor. No reimbursement on full remission of debt for solidary debtors: The remission of the whole obligation, obtained by one of the solidary debtors, does not entitle him to reimbursement from his co-debtors.

OBLIGATIONS AND CONTRACTS 2011 Loss of the Thing or Impossibility of Prestation: Without the fault of the solidary debtors: The obligation is extinguished. With fault by any of solidary debtor, or due to fortuitous event after one incurred delay: All shall be responsible to the creditor, for the price and the payment of damages and interest, without prejudice to their action against the guilty or negligent debtor. Defenses of Solidary Debtor: 1. Defenses derived from the nature of the obligation 2. Defenses personal to the debtor-defendant 3. Defenses personal to the other solidary debtors Defenses Inherent in Obligation: (TOTAL DEFENSE) 1. The non-existence of the obligation because of illicit cause or object, or absolute simulation 2. Nullity due to the defect in capacity or consent of all debtors, such as minority, mistake, fraud, violence. 3. Unenforceability because of lack of proper proof under the Statute of Frauds. 4. Non-performance of suspensive condition or non-arrival of period affecting the entire obligation. 5. Extinguishment of the obligation, such as in payment and remission. 6. All other means of defense which may invalidate the original contract from which the right or the action of the creditor against the debtors arises, such as res judicata, prescription and others of the same class. Defenses Personal to Defendant: (TOTAL OR PARTIAL DEFENSE) 1. Total defense: Minority, insanity, fraud, violence, or intimidation 2. Partial defense: If special terms or conditions affecting his part of the obligation, he may utilize them only with respect to his part; but he can still be sued for the portions not subject to terms or conditions, because he is solidarily liable. Defenses Personal to Other Debtors: It includes whether such defenses affect the capacity or consent of such debtors or only to refer to terms or conditions affecting their shares. Partial defense: To the debtor-defendant, all these are only a partial defense, exempting him from payment of the portions of the obligation corresponding to the other debtors who have such personal defenses. DIVISIBILITY OF OBLIGATIONS The divisibility or indivisibility of the obligation refers to the prestation and not to the thing which is the object thereof. Presumption of Indivisibility: Absent any other stipulation to the contrary, the obligation is presumed indivisible. Test of Divisibility: 1. The will or intention of the parties, which may be expressed or presumed. 2. The objective or purpose of the stipulated prestation. 3. The nature of the thing 4. Provisions of law affecting the prestation. DIVISIBLE OBLIGATIONS Is one capable of partial performance The debtor can legally perform the obligation by parts and the creditor cannot demand a single performance of the entire obligation. Determination of Divisibility: Whether or not the thing is susceptible of partial performance.

Kinds of Division: 1. Qualitative: When the thing is not entirely homogenous. Depends on quality, irrespective of quantity E.g. if one child inherits land and another inherits cash. (inheritance) 2. Quantitative: When the thing divided is homogenous. Depends on quantity E.g. if 10 chairs are equally divided between two brothers. 3. Ideal/Intellectual: When the parts are not separated in a material way, but they are assigned to several persons, as in coownership. Neither the co-owners owns any definite portion of the entire thing e.g. fencing on a portion of the land is not allowed. Moreover, the partition of the land is equality in the value and not equality of measurement One that exists merely in the mind, and not in physical reality. If the division of the thing reduces or alters its value, then it is an ideal division. E.g. A and B own in a common car. Effects of Partial Performance: Performance of one part partly extinguishes the obligation. Non-performance of one part results only to breach of that part. Acceleration Clause: if a part due is not paid, the entire obligation including future installments, interests, penalties are all due and demandable. This is a standard clause in bank loans. INDIVISIBLE OBLIGATIONS Is one not capable of partial performance Whatever may be the nature of the thing which is object thereof, when it cannot be validly performed in parts then it is indivisible obligation. Obligations from final judgments such as damages are indivisible. Kinds of Indivisibility: 1. Conventional: when parties expressly stipulated or intended 2. Legal: when indivisibility is prescribed by law 3. Natural: when indivisibility is caused by the nature of the thing itself i.e. delivery of car Indivisible Joint Obligation: In case of non-performance by any debtors, the obligation is converted into a liability of losses and damages, which is divisible. Liable for individual shares: If one of the debtors is insolvent or fails to pay his share, the others will not be liable for his share; the debtors who are ready to perform their part do not become liable more than the portions respectively corresponding to their share. One Debtor, Several Creditors: The obligation can be performed only by delivering the object to all the creditors JOINTLY. Effects of Plurality of Creditors (with One Debtor): 1. A debtor who delivers the thing to one creditor only, becomes liable for damages because of nonperformance to the other creditors, unless they have authorized the former to receive payment for all of them. 2. If only one or some of the creditors demand the prestation, the debtor may legally refuse to deliver them.

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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 in court by way of consignation. 4. In case of non-performance of debtor, the obligation to pay damages arises. With respect to the damages, the prestation becomes divisible, and each creditor can recover separately his proportionate share. Collective Action: The indivisibility requires collective action to be effective. If a written demand is made by one creditor only, the debtor cannot pay to him alone; payment must be made to all. Hence, the act of one alone is ineffective. Effects of Plurality of Debtors: 1. The indivisible obligation can be performed by them only by ACTING TOGETHER. 2. If any of the debtors is not willing to perform, the prestation is converted into an indemnification for damages. 3. Once converted, the creditor can sue the debtors separately for their respective shares in the indemnity. Indivisible Solidary Obligation: Every debtor is liable for losses and damages, although those ready to perform can later recover from the guilty one. Creditor can claim to whom: The creditor may demand the entire indemnity, including the price of the thing or prestation and the damages, from any debtor, even if the latter was ready and willing to perform. Remedy for innocent debtor: A debtor who has paid the entire indemnity may recover from others their respective shares in the price, and from the debtor the entire amount of damages. Rules on Solidary Debtors: 1. Condonation by one creditor for the entire obligation or only for his part is not allowed. Effect of Partial Performance: General rule: Where the contract is indivisible, debtor cannot recover on quantum meruit for the work already finished, because in indivisible obligations partial performance is equivalent to non-performance. Exceptions: 1. Where the obligation has been substantially performed in good faith, the debtor may recover as if there had been complete performance, minus the damages suffered by the creditor. (Art. 1234) 2. When the creditor accepts the performance, knowing its incompleteness, and without protest, the obligation is deemed fully performed. (Art. 1235) OBLIGATION WITH PENAL CLAUSE Concept and Nature of Penalty: Penal clause: is an accessory undertaking to assume greater liability in case of breach. Form of penalty: 1. Sum of money 2. Other things stipulated by the party including an act or an abstention. Kinds: 1. Subsidiary or alternative: upon non-performance only the penalty can be asked. 2. Joint or cumulative: both the principal undertaking and the penalty may be demanded. Purpose of Penal Clause: 1. To provide for liquidated damages 2. To strengthen the coercive force of the obligation by the threat of greater responsibility in the event of breach. st To strengthen the coercive force of the obligation 1 Purpose: To provide liquidated damages

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The creditor cannot recover more than the penalty stipulated, even if he proves that the damages suffered by him exceed in amount such penalty. When arises: Penal clause is demandable when the principal obligation is not performed and the same arises only on mora, dolo, culpa, or contravention of terms. If fortuitous event: Penal clause is not enforceable. Proof of damages not needed: Creditor need not prove actual damages, breach is enough to enforce the obligation. Instances where damages and interest may be recovered in addition to penalty: 1. When there is an express provision to that effect 2. When the debtor refuses to pay the penalty 3. When the debtor is guilty of fraud in the non-fulfillment of the obligation. nd 2 Purpose: To strengthen the coercive force of the obligation To post a threat of punishment The payment of penalty is only SUBSIDIARY. rd 3 Purpose: To strengthen the coercive force of the obligation Enforcement of Penalty: It can be demanded by the creditor only when the non-performance is due to the fault or fraud of the debtor. No need to prove: The non-performance gives rise to the presumption of fault; and the debtor, to avoid the payment of the penalty, has the burden of proving force majeure or creditor’s fault. Plurality of Debtors: 1. The divisibility of obligation does not carry with it the divisibility of the penalty. 2. If joint: Each debtor responds only for his own failure to perform, and in proportion to his share in the penalty. 3. If solidary: The penalty may be enforced against any debtor for the non-performance of another debtor. Penalty as Facultative, Alternative, Cumulative: If facultative: Debtor may perform or pay the penalty if the principal obligation cannot be paid provided that the substitution is in good faith and there is no intention to evade the principal obligation. If alternative: Either debtor or creditor may choose on what obligation to perform, whether principal or penalty. If cumulative/joint: Creditor may enforce both principal obligation and penalty. Distinguished from Conditional Obligations: 1. In conditional obligation, there is no obligation before the suspensive condition happens. In obligation with penal clause, there is already an existing obligation (principal obligation) from the very beginning. 2. In conditional obligation, the principal itself is dependent upon an uncertain event. In obligation with penal clause, it is the accessory obligation (penalty) which is dependent upon nonperformance of the principal obligation. Distinguished from Alternative Obligations: 1. In alternative, two or more obligations are due, but fulfillment of one of them is insufficient. In OPC, there is only one prestation and it is only when this is not performed that the penal clause is enforceable. 2. In alternative, the impossibility of one of the obligations, without the fault of the debtor, still leaves other subsisting. In OPC, the impossibility of the principal obligation extinguishes also the penalty. 3. In alternative, the debtor can choose which prestation to fulfill.

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In OPC, debtor cannot choose to pay the penalty to relieve himself of the principal obligation, unless that right is expressly granted to him. Distinguished from Facultative Obligations: 1. In facultative, the power of the debtor to make the substitution is absolute. In OPC, the payment of the penalty in lieu of the principal obligation can be made only by express stipulation. 2. In facultative, the creditor can never demand both prestations. In OPC, the right to demand both prestations may be granted to the creditor. Compared with Guaranty: Guaranty: is a contract by virtue of which a third person, called the guarantor, binds himself to fulfill the obligation of the principal debtor in case the latter should fail to do so. Similarities: 1. They are both intended to insure performance of the principal obligation. 2. They are both accessory and subsidiary obligations. Differences: 1. In penal clause, the obligation to pay the penalty is different from the principal obligation In guaranty, the object of the obligations of the principal debtor and the guarantor is the same. 2. In penal clause, the principal obligation and the penalty can be assumed by the same person In guaranty, the principal debtor cannot be guarantor of the same obligation. 3. In penal clause, the penalty is extinguished by the nullity of the principal obligation, except when the penal clause is assumed by a third person. In guaranty, guaranty subsists even when the principal obligation is voidable or unenforceable or is a natural one. Exception: if the penal clause, however, is assumed by a third person, the same principle will apply as in the case of a guaranty. Interests: General Rule: In any contract, the stipulation to pay interest must be in writing, regardless of the nature of the interest. Nature of Interests: 1. Monetary 2. Penalty (surcharge) Monetary Interest: Due, enforceable, demandable regardless of the rate agreed upon by the parties. Construed as return in investment or income earned in lending money enforceable even if there is no breach of pure obligation. Interest as Penalty (Surcharge): Imposed on default or non-performance of the principal obligation Parties may stipulate on rate of penalty and the said rates are no longer covered by the usury law. Illustration on Interests: (Loan) Principal: 1M Interest: 20%/annum (Monetary Interest) Penalty: 5%/month in case of default + compounded interest of 2%/month(interest on interest) (Penalty interest) Collection fees and attorney’s fees: 3% (Penalty interest) Available Court’s actions: 1. Reduce the penalty or interest 2. Impose legal rate of interest a. Loans or forbearances of money, goods, credits – 12%/annum

b. Other monetary – 6%/annum Examples: 1. In a contract of sale wherein the buyer fails to pay the purchase price (forbearance) – 12% 2. Goods or merchandise as credits from sari-sari store – 12% 3. Actual damages from quasi-delict (forbearance) – 12% 4. Civil liability in crime – 12% 5. Support in arrears – 12% 6. Damages arising from bigamy – 6% Courts may reduce the interest: 1. Partial performance 2. Irregular performance, provided that there is no fraud on part of the debtor 3. No performance provided that the amount of the penalty is iniquitous or unconscionable When it is unconscionable: 1. A penalty would be contrary to good customs if it would occasion the economic ruin and represent an undue exploitation of the debtor. 2. A penalty may also become iniquitous by a supervening change of circumstances, which makes the amount grossly disproportionate to the damage suffered by the creditor. 3. When the penalty is contrary to morals or good customs, it may be even entirely voided by the Court. In reducing the penalty, the courts should also consider: 1. Gravity of the violation of the obligation 2. Benefits which the debtor may have derived from it Power of court: The power of the court to reduce the penalty refers only to the penalties prescribed in contracts. It does not cover the collection of surcharge on taxes that are due, which is mandatory on the collector. Penalty Not Enforceable: 1. When the principal obligation becomes impossible due to fortuitous event. 2. When the creditor prevents the debtor from performing the principal obligation. Nullity of Principal Obligation: General rule: Nullity of the principal obligation also nullifies the penal clause, which is only an accessory of the principal obligation. Exception: (penalty clause subsists even if the principal obligation cannot be enforced) 1. When the penalty is undertaken by a third person precisely for an obligation which is unenforceable, voidable, or natural, in which case it assumes the form of guaranty. 2. When the nullity of the principal obligation itself gives rise to liability of debtor for damages, such as when the vendor knew that the thing was inexistent at the time of the contract. In this case, the vendor becomes liable for damages, although the contract itself is avoided; and since the penalty is merely a substitute for damages, it can be enforced. Escalation or Adjustment Clause: Shall apply in cases in which the originally stipulated interest had been modified whether to a higher or lower rate which can be pegged from the prevailing rate prescribed by BSP. Limitation: Escalation clause is valid except when it gives to creditor the sole or inclusive right to impose the applicable interest rate without consent of the debtor. If the escalation clause is solely based on the creditor, the same is null and void and the original rate shall prevail. The right to increase includes the right to decrease the rate. -

OBLIGATIONS AND CONTRACTS 2011 EXTINGUISHMENT OF OBLIGATIONS 1. Payment or performance 2. By the loss of the thing due 3. By the condonation or the remission of the debt 4. By confusion or merger of the rights of creditor an debtor 5. By compensation 6. By novation Other Causes of Extinguishment of Obligation 1. Prescription: a. The acquisition of a right by the lapse of time, known as acquisitive prescription or adverse possession and usucapcion. b. The loss of a right of action by the lapse of time, known as extinctive prescription, or limitation of actions. 2. Death: extinguishes obligations which are of a purely personal character, apart from its extinctive effect in some contracts, such as partnership and agency. 3. Renunciation by the creditor, compromise, fulfillment of resolutory conditions and arrival of resolutory periods, rescission and nullity of contracts, and mutual dissent. 4. Will of one of the parties or change in civil status in partnership or agency. 5. Happening of unforeseen events 6. Want of interest: When X binds himself in favor of Y not to engage in a particular business in Manila for a period of 20 years, because Y is engaged in that business; if Y definitely gives up such business after five years, the obligation of X to abstain therefrom should be deemed extinguished. 7. Abandonment: a. Abandonment of a party wall in Art. 662 b. Abandonment of a vessel under the code of commerce 8. Insolvency: An obligation is not extinguished by the insolvency of the debtor, unless it has been judicially declared and a discharge has been given to him. PAYMENT OF PERFORMANCE Payment: It means not only the delivery of money but also the performance in any other manner, of an obligation. It is a juridical act which is: a. Voluntary b. Licit c. With the intent to extinguish the obligation Requisites of Payment 1. The person who pays 2. The person to whom payment is made 3. The thing to be paid 4. The manner, time and place of payment, etc. 5. The payment be in accordance with the obligation. 6. The person paying as well as the one receiving payment should have the requisite capacity. 7. It should be made by the debtor to creditor. 8. It should be made at the right time and place. Kinds of Payment: a. Normal: When the debtor voluntarily performs the prestation stipulated.

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Abnormal: When he is force by means of judicial proceeding, either to comply with the prestation or to pay indemnity. Identity and Integrity: Identity: The very thing or service due must be delivered or released. Integrity: The prestation must be fulfilled completely. Identity: In real, generic obligation: there is identity when an average is delivered consistent to intent or purpose of obligation. In real, specific obligation: the very thing contemplated must be delivered with fruits, accessories, accessions; substitution, on this case, amounts to breach and there will be on payment. When substitution is valid in real, specific obligation: 1. If creditor accepts the thing without protest (estoppel). 2. There is dacion en pago mutually agreed upon by parties. 3. Facultative obligation In personal obligation: substitution is not allowed. In obligation involving payment of money: Under RA 8183, all monetary obligation may be settled or paid by: 1. Legal tender in Philippines 2. Any currency stipulated by parties Legal tender: currency used for payments of debts i.e. Phil. Peso, any coins or notes issued by BSP Payment in foreign currency: It is valid provided that the currency be convertible and acceptable by BSP Payment through instruments: 1. General rule: The payment of obligation through debt instruments shall amount to breach of obligations i.e. promissory notes, bill of exchange, check (personal, manager, cashier) 2. Exceptions: a. When the payment in instruments is stipulated. b. Creditor accepts the instrument, even without prior stipulation. Value of instrument impaired: if the value of the instrument is impaired due to creditor’s fault, the same is still tantamount to payment. Integrity: General rule: Partial performance is no performance thus a prestation must be performed in entirety. Exceptions: 1. Divisible obligations 2. Subject to different terms or conditions allowing partial performance Division and liquidation: Partial performance will not extinguish the obligation if obligation is divided between liquidated and non-liquidated parts; in this case ONLY the liquidated are due. Substantial Performance: 1. Rule: In order that there may be substantial performance of an obligation, there must have been an attempt in good faith to perform, without any willful or intentional departure therefrom. 2. Performance: The deviation from the obligation must be slight, and the omission or defect must be technical and unimportant, and does not defeat the very purpose of the obligation. 3. Effect: The one who received the benefits of substantial performance shall pay the price agreed upon, and it is manifestly unjust to permit him to retain them without paying, or doing as he promised. Waiver of Defect of Performance: 1. Provision: When the obligee accepts the performance knowing its incompleteness or irregularity, and without expressing any protest or objection, the obligation is deemed fully complied with.

