Obligations and Contracts Notes

TABLE

OF CONTENTS

TITLE I - OBLIGATIONS CHAPTER 1 General Provisions

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CHAPTER 2 NATURE AND EFFECT OF OBLIGATIONS

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CHAPTER 3 DIFFERENT KINDS OF OBLIGATIONS SECTION 1. - Pure and Conditional Obligations SECTION 2. - Obligations with a Period SECTION 3. - Alternative Obligations SECTION 4. - Joint and Solidary Obligations SECTION 5. - Divisible and Indivisible Obligations SECTION 6. - Obligations with a Penal Clause

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CHAPTER 4 EXTINGUISHMENT OF OBLIGATIONS GENERAL PROVISIONS SECTION 1. - Payment or Performance SUBSECTION 1. - Application of Payments SUBSECTION 2. - Payment by Cession SUBSECTION 3. - Tender of Payment and Consignation SECTION 2. - Loss of the Thing Due SECTION 3. - Condonation or Remission of the Debt SECTION 4. - Confusion or Merger of Rights SECTION 5. – Compensation SECTION 6. – Novation

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28 34 35 36 38 41 42 43 48

Title II. - CONTRACTS CHAPTER 1 GENERAL PROVISIONS

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CHAPTER 2 ESSENTIAL REQUISITES OF CONTRACTS GENERAL PROVISIONS SECTION 1. – Consent - - - - - - - - - - - - - - - - - - 58 SECTION 2. - Object of Contracts - - - - - - - - - - - - - - - - - - 71 SECTION 3. - Cause of Contracts - - - - - - - - - - - - - - - - - - 72 CHAPTER 3 FORM OF CONTRACTS

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REFORMATION OF INSTRUMENTS

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INTERPRETATION OF CONTRACTS

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RESCISSIBLE CONTRACTS

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VOIDABLE CONTRACTS

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UNENFORCEABLE CONTRACTS

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VOID AND INEXISTENT CONTRACTS

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Title III. - NATURAL OBLIGATIONS TITLE 1 – OBLIGATIONS

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CHAPTER 1 General Provisions Art. 1156. An obligation is a juridical necessity to give, to do or not to do. OBLIGATIONS is a juridical relation whereby a creditor may demand from the debtor the observance of a determinate conduct, and, in case of breach, may obtain satisfaction from the assets of the debtor. Essential requisites of an obligation – a) An active subject, who has the power to demand the prestation, known as the creditor or obligee; b) A passive subject, who is bound to perform the prestation, known as debtor or obligor. c) An object or the prestation which may consist in the act of giving, doing or not doing something. d) The vinculum juris or the juridical tie between the two subjects by reason of which the debtor is bound in favor of the creditor to perform the prestation. It is the legal tie which constitutes the source of obligation—the coercive force which makes the obligation demandable. It is the legal tie which constitutes the devise of obligation… the coercive force which makes the obligation demandable. Example: Thonyx enters into a contract of sale with Skaei who paid the purchase of a Yamaha Mio. Thonyx did not deliver the Yamaha Mio. Thonyx is the passive subject or debtor and Skaei is the active subject or creditor. The object or prestation is the Yamaha Mio and the obligation to deliver is the legal tie or the vinculum juris which binds Thonyx and Skaei.

Art. 1157. Obligations arise from: (1) Law; Law: Example is the duty to pay taxes and to support one’s family. Refer to Art. 1158. (2) Contracts; Contracts: Example is the duty to pay a loan by virtue of an agreement. Refer to Art. 1159. (3) Quasi-contracts; Quasi-contracts: Example is the duty to refund an “over charge” of money because of solutio indebiti or negtiorum gestio. Refer to Art. 1160. (4) Acts or omissions punished by law; Acts or omissions punished by law or Delict: Example is the duty to return a stolen carabao. Refer to Art. 1161. (5) Quasi-delicts Quasi-delicts: Example is the duty to repair damages due to negligence. Refer to Art. 1162. Art. 1158. Obligations derived from law are not presumed. Only those expressly determined in this Code or in special laws are demandable, and shall be regulated by the precepts of the law which establishes them; and as to what has not been foreseen, by the provisions of this Book.

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Example: It is the duty of the Spouses to support each other. (Art. 291, New Civil Code) And under the National Internal Revenue Code, it is the duty of every person having an income to pay taxes.

Art. 1159. Obligations arising from contracts have the force of law between the contracting parties and should be complied with in good faith. Example: Tonix borrowed from Sky P1,000,000 and agreed that in case of non-payment on the date stipulated, Tonix’s house and lot would be sold to Sky for the amount of P1,000,000. Is the stipulation valid? Yes. If Tonix does not pay, he should sell the house and lot for P1,000,000 to Sky. The agreement is not contrary to law.

Art. 1160. Obligations derived from quasi-contracts shall be subject to the provisions of Chapter 1, Title XVII, of this Book. Quasi-contract is the juridical relation resulting from a lawful, voluntary and unilateral act which has for its purpose the payment of indemnity to the end that no one shall unjustly enrich or benefited at the expense of another. (Art. 2142, NCC) Solutio Indebiti (Payment by mistake) It is the juridical relation which arises when a person is obliged to return something received by him through error or mistake. ExampleSky owed Tonix the sum of P1, 000.00. By mistake, Sky paid P2, 000.00. Tonix has the obligation to return the P1, 000.00 excess because there was payment by mistake. Negotiorum gestio (management of another’s property) It is the voluntary management or administration by a person of the abandoned business or property of another without any authority or power from the latter. (Art. 2144, NCC) ExampleClint, a wealthy landowner suddenly left for abroad leaving his livestock farm unattended. John, a neighbor of Clint managed the farm thereby incurring expenses. When Clint returns, he has the obligation to reimburse John for the expenses incurred by him and to pay him for his services. It is bases on the principle that no one shall enrich himself at the expense of another.

Art. 1161. Civil obligations arising from criminal offenses shall be governed by the penal laws, subject to the provisions of Article 2177, and of the pertinent provisions of Chapter 2, Preliminary Title, on Human Relations, and of Title XVIII of this Book, regulating damages. While an act or omission is felonious because it is punished by law, the criminal act gives rise to civil liability as it caused damage to another. Civil liability arising from delicts:  Restitution – which is the restoration of or returning the object of the crime to the injured party.  Reparation – which is the payment by the offender of the value of the object of the crime, when such object cannot be returned to the injured party.  Indemnification – the consequential damages which includes the payment of other damages that may have been caused to the injures party.

