Obligation & CONTRACTS [1 Joint and Solidary Obligation]

JOINT AND SOLIDARY OBLIGATION - There must be a plurality of parties, either on the creditor’s, debtor’s side or on both sides. - However, the mere fact or the presence of plurality of parties does not necessarily mean that the obligation is Solidary. - Solidarity may only exist in 3 ways (see 3 sources of solidarity) Q: 3 SOURCES OF SOLIDARITY: [aka “Test of Solidarity”] 1. By Law 2. By stipulation of the parties 3. By reason of the nature of the obligation Q: 3 ways to determine if the Obligation is Solidary: 1. Is there a law that provides that the obligation is Solidary? o If YES – Solidary o If NO – answer the 2nd question 2. Did the parties stipulate for Solidarity? o If YES – Solidary o If NO – answer to the 3rd question 3. Does the nature of the obligation require solidarity? o If Yes – Solidary o If NO – the presumption is JOINT Note: SOLIDARY presumed.

Obligations

are

never

Q: Why does Solidary is never presumed? 1. Active Solidarity - Because if an obligation is Solidary, the law gives the solidary creditor, a tremendous right in which he can demand full compliance of the obligation from anyone of the solidary debtors. - In joint Obligation, the creditor can demand only as much as it may correspond to his share in the credit. 2. Passive Solidarity

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Any of the solidary debtors can be may to pay / compelled to pay, not only his share, but the entire debt to anyone of the solidary creditors.

Note: In passive solidarity, the law gives the solidary debtors a tremendous burden whereas, in active solidarity, the law gives the solidary creditors a tremendous right. Q: For an obligation to be Solidary, is it necessary to use the term “Solidary”? -

Yes. In order that the contract be solidary. Even though the law does not require this term to make it solidary, as long as the parties may use other terms to make the obligation solidary.

Q: Can the obligation be Solidary without using the term “Solidary”? - Yes. Because the law does not require the use of the term for the obligation to be solidary, what the law allows is that the parties may use other terms as long as it will make the obligation Solidary. (ex: Joint and Severally) CASE: RONQUILLO - Action to recover a sum of money against 3 defendants - Parties entered into a compromise agreement - His claim was rounded off to 100K instead of 116K - 50% will be paid by the 3 defendants on the sate specified in the agreement - The other 50% will be paid again on the date specified also in the agreement - The agreement provided that: “We hereby bind ourselves JOINTLY and SEVERALLY” - No payment was made by the defendants - SC ruled that under the phrase Jointly and Severally it means SOLIDARY. Q: What is the distinction between the rights of the active subject and obligation of the Page 1 of 5 OBLIGATIONS AND CONRACTS – Finals R.A. 2010-2011

passive subject in Joint and Solidary Obligations? 1. Joint Obligation a. Creditor may only collect his share in the credit from the debtor b. Debtor may only be made to pay in so much as it may correspond to his share in the debt. 2. Solidary Obligation a. Solidary Creditor may collect the entire amount if the obligation from any of the Solidary Debtors. b. Solidary Debtor can be made to pay the entire amount of the obligation to any of the Solidary Creditors. Q: What is the basis of these rights? - Mutual Agency (creditor side) and Mutual Guaranty (debtor side) Q: What is Mutual Agency? - It is the principle that governs the relationship existing among the creditors only in a Solidary Obligation. - It means that one of the Solidary Creditors acts also in behalf of his cocreditors and each of the Solidary Creditors is an agent of each other. Q: What is the basis of the obligation of the Solidary Debtors to pay the full amount of their obligation? [mutual agency] - The principle of mutual agency governs the relationship existing between the solidary debtors. - Each solidary debtors binds himself to pay not only his share but the entire debt. Q: When does the principle of Mutual Agency begins and when does it end? - Mutual Agency in Active Solidarity begins from the moment of the perfection of the obligation. - It ends either:

o o

1. Upon payment of the obligation 2. When demand is made by anyone of the solidary creditors.

Note: Illustration of how Mutual Agency begins. Solidary A

B

Solidary C

X

A, B, C binds themselves solidarily in favor of X, Y, Z

Y

Z

***From the moment of the perfection of the obligation, Mutual Agency begins to govern the relationship among the solidary creditors.