OBLIGATIONS AND CONTRACTS 2011 2. 3.

Rule: To constitute a waiver, there must be an intentional relinquishment of a known right. Waiver: There must have been ACCEPTANCE of the defective performance with ACTUAL KNOWLEDGE of the incompleteness of the debt. 4. Estoppel by Creditor: A creditor cannot object because of defects in performance resulting from his acts or directions. If he accepts the same, he is estopped in setting up other objections. Who may receive the payment? 1. Creditor, he may not be the same creditor at the establishment of the obligation. 2. Successors-in-interest, heirs, assignees, subrogates, and those who acquired rights of the creditor. 3. Any duly authorized person by the creditor, through special powers of attorney. 4. Executors of wills, administrators, administrators of the property of absentee, assignees or receivers in insolvency. Payment to wrong party: It does not extinguish the obligation as to the creditor, if there is no fault or negligence which can be imputed to the latter. Or even if there no fault or negligence, the payment to one who is not in fact his creditor, or authorized to receive such payment, is VOID. Who must pay? 1. Debtor on the time when the obligation is due, he may not be the same as debtor when the obligation is established. 2. Duly authorized agent of the debtor, the authorization must be expressed in writing. 3. Any third person who has interest on the obligation such as guarantors, sureties, accommodation parties. When payment is received by incapacitated: Payment is voidable. The debtor will be required to pay anew unless the incapacitated: 1. Retained the thing delivered or 2. Benefited from the same Payment to third person: Payment to a third person shall also be valid insofar as it has redounded to the benefit of the creditor. The benefit need not be proved in case: 1. If after the payment, the third person acquires the creditor’s rights. 2. If the creditor ratifies the payment to the third person. 3. If by the creditor’s conduct, the debtor has been led to believe that the third person had authority to receive the payment. 4. When, without notice of the assignment of the credit, he pays to the original creditor. 5. When in good faith he pays to one in possession of the credit. Payment by a third person: Third person: is a complete stranger to an obligation. General rule: Creditor is not bound to accept payment from a third person who is not bound under the obligation, unless there is a stipulation to the contrary. The reason being there will be modification of the prestation that is due. Amount or Recovery by Third Person: 1. With debtor’s knowledge or consent (DELEGATION): a. Entitled to recover the full amount he had paid. b. Transfer of rights to guaranty, surety, mortgage. 2. Without knowledge or against the will of debtor (BENEFICIAL REIMBURSEMENT): a. Reimbursement insofar as the payment has been beneficial to the debtor. But as between the debtor and creditor, the obligation is extinguished. b. No rights to penalty, surety, mortgage, pledge, penalty, interest

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Payment by third person as donation: Payment made by third person who does not intend to be reimbursed by the debtor is deemed to be a donation, which requires the debtor’s consent. But the payment is in any case valid as to the creditor who has accepted it. (Art. 1238) Effect to Prescription: Partial payment by stranger will not stop the running of the period of prescription with respect to the remainder of the debt. Rules on Subrogation: Whoever pays on behalf of the debtor without the knowledge or against the will of the latter, cannot compel the creditor to subrogate him in his rights, such as those arising from a mortgage, guaranty or penalty. (Art. 1237) Payment by debtor after he has been judicially ordered to retain the debt: Rule: The payment to the creditor after the credit has been attached or garnished, is void as to the party who obtained the garnishment or attachment. Illustration: A sues B for a certain debt. B in turn is a creditor of C for P500. Pending the litigation between A and B, A attaches or garnishes the credit of B of P500, and the order of garnishment is served on C. From the moment C receives the order, he should not pay to B. If he pays to B, the payment is VOID as against A; so that if A wins the suit against B, the debtor C can be made to pay P500 again to A. C, on the other hand, can recover what he paid to B because if not, the latter will be unjustly enriched. Where payment be made? If determinate: The situs of the thing when the obligation was constituted If determinable or if to do: The domicile of the debtor Expenses: 1. General rule: The creditor should bear the expenses. 2. Exception: When the debtor: a. Changes his domicile in bad faith b. After the debtor has incurred in delay SPECIAL FORMS OF PAYMENT 1. Dacion En Pago 2. Payment by Cession or Assignment 3. Application of Payments 4. Tender of Payment and Consignation DATION IN PAYMENT Is the delivery and transmission of ownership of a thing by the debtor to the creditor as an accepted equivalent of the performance of the obligation. How: When the debtor and creditor agree to transform the obligation to an obligation to convey a property. Effects: It extinguishes the obligation to the extent of the value of the thing delivered. Hence, it can be partial or full. Presumption: Value of the property is presumed to be equivalent to the value of the monetary obligation. Forms: 1. Ownership of a thing 2. Real right (such as usufruct) 3. Credit against third person Difference from Alternative Obligation: The conveyance of property is not originally intended.

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Difference from Facultative Obligation: Conveyance of the property is chosen after the principal obligation cannot be performed and there should be MUTUAL DECISION. Pledge: Where the personal property is delivered to the creditor, the transaction is a pledge, not dation in payment, unless this is clearly the intention of the parties. Governed by Law of Sales: 1. The monetary obligation takes the form of purchase price 2. Warranties of Debtor: a. Warranty against eviction: If creditor is ousted by final judgment involving the property delivered, then original obligation is revived. b. Warranty against hidden defects: Hidden defects on the thing delivered, for example cars, give rise to the revival of the original obligation. PAYMENT BY CESSION OR ASSIGNMENT It is the abandonment of the universality of the property of the debtor for the benefit of his creditors, in order that such property may be applied to the payment of the credits. Kinds of Cession: 1. Voluntary: Transfer the right to asset or property by contract between debtor and ALL of creditors. Creditors do not automatically acquire the right to property. ONLY the right to administer and manage the same at first, and the right to sell comes in the end. Sale of Property: Private(negotiated contracts with interested buyer) or Public(auction) Sale Proceeds: The proceeds of the sale shall be applied to the indebtedness. If the proceeds is not enough, the remaining debt is due and demandable. 2. Judicial: Governed by FRIA (Financial Rehabilitation and Insolvency Act of 2010) Under FRIA, for individual debtors (not corporate), they may avail for two remedies: a. Suspension of Payments b. Insolvency Suspension of Payments: It is applicable when the assets of the debtors is adequate to pay the liabilities but can only pay when the assets mature. Purpose: To reschedule the payments of debts until debtor realizes the assets to cash Insolvency: It is applicable when the assets of the debtors are insufficient to cover all the liabilities. Purpose: 1. Consolidate all assets and claims against the debtor. When adjudicated, the assets are assigned to the name of receiver or assignee. Assets pertained in here refers to: a. Present Asset, and b. Accruing Asset (property to be inherited) 2. To equitably distribute the property in favor of the creditors based on rules on preferences and concurrences of credit Some creditors are preferred and they shall be paid first in full. Preference: (in order) 1. Wages, salaries, benefits of workers 2. Taxes 3. Mortgage

4. Remaining debt, by ratio and proportion and not equal distribution Action for Insolvency: Can be debtor or creditor initiated. For the creditor to initiate: He should hold at least 25% of total outstanding debt to file a petition, and show proof that debtor is committing acts of insolvency such as transferring or property to relatives. Effects on debtor: Once the case is filed, the debtor cannot make any voluntary payment without judicial authority. Distinguished from Dation in Payment: 1. Dation in payment transfers the ownership over the thing alienated to the creditor, in assignment only the possession and administration (not the ownership) are transferred to the creditors, with an authorization to convert the property into cash with which the debts shall be paid. 2. While the dation in payment may totally extinguish the obligation and release the debtor, the assignment only extinguishes credits to the extent of the amount realized from the properties assigned, unless otherwise agreed upon. 3. While dation in payment of only some specific thing, assignment involves all the property of the debtor. 4. While in dation in payment, the transfer is only in favor of one creditor to satisfy a debt, in assignment there are various creditors. APPLICATION OF PAYMENTS It is the designation of the debt which is being paid by a debtor who has several obligations of the same kind in favor of the creditor to whom payment is made. Requisites: 1. One creditor and one debtor. 2. Two or more obligations between the two parties wherein the debtor must pay all in those obligations. 3. All obligations are due and liquidated. If not, then the application of payment may only be applicable in this case, when the same is made by stipulation. 4. Same kind or nature of obligations 5. The payment of the debtor to creditor is not sufficient to cover all; there’s only partial performance for all or full performance for one. Right to Choose: General Rule: Right to choose belong to debtor at the time of the payment Limitations on Debtor’s Right to Apply Payment: 1. If there is only one obligation bearing stipulated interest, the debtor cannot apply the payment to the capital, because the law requires its application to interest first. 2. The debtor cannot apply the payment to debt not yet liquidated. 3. He cannot choose a debt with a period for the benefit of the creditor, when the period has not yet arrived. 4. When there is an agreement as to the debts which are to be paid first, the debtor cannot vary the agreement. If debtor did not choose: The creditor acquires the right and the same is reflected on the acknowledgment receipt. If no one chooses: The payment is applied to debt that is more onerous or burdensome. Thing is onerous if: 1. Debtor is sole principal, than one which he is only subsidiarily liable. 2. Debtor is sole debtor, than one which he is only solidary debtor. 3. Older debts, than recent ones. 4. Debt that bears interest, than one which does not even if it is older.

OBLIGATIONS AND CONTRACTS 2011 5. When both obligations bear interest, debt with higher interest is onerous. 6. Unsecured debt bearing interest, than secured debt without interest. 7. Where there is encumbrance, debt with a guaranty, than that without security. 8. Secured debt, than unsecured debt. 9. In indemnity for damages, one with penal clause, than one subject to the general rules on damages. 10. Liquidated debt, than unliquidated debt. 11. Obligation where debtor is in default, than one which he is not. Nature and Burden: When debts are of the same nature and burden, apply pro rata not equal division. Effect of Creditor’s Refusal: If the application of payment by the debtor is valid yet the creditor refused to accept the same, then such creditor will incur delay. In relation to Art, 1176: Provision: The receipt of principal by the creditor, without reservation with respect to interest, shall give rise to the presumption that said interest has been paid. Remedy: Creditor should expressly state that interest has not yet been paid. Par. 2: The receipt of later installment of a debt without reservation as to prior installments, shall likewise raise the presumption that such installments have been paid. TENDER OF PAYMENT AND CONSIGNATION Tender of Payment: It is the manifestation made by the debtor to the creditor of his desire to comply with his obligation, with offer to immediate performance. Nature of Tender of Payment: 1. It is only a preparatory act which precedes consignation 2. Tender of payment by itself does not extinguish the obligation, unless completed by consignation. Consignation: Is the deposit of the object of the obligation in a competent court in accordance with rules prescribed by law, after the tender of payment has been refused or because of circumstances which render direct payment to the creditor impossible or inadvisable. Requisites of Consignation: 1. There was a debt due. 2. The consignation of the obligation was made because of some legal cause provided in Art. 1256. 3. Previous notice of the consignation has been given to the persons interested in the performance of the obligation. 4. The amount or thing due was placed at the disposal of the court. 5. After the consignation had been made, the person interested were notified thereof. st 1 Requisite: Existence of Debt Consignation is not proper if there is not debt to extinguish. Purpose: Extinguishment of debt and not the proper remedy for the exercise of a right. nd 2 Requisite: Creditor’s Refusal Rule: If the creditor to whom the tender of payment has been made refuses without just cause to accept it, consignation releases the debtor from thing or sum due. Consignation alone shall produce the same effect: 1. When the creditor is absent or unknown, or does not appear at the place of payment. Absentee: It is not enough that the creditor is absent or incapacitated; he must, furthermore, have no legal representative, or if he has one, the debtor has no knowledge of the same. Unknown: Creditor is not yet identified or ascertained. 2. When he is incapacitated to receive the payment at the time it is due. 3. When, without just cause, he refuses to give a receipt. It is because receipt is the only proof of payment.

4. When two or more persons claim the same right to collect I.e. Creditor died and no settlement proceeding was conducted, thus two or more persons can claim the right to collect. 5. When the title of the obligation has been lost. Example of title is a promissory note. If the reason for consignation is the unjust refusal of the creditor then it should be shown that: 1. There was previous tender of payment, without which the consignation is ineffective except for the aforementioned reasons. 2. The tender of payment was of the very thing due, or in case of money obligations, that legal tender currency was offered. 3. The tender of payment was unconditional. 4. The creditor refused to accept the payment without just cause. rd 3 Requisite: Previous Notice Purpose: For the creditors to rethink the refusal and instead, receive the performance. Person to be Notified: 1. Passive subjects: co-debtors, guarantors, sureties 2. Active subjects: solidary creditors, possible litigants When: Contemporaneous or subsequent to the tender of payment AND prior to the filing of action in court. How: 1. Verbal is sufficient, but for evidenciary purposes, the same must be made in writing. 2. Publication, in case the creditor is absent or unknown. Without prior notice: Without proof of prior notice, the court will dismiss the case moto proprio. th 4 Requisite: Amount in Disposal of Court Must be deposited to court with competent jurisdiction. Deposit of the property may be simultaneous to the filing for consignation in court. When the property is deposited then the same is under the control or disposal of the court alone. th 5 Requisite: Subsequent Notice Service of summons by the Sheriff sent to the parties of the consignation or to any third person with interest in the obligation. Purpose: To allow them to file a complaint or answer in intervention. After receiving the second notice, the creditor may: 1. Accept the thing or amount deposited, in which case the matter or payment is terminated. 2. Refuse to accept the thing or amount, in which case a trial must be held to determine the validity of the consignation. 3. The creditor may either accept nor refuse, in which case the debtor may ask the court to cancel the obligation after showing that the requisites of consignation have been complied with. Effects of Consignation: Once the consignation has been accepted by the creditor , or the court declares that it has been validly made, the following effects will take place: 1. The debtor is released in the same manner as if he had performed the obligation at the time of the consignation, because this produces the same effect as valid payment. 2. The accrual of interest on the obligation is suspended from the moment of consignation. 3. The deteriorations or loss of thing or amount consigned occurring without fault of the debtor must be borne by the creditor, because the risks of the thing are transferred to the creditor from the moment of deposit. -

OBLIGATIONS AND CONTRACTS 2011 4.

Any increment or increase in value of the thing after the consignation inures to the benefit of the creditor. Withdrawal by Debtor: Once the consignation has been accepted by the creditor or judicially declared properly made, the debtor loses his right over the thing or amount deposited, and he cannot withdraw the same without the consent of the creditor. Reservation on balance by Creditor: When the amount consigned does not cover the entire obligation, the creditor may accept it, reserving his right to balance. If no reservations are made, the acceptance by the creditor of the amount consigned may be regarded as waiver of further claims under contract. Attachment by Third Persons: When money is deposited I court under the provisions on the law of consignation, it is in custodia legis, and, therefore, exempt from attachment and execution. Debtor’s Voluntary Withdrawal with Creditor’s Consent: If consignation has been made, and the creditor accepted it or it was judicially declared proper, the debtor cannot withdraw the thing deposited without the consent of the creditor. Effects of aforementioned withdrawal: 1. Creditor shall lose every preference which he may have over the thing. 2. The co-debtors, guarantors and sureties shall be released and the same result to an UNSECURED DEBT. 3. Revival of obligations between debtor and creditor. LOSS OF THE THING DUE Refers to “IMPOSSIBILITY OF PERFORMANCE” Rule: The impossibility of the performance must be subsequent to the execution of the contract in order to extinguish the obligation. Requisites of Loss to Extinguish Obligation: 1. Obligation is to do or to deliver Generic real obligation is not subject to loss 2. Debtor must not be guilty of fraud or negligence 3. Debtor must not be guilty of delay nd rd In the absence of 2 and 3 requisites, the obligation to deliver is converted to indemnity of damages. Extent of Creditor’s Rights: The creditor shall have all the rights of action which the debtor may have against third person by reason of the loss. Kinds of Loss: 1. Physical Loss: such as when a car is burned due to conflagration 2. Civil Loss: the thing is beyond recovery 3. Legal Loss: subsequently declared illegal or prohibited or declared outside article of commerce Debtor’s Liability Due to Fortuitous Events: General Rule: Debtor is not liable. Exceptions: 1. When the law expressly provides. 2. When by express stipulation, the obligor is made liable even if loss occurs through fortuitous events 3. When the nature of the obligation requires the assumption of risk 4. When the default or negligence of the debtor concurs with the fortuitous event in causing the loss.