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Example: Bowser was convicted and sentenced to imprisonment by the Court for the crime of theft, the gold necklace, of Luigi. In addition to whatever penalty that the Court may impose, Bowser may also be ordered to return (restitution) the gold necklace to Luigi. If restitution is no longer possible, for Bowser to pay the value (reparation) of the gold wrist watch. In addition to either restitution or reparation, Bowser shall also pay for damages (indemnification) suffered by Luigi. Art. 1162. Obligations derived from quasi-delicts shall be governed by the provisions of Chapter 2, Title XVII of this Book, and by special laws. Quasi-delict is one where whoever by act or omission causes damage to another, there being fault of negligence, is obliged to pay for the damage done. Such fault of negligence, if there is no pre-existing contractual relation between the parties. (Art. 2176) Example: If Andrew drives his car negligently and because of his negligence hits Soriano, who is walking on the sidewalk of the street, inflicting upon him physical injuries. Then Andrew becomes liable for damages based on quasi-delict.

CHAPTER 2 NATURE AND EFFECT OF OBLIGATIONS Art. 1163. Every person obliged to give something is also obliged to take care of it with the proper diligence of a good father of a family, unless the law or the stipulation of the parties requires another standard of care. (1094a) To preserve or take care of the thing, with proper diligence of a good father to a family. It means the ordinary diligence that a prudent man would exercise in taking care of his own property taking into consideration the nature of the obligation, of the time and of the place. Example: Richard obliged to give to Laila a wedding ring five days from now. When the promise was due, Richard, for being too busy, lost the wedding ring he promised to Laila. Richard is liable to Laila for being negligent in loosing the ring he promised. He should have properly taken care of it with proper diligence of a good father of a family.

Art. 1164. The creditor has a right to the fruits of the thing from the time the obligation to deliver it arises. However, he shall acquire no real right over it until the same has been delivered to him. (1095) Kinds of Rights: Personal right – is power demandable by one person of another. Real right – is a power over a specific thing and is binding on the whole world only when the thing is actually delivered to him. Example: Leo obliged to give to Escorido a certain parcel of land on December 25. Before December 25, Escorido do not have the right to the fruits of the parcel of land Leo promised. After December 25, Escorido poseses the right to the fruits from the parcel of Land. Upon actual delivery of the property to Escorido, only then he becomes the owner of said fruit and land on the day of delivery.

Art. 1165. When what is to be delivered is a determinate thing, the creditor, in addition to the right granted him by Article 1170, may compel the debtor to make the delivery. University of Cebu College of Law

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If the thing is indeterminate or generic, he may ask that the obligation be complied with at the expense of the debtor. If the obligor delays, or has promised to deliver the same thing to two or more persons who do not have the same interest, he shall be responsible for any fortuitous event until he has effected the delivery. (1096) Determinate thing – a thing is determinate when it is particularly designated or physically segregated from all others from the same class. (Art. 1460, NCC) Example: Patrick promised to give to Ivy a Gucci Necklace Emperador model five days from now. If after 6 days, Patrick has not yet delivered the said necklace because he was robbed early in the morning on the 6th day, even after consistent demand of Ivy for the necklace since the day before, Ivy can compel Patrick to deliver the item since the object was determinate or specific. Indeterminate or generic thing – A thing is generic when it refers to a class or thing or genus and cannot be designated with particularity. (Art. 1460, NCC) Example: Amy promised to give to Andrew a gun, five days from now. If after five days, Amy has not yet delivered the gun since she lost it on her way home, Andrew can ask Amy to comply with her obligation at her own expense. Fortuitous Events – those events which could not be foreseen or which though foreseen were inevitable. (Art. 1174, NCC)

Art. 1166. The obligation to give a determinate thing includes that of delivering all its accessions and accessories, even though they may not have been mentioned. (1097a) Accessories – those joined to or included with the principal object for the latter’s better use, perfection, or enjoyment. (like the keys to a house and the dishes in the restaurant) Example: Lleina promised to give Jack a particular pickup truck. Lleina should also deliver the tools and the spare tire of the said pickup truck. Accessions – additions to or improvements upon a thing. Example: Jack obliged to give Lleina a certain piece of land. Jack should also deliver including the accessions in the said piece of land, like the building attached to it and all other infrastructure constructed.

Art. 1167. If a person obliged to do something fails to do it, the same shall be executed at his cost. This same rule shall be observed if he does it in contravention of the tenor of the obligation. Furthermore, it may be decreed that what has been poorly done be undone. (1098) This provision mainly focuses on Positive Personal Obligation, or an obligation to do. Remedies if the debtor fails to do > To have the obligation performed at his expense and to demand damages. If a thing may be ordered undone > If poorly made and if requires a negative obligation (not to do) for the debtor. Example: University of Cebu College of Law

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Antonio promised to construct a two-storey house for Comique. Few hours after constructing the house of Comique, the roofing system of the garage fell down. Comique can demand Antonio to undo the defect and reconstruct the garage roof at his expense since it was made poorly. Art. 1168. When the obligation consists in not doing, and the obligor does what has been forbidden him, it shall also be undone at his expense. (1099a) This provision mainly focuses on Negative Personal Obligation or an obligation not to do. Remedies if the debtor fails to do > Is the undoing of the prohibited thing plus damages. Example: Roniel promised to Inot not to use Inot’s money for gambling in Casinos but only for schooling, if in case Roniel does what he promised not to do, he will be liable to return the money he used in gambling in the Casino and to pay Inot the same amount as penalty. If in case Roniel goes to the Casino and use Inot’s money in gambling, he will be liable for the return of the money, the penalty and damages.

Art. 1169. Those obliged to deliver or to do something incur in delay from the time the obligee judicially or extrajudicially demands from them the fulfillment of their obligation. However, the demand by the creditor shall not be necessary in order that delay may exist: (1) When the obligation or the law expressly so declare; or (2) When from the nature and the circumstances of the obligation it appears that the designation of the time when the thing is to be delivered or the service is to be rendered was a controlling motive for the establishment of the contract; or (3) When demand would be useless, as when the obligor has rendered it beyond his power to perform. In reciprocal obligations, neither party incurs in delay if the other does not comply or is not ready to comply in a proper manner with what is incumbent upon him. From the moment one of the parties fulfills his obligation, delay by the other begins. (1100a) Mora means a legal delay or default and it consists of failure discharge a duty resulting to one’s own disadvantaged. The debtor incurred delay if:  The debtor fails to perform his obligation when it falls due; and  A demand has been made by the creditor judicially or extra judicially. Example – Ria obliged herself to deliver a Siberian Husky Puppy to Lleina on June 20, this year. Ria failed to delivered on the agreed date, is Ria already on delay on June 20? Only when Lleina makes a judicial or extra-judicial demand and from such date of demand when Ria still fails to deliver the said puppy, she is on default or delay. Exceptions for the requirement of demand When the obligation expressly so provides – An agreement to the effect that fulfillment or performance is not made when the obligation becomes due, default or delay by the debtor will automatically arise. When the law so provides – The express provision of law that a debtor is in default. For instance, taxes must be paid on the date prescribed by law, and demand is not necessary in order that the taxpayer is liable for penalties. When time is of the essence – Because time is the essential factor in the fulfillment of the obligation. Example, Vicky binds herself to sew the wedding gown of Laila to be used by the University of Cebu College of Law

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latter on her wedding date. Vicky did not deliver the wedding gown on the date agreed upon. Even without demand, Vicky will be in delay because time of the essence. When demand would be useless – When the debtor cannot comply his obligation as when it is beyond his power to perform. Like when the object of the obligation is lost or destroyed through the fault of the debtor, demand is not necessary. In a reciprocal obligation, from the moment one of the parties fulfills his obligation, delay to the other begins – For instance, in a contract of sale between Jack and Jamero, if Jack, the seller, delivers the object to Jamero, the buyer, and Jamero does not pay, then delay by Jamero begins and vice versa, if Jamero pays and Jack did not deliver the object, then Jack is on delay.