Note: Illustration of how Mutual Agency ends. Solidary DEBTORS A

B

Solidary CREDITORS C

X

Y

Z

How does it end?

1. When anyone from A, B, C pays anyone from X, Y, Z. (the obligation is extinguished)

2. When anyone of from X, Y, Z made a Q: Why does demand put an end to Mutual Agency? - The moment one of the solidary creditors made a demand upon anyone of the solidary debtors. - Because the debtor who receives the demand cannot pay to any other creditors who did not made the demand. - The debtor who receives the demand can pay only to the creditor who made the demand. - Paying the creditor who did not make the demand means paying a 3rd person. - Because the moment demand was made by one of the Solidary Creditors, Page 2 of 5 OBLIGATIONS AND CONRACTS – Finals R.A. 2010-2011

all rights of the other creditors are said to be concentrated in the creditor who made the demand, so that the debtor who received the demand cannot pay the other creditor. He can only pay the demanding creditor. As a General Rule: anyone of the Solidary Creditors can demand and anyone of the Solidary Debtors can pay the entire obligation. XPN: once a Solidary Creditor makes a demand, Mutual Agency ceases to exist because in so far as the two parties are concerned; the Debtor who received the demand can only pay to the demanding creditor. NOTE: Illustration of the XPN: Solidary DEBTORS A B C

-

-

Solidary CREDITORS X Y Z

In so far as X and A are concerned, the General Rule does not apply to them because the Mutual Agency has ceased to exist when X demanded payment from A. In here, A can only pay to X, who made the demand, because all rights of Y and Z are now concentrated only to X.

Q: Since A cannot pay to Y and Z, Can B or C pay the obligation after X has been paid by A? - Yes. The General Rule still applies to B and C. Q: Can X still receive payment from B and C? - Yes. Because the General Rule still applies to them. - The termination of Mutual Agency only applies to A and X cannot refuse to accept the payment.

Q: Mixed Solidarity? - Solidarity exist from both creditor and the debtors sides. Q: Mutual Guaranty? - When A pays to any of the solidary creditors, the obligation of A, B, C is extinguished. - However, since A was the one who paid the entire obligation, he then now becomes the new creditor of B and C. - But it does not mean that A acquires the original right of X, Y, Z as creditors because he does not in anyway. - A is only entitled to be reimbursed. A’s job is to seek reimbursement from B and C. - A is not subrogated to the rights of X, Y, Z because of he is subrogated, he can seek the full amount from B and C even his share. Q: The law says that each of the solidary creditors may do whatever may be useful to the others but not anything which may be prejudicial to the latter. However, in a subsequent provision, Novation, Compensation, Confusion or Remission of the Debt made by any of the solidary credtiors or with any of the solidary debtors shall extinguish the obligation? Example: - A,B,C owes 30K to X,Y,Z - A,B,C’s share is 10K each. - X loves dogs and he asked A to give him a dog and the credit will be paid. - The effect of the obligation is extinguished Q: The act of A is not beneficial to Y and Z. Is it not prejudicial to his other creditors? - Acts of novation, compensation, confusion or remission of the debt shall extinguish the obligation. Provided, that the acting creditor delivers to his co-creditors their shares in the credit, there is no prejudice. - However, the provision overlooked one thing; What if X becomes Page 3 of 5 OBLIGATIONS AND CONRACTS – Finals R.A. 2010-2011

insolvent? What is the remedy of the other creditors? – NO REMEDY.

10K is due on May 1, it should be paid by C

Q: X demands from A. A did not pay. What is X’s remedy? - X can demand from B or C - Or he can go to court and sue A in order to collect payment

Q: Can B and C be compelled to pay on either of the due dates provided? - YES. Because they are solidary debtors.