5. When the loss occurs after the debtor has incurred in delay. 6. When the debtor has promised to deliver the same thing to two or more different parties 7. When the obligation to deliver a determinate object arises from criminal act. Effect of Partial Loss: General Rule: Partial loss is not imputable to the fault or negligence of the debtor, but to fortuitous events or circumstances beyond his control. Does Not Extinguish Obligation: Partial loss does not extinguish obligation; the thing should be delivered to the creditor in its impaired condition, without any liability for damages on the part of debtor. When It Extinguishes Obligation: If the portion that is lost is of such an extent or nature that the obligation would not have been constituted without it, then the obligation is extinguished. Rebus Sic Stantibus: Provision: When the service has become so difficult as to be manifestly beyond the contemplation of the parties, the obligor may also be released therefrom, in whole or in part. Requisites: 1. The event or change in circumstances could not have been foreseen at the time of the execution of the contract. 2. It makes the performance of the contract extremely difficult but not impossible. There must be a good faith attempt to perform the obligation. 3. The event must not be due to the act of any of the parties. 4. The contract is for future prestation. Remedy: Go to court and pray to be completely or partially released from the obligation. Question of Fact: When Art. 1267 is invoked, that is a question of fact, it must be shown that to compel the debtor to perform the prestation will be grossly disadvantageous on his part because of the obstacles present. CONDONATION OR REMISSION OF DEBT Condonation: It is a gratuitous abandonment of the right of the creditor. Gratuitous: There is no equivalent received for the benefit given. If equivalent exists, it results to: a. Dation in payment: When the creditor receives a thing different from that stipulated. b. Novation: When the object or principal conditions of the obligation should be changed c. Compromise: When the matter renounced in litigation or dispute and in exchange of some concession which the creditor receives. Requisites of Remission: 1. The debt must be existing and demandable at the time the remission is made 2. The renunciation of the debt must be gratuitous or without any equivalent or consideration 3. The debtor must accept the remission. No person shall be compelled to accept donation, condonation or inheritance. 4. Both debtor and creditor must be legally capacitated 5. Amount condoned is not inofficious It is inofficious when the same would impair the right of other person. Example: If A condoned a loan as creditor, then he died without leaving anything to his heirs, then the condonation is void. Kinds of Remission: 1. As to form: a. Express: When it is made formally, and it should be in accordance with the forms of ordinary donations.

OBLIGATIONS AND CONTRACTS 2011 b. Implied: When it can be inferred from the acts of the parties. As to extent: a. Partial: refer to the amount of indebtedness or to an accessory obligation only (such as pledge or interest), or to some other aspect of the obligation (such as solidarity) b. Total: Entire obligation 3. As to the manner of remission: a. Inter vivos: Effective during the lifetime of debtor and creditor b. Mortis causa: Effective upon the death of the creditor. It must be contained in a will or testament. Express remission of immovable property: The law subjects express remission to the same formalities as donations. The same should be contained in a public instrument. Acceptance of the debtor must be contained in the same or in a separate public instrument. If thing has value greater than P5000, the donation should be made in writing with acceptance of the debtor to be valid. Implied condonation does not apply to donations, it results from inference realizing from following acts: 1. Voluntary delivery of the private instrument such as promissory note to the debtor. Presumption of Delivery: When the debtor has possession of evidence of credit, the presumption is that the same was delivered by the creditor, implying a remission of the debt evidenced by such private document. This is a mere disputable legal presumption and may be overcome by justification of the following purpose: a. Examination of the instrument b. Collection Plurality of Subjects: a. If joint: When a private document evidencing debt is found in the possession of one of the debtors, the presumption of remission can refer only to portion of the debtor who is in possession of the instrument. b. If solidary: The remission must be considered as total. 2. Possession of the debtor of the thing pledged after it was voluntarily returned by the creditor Return of the thing: The remission of the pledge extinguishes only the security; it does not affect the principal obligation, which remains subsisting. 2.

CONFUSION OR MERGER OF RIGHTS Merger or Confusion: It is the meeting in one person of the qualities of creditor and debtor with respect to the same obligation. Requisites: 1. It must take place between the creditor and the principal debtor. 2. The very same obligation must be involved, for if the debtor acquires rights from the creditor, but not the particular obligation in question, then there will be no merger. 3. The confusion must be total or as regards the entire obligation. Merger with respect to guarantors: Release of Guarantor: The extinguishment of the principal obligation through confusion releases the guarantors, because the obligation of the latter is merely accessory. Merger in Guarantor: 1. When the merger takes place in the person of a guarantor, the obligation is not extinguished. 2. If the guarantor acquires the credit, his obligation as a guarantor is extinguished, but the principal obligation subsists and can be enforced by him against the debtor and the other co-guarantors.

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Mortgaged Property: 1. Ownership of a part: When the mortgaged property belongs to a third person, and the mortgagee acquires a part of such property subject to mortgage, that part is released from the encumbrance, which continues to burden the rest of the parties. But the credit is not extinguished, even in part, because there is no confusion as to it. 2. Ownership of entire: When the mortgagee acquires ownership of entire mortgaged property, the mortgage is extinguished. Confusion on joint obligations: Provision: Confusion does not extinguish a joint obligation except as regards the share corresponding to the creditor or debtor in whom the two characters concur. Additional rules: 1. If solidary: a. Only part is transferred: ordinary assignment b. Entire amount is transferred: confusion 2. If joint: confusion or merger as to the proportionate amount only. COMPENSATION It is a mode of extinguishing to the concurrent amount, the obligations of those persons who in their own right are reciprocally debtors and creditors of each other. It is the offsetting of the two obligations which are reciprocally extinguished if they are of equal value, or extinguished to the concurrent amount if of different values. Distinguished from payment: 1. In payment, capacity to dispose of the thing paid and capacity to receive payment are required for the debtor and creditor, respectively; in compensation such capacity is not necessary, because the same operates by law and not by the act of the parties. 2. In payment, the performance must be complete; in compensation, there may be partial extinguishment of an obligation. Advantage of compensation over payment: 1. It is simple, taking effect without action by either party to extinguish their respective obligations. 2. There is more guaranty in making the credit effective, because there is less risk of loss by the creditor due to insolvency of fraud of the debtor. Distinguished from Merger: 1. Merger involves only one obligation, whereas in compensation there must always be two obligations. 2. In merger, there is only one person in whom the characters of creditor and debtor meet, with respect to the same obligation; in compensation, there are two persons who are mutually debtors and creditors of each other in two separate obligations, each arising from a different cause. Distinguished from Counterclaim: 1. Set-off or counterclaim must be pleaded to be effectual; compensation takes place by operation of law, and extinguishes reciprocally the two debts as soon as they exist simultaneously, to the amount of their concurrent sums. Kinds of Compensation: 1. As to effects: a. Total: when the two obligations are of the same amount b. Partial: when the amounts are not equal 2. As to origin: a. Legal: when it takes place by operation of law because all the requisites are present

OBLIGATIONS AND CONTRACTS 2011 b.

Facultative: when it can be claimed by one of the parties who, however, has the right to object to it, such as when one of the obligations has a period for the benefit of one party alone and who renounces that period so as to make the obligation due. c. Conventional: when the parties agree to compensate their mutual obligations even if some requisite is lacking. d. Judicial: when declared by the court in a case where there is a counterclaim. Applicable when one party submits to compensation but the other party denies. Voluntary or Conventional Compensation: This is compensation by agreement of the parties, even if some requisite provided by law should be wanting. Requisites: 1. That each of the parties can dispose of the credit he seeks to compensate. 2. That they agree to the mutual extinguishment of their credit. It is not limited to obligations which are not yet due. Other applications: The parties may compensate by agreement any obligations, in which the objective requisites provided for legal compensation are not present. Requirement: It is necessary, however, that the parties should have the capacity to dispose of the credits which they compensate, because the extinguishment of the obligations in this case arises from their WILLS and not from LAW. Judicial Compensation: Occurs when the defendant, who is creditor of the plaintiff for an unliquidated amount, sets up his credit as a counterclaim against the plaintiff, and his credit is liquidated by the judgment, thereby compensating it with the credit of the plaintiff. Debts from final judgment: Two debts arising from final and executor judgments may be extinguished due to compensation. Counterclaim: suing the person who sued you 1. Permissive: The cause for the counterclaim is different from the original case. It may happen that instead of suing in another claim, the same is consolidated to the original case. When compensated: if permissive counterclaim is proved by the defendant and there is judgment in original case against him, then the court can order the judicial compensation to offset the award of damages on both cases. 2. Compulsory: Arises from the same action, usually for claim of damages suffered by the respondent upon filing of the case by the plaintiff. Facultative Compensation: This is a compensation which can be set up only at the option of a creditor, when legal compensation cannot take place because of the want of some legal requisites for the benefit of the creditor. Distinguished from Conventional Compensation: FC is unilateral while CC depends upon the agreement of both parties. Illustration: 1. A owes B an Arabian horse, and B owes A a generic horse. There can be no legal compensation here, because of lack of identity in the quality of the things due. 2. But since B can deliver any horse to A, so long as it is not of poor quality, B can set up compensation. 3. This would have the same effect as if B demanded the Arabian horse from A then delivered it back to A in the performance of B’s obligation.

Legal Compensation: Requisites: 1. That each one of the obligors be bound principally, and that he be at the same time a principal creditor of the other; 2. That both debts consist in a sum of money, or if the things due are consumable, they be of the same kind, and also of the same quality if the latter has been stated; 4. That the two debts be due; 5. That they be liquidated and demandable; 6. That over neither of them there be any retention or controversy, commenced by third persons and communicated in due time to the debtor. st 1 Requisite: Mutual Debtors and Creditors: They must be mutually debtors and creditors IN THEIR OWN RIGHT, and AS PRINCIPALS. In their own right: There can be no compensation if one owes a debt personally to the other, and has a claim in a representative capacity against the latter. As principals: There can be no compensation when one party is a principal creditor in one obligation but is only a surety or guarantor in the other. Compensation as defense for guarantor: if there are two subsisting obligations, P1 and P2, and the guarantor is required to pay for P1 since the debtor therein failed to do so, then the guarantor can raise the defense of legal compensation by alleging the existence of P2 between the two parties, which can offset P1. nd 2 Requisite: Fungible Things Fungible: things which can be substituted for each other. Depends on: Whether the prestation refers to fungibles will depend largely on the will of the parties. When no compensation: When the obligations refer to determinate or specific things, there can be no compensation. Not same in quality: If they are not of the same quality then apply the rules on facultative compensation. In here, the one who can claim legal compensation is the one who is the creditor of a specific thing. rd 3 Requisite: Due and Demandable Maturity of debts: Both debts must be due to permit compensation. Debts both demandable: This means that the debts are enforceable in court, there being no apparent defenses inherent in them. Instances when obligation is not demandable: 1. When there is a period which has not yet arrived, including the case when one party is in a state of suspension of payments. 2. When there is a suspensive condition that has not yet happened, although once fulfilled, the same should be given retroactive effect. 3. When the obligation cannot be sued upon, as in natural obligations 4. When one of the debts has already prescribed, there can be no compensation. th 4 Requisite: Liquidated and Demandable Liquidated: A debt is liquidated when its existence and amount are determined. It is enough that the exact amount is known. Unliquidated claim before judgment: When the defendant who has an unliquidated claim sets it up by way of counterclaim, and a judgment is rendered liquidating such claim, it can be compensated against the plaintiff’s claim from the moment it is liquidated by judgment. th 5 Requisite: Free from Retention or Controversy Controversy: There is controversy when a third person claims to be one of the creditors of the parties. Retention: There is retention when one of the debts of one party is being claimed by a third person.

OBLIGATIONS AND CONTRACTS 2011 Obligations cannot be subject to compensation: 1. When one of the debts arises from a depositum, the depositary cannot set up compensation. But the depositor can. 2. When one of the debts arises from commodatum, the borrower cannot set up compensation. But the lender can. 3. When one of the obligations arises from future support 4. When one of the debts consists in civil liability arising from a penal offense. 5. Debts in favor of the government in the form of taxes, fees, duties, and similar forced contributions, cannot be extinguished by compensation. Exception: But when the debt in favor of the government is purely contractual, there is no reason why compensation cannot take place. Effects of Compensation: Upon principal or upon several debtors: If a person should have against him several debts which are susceptible of compensation, the rules on the application of payments shall apply to the order of the compensation. (Art. 1289) Upon guarantor: The guarantor may set up compensation as regards what the creditor may owe the principal debtor. Examples: a. A owes B 500K . C is the guarantor of A. B owes A P100,000. When B sues A and A cannot pay, for how much will C be liable? 400K, because he can set up the 100K credit of A as the basis for partial compensation. b. A owes B 500K. C is the guarantor of A. B owes C 500K. When B sues A for the 500K, A cannot put up the defense of compensation that his guarantor C is creditor of B for the same amount. Of Assignment of Rights By Creditor to a Third Person: 1. The assignment may be made with the consent of the debtor. Effect: Compensation cannot be set up because there has been consent, and, therefore, a waiver. Exception: If the right to the compensation that has already taken place is reserved 2. The assignment may be made with the knowledge but without the consent or against the will of debtor. Effect: Compensation can be set up regarding debts previous to the cession or assignment. This refers to debts maturing before the assignment (that is, before the NOTICE); hence, here legal compensation has already taken place. 3. The assignment may be made without the knowledge of the debtor. Effect: Debtor can set up compensation as a defense for all debts maturing PRIOR to his knowledge of the assignment (whether the debts matured before or after the assignment) Note: The crucial time here is the time of the knowledge of the assignment, not the time of assignment itself. NOVATION It is the extinguishment of an obligation by the substitution or change of the obligation by a subsequent one which extinguishes or modifies the first. It is not an absolute mode of extinguishment of obligation because there is a replacement of the obligation. Modes: 1. Changing their object or principal conditions 2. Substituting the person of the debtor 3. Subrogating a third person in the rights of the creditor

Requisites of Novation: 1. A previous valid obligation It means that there must be an original existing obligation at the time of the novation. That obligation must not only be valid, but also that it has not been extinguished by any cause. 2. The agreement of all parties to the new contract 3. The extinguishment of the old contract Either express or implied 4. The validity of the new one It is indispensable that the new contract which purports to annul the previous one, be valid and effective. Classification of Novation: 1. As to its nature/purpose: a. Subjective or personal: is the modification of the obligation by the change of subject. a.1 Active: When a third person is subrogated in the rights of the creditor. a.2 Passive: The substitution of the debtor b. Objective or real: It is the change of the obligation by substituting the object with another or changing the principal conditions. c. Mixed: When there is a combination of the subjective and objective novation. 2. As to its form: a. Express: When the parties declare that the old obligation is extinguished and substituted by the new obligation. Novation takes place only when the contracting parties expressly disclose that their object in making the new contract is to extinguish the old contract. b. Implied: When there is such incompatibility between the old and the new obligations that they cannot stand together. (SERIOUS AND IRRECONCILABLE DIFFERENCE) No specific form is required for an implied novation. All that is required is incompatibility between the original and the subsequent contracts. Test of incompatibility: Whether they can stand together each, each one having an independent existence. If they cannot, they are incompatible, and the subsequent obligations novates the first. Upon such novation, the former obligation loses all its force and effect, and only the new obligation can be the basis of an action. Essential Changes: The change must refer to the object, the cause, or the principal conditions of the obligation. Examples of Essential Changes: a. The change of an obligation from one to pay to one for delivery of a thing, vice versa b. The conversation of a deposit into a lease or a loan c. When simple obligation is changed into alternative one, vice versa d. The increase in amount of a debt, but NOT the reduction of the amount of the obligation because the latter becomes partial remission or condonation of the same debt. Accidental Changes: By the rule, accidental modifications in an existing obligation do not extinguish it by novation. Where the changes refer to secondary agreements and not the object or principal conditions of the contract, there is no novation. Examples of Accidental Changes: a. The mere extension of the term of payment does not result to novation, for the period affects only the performance, not the creation of the obligation. b. Acceptance of partial payment, the giving of additional security, addition of a penal clause, renunciation of existing securities by the debtor, and the change of place or manner of payment.

OBLIGATIONS AND CONTRACTS 2011 3.