Art. 1170. Those who in the performance of their obligations are guilty of fraud, negligence, or delay, and those who in any manner contravene the tenor thereof, are liable for damages. (1101) Fraud (dolo) – is the intentional deception made by one person resulting in the injury of another. The fraud referred to is incidental fraud, that is, fraud incident to the performance of a pre-existing obligation. Refer to Article 1171. Negligence (culpa) – consists in the omission by the obligor of that diligence which is required by the nature of the obligation and corresponds with the circumstances of the person, of the time and of the place. Refer to Article 1173. Delay (Mora) – like when there has been judicial or extra-judicial demand and the debtor does not comply his obligation, delay will occur. Also refer to Article 1169. In contravention of the tenor of the obligation – refers to the violation of the terms and conditions or defects in the performance of the obligation, like when a landlord fails to maintain a legal and peaceful possession of a tenant being leased by the latter because the landlord was not the owner and the real owner wants to occupy the land, there is contravention of the tenor of the obligation.

Art. 1171. Responsibility arising from fraud is demandable in all obligations. Any waiver of an action for future fraud is void. (1102a) Fraud may be either past or future. Meaning of fraud may be classified as a. Fraud in obtaining consent Example: Jack violently forced Jamero to sign a gratuitous contract in favor of Jack which he also accepted. The means employed in order to obtain consent was vitiated, thus the contract is considered void and inexistent. b. Fraud in performing the contract. • Dolo causante (causal fraud) • Dolo incidental (incidental fraud) Example: Lleina and Canoy entered into a contract of sale wherein Lleina will buy a certain scooter of Canoy and in turn deliver the scooter upon payment of Lleina which is five days after the birth of the contract. It is also stipulated in their contract that if ever Canoy cannot deliver for any reason, she will not be responsible for it. Canoy sold and delivered the scooter to Jack, thus never delivered the scooter to Lleina. Canoy is still liable for damages since the stipulation in the contract waiving any act of future fraud is deemed void, so Lleina can still claim damages against Canoy.

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Art. 1172. Responsibility arising from negligence in the performance of every kind of obligation is also demandable, but such liability may be regulated by the courts, according to the circumstances. (1103) Kinds of Culpa classified as to source of obligations • Culpa Contractual – that which results in a breach of a contract. Example: Emi, proprietor of Emi Taxi Company, hired Parekoy as one of her driver of her taxi units. Tonix was able to chance upon Emi’s taxi, Parekoy being the driver. Parekoy drove negligently fast on a barangay road and accidentally hit a lamp post while turning a curb. The accident resulted to some bruises on Tonix. However, Emi is liable for the negligence acted by Parekoy, and is subject for damages for breach of contract of carriage. •

Culpa Aquiliana – also referred to as civil negligence or tort or quasi-delict Example: Referring to the same problem stated above. If Parekoy while driving Tonix to his place, drove negligently fast and accidentally hit a lamp post while turning a curb, and at the same time caused physical injuries to a Sky, a bystander in the curb. Sky can file a case against Emi, the owner of Emi Taxi Company and her driver parekoy.

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Culpa Criminal – also called as criminal negligence, or that which results in the commission of a crime or a delict. Example: Referring to the same problem stated above. Sky can also file an criminal action against Parekoy for reckless imprudence resulting to physical injuries.

Art. 1173. The fault or negligence of the obligor consists in the omission of that diligence which is required by the nature of the obligation and corresponds with the circumstances of the persons, of the time and of the place. When negligence shows bad faith, the provisions of Articles 1171 and 2201, paragraph 2, shall apply. If the law or contract does not state the diligence which is to be observed in the performance, that which is expected of a good father of a family shall be required. (1104a) Degrees of Culpa • Grave Negligence is required – slight negligence will make the debtor liable. •

Ordinary Negligence is required – ordinary negligence will make the debtor liable.

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Slight Negligence is required – grave negligence will make the debtor liable

Art. 1174. Except in cases expressly specified by the law, or when it is otherwise declared by stipulation, or when the nature of the obligation requires the assumption of risk, no person shall be responsible for those events which could not be foreseen, or which, though foreseen, were inevitable. (1105a) Fortuitous even – is an event which cannot be foreseen which though foreseen is inevitable. Fortuitous event proper are acts of God such as volcanic eruption, earthquake, lightning, etc. is now similar with force majuere or acts of man such as conflagration, war, robbery, etc. Requisite necessary to constitute fortuitous event  The failure of the debtor to comply with the obligation must be independent from the human will; University of Cebu College of Law

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 The occurrence makes it impossible for the debtor to fulfill the obligation on a normal manner, and the obligor did not take part as to aggravate the injury of the creditor. (Vasquez v.C.A. G.R. 42926) As a general rule, no person shall be held responsible for fortuitous events Example – Lyka obliged herself to deliver a determinate car to Dockie on Dec. 30, 2012. Before the arrival of the period, the car was struck by lightning and was totally destroyed. Lyka cannot be held responsible for the destruction of the car, hence her obligation to deliver is extinguished. Exceptions (when the person is responsible despite the fortuitous even). a. When the law expressly so provides, such as:  The debtor is guilty of fraud, negligence or in contravention of the tenor of the obligation. Refer to Article 1170.  The debtor has proved to deliver the same thing to two or more persons who do not have the same interest. Refer to Article 1165.  The thing to be delivered is generic.  The debtor is guilty of default or delay. Refer to Article 1169.  The debtor is guilty of concurrent negligence. b. When declared by stipulation; c. When the nature of obligation requires the assumption of risk. An example of this is a contract of insurance.

Art. 1175. Usurious transactions shall be governed by special laws. (n)

Art. 1176. The receipt of the principal by the creditor without reservation with respect to the interest, shall give rise to the presumption that said interest has been paid. The receipt of a later installment of a debt without reservation as to prior installments, shall likewise raise the presumption that such installments have been paid. (1110a) Example: Dong Juan, creditor of P 1M, with 8% interest, received P1,000,000 in payment of the principal. Interest was not referred to in the payment. It is presumed that the 8% interest had already been previously paid. This is because under Article 1253 of this code, payment of the interest as a rule precedes payment of the principal.