Q: To whom he must sue? - Anyone from the solidary debtors. CASE: PNB v. CONCEPCION MINING - SC ruled that it was not necessary to include the estate of the person who died, while it is true that all the members of the Board who signed, while they are necessary parties, they are NOT INDISPENSABLE parties. - Law says that in enforcing the Solidary Obligation, the creditor can file an action against any of the Solidary Debtors; the creditor can choose among them; the creditor can sue only a few of them and not necessarily all of them. CASE: IMPERIAL INSURANCE v. DAVID - SC ruled that the obligation is Solidary since they bound themselves “jointly and severally”. The death of one does not mean extinguishment of the other. The death of one simply means the concentration of the demand upon the surviving debtor. Q: In case of Passive Solidarity (Solidary Debtors), is it necessary that the debtors be bound by the same terms and conditions? - The law says: Solidarity may exist although the creditors and debtors may not be bound in the same manner and by the same periods and conditions. Example: 10K is due on March 1, it should be paid by A 10K is due on April 1, it should be paid by B

Q: REMISSION or CONDONATION - Act of forgiveness Q: Can a law on remission ve applied to solidary obligation? - Yes. Q: If the obligation is condoned, what will be the effect of remission? - The effect depends on the object of the remission/condonation. a. If what has been condoned is only a PORTION OF THE OBLIGATION, it will result to PARTIAL EXTINGUISHMENT of the obligation. b. If what has been condoned is only the SHARE OF A SPECIFIC DEBTOR, the share of that debtor is extinguished but he is not released from the obligation because of solidarity. c. If what is condoned is the SOLIDARY TIE, the obligation remains and the obligation is transformed from solidary to joint. Q: What is the effect of the delay incurred by a Solidary Debtor? - Gen. Rule: Delay of one is delay of all. - Should the thing due get lost due to the fault of one of the solidary debtors: a. If the one to pay is the GUILTY DEBTOR, he is also required to pay the value + damages + interest. b. If the one to pay is the INNOCENT DEBTOR, he has the right of recourse against the guilty debtor. He can recover from him. Q: What is a PENAL CLAUSE? Page 4 of 5 OBLIGATIONS AND CONRACTS – Finals R.A. 2010-2011

-

An accessory undertaking made by a party to assume greater liability in case of breach.

Q: What is the purpose? - Generally, it is to strengthen coercive force of an obligation but also serves as a substitute indemnification for damages payment of interest.

the it is for and

Q: Substitute for Indemnification? - Means that if BREACH is committed, the injured party can only recover from the penalty clause not from damages. - XPNs: 1. When there is a stipulation 2. Debtor refuses to pay 3. When there is Fraud ***Innocent parties can claim Penalty and Damages Q: Penalty as substitute for indemnification for damages, suppose beach was committed but no damage resulted, can the penalty be demanded? If Yes, what is the penalty substituting it? - Proof of actual damage is not necessary to be able to claim the penalty because the basis of the right to claim the penalty is not damages but BREACH. Q: What kind of penalty may parties to a contract agree on? - Whatever the parties may agree shall be the law between them, but subject to LIMITATIONS. - (not contrary to law, public morals, good customs, public order and public policy)

2. When there has been IRREGULAR PERFORMANCE 3. Even if there has been NO PERFORMANCE at all, if the penalty agreed upon is excessive or unconscionable. Q: When will the provision apply which authorizes the court to reduce the penalty? - SC ruled: only if the obligation with a penal clause has been brought as a subject f the court’s litigation. Q: In an obligation with a Penal Clause, what if the debtor will just say: “I will just pay for the penalty clause”. Can the debtor compel the creditor to accept the payment or vice versa? - Gen. Rule: Debtor cannot compel the creditor nor the creditor demand from the debtor. - XPN – unless such right has been EXPRESSLY given to the debtor. Q: If that right is expressly given to the debtor, what will be its effect of the grant on the original obligation? - The original obligation with penal clause will cease to exist because the obligation will now be converted into either, Alternative or Facultative obligation, depending on the tenor of the grant of the right (on the debtor’s side) - (on the creditor’s side) – Express grant of the right is not required. Clear grant or it can be implied.

Q: May an agreed penalty be reduced? - Only valid penalties can be reduced. Q: When are courts empowered to reduce an agreed penalty? 1. When there has been a PARTIAL PERFORMANCE of an obligation Page 5 of 5 OBLIGATIONS AND CONRACTS – Finals R.A. 2010-2011