As to effect: a. Partial: When there is only a modification or change in some principal conditions of the obligation. b. Total: When the old obligation is completely extinguished. Effects of Novation: 1. Extinguishes original obligation. 2. Creates new obligation between the same or different parties. 3. Novation of principal obligation also carries novation of accessories such as interests, unless otherwise stipulated. 4. It releases pledges and mortgages as well as guarantors and sureties, unless the latter agreed to be bound under the new obligation. Exception: Stipulation in favor of a third person which is subordinated to the principal obligation. Although technically it is an accessory obligation, it is in reality a distinct obligation in favor of a third person, and cannot be extinguished by novation without the consent of the latter. Objective Novation: If the new obligation is void, the original one shall subsist, unless the parties intended that the former relation should be extinguished in any event. (Art 1297) If the original obligation is illegal or prohibited then the novation is void even if the subsequent is valid. New Valid Obligation: In order that a contract may be considered as novated, it is indispensable that the new contract which purports to annul the previous one, be valid and effective. New Obligation Voidable: If the new obligation is not entirely void, but only voidable, the novation becomes effective. Effects of annulment of the new voidable obligation: But if the action to annul is brought, and the obligation is set aside, it will be deemed as if there had been no novation, and the original obligation subsists, unless the parties intended to definitely extinguish it at all events. Example: Where the new contract is set aside on the ground of minority of one of the parties the attempted novation fails, and the original contract subsists. Conditional New Obligation: Pending the happening of the condition, the old obligation cannot be considered as extinguished, nor can its performance be enforced. If the condition is not fulfilled, there is no novation at all. Extinguishment of new obligation: If the new obligation is extinguished by the loss of its object, the creditor cannot demand the object of the novated original obligation. The novation is void if the original obligation was void, except when annulment may be claimed only by the debtor or when ratification validates acts which are voidable. (Art. 1298) Effects of Old Voidable Obligation: 1. When the original obligation has been ratified before novation, the novation is effective. 2. Even if there has been no previous ratification at the time of novation, if the nullity can be claimed only by the debtor, the consent of the debtor to the novation will render the novation effective, because such consent is impliedly a waiver of the action for nullity. Novation of prescribed debt: A new contract, recognizing and assuming the prescribed debt, would be valid and enforceable. The prescription, being available only to the debtor, can be waived by him, and he does so by voluntarily promising to pay the prescribed debt. Subjective Novation: Modes: 1. Substitution of the Debtor 2. Subrogation of the Rights of the Creditor

Substitution of the Debtor: Release of the Debtor: it is necessary that the old debtor be released from the obligation, and the third person or new debtor take his place in the relation. Without such release, there is no novation. Forms: 1. Expromision: the initiative for the change does not emanate from the debtor and may be made even without his knowledge, since it consists in a third person assuming the obligation. It logically requires the consent of the THIRD PERSON and the CREDITOR. Effects of expromision: a. Beneficial reimbursement from original debtor. b. In case there is no reimbursement, no rights arising from guaranty, surety, etc. can be acquired. 2. Delegacion: the debtor offers and the creditor accepts a third person who consents to the substitution, so that the consent of these THREE is necessary. The consent need not be given simultaneously and that it may be given afterwards. Effects of Delegacion: a. Full reimbursement from the original debtor regardless of the extent of benefit derived by the original debtor. b. In case there is no reimbursements made, the new debtor has rights arising from guaranty, surety, etc. Consent of the Creditor: The consent of the creditor whether in expromision or in delegacion, is an indispensable requirement. Nature of consent of the creditor: 1. The consent to the substitution may be express or implied. 2. It need not be given simultaneously with that of the debtor and of the third party, nor it is required to be in any specific or particular form, but it may be given by the creditor in any way or another. Insolvency of the new debtor: 1. Expromision: No liability for the new debtor’s insolvency can be enforced against the old debtor, because the latter did not have the initiative in making the change, which might have been made even without his knowledge. 2. Delegacion: In case of insolvency of the new debtor, Art. 1295 permits the creditor to sue the old debtor only when the insolvency was prior to the delegation and publicly known, or when the old debtor knew of such insolvency at the time he delegated the obligation. Knowledge by creditor: The knowledge of the creditor that the new debtor was insolvent at the time of delegation, will bar him from recovering from the old debtor. Subrogation of the Rights of the Creditor: Subrogation: It is the transfer of all the rights of the creditor to a third person, who substitutes him in all his rights. Forms: a. Legal: is that which takes place without agreement but by operation of law because of certain acts. It does not require the consent of all parties. There is legal subrogation when: 1. When a creditor pays another creditor who is preferred, even without the debtor's knowledge. 2. When a third person, not interested in the obligation, pays with the express or tacit approval of the debtor. 3. When, even without the knowledge of the debtor, a person interested in the fulfillment of the obligation pays, without prejudice to the effects of confusion as to the latter's share. b. Conventional: is that which takes place by agreement of the parties. It requires the intervention and consent of three persons: the original creditor, the new creditor, and the debtor.

OBLIGATIONS AND CONTRACTS 2011 a.

Illustration of subrogation: X is the debtor of Y for P1 million with REM, and of Z for 1M without security. If the debtor cannot pay, Z may pay X the P1 million because if not he will get nothing since Y is preferred secured creditor. After the payment by Z, he will acquire rights to the P1 million with REM plus the original debt of P1 million. b. Any person interested can pay the debt such as the guarantor. If the guarantor pays the same, he is new creditor of the debtor in relation to that debt. c. Any third person, even without interest, can pay the debt 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 in virtue of the partial payment of the same credit. (Art. 1304) PRESCRIPTION Rights may be acquired or extinguished by mere lapse of time provided for by law. Retroactivity of prescription: The acquisition of ownership or other real rights through prescription is retroactive. Once the period is completed, the new owner is considered as having acquired the thing or right from the moment the period began to run. Kinds of Prescription: 1. Acquisitive: The acquisition of a right by the lapse of time, also known as adverse possession and usucapcion. 2. Extinctive: The loss of a right of action by the lapse of time, also known as limitation of actions. ACQUISITIVE PRESCRIPTION Requisite: 1. Capacity to acquire by prescription 2. A thing capable of acquisition by prescription 3. Possession of the thing under certain conditions 4. Lapse of time provided by law Kinds: 1. Ordinary acquisitive prescription: requires possession of things in good faith and with just title for the time fixed by law. 2. Extraordinary acquisitive prescription: if not ordinary. EXTINCTIVE PRESCRIPTION “Prescription of actions” or “limitation of actions” Definition: It refers to the time within which an action may be brought, or some act done, to preserve a right. Effect of lapse of time: extinguishment of the action Prescription to be pleaded: The bar of the statute of limitations cannot be asserted as a defense unless it is specially pleaded in the answer and proven with the same degree of certainty by which any essential allegations in the pleadings is established. May be waived or renounced: It is deemed waived if not timely raised or pleaded before or during the hearing of the case. Statute of limitations: Are acts limiting the time within which actions shall be brought. Not right of action: It does not confer any right of action, but are enacted to restrict the period within which the right, otherwise unlimited, might be asserted. As defense: They are not matters of substantive right, but are available only as defenses.

Purpose: To protect the diligent and vigilant, not those who sleep on their rights. Prescription and Laches Independence: The defense of laches applies independently of prescription. PRESCRIPTION LACHES 1. Concerned with the fact of delay Concerned with the effect of delay 2. A matter of time A question of inequity of permitting a claim to be enforced, this inequity being founded on some change of condition of the property or the relation of the parties. 3. Statutory Not statutory 4. Applies to law Applies to equity 5. Based on fixed time Not based on fixed time Cannot be invoked between: 1. Spouses 2. Parents and children including support except: a. Action to impugn legitimacy b. Action for compulsory recognition of legitimacy 3. Guardian and ward 4. Against the State except: a. Patrimonial property of the State or any of its political subdivision b. Inalienable property as 30 years from the open, continuous, exclusive, and notorious (OCEN) possession, the owner shall be entitled to the title of land of the State Various Periods: 1. 40 days a. Redhibitory action (is an action brought to void the sale of something defective. The defect should one that renders it either useless or so flawed that the buyer would not have bought it in the first place.) Period commences from delivery or discovery 2. 6 months a. Breach of warranty for clean defects on any kind of property sold on sales (of medicine, appliances, furniture, etc. although this may be reduced by stipulations) b. To demand reduction of prices for real estate when discovered that area is smaller than what is stipulated. 3. 1 year a. Action to impugn legitimacy (reside within city or municipality) b. Period to revoke donation on acts of ingratitude c. On libel, for both criminal and civil aspects d. Unlawful detainer (counted from receipt of notice to vacate in writing) or forcible entry (counted from ousting) 4. 2 years a. Action to impugn legitimacy (reside in Philippines) 5. 3 years a. Action to impugn legitimacy (reside abroad) b. Action to demand damages arising from illegal dismissal 6. 4 years a. Action for instances wherein injuries are claimed and not other prescriptive period is applicable b. Rescission of rescissible contract including action to recover property delivered

OBLIGATIONS AND CONTRACTS 2011 c. Action for quasi-delict cases 5 years a. All action between spouses b. All actions where prescriptive period is not prescribed by law c. Action to enforce a final judgment (the right for issuance of writ of execution) 8. 6 years a. Action based on oral contract b. Action based on quasi-contract 9. 8 years a. Action to recover movable property held in bad faith (replevin) 10. 10 years a. All actions for valid written contracts b. All obligations created by law except between husband and wife, guardian and ward, State c. Action to enforce judgment (second opportunity) In this case, file a separate revival of judgment, but for the first 5 years, only a motion or writ of execution is necessary. d. Action to enforce a mortgage over a real property e. To recover immovable property held in good faith f. Accion publiciana: an ejectment suit filed after the expiration of one year from the accrual of the cause of action or from the unlawful withholding of possession of the realty. g. Action under a pacto de retro sale h. Equitable mortgage 11. 30 years a. Accion reinvidicatoria (issuance of title of property) b. Action to recover immovable property held in bad faith Imprescriptible Actions: 1. Action to claim legitimacy 2. Action to claim illegitimacy by record of birth, etc. 3. Action for nullity of void marriage 4. Action for quieting of title 5. Action for recovery of property under implied trust under a certificate of title issued 6. Action for support 7. Action to demand right of way 8. Action for declaration of nullity of contract 9. Action for declaration of nullity of marriage; indispensable requirement is “during the lifetime of spouses.” If one died, settle on estate proceedings. Computation of Period: Time from which period is computed: In cases where there is no special provision for such computation, the rule is that the period must be counted from the day on which the corresponding action could have been instituted. It is the legal possibility of bringing the action which determines the starting point for the computation of the period. Does not retroact: The period should not be made to retroact to the date of execution of the contract. Elements of good cause of action: 1. The existence of a legal right in the plaintiff, with the corresponding legal duty in the defendant. 2. A violation or breach of that right or duty with consequential damage or injury to the plaintiff, for which he may maintain action for appropriate relief.

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Illustration: 1. Payment of money within a year: it will run from first day of next year 2. Action based on fraud or deceit: it will run from the date of discovery of the fraud or deceit. 3. In quasi-delict: starts from the day quasi-delict occurred or was committed 4. Action for partition or reconveyance based on implied or constructive trusts: starts from the registration to Register of Deeds 5. Action to question the validity of will: starts when a third person claims a right under such instrument. 6. Action to set aside a written deed of pacto de retro sale: starts when the alleged vendees made known their intention by overt acts not to abide by the true agreement. Obligations with interest: 1. It runs only from the last payment of the interest, if the principal debt is already due. 2. Where there is a period for the principal obligation which is not yet due, the running of prescriptive period will commence only after the maturity of debt. 3. Where the existence of a past due mortgage was recognized by payments of interest, prescription runs only from the past payment of interest. Suspension during war: Only when the regular course of justice is interrupted to such extent that courts are not open thus not within the reach of the people. Thus, no suspension of prescription, even during war, on places where the courts continued functioning regularly. Effect of destruction of judicial records: All terms or periods fixed by law or regulations shall cease to run from the date of destruction of the records of the case. Return: It shall only begin to run again on the date when the parties or counsel shall have received notice to the effect that the records have been reconstituted. Other instances where there is interruption: 1. When they are filed before the court (judicial demand) 2. When there is written extra-judicial demand by the creditors (extra-judicial demand) If mailed then the prescriptive period runs from the date of mailing. 3. When there is any written acknowledgement of the debt of the debtor

ESTOPPEL An admission or representation is rendered conclusive upon the person making it, and cannot be denied or disproved as against the person relying thereon (Art. 1431) Concept: A bar which precludes a person from denying or asserting anything to the contrary of that which has, in contemplation of law, been established as truth, either by the acts of judicial or legislative officers or by his own deed or representation, either expressed or implied. Bars others: It bars not just the person causing estoppel but also successors-in-interest, etc. Binds privies: in blood like heirs, and in estate, like grantees When not applicable: 1. If the act, conduct or representation of the party sought to be estopped is due to ignorance founded on INNOCENT MISTAKE. 2. A party who had NO KNOWLEDGE of nor GAVE CONSENT to a transaction. 3. It is not applicable on ILLEGAL ACTS or those prohibited by law or are against public policy. 4. No estoppel against the government, as the same is not estopped by mistake or error on the part of its officials or agents.

OBLIGATIONS AND CONTRACTS 2011 Distinguished from Waiver: 1. Waiver is a voluntary and intentional abandonment or relinquishment of a known right. Equitable estoppel may arise even when there is no intention on the part of the person estopped to relinquish any existing right. 2. Waiver does not carry implication of fraud. Estoppel, otherwise. 3. Waiver involves the conduct of only one party. Estoppel, both. Distinguished from Ratification: 1. In ratification, the party is bound because he intended to be. 2. In estoppel, the party is bound notwithstanding the fact that there was no such intention, because the other party will be prejudiced and defrauded by his conduct unless the law treats him as legally bound. Kinds of Estoppel: 1. Estoppel by Record Definition: is the preclusion to deny the truth of matters set forth in record, whether judicial or legislative, and also to deny the facts adjudicated by a court of competent jurisdiction. Example: the conclusiveness of a judgment on the parties to a case. Thus, if there has been litigation between parties that resulted to final judgment, all matters decided on said case are conclusive between the parties. No rebuttal: No testimony on that case can be rebutted on another case. 2. Estoppel by Deed Definition: is a bar which precludes one party to a deed and his privies from asserting as against the other party and his privies any right or title in derogation of the deed, or from denying the truth of any material facts asserted in it. Art. 1436: A lessee or a bailee is estopped from asserting title to the thing leased or received, as against the lessor or bailor. Estoppel of Tenant: A tenant will not be heard to dispute his landlord’s title. Same rule on bailee when he borrowed a thing from the bailor. 3. Estoppel in Pais (Equitable estoppel) Definition: is a term applied to a situation where, because of something which he has done or omitted to do, a party is denied the right to plead or prove an otherwise important fact. Distinguished from technical estoppel: It arises out of the acts and conduct of the party estopped and not from the record or a deed. Elements in relation to the party sought to be estopped: 1. Conduct amounting to false representation or concealment of material facts, or at least calculated to convey the impression that the facts are otherwise than, and inconsistent with, those which the party subsequently attempts to assert. 2. Intent or at least expectation that this conduct shall be acted upon by, or at least influence, the other party. 3. Knowledge, actual or constructive, of real facts. Elements in relation to the party claiming the estoppel: 1. Lack of knowledge or of the means of knowledge of the truth as to the facts in question 2. Reliance, in good faith, upon the conduct or statements of the party to be estopped 3. Action or inaction based thereon of such character as to change the position or status of the party claiming the estoppel, to his injury, detriment or prejudice.

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Kinds: 1. By Representation/Positive Acts a. Art. 1434: When a person who is not the owner of a thing sells or alienates and delivers it, and later the seller or grantor acquires title thereto, such title passes by operation of law to the buyer or grantee. - Subsequent Acquisition of Title: A person who sells property when he did not have title to it, cannot deny validity to the sale after he has acquired the title. The vendee is also deemed a purchaser in good faith. b. Art. 1435: If a person in representation of another sells or alienates a thing, the former cannot subsequently set up his own title as against the buyer or grantee. c. Art. 1437: When in a contract between third persons concerning immovable property, one of them is misled by a person with respect to the ownership or real right over the real estate, the latter is precluded from asserting his legal title or interest therein, provided all these requisites are present: (1) There must be fraudulent representation or wrongful concealment of facts known to the party estopped; (2) The party precluded must intend that the other should act upon the facts as misrepresented; (3) The party misled must have been unaware of the true facts; and (4) The party defrauded must have acted in accordance with the misrepresentation. - Estoppel Against Owner: The rule is that the title to a land or real property may pass by an equitable estoppel, which is effectual to take the title to land from one person and vest it in another where justice requires that such an action be done. - Example: Where a true owner of real property holds out another as the owner thereof, or with knowledge of his own title, allows the latter to represent himself as the owner having full power of disposition over the property, and innocent third persons are led into dealing with such person with apparent title, the true owner cannot, to the prejudice of such third persons, nullify the act of the apparent owner. 2. By Admission A party may be estopped to insist upon a claim, assert an objection, or take a position which is inconsistent with an admission which he has previously made and in reliance upon which the other party has changed his position. Examples: a. Where one admits in a will that a certain property belonging to his son had been sold by his son to a third person, said testator was estopped from claiming the same lot from the vendee on the ground that his son had sold the same lot to him a month after said testator made the will. b. Admissions in pleadings or facts agreed to by stipulation of the parties are conclusive between the parties and cannot be contradicted, unless it be shown that the admissions were made through palpable mistake, for parties are not allowed to gainsay their own acts or deny rights which they have previously recognized. Limitations: a. It cannot cure the constitutionality of admission of guilt made extra-judicially without Miranda warning. b. It cannot create civil status or legal relationship between persons unless made in accordance with the Family Code.