Art. 1177. The creditors, after having pursued the property in possession of the debtor to satisfy their claims, may exercise all the rights and bring all the actions of the latter for the same purpose, save those which are inherent in his person; they may also impugn the acts which the debtor may have done to defraud them. (1111) Rights of Creditors – In order to satisfy their claims against the debtor, creditors have the following successive rights: 1. to levy by attachment and execution upon all the property of the debtor, except such as are exempt by law from execution; 2. to exercise all the rights and actions of the debtor, except, such as are inherently personal to him; and 3. to ask for the rescission of the contracts made by the debtor in fraud of their rights.

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Art. 1178. Subject to the laws, all rights acquired in virtue of an obligation are transmissible, if there has been no stipulation to the contrary. (1112) As a rule, all rights acquired in virtue of an obligation are transmissible, except in the following cases: When the law so provides. When the parties stipulate otherwise – by agreement of parties that the rights acquired by them will not be transmitted to any other person. When the obligation is purely personal in nature.

CHAPTER 3 DIFFERENT KINDS OF OBLIGATIONS SECTION 1. - Pure and Conditional Obligations Art. 1179. Every obligation whose performance does not depend upon a future or uncertain event, or upon a past event unknown to the parties, is demandable at once. Every obligation which contains a resolutory condition shall also be demandable, without prejudice to the effects of the happening of the event. (1113) Pure Obligation – when the obligation contains no term or condition whatever upon which depends the fulfillment of the obligation contracted by the debtor. It is immediately demandable and there is nothing to exempt the debtor from compliance therewith. Example – Ivy obliged herself to pay her loan of P1,000 to Sky on demand.

Art. 1180. When the debtor binds himself to pay when his means permit him to do so, the obligation shall be deemed to be one with a period, subject to the provisions of Article 1197. (n) Example: Tonix promised to pay Jack his P50,000.00 loan when his means permit. This is an obligation with an indefinite period. Jack’s remedy to insure and schedule the payment of Tonix is to go to let the court fix a period.

Art. 1181. In conditional obligations, the acquisition of rights, as well as the extinguishment or loss of those already acquired, shall depend upon the happening of the event which constitutes the condition. (1114) Suspensive condition – the happening of the condition gives rise to an obligation. Example: Lyka binds herself to deliver a determinate car to Tonix if he marries Guno. The obligation is only demandable upon the happening of the condition that is, if Tito marries Guno. The obligation is suspended and not yet demandable. Resolutory condition – the happening of the condition extinguishes the obligation already existing. Example: Sky binds himself to lend his only car to Ivy until the latter passes the Bar Exam. The obligation to lend is immediately demandable. Ivy’s right over the car is extinguished upon his passing the Bar exam. Ivy is now obliged to return the car.

Art. 1182. When the fulfillment of the condition depends upon the sole will of the debtor, the conditional obligation shall be void. If it depends upon chance or upon the will of a third person, the obligation shall take effect in conformity with the provisions of this Code. (1115) University of Cebu College of Law

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Potestative – is one the fulfillment of which depends upon the sole will of the debtor. This kind of condition is void. Example: Andrew Promised to give his only parcel of land to Amy if he decides to leave for the United States.

Casual – is one the fulfillment of which depends upon chance. Example: Marianne agrees to give Lila a determinate car if Marianne’s only racing horse will win the sweepstake race. Mixed – is one which depends partly upon the will of third person and partly upon chance. Example: Tonix promise to give Sky a new Toyota Car if Sky will be able to play with and beat Dominic in a game of chess. This is mixed condition, that is Dominic’s willingness to play chess with Sky and the latter’s winning over Dominic.

Art. 1183. Impossible conditions, those contrary to good customs or public policy and those prohibited by law shall annul the obligation which depends upon them. If the obligation is divisible, that part thereof which is not affected by the impossible or unlawful condition shall be valid. The condition not to do an impossible thing shall be considered as not having been agreed upon. (1116a) Impossible condition is divided into 2: a) Physical Impossibility – the condition imposed is not capable of being performed physically. Example: Lleina will give Jack an Ipad if he can bring a dead man alive. b) Illegal Impossibility – when the condition imposed is contrary to law, good custom or public policy. Example: 1. Contrary to law – Pedro agrees to give Paulino P100,000 if Paulino will kill Maria. 2. Contrary to good custom – Andrew binds himself to give Marianne a gold bracelet if she will cohabit with Mr. Abing without benefit of marriage. 3. Contrary to public policy – Marianne agrees to employ Guno in her company if Guno will not join a labor union. Effects of Impossible conditions: If the condition is Positive and Impossible = the condition and obligation is void Example: Andrew obliged to pay Jack P1,000,000 if Jack kills Andrew’s business competitor. If the condition is Negative and Impossible = the condition is void but the obligation remains. Example: Lleina obliged to give Jack a condominium unit if he does not raise a dead man alive. In this case the obligation still subsists.

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Art. 1184. The condition that some event happen at a determinate time shall extinguish the obligation as soon as the time expires or if it has become indubitable that the event will not take place. (1117) This article contemplates on a positive obligation, or an obligation to do. Example: I’ll give you my land if you marry Amy this year. If before the end of the year Amy died, and you have not yet married her, the obligation is extinguished. Art. 1185. The condition that some event will not happen at a determinate time shall render the obligation effective from the moment the time indicated has elapsed, or if it has become evident that the event cannot occur. If no time has been fixed, the condition shall be deemed fulfilled at such time as may have probably been contemplated, bearing in mind the nature of the obligation. (1118) This article contemplates on a negative obligation, or an obligation to not to do. Example: I’ll give you my land if you will not marry Amy this year. If before the end of the year Amy died, and you have not yet married her, the obligation is effective.

Art. 1186. The condition shall be deemed fulfilled when the obligor voluntarily prevents its fulfillment. (1119) Requisites: Voluntary – intent to prevent the fulfillment of the condition must be present. Actually Prevents – the intention has been fully acted Example: Lleina promised Jack that she will give him an 8-string guitar if he passes the bar exam. On the day of the bar exam, Lleina poisoned Jack. Jack missed some of the exams as a result and flunked the bar exam. Lleina is still bound to give Jack an 8-string guitar.