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3. By Promise (Promissory Estoppel) An estoppel may arise from the making of a promise, even though without consideration, if it was intended that the promise should be relied upon, and in fact it was relied upon, and if a refusal to enforce it would be virtually to sanction the perpetuation of fraud or would result in other injustice. 4. By Silence An estoppel may arise under the circumstances of silence and inaction. “One who is silent when he ought to speak will not be heard to speak when he ought to be silent.” Mere innocent silence will not work an estoppel. Torpitude or negligence: There must also be some element of turpitude or negligence connected with the silence by which another is misled to his injury. 5. By Acquiescence It is closely related to estoppel by silence. In estoppel by acquiescence, a person is prevented from maintaining a position inconsistent with one in which he has a acquiesced. Example: When the owner of a piece of land merely keeps silent and makes no objections, although he knows that a railroad corporation has entered upon his land without authority and is constructing a railway therein, he cannot later on recover his land or prevent its use by the railroad after the railway is completed at much expense. Estoppel from Benefits Art. 1438: One who has allowed another to assume apparent ownership of personal property for the purpose of making any transfer of it, cannot, if he received the sum for which a pledge has been constituted, set up his own title to defeat the pledge of the property, made by the other to a pledgee who received the same in good faith and for value. Application: Applicable to a case where the owner of personal property has allowed another to assume apparent ownership of the thing for the purpose of making any transfer of it, and the latter pledges it to a third person who receives the same in good faith and for value. The person is precluded from setting up his own title to defeat the pledge of the property if he received the sum for which the pledge has been constituted. Principle: The receipt of the sum for which the pledge has been made, estops the party benefited from questioning the validity and effectiveness of the matter or transaction. Even if benefits not received by owner: Notwithstanding the fact that the owner never received the proceeds of the pledge, he may be estopped from questioning the pledge if he clothed the agent with apparent authority to dispose of it and when the person setting up the estoppel acted and parted with value or extended credit on the faith of such apparent ownership or authority. Estoppel by Laches Laches: is failure or neglect, for an unreasonable and unexplained length of time, to do that which, by exercising due diligence, could or should have been done earlier. It is a negligence or omission to assert a right within a reasonable time, warranting a presumption that the party entitled to assert it either has abandoned or declined to assert it. Binds lazy and delay without valid cause: It binds those who are lazy in exercising their rights, but the inaction must be UNEXPLAINED so that delay must not be justified by a valid cause. Elements: 1. Conduct on part of the defendant, or of one under whom he claims, giving rise to the situation complained of. 2. Delay in asserting complainant’s rights after he had knowledge of the defendant’s conduct and after he has had an opportunity to sue. 3. Lack of knowledge or notice on the part of the defendant that the complainant would assert the right on which he bases his suit.

4. Injury or prejudice to the defendant in the event relief is accorded to the complainant. CONTRACTS Art. 1305: 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. It is an agreement on the declaration of the common will. Unilateral: Only one of the contracting parties is bound to perform Bilateral: Both parties are required to perform prestation towards one another Other Conventions: 1. A contract creates obligations which are more particular, concrete and transitory, because it establishes a relation which is more limited by reason of persons, effects, and importance. 2. In contract, the freedom to stipulate predominates over the necessity of the act; in other words, the intention of the parties is the determining factor in contracts, while the meeting of the minds is merely secondary in the other acts. 3. The law is the principal source of rights and obligations in the other acts mentioned but in contracts the law has only a suppletory effect. Other Contracts: 1. Auto-contracts: Entered by only one person, but in his separate and distinct capacities. Valid contract: It is a valid since the existence of a contract is not determined by the number of persons who intervene in it, but by the number of PARTIES thereto; not by the number of individual wills, but by the number of DECLARATION OF WILLS. A contract requires, not two persons, but two parties; not two wills, but two declarations of will. Effective element: It is not in the formation of the will but in its DECLARATION, thus in this contract, there are two declarations, although made by the same person. Example: The agent may be the buyer of the property, which the principal assigned him to sell, in his private capacity. Protection against conflict of interest: Art. 267 of Code of Commerce states that a commission agent, without the permission of the principal, could not buy for himself or for another that which he had been ordered to sell, or sell that which he had been commissioned to buy. 2. Contracts of Adhesion: One party has already a prepared form of contract, containing the stipulations he desires, and he simply asks the other party to agree to them if he wants to enter into the contract. It is valid since the party who adheres to the contract is in reality free to reject it entirely; if he adheres, he gives his consent. Classification of Contracts: Degree of dependence: a. Preparatory, such as agency b. Principal, such as lease or sale c. Accessory, such as pledge, mortgage, or suretyship Perfection: a. Consensual, such as purchase and sale b. Real, such as commodatum Solemnity or form: a. Common form, such as loan b. Special form, such as donations and mortgages of immovable property Purpose: a. Transfer of ownership, such as sale or barter

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b. Conveyance of use, such as commodatum c. Rendition of service, such as agency Subject-matter: a. Things, such as sale, pledge and mortgage b. Services, such as deposit, agency, and lease of services Nature of obligation produced: a. Bilateral, such as purchase and sale b. Unilateral, such as commodatum or gratuitous deposit Cause: a. Onerous, such as purchase and sale b. Gratuitous or lucrative, such as in commodatum Risk: a. Commutative, such as lease b. Aleatory, such as insurance Name: a. Nominate, or those with particular names, such as purchase and sale, lease, agency, etc. b. Innominate, or those without particular name

CHARACTERISTICS OF CONTRACTS Autonomy: Art 1306: The contracting parties may establish such stipulations, clauses, terms and conditions as they may deem convenient, provided they are not contrary to law, morals, good customs, public order, or public policy. Validity of Stipulations: The contract is the law between the contracting parties. And where there is nothing in the contract which is contrary to law, morals, good customs, public policy, or public order, the validity of the contracts must be sustained. Qualification of Contract: The law, not the parties, determines the JURIDICAL SITUATION created by the parties through their contract and the rights and obligations arising therefrom. A contract is to be judged by its character, and courts will look to the substance and not to the mere form of the transaction. Example of qualification: It has been held that even when the contract may be in the form of a sale with pacto de retro, if the real agreement of the parties is that of loan with a mortgage, the form of the contract will be disregarded and the contract held to be a mortgage. Limitations on stipulations: An act or contract that is illegal per se is one that by universally recognized standards is inherently or by its very nature, bad, improper, immoral or contrary to good conscience. Obligatory Force: Art. 1159: Obligations arising from contracts have the force of law between the contracting parties and should be complied with in good faith. Art. 1315: Contracts are perfected by mere consent, and from that moment the parties are bound not only to the fulfillment of what has been expressly stipulated but also to all the consequences which, according to their nature, may be in keeping with good faith, usage and law. (Consensual contracts) Consensual contracts: Consensual contracts are perfected by mere consent which is the meeting of minds of the parties upon the terms of contract. The consent need not be made expressly. Binding effects of contracts: The binding force of a contract is not limited to what is expressly stipulated, but extends to all consequences which are the natural effect of the contract. Considering its true purpose, the stipulations it contains, and the object involved. Principle: Contracts are not what the parties choose to call them, but what they really are as determined by principles of law.

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Example: Where the vendor of real property parts with title thereto in favor of the vendee, upon a third person’s assurance that he would himself pay to the vendor the balance of the purchase price still due from the vendee, such third person must make good his promise to pay. Right of First Refusal: a contractual right that gives its holder the option to enter a business transaction with the owner of something, according to specified terms, before the owner is entitled to enter into that transaction with a third party. Tuazon v. Del Rosario-Suarez: After the contract of lease is commenced, a distinct and separate offer to sell the property does not grant the right of first refusal. The same should be expressed on the Contract of Lease. The letter-offer of lessor did not form part of the Lease Contract because it was made more than six months after the commencement of the lease. Mutuality: There should be the presence of EQUAL BARGAINING POWER Principles: 1. That obligations arising from contract have the force of law between the contracting parties. 2. That there must be mutuality between the parties based on their essential equality, to which is repugnant to have one party bound by the contract leaving the other free therefrom. Unilateral cancellation: Once a contract is entered into, no party can renounce it unilaterally or without the consent of the other. When Stipulated: An agreement of the parties that either one of them may terminate the contract upon a reasonable period of notice is valid. Contract of adhesion: e.g. in buses, the contract releasing the bus company from any liability in case of death or accidents, is void. But for waiver of liabilities in case of lost or damage of cargo is allowed. Not binding to third parties, exception: Arts. 1309 and 1310 of NCC Art. 1309: The determination of the performance may be left to a third person, whose decision shall not be binding until it has been made known to both contracting parties. Art. 1310: The determination shall not be obligatory if it is evidently inequitable. In such case, the courts shall decide what is equitable under the circumstances. Arbitral Clause: it requires an arbitration of conflicts between parties (extra-judicial) before the same may be brought to court i.e. in construction industry Absence of arbitration: If the law states the need of arbitration yet the parties instantly file a case to court, the same will be dismissed because it is premature. Relativity: General rule: Art. 1311(1). Contracts take effect only between the parties, their assigns and heirs, except in case where the rights and obligations arising from the contract are not transmissible by their nature, or by stipulation or by provision of law. The heir is not liable beyond the value of the property he received from the decedent. No consent of third person: any contract entered into under the name of third person, without the latter’s consent, the same is unenforceable as far as the third person is concern. When third persons may be bound: 1. Stipulations pour autrui Art. 1311(2): If a contract should contain some stipulation in favor of a third person, he may demand its fulfillment provided he communicated his acceptance to the obligor before its revocation. A mere incidental benefit or interest of a person is not sufficient. The contracting parties must have clearly and deliberately conferred a favor upon a third person. Requisites: a. There must be a stipulation in favor of a third person. b. That the stipulation in favor of a third person should be a part, not the whole, of the contract.

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That the contracting parties must have clearly and deliberately conferred a favor upon a third person, not a mere incidental benefit or interest. d. That the favorable stipulation should not be conditioned or compensated by any kind of obligation whatsoever. e. That the third person must have communicated his acceptance to the obligor before its revocation. f. Neither of the contracting parties bears the legal representation or authorization of the third party. Test of Beneficial Stipulations: The third person acquires a right to the prestation only when this is in accordance with the intention of the contracting parties, such as contract (Letter of credit transaction) between a foreign bank and a local bank asking the latter to pay an amount to a beneficiary. 2. Contracts creating real rights Art. 1312: In contracts creating real rights, third persons who come into possession of the object of the contract are bound thereby, subject to the provisions of the Mortgage Law and the Land Registration Laws. Principle: Enforceable to everyone and no one in particular such as right of ownership Example: When a REM is registered then it is binding to all persons and anyone who deals with the property is deemed notified of the mortgage of the same. 3. Contracts in Fraud of Creditors Art. 1313: Creditors are protected in cases of contracts intended to defraud them. Example: When a debtor enters into a contract in fraud of his creditors, such as when he alienates property gratuitously without leaving enough for his creditors (Art. 1187), the latter, although not parties to such contract of alienation, may ask for its recission. 4. Tortuous Interference Art. 1314: Any third person who induces another to violate his contract shall be liable for damages to the other contracting party. Interference by third persons: A third person may be held liable for damages because he has induced a party to the contract to violate the terms thereof. Requisites: a. The existence of a valid contract b. Knowledge by the third person of the existence of the contract c. Interference by the third person in the contractual relation without legal justification. Consequences: a. As to the contracting party who violated: specific performance or resolution with additional damages. b. As to the injured party: proceed against the third person who induced the other party. 5. Collective Contracts - These are the cases 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. E.g. Collective Bargaining Agreement

STAGES IN EXECUTION OF CONTRACTS 1. Preparation, conception, or generation which is the period of negotiation or bargaining. 2. Perfection or birth of the contract, which is the moment when the parties come to agree on the terms of the contract. After its perfection: OBLIGATION PHASE, includes the performance of the prestation agreed upon. 3. Consummation or death, which is the fulfillment or performance of the terms agreed upon in the contract.

ELEMENTS OF CONTRACTS 1. Essential Elements: elements without which, there can be no contract. a. Consent b. Object c. Cause d. Delivery (if real) e. Form (if formal) 2. Natural Elements: 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. E.g. warranty in contract of sale 3. Accidental Elements: those which exist only when the parties expressly provide for them for the purpose of limiting or modifying the normal effects of the contract (i.e. conditions, terms, modes) Allowed clauses: a. “Prohibition to marry” clause: it is valid as long as it is not absolute; E.g. when employees are only prohibited from marrying employees from rival companies. b. Exclusivity clause: in dealership contract, as between the manufacturer and the distributor, the latter may be prohibited from selling competitor products. c. Non-involvement clause: usually applicable to officers or high-ranking officials of private corporations, prohibiting them from working for rival companies within a stipulated period. It is valid as long as it states a DEFINITE PERIOD, if it is indefinite then the same is void. d. Dragnet clause: stipulations providing that the existing mortgage must secure not just present obligation but also future obligations of the same creditor, thus there is no need to create another contract. e. Escalation/Adjustment clause: VALID if the increase on the interest rate has prior mutual consent from both parties and it also allows the decrease of such rate. VOID if it grants unilateral right to the creditor to increase the rate even without consent of the debtor. f. Option to purchase: must be considered SEPARATE and DISTINCT from the contract itself. g. Right of first refusal: VALID regardless of form, since not covered by Statute of Frauds; however, to bind third persons, it must be in writing and registered on Register of Deeds. h. Automatic increase of rental: VALID, provided that the increase is in accordance of Rent Control Law (allows maximum interest increase on residential property of 20%). If the increase is beyond what is prescribed by the Rent Control Law, then the excess is void. Consensual Contracts: Perfection: The perfection of a contract is the moment from which it exists; the juridical tie between the parties arises from that time How perfected: These contracts are perfected by mere consent which is the meeting of the minds of the parties upon the terms of the contract. The consent need not be made expressly. Formal Contracts: Definition: Those in which compliance with special external formalities is necessary for the validity of the contract. Real Contracts: Art. 1316: Real contracts, such as deposit, pledge and commodatum, are not perfected until the delivery of the object of the obligation. How perfected: A real contract is not perfected by mere consent; delivery of the thing is also required.

OBLIGATIONS AND CONTRACTS 2011 ESSENTIAL REQUISITES OF CONTRACTS 1. Consent / Meeting of Minds 2. Object / Subject Matter 3. Cause / Consideration CONSENT / MEETING OF MINDS Art. 1319: Consent is manifested by the meeting of the offer and the acceptance upon the thing and the cause which are to constitute the contract. The offer must be certain and the acceptance absolute. A qualified acceptance constitutes a counter-offer. Requisites: a. Plurality of subjects b. Capacity c. Intelligent and free will d. Express or tacit manifestation of the will e. Conformity of the internal will and its manifestation Manifestation of consent: Consent is manifested by the concurrence of offer and acceptance with respect to the object and the cause of the contract. Offer: Definition: is a unilateral proposition which one party makes to the other for the celebration of a contract. Requisites: a. Definite: The offer must be distinguished from mere communications indicating that a party is disposed to enter into a certain contract, or inviting the other to make an offer. b. Complete: Indicating with sufficient clearness the kind of contract intended and definitely stating the essential condition of the proposed contract, as well as the non-essential ones desired by the offeror. c. Intentional: Must not be an offer without seriousness, or made for fun or in jest, or pranks. Provisions: a. Art. 1321: The person making the offer may fix the time, place, and manner of acceptance, all of which must be complied with. b. Art. 1322: An offer made through an agent is accepted from the time acceptance is communicated to him. c. Art. 1323: An offer becomes ineffective upon the death, civil interdiction, insanity, or insolvency of either party before acceptance is conveyed. d. Art. 1325: Unless it appears otherwise, business advertisements of things for sale are not definite offers, but mere invitations to make an offer. Acceptance letter in relation to Art. 1323: there is perfected contract, as long as the letter is already sent before the occurrence of any event on Art. 1323. Sales advertisements: A business advertisement of things for sale may or may not constitute a definite offer. It is not a definite offer when the object is not determinate. Advertisements without specifications: it is deemed as an offer to make an offer because there is no definite offer. Option contracts: Art. 1324: When the offerer has allowed the offeree a certain period to accept, the offer may be withdrawn at any time before acceptance by communicating such withdrawal, except when the option is founded upon a consideration, as something paid or promised.

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Definition: A preparatory contract that gives a party the exclusive right to decide on the offer within a definite time and for consideration distinct from the price of the principal contract. When perfected: It is perfected once option was given with a definite period and option fee was paid for privilege. Violation of option contract: When the item under an option contract is sold by the owner to a third person during the option period, then such sale is rescissible. Period of Acceptance: a. With fixed period: the offeree may accept at any time until such period expires. b. No fixed period but person is present: the acceptance must be made immediately. c. Person is absent: the acceptance may be made within such time that, under normal circumstances, an answer can be received from him. Effect of Delay: It is not the moment of sending but the time of receipt of the revocation or acceptance which is controlling. Acceptance: Rule: The acceptance must be for the same object and must be unconditional. Counter-offer: If the acceptance changes the thing or conditions. Art. 1320: An acceptance may be express or implied. Implied acceptance: It may arise from acts or facts which reveal the intent to accept, such as the consumption of the things sent to the offeree, or the fact of immediately carrying out the contract offered. Withdrawal of Offer: The offeror may withdraw the offer at any time before acceptance, even before the period for acceptance has expired. Revocation of Acceptance: The acceptance may be revoked before it comes to the knowledge of the offeror. New action before acceptance: Pending the acceptance of an offer, the offeror can perfect a contract over the same thing with another person. If the first offer is not revoked by him before it is accepted, then he becomes liable for damages to the first offeree for culpable impossibility of performance. Preferred offeree: As between the two offerees, however, the one whose acceptance perfected a contract first is given priority; the other party has only an action for damages. Vices of Consent (Voidable) 1. Vices of Capacity 2. Vices of Will Vices of Capacity 1. Minority (Unemancipated minors) The contracts entered by minors can still become valid by: a. Upon reaching majority they ratify the same b. The contract has been entered into through a guardian and approved by a guardianship court. Valid contracts that a minor can enter: a. Contract of sale involving necessities b. The minor giving consent to a contract and making other party believe that he is capacitated (estoppel) 2. Insanity/Imbecility/Dementia To qualify: It is enough that the insanity existed at the time the contract was made, not in a lucid interval. It is not necessary that there be a previous judicial declaration of mental incapacity. Burden of proof: The same rests upon he who alleges it. He must overcome the presumption of capacity to enter to contract.

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Deaf-mutism Disqualification: The law refers to deaf-mute who does not know how to write or is illiterate. Being deaf mute alone is not a valid ground for disqualification. 4. Drunkenness/Hypnotic Spell When applicable: When a person through a superabundance of alcoholic drinks or the excessive use of drugs, may become so mentally obscured that he is, for the time being, comparable to an insane person in lack of understanding. Hypnotism/Somnambullism: The utter want of understanding is a common element of both. 5. Special Incapacities Examples: Being hospitalized, extremely sick, prodigal (spendthrift), absentee, insolvent Vices of Will Proof Necessary: Defect or lack of valid consent, in order to make the contract voidable, must be established by full, clear, and convincing evidence, and not merely by a preponderance thereof. 1. Mistake/Error How: In order that mistake may invalidate consent, it should refer to the substance of the thing which is the object of the contract, or to those conditions which have principally moved one or both parties to enter into the contract. Must be principal cause: Mistake as to the identity or qualifications of one of the parties will vitiate consent only when such identity or qualifications have been the principal cause of the contract. Simple mistake: A simple mistake of account shall give rise to its correction. False notion pertaining to the thing itself or any material fact relevant to the contract; mistake must be substantial. Kinds: a. Mistake of Fact: as to the object, personal qualifications in a personal contract, and/or principal conditions on clauses. b. Mistake of Law: generally, it does not vitiate consent unless the parties are lead to believe of such error; the mistake should be on the application of law or legal consequences of their contract. The mistake should be mutual and in good faith. 2. Violence/Intimidation Duress: is that degree of constraint or danger either actually inflicted (violence) or threatened and impending (intimidation), sufficient to overcome the mind and will of a person of ordinary firmness. When there is violence: There is violence when in order to wrest consent, serious or irresistible force is employed. Exception: Not every act of force or violence will cause vitiated contracts. Requisite of violence/force: a. That the physical force employed must be irresistible, or of such degree that the victim has no other course, under the circumstances, but to submit b. That such force is the determining cause in giving the consent to the contract. c. Evil upon any person of the contracting party or even to the latter’s spouse, ascendants, descendants, or property. Who may inflict force: Force may be employed by one part or a third person in behalf of the former; the relative capacities of the party must be taken into account as to the force applied. When there is intimidation: There is intimidation when one of the contracting parties is compelled by a reasonable and well-grounded fear of an imminent and grave evil upon his person or property, or upon the person or property of his spouse, descendants or ascendants, to give his consent.

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Requisites of intimidation: a. That the intimidation must be the determining cause of the contract, or must have caused the consent to be given. b. That the threatened act be unjust or unlawful c. That the threat be real serious, there being an evident disproportion between the evil and the resistance which all men can offer, leading to the choice of the contract as the lesser evil. d. That it produces a reasonable and well-grounded fear from the fact that the person from whom it comes has the necessary means or ability to inflict threatened injury. Unjust act: The intimidation must be unjust, contrary to law or morals, there being some evil intent. Things to be considered in intimidation: To determine the degree of intimidation, the age, sex and condition of the person shall be borne in mind. When legal: A threat to enforce one's claim through competent authority, if the claim is just or legal, does not vitiate consent. Undue Influence When there is undue influence: There is undue influence when a person takes improper advantage of his power over the will of another, depriving the latter of a reasonable freedom of choice. Other definition: It is any means employed upon a party which, under the circumstances, he could not well resist, and which controlled his volition and induced him to give his consent to the contract, which otherwise he would not have entered into. Form: Moral coercion whereby a party abused his moral ascendancy on the other to obtain the consent. Moral ascendancy: 1. Family relations 2. Confidential relations or any relations where trust and confidence are integral 3. Feeble-mindedness or ignorance 4. Moral or financial dependence (kapit sa patalim) Fraud When there is fraud: When, through insidious words or machinations of one of the contracting parties, the other is induced to enter into a contract which, without them, he would not have agreed to. In relation to fraud in Art. 1171: The fraud occurs in connection with the fulfillment of the obligation; while under Art. 1338, the fraud is prior or simultaneous to the consent or the creation of the obligation. Remedies on fraud in Art. 1171: Dolo causante is a ground for annulment of contract, whereas dolo incidente only gives rise to an action for damages. Compared with error: Error will vitiate consent only when it refers to the matters mentioned in Art. 1331, while a mistake induced by fraud will always vitiate the consent, when the fraud had a decisive influence of such consent. Requisites of fraud: 1. It must have been employed by one contracting party upon the other 2. It must have induced the other party to enter into the contract 3. It must have been serious 4. It must have resulted in damage or injury to the party seeking annulment Kinds: 1. Passive: Art. 1339: Failure to disclose facts, when there is a duty to reveal them, as when the parties are bound by confidential relations, constitutes fraud. Concealment or non-disclosure of material fact that will affect subject matter or cause. In other words, there is fraud when there is a positive affirmative duty to reveal a material fact, and that duty is not abided by.

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2. Active It must be deliberate and willful. Determining cause: Besides being serious, the fraud must be the determining cause of the contract. It is this casual connection between the fraud and the contract which vitiates the consent of the victim. When fraud not determining cause: It only gives rise to an action for damages, but not for annulment of contract. Tolerated Fraud: Art. 1340. The usual exaggerations in trade, when the other party had an opportunity to know the facts, are not in themselves fraudulent (also known as LAWFUL MISINTERPRETATION or DOLUS BONUS). It includes: a. Minimizing the defects of the thing b. Exaggeration of its good qualities c. Giving it qualities that it does not have Expression of Opinion: Art. 1341. A mere expression of an opinion does not signify fraud, unless made by an expert and the other party has relied on the former's special knowledge. Opinion by Layman: An expression of opinion by a layman does not constitute fraud. Opinion by Expert: An opinion by an expert is like a statement of a fact, and if false, may be considered a fraud. Fraud by a Third Person: a. General rule: The fraud employed by a third person upon one of the parties does not vitiate consent and cause the nullity of contract; it merely gives rise to an action for damages by the party injured against such third person. b. Exception: If there is collusion between the third person and one of the party and the latter is benefited thereby. c. Resulted to error on both parties: Deceit by a third person, even without connivance or complicity with one of the contracting parties, may lead to error on the part of the parties to the contract; in this case, consent is vitiated, and the contract may be annulled. Mutual Fraud: When both parties use fraud reciprocally, neither one has an action against the other; the fraud of one compensates that of the other, and neither party can ask for the annulment of the contract. Simulation of Contract: Art. 1345. Simulation of a contract may be absolute or relative. The former takes place when the parties do not intend to be bound at all; the latter, when the parties conceal their true agreement. Simulation, defined: It is the declaration of fictitious will, deliberately made by agreement of the parties, in order to produce, for the purposes of deception, the appearance of a juridical act which does not exist or is different from that which was really executed. Absolute and Relative Simulations of Contract: a. Absolute Simulation: There is color of a contract, without any substance thereof, the parties not having any intention to be bound. Example: A deed of absolute sale of a piece of land, stating that possession has been transferred and the price paid, when in reality there has been no agreement of sale between the parties. b. Relative Simulation: The parties have an agreement which they conceal under the guise of another contract. Example: A deed of sale of a piece of land is executed by the parties to conceal their true agreement which is donation. Or when two deeds of sale are executed, one having higher price and the other with lower one. Two juridical acts in relative simulation: a. Ostensible act: also called apparent or fictitious, which is the contract that the parties pretend to have executed.

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b. Hidden act: also called real, which is the true agreement between the parties. Rule: If the concealed or hidden act is lawful, it is enforceable if the essential requisites are present, such as when the true consideration was not stated. Effects of simulation of contracts: Art. 1346. An absolutely simulated or fictitious contract is void. A relative simulation, when it does not prejudice a third person and is not intended for any purpose contrary to law, morals, good customs, public order or public policy binds the parties to their real agreement. Absolute simulation contracts are void: The nullity of the absolutely simulated contract is based on want of true consent; there is no intent to be bound. The contract does not legally exist; it is illusory, a mere phantom. It is generally fraudulent and for the purpose of injuring third persons. Validity of relative simulation contracts: The relatively simulated contract is valid and enforceable, except when it prejudices third persons or has an illicit purpose. However, such concealed contract must have all the essential requisites such as consent, object, and cause.

OBJECT / SUBJECT MATTER The object of a contract is its subject matter. It is the thing, right, or service which is the subject matter of the obligation arising from the contract. Requisites of Object: 1. The object must be within the commerce of man. 2. It must be existing at the time of perfection of contract. 3. It must be licit, or not contrary to law, morals, good customs, public policy, or public order. 4. It must be possible. 5. It must be determinate as to its kind. Within Commerce of Man: Art. 1347: All things which are not outside the commerce of men, including future things, may be the object of a contract. All rights which are not intransmissible may also be the object of contracts. (2) No contract may be entered into upon future inheritance except in cases expressly authorized by law. Commerce of man: Including only those things which are not susceptible of appropriation or of private ownership, and which are not transmissible. Things outside the commerce of man: 1. Services which imply an ABSOLUTE SUBMISSION by those who render them, sacrificing their liberty, their independence or beliefs, or disregarding in any manner the equality and dignity of persons, such as perpetual servitude or slavery. 2. PERSONAL RIGHTS, such as patria potestas or marital authority, the status and capacity of persons, and honorary titles and distinctions. 3. Public offices, inherent attributes of the public authority, and political rights of individuals, such as the right of suffrage. 4. Property while they pertain to the public dominion, such as the roads, plazas, squares, and rivers. 5. Sacred things, common things, like the air and the sea, and rea nullius (nobody’s property), as long as they have not been appropriated. Must Be Existing: It is essential that the object must be in existence at the time of the perfection of the contract, or that it has the possibility or potentiality of coming into existence at some future time. Thus, future things can be the object of contracts. Future Things as Object: a. Those which do not belong to the obligor at the time the contract is made; they may be made, raised, or acquired by the obligor after the perfection of the contract.

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Includes not only material objects but also future rights. Examples: a contractor can assign in advance the price which he expects to receive under a construction contract; an author can sell to a publisher a work he intends to write; and a mortgage can be executed to secure a future debt. Kinds of contracts involving future things: a. Conditional: subject to the coming of an existence of the thing b. Aleatory: one of the parties bears the risk of the thing never coming into existence If the thing does not come into existence: a. Conditional: the obligation extinguishes b. Aleatory: the obligation remains Future things does not include: a. Property b. Future inheritance Must be Licit: All services or things which are not contrary to law, morals, good customs, public order or public policy may likewise be the object of a contract. Otherwise, they are void. Time of determination of licitness: time of the perfection of the contract. Must be Possible: Art. 1348: Impossible things or services cannot be the object of contracts. What: Things are impossible when they are not susceptible of existing, or they are outside the commerce of man. Impossible personal services: When they are beyond the ordinary strength or power of man. When: The impossibility must be actual and contemporaneous with the making of the contract, and not subsequent thereto. Kinds: 1. Absolute or objective: when nobody can perform it The contract is NULL and VOID. 2. Relative or subjective: when due to the special conditions or qualifications of the debtor it cannot be performed. a. If temporary: does not nullify the contract such as when a partner agrees to contribute to the partnership an amount more than what is permissible by his means b. If permanent: it nullifies the contract, such as blindness in contracts which required the use of eyesight. Liability for damages: a. No liability for damages if both parties have knowledge of the impossibility. b. The amount of damages will be limited to the losses the creditor may have suffered by having relied on the contract. Partly impossible: If the thing is partly possible and partly impossible: a. If indivisible: by nature or by intention of the parties, there is no contract b. If divisible: the contract is valid to the extent that it is possible Difficulty of performance: a. General rule: If a party charges himself with an obligation difficult of performance, he must abide by it. A showing of mere inconvenience, unexpected impediments, or increased expenses is not enough to relieve him of the obligation. b. Exception: If the obstacles to the performance of the prestation are so great that they can only be overcome with sacrifices which are absolutely disproportionate, or when accomplished, will prove to be dangerous to life and property.

Must be Determinate: Art. 1349: The object of every contract must be determinate as to its kind. The fact that the quantity is not determinate shall not be an obstacle to the existence of the contract, provided it is possible to determine the same, without the need of a new contract between the parties. Determinable: The object is valid for as long as it is at least determinable as to quality or quantity Determination of Kind: The object of a contract need not be individualized; but it must be determinate as to its kind or species. Determination of Quantity: The quantity of the object may be indeterminate, so long as the right of the creditor is not rendered illusory. CAUSE / CONSIDERATION Definition: It is the essential reason which moves the parties to enter into the contract. It is the immediate, direct and proximate reason which justifies the creation of an obligation through the will of the contracting parties. Requisites: 1. It must exist 2. It must be true 3. It must be licit Kinds: 1. Onerous 2. Remuneratory 3. Gratuitous Onerous vs. Remuneratory vs. Gratuitous Art. 1350: In onerous contracts the cause is understood to be, for each contracting party, the prestation or promise of a thing or service by the other; in remuneratory ones, the service or benefit which is remunerated; and in contracts of pure beneficence, the mere liberality of the benefactor. Onerous Contracts: The cause is the prestation that is reciprocally demandable between the parties. The cause need not be adequate or an exact equivalent in point of actual value, especially in dealing with objects which have a rapidly fluctuating price. Natural obligation: When the cause is a natural obligation, or one of conscience, there is a sufficient cause to sustain an onerous contract; and the cause will not be one of mere liberality. Moral obligation: But a moral obligation arising wholly from ethical considerations not constituting a natural obligation, is not a sufficient cause for onerous contracts. In unilateral, the cause is the PRESTATION that should be rendered. In gratuitous, the cause is LIBERALITY Remuneratory Contracts: One where a party gives something to another because of some service or benefit given or rendered by the latter to the former, where such service or benefit was not due as a legal obligation. Example: Where Pedro agrees to give to Juan a piece of land in consideration of the service rendered by Juan in saving Pedro from drowning on some previous occasion, the contract is remuneratory. The cause of the contract is the service previously rendered as a voluntary act by Juan. Gratuitous Contracts These are essentially agreements to give donations. Cause: The generosity or liberality of the benefactor is the cause in such contracts. Voluntary conveyance valid: A voluntary conveyance, without any valuable consideration whatever, is good as between the parties and cannot be set aside, unless made in fraud of existing creditors.

OBLIGATIONS AND CONTRACTS 2011 Absence of Cause vs. Failure / Inadequacy of Cause Art. 1352: Contracts without cause, or with unlawful cause, produce no effect whatever. The cause is unlawful if it is contrary to law, morals, good customs, public order or public policy. Art. 1353: The statement of a false cause in contracts shall render them void, if it should not be proved that they were founded upon another cause which is true and lawful. Art. 1354: Although the cause is not stated in the contract, it is presumed that it exists and is lawful, unless the debtor proves the contrary. Art. 1355: Except in cases specified by law, lesion or inadequacy of cause shall not invalidate a contract, unless there has been fraud, mistake or undue influence. Want of cause: A simulated contract of sale is without any cause or consideration, and is therefore null and void. No action necessary when want of cause: In such case, no independent action to rescind or annul the contract is necessary, and it may be treated as non-existent for all purposes. Illegality of cause: Such agreement is void ab initio. Statement of false cause: Where the cause stated in the contract is false, the latter may nevertheless be sustained by proof of another licit cause. Presumption of lawful cause: Unless the contrary is proved, a contract is presumed to have a good and sufficient consideration. The presumption applies when no cause is stated in the contract. But if a cause is stated in the contract, and it is shown to be false, the burden of proving the legality of the cause is upon the party enforcing the contract. Inadequacy of Cause: It does not impair contract unless it is brought by fraud at the time of the consent, thus HARD BARGAINING is valid. Cause vs. Motive: Fundamental distinction: Cause is the objective, intrinsic and juridical reason for the existence of the contract itself while motive is psychological, individual or persona purpose of a party to the contract. Other distinctions: a. The cause is the objective of a party in entering into the contract, while the motive is a person’s reason for wanting to get such objective. b. The cause in each kind of contract is always the same; the motive differs with each person Illustration: a. In a contract of sale, the objective of every seller is to receive the price; but one seller may want it in order to pay his debts, while a different seller may want it for buying other property. b. On the other hand, the objective of every buyer is to get the thing; but he may want it because some of some particular use he intends for it, or because a particular quality thereof which appeals to him. c. In a contract of loan, the cause for the borrower is the acquisition of money, and for the lender, the right to require its payment. Effect of Motive: a. General rule: The motive of a party does not affect the validity or existence of a contract. b. The motives of a contracting party cannot be the basis for the annulment of the contract, unless the realization of such motives has been made a condition upon which the contract is to depend. c. Motives cannot cure want of cause: The mere presence of motives cannot cure the absence of consideration. When motives may affect juridical act: 1. When the motive of a debtor in alienating property is to defraud his creditors, the alienation is rescissible. 2. When the motive of a person in giving his consent is to avoid a threatened injury, as in case of intimidation, the contract is voidable.