Art. 1187. The effects of a conditional obligation to give, once the condition has been fulfilled, shall retroact to the day of the constitution of the obligation. Nevertheless, when the obligation imposes reciprocal prestations upon the parties, the fruits and interests during the pendency of the condition shall be deemed to have been mutually compensated. If the obligation is unilateral, the debtor shall appropriate the fruits and interests received, unless from the nature and circumstances of the obligation it should be inferred that the intention of the person constituting the same was different. In obligations to do and not to do, the courts shall determine, in each case, the retroactive effect of the condition that has been complied with. (1120) Once the condition is fulfilled, the effects of the conditional obligations shall retroact to the day of the constitution of the obligation and not on the date when the condition was fulfilled. Example: On Jan. 1, 2015 Jack agreed to give Lleina a parcel of land if she passes the May, 2015 bar exams. If Lleina passes the bar exams in May, 2015, she is entitled to the land effective Jan. 1, 2015 because Lleina’s right over the land retroacts to the date when the obligation was constituted. As to the fruits and interest – The effect of conditional obligation to give, as a rule, do not retroact to the date of the constitution of the obligation. The following rules shall govern: In reciprocal obligation (like a contract of sale) – the fruits and interest during the pendency of the condition shall be deemed to have been mutually compensated. Example: Abing agrees to sell and Baring agrees to buy Abing’s parcel of land if Baring passes the May, 2013 Bar exams. If Baring passes the May, 2013 bar, the obligation becomes demandable. Baring is entitled to all the interests that his money (with which to pay Abing) may earn while Abing is entitled to the fruits which the parcel of land may have produced during the pendency of the condition. University of Cebu College of Law

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In unilateral obligation – the debtor shall appropriate the fruits and interests received during the pendency of the condition unless a contrary intention appears. Example: Xam agreed to give Yuri a parcel of land if Yuri passes the CPA Board in May, 2012 exams. Pending the happening of the condition, Xam is entitled to the fruits which the land may produce, Xam will deliver only the parcel of land if the condition is fulfilled, unless a contrary intention appears. Art. 1188. The creditor may, before the fulfillment of the condition, bring the appropriate actions for the preservation of his right. The debtor may recover what during the same time he has paid by mistake in case of a suspensive condition. (1121a) Preservation of Creditor’s Right – The action for the preservation of the creditor’s right may have for their objectives: 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 person; Paragraph I of the above article authorizes the creditor to take any appropriate actions for the preservation of creditor’s right during the pendency of the condition: Example: On Jan. 1, 2012, Paul obliged himself to sell a parcel of land to Densyo if he passes the CE Board exams in December, 2012. From the time the obligation was constituted and pending the happening of the condition (passing the CE Board Exams) Densyo may cause the annotation of the condition in the certificate of title in the Register of Deeds where the land is located, to preserve his right over the parcel of land. Paragraph II in order that debtor may recover what he has paid by mistake, during the pendency of the condition, the following requisites may be present: 1. The debtor paid the creditor before the fulfillment of the condition; 2. Payment made by debtor was through mistake and error; The action to recover what was paid by mistake should be made before the fulfillment of the condition. Example: Patrick obliged himself to pay Sky P20,000 if a PAL plane crashes at Cebu before Dec. 30, 2012. After the obligation was constituted and before December 30, 2012, a plane crushed in Cebu. Patrick honestly and believing that the condition was fulfilled paid the P20,000 to Santos. It turned out however that it was a Cebu airline that crushed. Thus, Pedro may recover the amount paid to Santos by mistake for the reason that the condition has not yet been fulfilled.

Art. 1189. When the conditions have been imposed with the intention of suspending the efficacy of an obligation to give, the following rules shall be observed in case of the improvement, loss or deterioration of the thing during the pendency of the condition: (1) If the thing is lost without the fault of the debtor, the obligation shall be extinguished; (2) If the thing is lost through the fault of the debtor, he shall be obliged to pay damages; it is understood that the thing is lost when it perishes, or goes out of commerce, or disappears in such a way that its existence is unknown or it cannot be recovered; (3) When the thing deteriorates without the fault of the debtor, the impairment is to be borne by the creditor; (4) If it deteriorates through the fault of the debtor, the creditor may choose between the rescission of the obligation and its fulfillment, with indemnity for damages in either case; (5) If the thing is improved by its nature, or by time, the improvement shall inure to the benefit of the creditor;

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(6) If it is improved at the expense of the debtor, he shall have no other right than that granted to the usufructuary. (1122) These rules apply only to obligation to give a determinate or specific thing subject to a suspensive condition in case of loss, deterioration or improvement of the thing. 1. In case of loss of the thing without the fault of the debtor, the obligation shall be extinguished. If the thing is lost through the fault of the debtor, he shall be obliged to pay damages. If in the example above, the specific car was lost through the fault of Reyes, he shall be liable for damages upon the fulfillment of the condition. Example: Jack obliged himself to give Lleina a determinate car if he passes the CE Board Exams in Oct. the current year. If during the pendency of the condition the car was lost through fortuitous event without the fault of Jack, the obligation to deliver the car is extinguished even if the condition is fulfilled later. It is understood that the thing is lost: When it perishes (as when a house is burnt to ashes) When it goes out of commerce (as when the object before is unprohibited becomes prohibited) When disappears in such a way that its existence is unknown (as when a particular car has been missing for some time) When it disappears in such a way that it cannot be recovered (as when a particular diamond ring is dropped in the middle of the Atlantic Ocean). 2. When the thing deteriorates a) When the thing deteriorates during the pendency of the condition, without the fault of the debtor, the impairment is to be borne by the creditor. Example: Jack obliged himself to give Tonix a determinate Toyota car if Tonix passes the October CPA Exams. During the pendency of the condition, the car was partially damaged by flood, without the fault on the part of Jack. If the condition is fulfilled, Ian will bear the impairment. b) If the thing deteriorates, during the pendency of the condition, through the fault of the debtor, the creditor may choose, after the fulfillment of the condition, between the rescission of the obligation or its fulfillment, with indemnity for damages in either case. 3. When the thing improved – a) If the thing improved during the pendency of the condition, by its nature, or by time, the improvement shall inure to the benefit of the creditor. The reason for this is to compensate the creditor who would suffer in case, instead of improvement, there would be deterioration without the fault of the debtor. b) If the thing is improved at the expense of the debtor, he have no other right than that granted to the usufructuary. By us usufruct is meant the right to enjoy the property of another which includes the right to enjoy and use the fruits of the property. In summary: Creditor's Rights Lost Deteriorate Improve University of Cebu College of Law

Debtor's Fault Pay Damages Recission or Fulfillment, both with damages Usufructuary

Not thru Debtor's Fault Extinguished

Nature -

Impairment to the Creditor

-

-

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Art. 1190. When the conditions have for their purpose the extinguishment of an obligation to give, the parties, upon the fulfillment of said conditions, shall return to each other what they have received. In case of the loss, deterioration or improvement of the thing, the provisions which, with respect to the debtor, are laid down in the preceding article shall be applied to the party who is bound to return. As for the obligations to do and not to do, the provisions of the second paragraph of Article 1187 shall be observed as regards the effect of the extinguishment of the obligation. (1123) Effects when resolutory condition is fulfilled: 1.

The obligation is extinguished. (Art. 1181, NCC)

2. Because the obligation is extinguished and considered to have had no effect, the parties should restore to each other what they have received. 3.