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When the motive of a person induced him to act on the basis of fraud or misrepresentation by the other party, the contract is voidable. Motive regarded as cause: When motive predetermines the purpose of the contract. FORMS OF CONTRACTS 1. Form for Validity, as an essential element of a contract 2. Form for Enforceability, statute of frauds 3. Form for Convenience Form for Validity: Those which are required for the validity of the contract General rule: Contracts are binding parties regardless of form Exceptions: Some contracts forms are essential for it to be valid a. Donation of immovable or right of immovable, written b. Donation of movable with value more than P5000, written c. Sale of land through an agent, the agency shall be in form of Special Power of Attorney; If no SPA, the sale is void and the principal cannot ratify the same d. In penal clause, any promise to pay interest shall be in writing e. In partnership, when one party contributes a real estate or property, written Form for Enforceability Those required for the purpose of proving the existence of the contract such as in Statute of Frauds Contract is valid because it complied with the essential elements, but neither party can demand the prestation because nothing is written. Statute of Frauds: Art. 1403.[2] (2) Those that do not comply with the Statute of Frauds as set forth in this number. In the following cases an agreement hereafter made shall be unenforceable by action, unless the same, or some note or memorandum, thereof, be in writing, and subscribed by the party charged, or by his agent; evidence, therefore, of the agreement cannot be received without the writing, or a secondary evidence of its contents: (a) An agreement that by its terms is not to be performed within a year from the making thereof; (b) A special promise to answer for the debt, default, or miscarriage of another; (c) An agreement made in consideration of marriage, other than a mutual promise to marry; (d) An agreement for the sale of goods, chattels or things in action, at a price not less than five hundred pesos, unless the buyer accept and receive part of such goods and chattels, or the evidences, or some of them, of such things in action or pay at the time some part of the purchase money; but when a sale is made by auction and entry is made by the auctioneer in his sales book, at the time of the sale, of the amount and kind of property sold, terms of sale, price, names of the purchasers and person on whose account the sale is made, it is a sufficient memorandum; (e) An agreement of the leasing for a longer period than one year, or for the sale of real property or of an interest therein; (if not in writing the contract is only for the period of one year) (f) A representation as to the credit of a third person. (such as credit reference required by banks in granting loans, the same shall be made in writing by the reference) Form for Convenience Those required to make the contract effective as against third parties (Arts. 1357 and 1358) The contract must be NOTARIZED to create real right Art. 1358. The following must appear in a public document: (1) Acts and contracts which have for their object the creation, transmission, modification or extinguishment of real rights over immovable property; sales of real property or of an interest therein a governed by Articles 1403, No. 2, and 1405; (because land can only be registered to ROD if it is notarized;

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in execution of REM, the instrument must be notarized; also in Discharge of Real Estate Mortgage, a public document is needed to remove the property under REM) (2) The cession, repudiation or renunciation of hereditary rights or of those of the conjugal partnership of gains; (3) The power to administer property, or any other power which has for its object an act appearing or which should appear in a public document, or should prejudice a third person; (4) The cession of actions or rights proceeding from an act appearing in a public document. All other contracts where the amount involved exceeds five hundred pesos must appear in writing, even a private one.

REFORMATION OF INSTRUMENTS Purpose: In order that the true intention of the contracting parties may be expressed. Basis: The action for such relief rests on the theory that the parties came to an understanding, but in reducing it to writing, through mutual mistake, fraud or some other reason, some provision was omitted or mistakenly inserted, and the action is to change the instrument so as to make it conform to the contract agreed upon. Who: Art. 1368. Reformation may be ordered at the instance of either party or his successors in interest, if the mistake was mutual; otherwise, upon petition of the injured party, or his heirs and assigns. Distinguished from annulment: a. The action for reformation of instruments presupposes that there is a valid existing contract between the parties, and only the document or instrument which was drawn up and signed by them does not correctly express the terms of their agreement. b. Annulment involves a complete nullification of the contract, while reformation gives life to it upon certain corrections. Effects of reformation: The general rule is that it relates back to, and takes effect from the time of its original execution, especially as between the parties. Effect on Statute of Frauds: The statute of frauds is no impediment to the reformation of an instrument, whether by way of correcting a description which by mistake includes property other than that intended, or omits the property from the description, or conveys too much. Requisites of Reformation: 1. There must have been a meeting of the minds upon the contract. 2. The instrument or document evidencing the contract does not express the true agreement between the parties, 3. The failure of the instrument to express the agreement must be due to mistake, fraud, inequitable conduct, or accident. When Available: 1. Art. 1361: When a mutual mistake of the parties causes the failure of the instrument to disclose their real agreement, said instrument may be reformed. (Mutual mistake) Requisites of Mistake: 1. That the mistake is one of fact 2. That it was common to both parties 3. The proof of common mistake must be clear and convincing (more than mere preponderance of evidence) 2. Art. 1362: If one party was mistaken and the other acted fraudulently or inequitably in such a way that the instrument does not show their true intention, the former may ask for the reformation of the instrument.

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Mistake of one party: A written instrument may be reformed where there is a mistake on one side and fraud or inequitable conduct on the other. Applicable: The mistake of one party, under this article, must refer to the CONTENTS OF THE INSTRUMENT, and not the subject matter or principal conditions of the agreement. In the latter case an action for annulment of the contract is the proper remedy. 3. Art. 1363: When one party was mistaken and the other knew or believed that the instrument did not state their real agreement, but concealed that fact from the former, the instrument may be reformed. 4. Art. 1364: When through the ignorance, lack of skill, negligence or bad faith on the part of the person drafting the instrument or of the clerk or typist, the instrument does not express the true intention of the parties, the courts may order that the instrument be reformed. Mistake of Draftsman: Whenever an instrument with the intention of carrying an agreement previously made, by which, due to mistake or inadvertence of the draftsman or clerk, does not carry out the intention of the parties, but violates it, there is ground to correct the mistake by reforming. 5. Art. 1365: If two parties agree upon the mortgage or pledge of real or personal property, but the instrument states that the property is sold absolutely or with a right of repurchase, reformation of the instrument is proper. Who May File Action for Reformation: 1. A. 1361: Either of the parties 2. A. 1362: Only innocent party 3. A. 1363: Only innocent party 4. A. 1364: Only innocent party 5. A. 1365: Either of the parties When Prohibited: 1. Art. 1366: There shall be no reformation in the following cases: a. Simple donations inter vivos wherein no condition is imposed b. Wills c. When the real agreement is void 2. Art. 1367: When one of the parties has brought an action to enforce the instrument, he cannot subsequently ask for its reformation. Donations and Wills: The reason is that both donation and wills are gratuitous dispositions of property. Reason: The courts will not interfere to reform these instruments because an action to reform a written instrument is in the nature of an action for specific performance and requires a valuable consideration – an element lacking as between donor and donee, and between testator and beneficiary. Void Agreements: An instrument which when corrected will be void or inoperative, will not be reformed. Reason for A.1367: Because there has been an election as between the inconsistent remedies, one in the affirmance of the written contract and the other the disaffirmance. The party suing under the written contract may be said to have ratified the same. INTERPRETATION OF CONTRACTS 1. Art. 1370: If the terms of a contract are clear and leave no doubt upon the intention of the contracting parties, the literal meaning of its stipulations shall control. If the words appear to be contrary to the evident intention of the parties, the latter shall prevail over the former. Written Contracts: Where the parties have reduced their contract into writing, the contents of the writing constitutes the sole repository of the terms of agreement between the parties. Rule: A contract is what the law defines it to be, and not what it is called by the contracting parties. Interpretation of terms: The language of the writing is to be interpreted according to the legal meaning it bears in the place of its execution, unless the parties have reference to a different place

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Intent of the parties: In construction of an instrument, the intention of the parties is to be pursued. Art. 1371: In order to judge the intention of the contracting parties, their contemporaneous and subsequent acts shall be principally considered. Determining intention: The circumstances under which the contract was made, including the situation of the subject thereof and of the parties to it, may be shown, so that the judge may be placed in the position of those whose language he is to interpret. Art. 1372: However general the terms of a contract may be, they shall not be understood to comprehend things that are distinct and cases that are different from those upon which the parties intended to agree. Scope of general terms: When a general and a particular provision are inconsistent, the latter is paramount to the former. So a particular intent will control a general one that is inconsistent with it. Art. 1373: If some stipulation of any contract should admit of several meanings, it shall be understood as bearing that import which is most adequate to render it effectual. Validity Favored: Where the instrument is susceptible of two interpretations, one which will make it invalid and illegal, and another which will make it valid and legal, the latter interpretation should be adopted. Art. 1374: The various stipulations of a contract shall be interpreted together, attributing to the doubtful ones that sense which may result from all of them taken jointly. Contract taken as a whole: A contract should not be construed by parts, but its clauses should be interpreted in relation to one another. Example of Doctrine of “complementary contracts construed together”: That the "complementary contracts construed together" doctrine applies in this case finds support in the principle that the surety contract is merely an accessory contract and must be interpreted with its principal contract, which in this case was the loan agreement. Art. 1375: Words which may have different significations shall be understood in that which is most in keeping with the nature and object of the contract. Purpose of contract: When there is doubt as to the meaning of any particular language, it should be determined by a consideration of the general scope and purpose of the instrument in which it occurs. Art. 1376: The usage or custom of the place shall be borne in mind in the interpretation of the ambiguities of a contract, and shall fill the omission of stipulations which are ordinarily established. Usages of Customs: An instrument may be construed according to usage, such as when in a contract of lease no amount of compensation is stipulated, the amount to be paid should be determined by the rate customarily paid in the place where the services is rendered. Art. 1377: The interpretation of obscure words or stipulations in a contract shall not favor the party who caused the obscurity. Obscure terms construed: The party who draws up a contract in which obscure terms or clauses appear, is the one responsible for the obscurity or ambiguity; they must therefore be construed against him. Contract of adhesion: Since one party prepared the contract, it should be construed against that party and in favor of the party who conformed. Art. 1378: When it is absolutely impossible to settle doubts by the rules established in the preceding articles, and the doubts refer to incidental circumstances of a gratuitous contract, the least transmission of rights and interests shall prevail. If the contract is onerous, the doubt shall be settled in favor of the greatest reciprocity of interests. If the doubts are cast upon the principal object of the contract in such a way that it cannot be known what may have been the intention or will of the parties, the contract shall be null and void. Reciprocity of rights: Where a contract is susceptible of being interpreted as a sale with right of repurchase, and as a loan with mortgage, the latter interpretation is to be followed because it is in favor of the greater reciprocity of interests.

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Least transmission of rights: Construction which would amount to impairment or the loss of right is not favored; conservation and preservation, not waiver, abandonment or forfeiture of a right, is the rule. Intention unknown: A deed of exchange is void or inexistent where the intention of parties relative to the objects of the exchange cannot be definitely ascertained. 10. Art. 1379: The principles of interpretation stated in Rule 123 of the Rules of Court shall likewise be observed in the construction of contracts. Partly written contract: It is a well-settled rule that in case repugnance exists between written and printed portions of a policy, the written portion prevails. Natural right: When an instrument is equally susceptible of two interpretations, one in favor of natural right and the other against it, the former is to be adopted. The right to redeem is a natural right, and a construction of a contract favoring it should be followed. DEFECTIVE CONTRACTS 1. Rescissible Contracts: which is a contract that has caused a particular damage to one of the parties or to a third person, and which for equitable reasons may be set aside even if it is valid. 2. Voidable Contracts: which is a contract in which the consent of one party is defective, either because of want of capacity or because it is vitiated, but which contract is valid until set aside by a competent court. 3. Unenforceable Contracts: which is a contract that for some reason cannot be enforced, unless it is ratified in the manner provided by law. 4. Void/Inexistent Contracts: which is an absolute nullity and produces no effect, as if it had never been executed or entered into. RESCISSIBLE CONTRACTS Rescission: It is a remedy granted by law to the contracting parties and even to third persons, to secure the reparation of damages caused to them by a contract, even if this should be valid, by means of restoration of things to their condition at the moment prior to the celebration of said contract. It is a relief for the protection of one of the contracting parties and third persons from all injury and damage the contract may cause, or to protect some incompatible and preferent right created by the contract. Nature of contract: Rescission is perfectly compatible with the validity of contract, but it does not require such validity as an essential condition. Hence, a voidable contract may also be rescinded. Direct proceedings to rescind: Rescissible contracts are not void, and until set aside in a rescissory action they are legally effective, convey title, and cannot be attacked collaterally upon the grounds for rescission in a land registration proceeding. Requisites for Rescission: 1. The contract must be a rescissible contract, those mentioned in articles 1381 and 1382. 2. The party asking for rescission must have no other legal means to obtain reparation for damages suffered by him (Art. 1383) 3. The person demanding rescission must be able to return whatever he may be obliged to restore if rescission is granted (Art. 1385) 4. The 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) 5. The action for rescission must be brought within the prescriptive period of four years (Art. 1389)

OBLIGATIONS AND CONTRACTS 2011 Rescissible Contracts: 1. Lesion: Art 1381(1): Those which are entered into by guardians whenever the wards whom they represent suffer lesion by more than one-fourth of the value of the things which are the object thereof; Art. 1381(2): Those agreed upon in representation of absentees, if the latter suffer the lesion stated in the preceding number; Art. 1386: Rescission referred to in Nos. 1 and 2 of Article 1381 shall not take place with respect to contracts approved by the courts. Lesion, defined: it is the injury which one of the parties suffers by virtue of a contract which is disadvantageous for him. When: To give rise to rescission, the lesion must be known or could have been known at the time of making the contract, and not due to circumstances subsequent thereto or unknown to the parties. Contracts of guardian: As a rule, when a guardian enters into a contract, involving disposition of the ward’s property, he must secure the approval of the guardianship court. Acts of administration only: A guardian is authorized only to manage the estate of his ward; hence, he has no power to dispose of any portion thereof without the approval of the court. Acts of dominion without court approval, invalid: He cannot, without judicial approval, enter into any contract which would be more than a mere act of administration. When unenforceable and not rescissible: If such contracts of disposition are not approved by the court, they are unenforceable under par. 1 of Art. 1403, irrespective of whether there is lesion or not. They are not rescissible. When contract by guardian rescissible: The law here must be limited to contracts which constitute mere ACTS OF ADMINISTRATION. These contracts do not need court approval, because they are made in the ordinary course of the management of the estate of the ward. If the required lesion exists, they are rescissible. When contract not rescissible even with lesion: But even if such lesion exists, the contract cannot be rescinded, if the guardian has secured the approval of the guardianship court for such contract (Art. 1386) Contracts for Absentees: The power and duties of a legal representative of an absentee, appointed by the court, are the same as of those guardians. Thus, same rules on contracts of guardians. Start of prescriptive period of four years: From the discovery of lesion 2. In Fraud of Creditors / Accion Pauliana Art. 1381(3): Those undertaken in fraud of creditors when the latter cannot in any other manner collect the claims due them; Meaning: These are the contracts with the intention to prejudice the rights of creditors. Requisite before a contract may be rescinded on ground of fraud of creditors: 1. That the plaintiff asking for rescission has a credit prior to alienation, although demandable later. 2. That the debtor has made a subsequent contract conveying a patrimonial benefit to a third person 3. That the creditor has no other legal remedy to satisfy his claim, but would benefit by the rescission of the conveyance to the third person. 4. That the act being impugned is fraudulent. 5. That the third person who received the property conveyed, if it is by onerous title, has been an accomplice in the fraud. When there is presumption of fraud: 1. Art. 1387: All contracts by virtue of which the debtor alienates property by gratuitous title are presumed to have been entered into in fraud of creditors, when the donor did not reserve sufficient property to pay all debts contracted before the donation.