The fruits and interests thereon should also be returned after deducting of course the expenses made for the production, gathering and preservation, if any.

4. The rules given in Art. 1189, N CC will apply to whoever has the duty to return in case of loss, deterioration or improvement of the thing. 5. The courts are given power to determine the retroactivity of the fulfillment of a resolutory conditions. Example : Abing gave Ivy a parcel of land on condition that Ivy will pass the Bar Exams on May, this year. Ivy did not pass the Bar Exams. The obligation is extinguished and therefore, it is as if there was never an obligation at all. Ivy will therefore have to return both the land and the fruits he had received there from the moment Abing has given him the land.

Art. 1191. The power to rescind obligations is implied in reciprocal ones, in case one of the obligors should not comply with what is incumbent upon him. The injured party may choose between the fulfillment and the rescission of the obligation, with the payment of damages in either case. He may also seek rescission, even after he has chosen fulfillment, if the latter should become impossible. The court shall decree the rescission claimed, unless there be just cause authorizing the fixing of a period. This is understood to be without prejudice to the rights of third persons who have acquired the thing, in accordance with Articles 1385 and 1388 and the Mortgage Law. (1124) The right to rescind means the right to cancel or to resolve in case of reciprocal obligation in case of non-fulfillment on the part of one. Example: In a contract of sale, the buyer can rescind if the seller does not deliver or the seller can rescind if the buyer does not pay. The power to rescind is given to the injured party and the injured party has the following alternative remedies: 1. Demand fulfillment of the obligation plus damages; or 2. Demand rescission of the obligation plus damages.

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Art. 1192. In case both parties have committed a breach of the obligation, the liability of the first infractor shall be equitably tempered by the courts. If it cannot be determined which of the parties first violated the contract, the same shall be deemed extinguished, and each shall bear his own damages. (n) Rules if Both Parties Have Committed a Breach: The above rules are deemed just. The first one is fair to both parties because the second infract or, though they would derive some advantage by his own act or neglect. The second rule is likewise just, because it is presumed that both parties at about the same time tried to reap some benefits. (Report of the Code Commission) Example: Jack agreed with Richard that he will sell his brand new 8-string guitar to Richard. Jack delivered to Richard the 8-string guitar, not mentioning to Richard that it is defective. Richard also paid Jack with half of the amount with fake money. In this case, the remedy is to let the courts temper each liability to the other.

SECTION 2. - Obligations with a Period Art. 1193. Obligations for whose fulfillment a day certain has been fixed, shall be demandable only when that day comes. Obligations with a resolutory period take effect at once, but terminate upon arrival of the day certain. A day certain is understood to be that which must necessarily come, although it may not be known when. If the uncertainty consists in whether the day will come or not, the obligation is conditional, and it shall be regulated by the rules of the preceding Section. (1125a) A period is a future and certain length of time which determines the effectivity or the extinguishment of obligation. Obligation with a period is one whose consequences are subject in one way or another to the expiration of said period or term. A day certain is understood to be that which must necessarily come, although it may not be known when. Period and Condition Distinguished: As to fulfillment - A period is a certain event which must happen sooner or later while a condition is an uncertain event. As to time – a period refers only to the future while a condition may refer to a past unknown event. As to influence or effect on the obligation – the period fixes the time of the effectivity of the obligation while a condition may cause the demandability of the obligation to arise or to terminate. Example: Lleina promised to Jack that she will buy and give him an Ibanez 8-string guitar on June 1, 2012. When June 1, 2012 come, Lleina’s obligation to give will be demandable.

Art. 1194. In case of loss, deterioration or improvement of the thing before the arrival of the day certain, the rules in Article 1189 shall be observed. (n) Effect of loss, deterioration, or improvement before the arrival of period. Also refer to Article 1189, NCC. Example: If Andrew was suppose to deliver to Brian a particular car on Dec. 19, 2011 but the car was destroyed by fortuitous event in July 1, 2011, the obligation is extinguished. University of Cebu College of Law

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Art. 1195. Anything paid or delivered before the arrival of the period, the obligor being unaware of the period or believing that the obligation has become due and demandable, may be recovered, with the fruits and interests. (1126a) Effect Of Payment Before Arrival of Period This article which is similar to Article 1188, NCC, in an obligation to give, allows the recovery of what has been paid by mistake before the fulfillment of a suspensive condition. Example: Erin owes Grant P20,000.00, which was supposed to be paid on December 25 this year. By mistake, Erin paid his obligation on December 25 last year. Assuming that today is only June 30, Erin can recover the amount plus interest therein. But Erin cannot recover, except the interest, if the debt had already matured or if Erin had knowledge of the period.

Art. 1196. Whenever in an obligation a period is designated, it is presumed to have been established for the benefit of both the creditor and the debtor, unless from the tenor of the same or other circumstances it should appear that the period has been established in favor of one or of the other. (1127) Presumption as to benefit of a Period: The general rule is that when a period is fixed by the parties, the period is presumed to be for the benefit of both creditor and debtor. Which means that before the expiration of the period, the debtor may not fulfill the obligation and neither the creditor demands its fulfillment? By way of exceptions, however, if the tenor of the obligation or other circumstances may indicate that a period is have been established for the benefit of either the creditor or debtor: 1. For the benefit of both creditor and debtor Example: Jack obtained a loan of P10, 000 at 12% interest per annum from Leo for one year. Jack has a period of one year within which to use the money, while Leo will benefit from the interest which the money will earn. 2. For the benefit of the creditor Example: Jack executes a promissory note in favor of Leo which reads: “I promise to pay Leo for order the amount of P10,000 on demand. Thus, Leo can demand payment from Jack anytime. 3. For the benefit of debtor Example: Jack executes a promissory note which reads: “I promise to pay Leo for order the amount of P 10,000 or before December 31, 2001. Jack can pay her obligation on or before Dec. 31, 2001.

Art. 1197. If the obligation does not fix a period, but from its nature and the circumstances it can be inferred that a period was intended, the courts may fix the duration thereof. The courts shall also fix the duration of the period when it depends upon the will of the debtor. In every case, the courts shall determine such period as may under the circumstances have been probably contemplated by the parties. Once fixed by the courts, the period cannot be changed by them. (1128a) Court Generally is Without Power to Fix a Period

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If an obligation does not state a judicial period and no period is intended, the court is not authorized to fix a period. The courts have no right to make contracts for the parties. Exceptions: 1. If the obligation does not fix a period but it can be inferred from its nature and circumstances that a period is intended. Example: Steff sold a parcel of land to Abing with a right of repurchase. No term is specified in the contract for the exercise of the right. Then, the court is authorized to fix the period to repurchase. 2. If the duration of the period depends upon the sole will of the debtor Example: I will pay you as soon as possible. Here, the period is not fixed, so the court may fix the same because if this is not so the obligation may never be complied with by the debtor.