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Alienations by onerous title are also presumed fraudulent when made by persons against whom some judgment has been issued. The decision or attachment need not refer to the property alienated, and need not have been obtained by the party seeking the rescission. 3. Any sale made for fictitious or simulated considerations. 4. Any sale made for grossly inadequate considerations. 5. Any sale on credit made by insolvent debtor. 6. Any sale or transmission of property made after action is instituted against debtor. 7. Any sale where the buyer still have the exclusive possession of the things sold. 8. If the buyer knows that the property sold is the only property of the vendor who is indebted. 9. Transfer of all properties of insolvent debtors or debtor financially embarrassed 3. Contracts for Things Under Litigation: Art. 1381(4): Those which refer to things under litigation if they have been entered into by the defendant without the knowledge and approval of the litigants or of competent judicial authority; What: It refers to a contract executed by the defendant in a suit involving the ownership or possession of a thing, when such contract is made without the knowledge and approval of the plaintiff or of the court. Right of Transferee: Where the claim of the plaintiff in the pending litigation has not been registered, and there is no legal obstacles to the transfer, the transferee of a property in litigation, who acquires the same in good faith and for valuable consideration, without knowledge or notice of the litigation or claim of the plaintiff, cannot be deprived of such property by a rescissory action. But if transfer is gratuitous: The transferee loses nothing by the rescission, and the contract may be rescinded even if he acted in good faith. Examples: 1. Transfer of things in litigation whether or not there is notice of lis pendens 4. Declared by Law: Art. 1381(5): All other contracts specially declared by law to be subject to rescission. Examples: 1. Payment made 180 days prior to the insolvency (FRIA) 5. Payments in Insolvency: Art. 1382: Payments made in a state of insolvency for obligations to whose fulfillment the debtor could not be compelled at the time they were effected, are also rescissible. Payment When Insolvent: Where a debtor transfers property to a creditor allegedly in payment of a debt which has not yet matured, at a time when the debtor is insolvent, and when the consideration for the transfer is grossly inadequate, compared to the actual value of the property transferred, the transfer is fraudulent and may be set aside by the creditors prejudiced thereby. Insolvency referred: The insolvency referred to in this article is insolvency in fact, not requiring any judicial proceeding on insolvency. Nature and Effects: Art. 1383: 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. No Other Remedy: The plaintiff asking for rescission must prove that he has no other legal means to obtain reparation. Art. 1384: Rescission shall be only to the extent necessary to cover the damages caused. Extent of Rescission: The rescission is only in favor of the plaintiff creditor; not all the creditors. Who May Bring Action: 1. The person who is injured by the rescissible contract, such as the ward or absentee in the case of lesion, the creditors prejudiced by a fraudulent alienation, and the plaintiff in a case where a thing in litigation is alienated by the defendant.

OBLIGATIONS AND CONTRACTS 2011 2. The heirs of these persons 3. Their creditors by virtue of the right granted by Art. 1177 Art. 1385: Rescission creates the obligation to return the things which were the object of the contract, together with their fruits, and the price with its interest; consequently, it can be carried out only when he who demands rescission can return whatever he may be obliged to restore. Neither shall rescission take place when the things which are the object of the contract are legally in the possession of third persons who did not act in bad faith. In this case, indemnity for damages may be demanded from the person causing the loss. Mutual Restitution: The only possible application of the rule that the party seeking rescission must offer to restore that which he has received from the other, is in contracts executed by guardians or administrators in Ar. 1381 (1) and (2). Prescriptive Period: Art. 1389. The action to claim rescission must be commenced within four years. Minority of Party: A minor who is a party to a contract of sale must bring the action for rescission within four years after attaining the age of majority. VOIDABLE CONTRACTS Voidable or Annullable Contracts: Existent, valid, and binding, although they can be annulled because of want of capacity or vitiated consent of one of the parties; but before the annulment, they are effective and obligatory between the parties. When applicable: Art. 1390. The following contracts are voidable or annullable, even though there may have been no damage to the contracting parties: (1) Those where one of the parties is incapable of giving consent to a contract; (2) Those where the consent is vitiated by mistake, violence, intimidation, undue influence or fraud. Rescission and Annulment, distinguished: 1. Nullity, as its name implies, declares the inefficacy which the contract already carries in itself, while rescission merely produces that inefficacy, which did not exist essentially in the contract. 2. Nullity, to be cured, requires an act of ratification, while rescission, to be ineffective, needs no ratification. 3. In nullity, the direct influence of the public interest is noted, while in rescission private interest alone governs. 4. Nullity based on a vice of the contract which invalidates it, while rescission is compatible with the perfect validity of the contract. 5. Nullity is a sanction, while rescission is a remedy, the law predominating in the former, and equity in the latter. 6. While nullity can be demanded only by the parties to the contract, rescission may be demanded even by third parties affected by it. Annulment as a Remedy: Must be declared by the court by final judgment. It is also a sanction imposed by law who entered into contract by bad faith. As defense: It can also be invoked as defense by defendant-innocent party when sued for performance of contract. Who May Bring: 1. Only innocent party on file or his guardian or representative 2. Any other person with interest, such as solidary co-debtor, person subsidiarily liable, accommodation mortgagors. Prescriptive period: the action for annulment shall be brought within four years.

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When it commences: a. In cases of intimidation, violence or undue influence, from the time the defect of the consent ceases. b. In case of mistake or fraud, from the time of the discovery of the same. c. And when the action refers to contracts entered into by minors or other incapacitated persons, from the time the guardianship ceases. Application of period: The period of prescription provided in this article applies to the parties to the contract but not to third persons. Registered documents: Discovery of fraud must be reckoned to have taken place from the time the document was registered in the office of the register of deeds, for the familiar rule is that registration is a notice to the whole world. Art. 1401: The action for annulment of contracts shall be extinguished when the thing which is the object thereof is lost through the fraud or fault of the person who has a right to institute the proceedings. If the right of action is based upon the incapacity of any one of the contracting parties, the loss of the thing shall not be an obstacle to the success of the action, unless said loss took place through the fraud or fault of the plaintiff.

Liability for damages Mutual restitution (status quo ante) It must be contemporaneous restitution. When mutual restitution not applicable: (as only one party will only restitute) a. Annulled contract involving incapacitated b. If the plaintiff lost the object of contract, action is barred c. If the defendant lost the object, he must return the value of the object. d. When there will be unjust enrichment Ratification / Confirmation Definition: It is that act or means by which efficacy is given to a contract or an obligation which suffers from a vice of curable nullity. It extinguishes the action to annul voidable contract. There is no need for juridical action for the same to take effect. Distinguished from acknowledgement: Confirmation or ratification cures a defect of nullity, while acknowledgement remedies deficiency of proof. Requisites of Confirmation: 1. That the contract is voidable or annullable, or one in which the consent of one party is defective, either because of lack of capacity to contract or because of error, fraud, violence, intimidation or undue influence. 2. That the ratification is made with knowledge of the cause for nullity. 3. That at the time the ratification is made, the cause of nullity has already ceased to exist. How Made: Express or Implied 1. Express ratification: a. As to nature: it seems clear that any oral or written manifestation of the person entitled to ask for annulment that he agrees to be bound by the contract or that he will not seek its annulment, would be express ratification. b. As to requisites: They are the same as those for implied ratification it is only in the form that these two kinds of ratification differ. 2. Implied ratification:: It may be implied from the conduct or acts of the party entitled to ask for annulment. Examples:

OBLIGATIONS AND CONTRACTS 2011 a. By silence or acquiescence b. By acts showing the approval or adoption of the contract c. By acceptance and retention of benefits flowing therefrom Who May Ratify: 1. Injured party after attaining capacity 2. Guardian of injured party even if the latter is still incapacitated Effects of Ratification: After a contract has been validly ratified, no action to annul the same can be maintained based upon defects relating to its original validity. Retroactivity of ratification: Its effect retroact to the moment when the contract was entered into.

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UNENFORCEABLE CONTRACTS One which cannot be enforced unless it is first ratified in the manner provided by law. The contract is valid and there is no vice in consent, but neither of the party can enforce the same. Distinguished from annullable and rescissible contract: These two contracts produce legal effects unless they are set aside by a competent court, while the unenforceable contract does not produce any effect unless it is ratified. Kinds of Unenforceable Contracts: 1. Unauthorized Contracts Art. 1403 (1): Those entered into in the name of another person by one who has been given no authority or legal representation, or who has acted beyond his powers; Governed by Art. 1317 and principles of agency When: When a person enters into a contract for and in the name of another, without authority to do so, the contract does not bind the latter, unless he ratifies the same. Example: The agent, who has entered into the contract in the name of the purported principal, but without authority from him, is liable to third persons upon the contract. It must have been the intention of the parties to bind someone, and, as the principal was not bound, the agent should be. In corporation law: The contract entered by an unauthorized officer, that is other than the Board, is unenfcorceable. 2. Contracts Infringing the Statute of Frauds Art. 1403(2): Those that do not comply with the Statute of Frauds as set forth in this number. In the following cases an agreement hereafter made shall be unenforceable by action, unless the same, or some note or memorandum, thereof, be in writing, and subscribed by the party charged, or by his agent; evidence, therefore, of the agreement cannot be received without the writing, or a secondary evidence of its contents: (a) An agreement that by its terms is not to be performed within a year from the making thereof; (b) A special promise to answer for the debt, default, or miscarriage of another; (c) An agreement made in consideration of marriage, other than a mutual promise to marry; (d) An agreement for the sale of goods, chattels or things in action, at a price not less than five hundred pesos, unless the buyer accept and receive part of such goods and chattels, or the evidences, or some of them, of such things in action or pay at the time some part of the purchase money; but when a sale is made by auction and entry is made by the auctioneer in his sales book, at the time of the sale, of the amount and kind of property sold, terms of sale, price, names of the purchasers and person on whose account the sale is made, it is a sufficient memorandum; (e) An agreement of the leasing for a longer period than one year, or for the sale of real property or of an interest therein; (f) A representation as to the credit of a third person.

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Statute of Frauds: is descriptive of statutes which require certain classes of contracts to be in writing. Nature: The statute does not deprive the parties of the right to contract with respect to the matters therein involved, but merely regulates the formalities of the contract necessary to render it enforceable. Purpose: To prevent fraud and perjury in the enforcement of obligations depending for their evidence upon an unassisted memory of witnesses by requiring certain enumerated contracts and transactions to be evidenced by a writing signed by the party to be charged. Validity of contracts: The statute of frauds simply provides 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. Defense is Personal: Statute of frauds is personal to the party of the agreement. Unenforceable contracts cannot be assailed by third persons. Oral evidence: Oral evidence of the contract will be excluded upon timely objection. Parole Evidence Rule: a. Failure to Object: But if the parties to the action, during the trial, make no objection to the admissibility of oral evidence to support the contract covered by the statute, and thereby permit such contract to be proved orally, it will be just as binding upon the parties as if it had been reduced to writing. b. When there is estoppel; When the party received or accepted benefits derived from the unwritten contract. Note or memorandum: No particular form of language or instrument is necessary to constitute a memorandum or note as a writing under the statute of frauds. It includes even electronic evidences pursuant to E-Commerce Act. When there is partial performance: The defense of Statute of Frauds is unavailable. Wholly executory contracts: statute of frauds applies to this and not to executed or partially executory contracts. Contracts Entered by Both Incapacitated Parties Art. 1403(3): Those where both parties are incapable of giving consent to a contract. In this case, neither party nor his representative can enforce the contract unless it has been previously ratified. Ratification by one party: Converts the contract into a voidable contract – voidable at the option of the party who has not ratified; the latter, therefore, can enforce the contract against the party who has already ratified. Or, instead of enforcing the contract, the party who has not ratified it may ask for annulment on the ground of incapacity.

VOID / INEXISTENT CONTRACTS It is one which has no force and effect from the very beginning, as if it had never been entered into, and which cannot be validated either by time or ratification. Distinguished from rescissible contracts: 1. In rescissible contract, the defect is in their effects, either to one of the parties or to a third party; while in void contracts, the defect is inherent in the contract itself. 2. The nullity of the inexistent contract is a matter of law and public interest, while rescission is based on equity and is more a matter of private interest. 3. If no action is taken to set aside a rescissible contract, it remains valid and produces all its effects; in void contracts, there are no legal effects even if no action is taken to set it aside. 4. The action to rescind prescribes while the action to declare the nullity of void contracts never prescribes.

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Distinguished from unenforceable contracts: 1. They are similar in that they cannot be the basis of actions to enforce compliance. 2. They differ in that unenforceable contracts can be ratified and thereafter enforced, while the latter can never be ratified and become enforceable. 3. In void contracts, there is no contract at all; while in unenforceable contracts, there is a contract, which, however, cannot be enforced unless properly ratified. Distinguished from voidable contracts: 1. Voidable contracts are those in which the essential elements are present, but consent is vitiated by want of capacity, or by error, violence, intimidation, undue influence, or deceit; while a void contract is one in which one of those essential requisites is wanting, either in fact or in law, or is declared void by statute. 2. An annullable contract is valid until it is set aside and its validity may be assailed only in an action for that purpose by a party to the contract, and never by a third person. On the other hand, inexistent contract implies that there is not contract but only the appearance of one, and it produces no effect even if not set aside by a direct action. 3. ‘the nullity of a void contract can be set up against anyone who asserts a right arising from it; not only against the first, but against all his successors who are not protected by law. The nullity of a voidable contract can be set up only against a party thereto. 4. An annullable contract may be rendered perfectly valid by ratification, but an inexistent contract, not having the essential requisites, is not susceptible to ratification. 5. The action for annulment of a voidable contract prescribes, while the action to declare the nullity of a void contract does not prescribe. Characteristics of Void Contracts: 1. The contract produces no effect whatsoever either against or in favor of anyone; hence, it does not create, modify or extinguish the juridical relation to which it refers. 2. No action for annulment is necessary, because the nullity exists ipso jure; a judgment of nullity would be merely declaratory. 3. It cannot be confirmed or ratified. 4. If it has been performed, the restoration of what has been given is in order. Inexistent and Void Contracts: 1. Those whose cause, object or purpose is contrary to law, morals, good customs, public order or public policy; (void) 2. Those which are absolutely simulated or fictitious; (void) 3. Those whose cause or object did not exist at the time of the transaction; (inexistent) 4. Those whose object is outside the commerce of men; (void) 5. Those which contemplate an impossible service; (void) 6. Those where the intention of the parties relative to the principal object of the contract cannot be ascertained; (inexistent) 7. Those expressly prohibited or declared void by law. (void) Such as: a. Purchase of property under litigation b. Contracts disposing future legitime c. Sale or donation of property to spouses d. Testamentary disposition to paramour e. Designate paramour as beneficiary in insurance f. Household services without compensation 8. A contract which is the direct result of a previous illegal contract, is also void and inexistent.

Action for Declaration of Nullity: Prescriptive period: It does not prescribe Divisibility: If the stipulations can be separated from each other, then those which are void will not have any effect, but those which are valid will be enforced. In case of doubt, the contract must be considered as divisible or separable. Who May Bring: 1. Parties of the contract 2. Third persons DIRECTLY affected by the contract Prohibited Contracts: Effects and Remedies 1. Illegality a. In case of In Pare Delicto (when both parties are equally guilty criminally) Neither may file an action for performance or to deliver what have been delivered Object of contract must be confiscated in favor of the government Both parties are criminally liable b. In case one party is innocent or disadvantaged: The law allows recovery of what have been paid or delivered by innocent or less guilty party. A buyer in a sale of stolen thing may recover his downpayment before full payment or accomplishment of contract 2. Prohibited (Not illegal, not a crime) a. In case of In Pare Delicto When the fault is on the part of both contracting parties, neither may recover what he has given by virtue of the contract, or demand the performance of the other's undertaking b. In case one party is innocent or disadvantaged: When only one of the contracting parties is at fault, he cannot recover what he has given by reason of the contract, or ask for the fulfillment of what has been promised him. The other, who is not at fault, may demand the return of what he has given without any obligation to comply his promise. When Recovery is Allowed: 1. Contract that stipulates for payment of usurious interest 2. Contracts requiring employee to render service more than 8 hours or below minimum wage. The employee is entitled to recover overtime pay or difference between actual payment and minimum wage. 3. Contracts involving goods in excess of price ceiling. NATURAL OBLIGATIONS This are not sanctioned by any action but have a juridical effect Distinguished from civil obligations: Art. 1423. Obligations are civil or natural. Civil obligations give a right of action to compel their performance. Natural obligations, not being based on positive law but on equity and natural law, do not grant a right of action to enforce their performance, but after voluntary fulfillment by the obligor, they authorize the retention of what has been delivered or rendered by reason thereof. Some natural obligations are set forth in the following articles. Kinds: 1. When a right to sue upon a civil obligation has lapsed by extinctive prescription, the obligor who voluntarily performs the contract cannot recover what he has delivered or the value of the service he has rendered. 2. When without the knowledge or against the will of the debtor, a third person pays a debt which the obligor is not legally bound to pay because the action thereon has prescribed, but the debtor later voluntarily reimburses the third person, the obligor cannot recover what he has paid.

OBLIGATIONS AND CONTRACTS 2011 3.

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When a minor who has entered into a contract without the consent of the parent or guardian, after the annulment of the contract voluntarily returns the whole thing or price received, notwithstanding the fact the he has not been benefited thereby, there is no right to demand the thing or price thus returned. 4. When a minor, who has entered into a contract without the consent of the parent or guardian, voluntarily pays a sum of money or delivers a fungible thing in fulfillment of the obligation, there shall be no right to recover the same from the obligee who has spent or consumed it in good faith. Restitution by Minor: After the decree of annulment of a contract, when a minor makes a restitution more than the extent that he was benefited or if he was never benefited at all. 5. When, after an action to enforce a civil obligation has failed the defendant voluntarily performs the obligation, he cannot demand the return of what he has delivered or the payment of the value of the service he has rendered. 6. When a testate or intestate heir voluntarily pays a debt of the decedent exceeding the value of the property which he received by will or by the law of intestacy from the estate of the deceased, the payment is valid and cannot be rescinded by the payer. 7. When a will is declared void because it has not been executed in accordance with the formalities required by law, but one of the intestate heirs, after the settlement of the debts of the deceased, pays a legacy in compliance with a clause in the defective will, the payment is effective and irrevocable.

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