Art. 1198. The debtor shall lose every right to make use of the period: (1) When after the obligation has been contracted, he becomes insolvent, unless he gives a guaranty or security for the debt; (2) When he does not furnish to the creditor the guaranties or securities which he has promised; (3) When by his own acts he has impaired said guaranties or securities after their establishment, and when through a fortuitous event they disappear, unless he immediately gives new ones equally satisfactory; (4) When the debtor violates any undertaking, in consideration of which the creditor agreed to the period; (5) When the debtor attempts to abscond. (1129a) The general rule is that the obligation is not demandable before the lapse of the period. The exceptions are based on the fact that the debtor might not be able to comply with his obligation: When debtor becomes insolvent: The insolvency need not be judicially declared. It is sufficient that the debtor has less assets than his liabilities or if debtor is unable to pay his debts as they mature. It is noted that the insolvency of the debtor must occur after the obligation has been contracted. When debtor does not furnish guaranties or securities promised: Example: Green borrowed loan from Tonix which loan was secured by a chattel mortgage of Green’s car as a guaranty. After obtaining the loan, Green fails or does not execute a chattel mortgage, the loan becomes demandable or the debtor loses her right to make use of the period. When by his own acts he has impaired said guaranties or securities: Example: Green borrowed P50, 000 from Tito which loan was secured by a chattel mortgage on Green‘s car. Later, Green’s fault, the car was damaged or she causes the impairment of the car, Green loses her right to make use of the period, unless she gives another one equally satisfactory. When by fortuitous event, the guaranty or security was lost. Example: Green borrowed P50,000 from Tonix which loan was secured by a chattel mortgage on Green’s car. After obtaining the loan, the car was lost by fortuitous event. Green loss his right to make use of the period unless he gives another guaranty or security equally satisfactory. University of Cebu College of Law

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When debtor violates an undertaking – Example: Arthur secured a loan from Arnel on condition that Art will paint the house of Arnel. If after the proceeds of the loan were given to Arthur, he did not pant the house of Arnel, Arthur loses his right to make use of the period. When the debtor attempts to abscond. Abscond means a depart or escape from creditor’s knowledge to avoid payment of his debt. Mere attempt on the part of debtor will entitle the creditor to demand payment of the obligation without waiting for the period to expire.

SECTION 3. - Alternative Obligations Art. 1199. A person alternatively bound by different prestations shall completely perform one of them. The creditor cannot be compelled to receive part of one and part of the other undertaking. (1131) Meaning of Alternative Obligation: It means an obligation where two or more prestations are due but the delivery of one is sufficient to extinguish the obligation. Example: Lleina binds herself to give Jack either a determinate refrigerator or a TV set. If Lleina chooses and delivers the TV set, the obligation is extinguished. Thus, Lleina cannot compel Jack to accept part of one and the part of the other prestations.

Art. 1200. The right of choice belongs to the debtor, unless it has been expressly granted to the creditor. The debtor shall have no right to choose those prestations which are impossible, unlawful or which could not have been the object of the obligation. (1132) Rule on who makes the choice: As a general rule, the right of choice or to select the prestation belongs to the debtor, unless the right to choose is expressly granted to the creditor. But the right of the debtor is subject to the following: The debtor cannot choose those prestations which are: a) Impossible – Example: Lleina promised to deliver to Jack 100 sacks of rice or a stone from Uranus. Lleina cannot chose to deliver the stone coming from Uranus as it is physically impossible. b) Unlawful – Example: Jack obliged herself to deliver to Lleina a kilo of shabu or a parcel of land. Jack can choose only the delivery of parcel of land. c) Could not have been the object of the obligation – Example: Lleina borrowed from Jack P50,000. It was agreed that Lleina would give Jack her horse or her German Piano. Now, Lleina has two horses, a race horse worth P50,000 and an ordinary horse which is worth for only P5,000. Gaya cannot choose the ordinary horse, since it is not the horse which Lleina promised. d) Only one prestation is practicable (Art. 1202) – Example: Lleina will deliver to Jack her carabao, or her horse or her refrigerator. Through no fault of Lleina, the horse and the carabao were lost by fortuitous event. Lleina can only delivery the refrigerator which is the only one practicable.

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Art. 1201. The choice shall produce no effect except from the time it has been communicated. (1133) Right of Choice Must be communicated – Until the choice is made and communicated, the communicated, the obligation remains alternative. Once the notice to the effect that a choice is made, the obligation ceases to be alternative and becomes a simple obligation. Where the choice has been expressly given to the creditor, such choice shall likewise produce legal effects upon being communicated to the debtor. (Art. 1205, par. 1) Example: Lleina promised to give to Jack her Netbook, or her Ipad or her mountain bike 5 days from now. She’s told some of Jack’s friend that she will give the netbook. When the obligation was due, Lleina expressly communicated to Jack to give the mountain bike. The choice of giving the mountain bike is binding to Lleina.

Art. 1202. The debtor shall lose the right of choice when among the prestations whereby he is alternatively bound, only one is practicable. (1134) Example: Xander obliged to give Yuri either object A or object B or object C. If objects A and B are lost by fortuitous event before choice can be made, Xander can deliver only object C, because the obligation has become a simple one. If later, object C is also destroyed by a fortuitous event, the obligation is extinguished, and Xander would not be liable in any way.

Art. 1203. If through the creditor's acts the debtor cannot make a choice according to the terms of the obligation, the latter may rescind the contract with damages. (n) When debtor may rescind contract: If through the creditor’s fault, the debtor cannot made a choice according to the terms of the obligation the debtor is given the right to rescind and recover damages. Example: Guno borrowed from Tonix P5, 000.00. It was agreed that instead of P5, 000, Guno could deliver a TV set or a refrigerator or a piano. If through the fault of Tonix, the TV set was destroyed, Guno can rescind the contract if she wants. In case of rescission, the amount of P 5, 000.00 must be returned by Guno with interest. Tonix, in turn, must pay Guno the value of the TV set plus damages.

Art. 1204. The creditor shall have a right to indemnity for damages when, through the fault of the debtor, all the things which are alternatively the object of the obligation have been lost, or the compliance of the obligation has become impossible. The indemnity shall be fixed taking as a basis the value of the last thing which disappeared, or that of the service which last became impossible. Damages other than the value of the last thing or service may also be awarded. (1135a) When right of choice is with debtor and all prestations were lost – This article entitles the creditor to indemnity for damages when all the alternative objects are lost through the fault of the debtor before he has made his choice. The indemnity for which the creditor is entitled shall be based on the value of the last thing which disappeared or lost or the compliance of the obligation has become impossible. Example: Xander obliged to give Yuri either object A or object B or object C. If all objects were lost through the acts of the debtor event before choice can be made, Xander is liable to pay Yuri an amount equal to the last thing lost to be paid with damages. University of Cebu College of Law

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Art. 1205. When the choice has been expressly given to the creditor, the obligation shall cease to be alternative from the day when the selection has been communicated to the debtor. Until then the responsibility of the debtor shall be governed by the following rules: (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. The same rules shall be applied to obligations to do or not to do in case one, some or all of the prestations should become impossible. (1136a) When Right of Choice is With Creditor and All Prestations Were Lost This article provides for the rules to be observed when the right of choice is expressly granted to the creditor, the rules are as follows: 1. When a thing is lost through a fortuitous event Example: Ivy obliged herself to deliver to Skai a TV set, or a refrigerator, or a piano. If the TV set was lost through fortuitous event, Skai can choose from among the remainder or that which remains if only one subsists. 2. When a thing is lost through debtor’s fault Example: If the loss of the TV set occurs through the fault of Ivy, Skai may claim the refrigerator or the piano with a right of damages or the price of the TV set with a right of damages. 3. When all the things were lost through debtor’s fault Example: If all the items are lost through the fault of Ivy, then Skai can demand the payment of the price of any one of them with a right to indemnity for damages. 4. When all the thing are lost through a fortuitous event Example: The obligation of Ivy shall be extinguished if all the items which are alternatively the object of the obligation are lost through a fortuitous event (Art. 1174 will apply).

Art. 1206. When only one prestation has been agreed upon, but the obligor may render another in substitution, the obligation is called facultative. The loss or deterioration of the thing intended as a substitute, through the negligence of the obligor, does not render him liable. But once the substitution has been made, the obligor is liable for the loss of the substitute on account of his delay, negligence or fraud. (n) Meaning of Facultative Obligation – A facultative obligation is one where only one prestation has been agreed upon but the obligor may render another in substitution.

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Example: I will give you my piano but I may give my television set as a substitute. SECTION 4. - Joint and Solidary Obligations Art. 1207. The concurrence of two or more creditors or of two or more debtors in one and the same obligation does not imply that each one of the former has a right to demand, or that each one of the latter is bound to render, entire compliance with the prestation. There is a solidary liability only when the obligation expressly so states, or when the law or the nature of the obligation requires solidarity. (1137a) Art. 1208. If from the law, or the nature or the wording of the obligations to which the preceding article refers the contrary does not appear, the credit or debt shall be presumed to be divided into as many shares as there are creditors or debtors, the credits or debts being considered distinct from one another, subject to the Rules of Court governing the multiplicity of suits. (1138a) Joint Obligation – It is an obligation where there is a concurrence of two or more debtors or two or more creditors or of several debtors and creditors, by virtue of which each of the debtors is liable for a proportionate part of the credit. Example of different instances 1.) Patrick, Leo, and Roniel borrowed P9,000 for Lyka. The presumption is that Patrick, Leo, and Roniel are jointly liable. Lyka demand only P3,000 from each or a total of P9,000. 2.) Abing borrowed from Leo, Roniel and Lyka P9,000. There is one debtor and three creditors. Each creditor can demand only P3,000 from A. 3.) Abing and Leo are liable to Roniel and Lyka for P9,000. There are two debtors and two creditors. Each creditor can demand only P4,500 from each debtor. There are solidary liability when: 1.) The obligation expressly so states, or 2.) The law requires solidarity or 3.) The nature of the obligation requires solidarity. Kinds of Solidary Obligation 1. Passive – solidarity on the part of the debtors, where anyone of them can be made liable for the fulfillment of the entire obligation. Example – Tonix and Skai are solidary debtors of Jack in the amount of P 10,000 2. Active – solidarity on the part of the creditors, where anyone of them can demand the fulfillment of the entire obligation. Example – Tonix is liable to Skai and Jack for the amount of P10,000. Skai and Jack are solidary creditors. 3. Mixed Solidarity – solidarity on the part of the debtors and creditors where each one of the debtors is liable to render and each one of the creditors has a right to demand, entire compliance with the obligation. Example – Tonix and Skai are solidarity debtors to Jack and Dann, solidary creditors in the amount of P 10,000. Solidarity not presumed – The presumption, where there are two or more persons in the same obligation, is that it is joint. The reason is that solidary obligations are very burdensome for they create unusual rights and liabilities. Solidarity between debtors increases their responsibility while solidarity between creditors presuming that they are bound jointly and not solidarily. University of Cebu College of Law

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Art. 1209. If the division is impossible, the right of the creditors may be prejudiced only by their collective acts, and the debt can be enforced only by proceeding against all the debtors. If one of the latter should be insolvent, the others shall not be liable for his share. (1139) Indivisible Joint Obligation – The object is indivisible and the T/E between the parties are merely proportionately liable. Example – Lleina and Ria are jointly liable to give Emi a particular car. The obligation is joint but since the object is indivisible, the creditor must proceed against all the joint debtor. If any of the joint debtors be insolvent, the others shall not be liable for others.

Art. 1210. The indivisibility of an obligation does not necessarily give rise to solidarity. Nor does solidarity of itself imply indivisibility. (n) Indivisibility as Distinguished from Solidarity – Indivisibility refers to the subject matter while solidarity refers to the Tie between the parties. Examples: Joint divisible obligation – Abing and Roniel are jointly liable to Canoy for P10, 000. Joint indivisible obligation – Lleina and Ria are jointly liable to give Canoy their car. Solidary divisible obligation – Emi and Lleina are solidarily liable to give Ria P10, 000. Solidary indivisible obligation – Saj and Emi are solidarily liable to give Dean their car.

Art. 1211. Solidarity may exist although the creditors and the debtors may not be bound in the same manner and by the same periods and conditions. (1140) The solidary character of the obligation is not destroyed even if the creditors and debtors are bound by different terms and conditions. The solidarity is still preserved by recognizing in the creditor the power of claiming from any or all debtors the payment of the entire obligation. Example: Jack and Lleina solidarily bound themselves to pay a total of P10,000 to Ria, and Emi and Saj to the following conditions. Ria’s share will be due at the end of the year; Emi will get her share only after she passes the CPA exams and Saj will get his share only after he painted the house of Ria.

Art. 1212. Each one of the solidary creditors may do whatever may be useful to the others, but not anything which may be prejudicial to the latter. (1141a) Art. 1213. A solidary creditor cannot assign his rights without the consent of the others. (n) Solidary Creditors May Do Useful Act; Not Prejudicial Acts – A solidary creditor may do any act beneficial or useful to the others but he cannot act prejudicial to them. Example of Beneficial Acts – To interrupt the running of prescription, the act of one solidary creditor in making a judicial demand upon any of the solidary debtors is sufficient. (Art. 1155, NCC) Example of Prejudicial Acts – Should not be performed, otherwise, there will be liability for damages. However, in the case of remission or condonation, the solidary creditor is allowed to so remit, and the obligation is extinguished.

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Art. 1214. The debtor may pay any one of the solidary creditors; but if any demand, judicial or extrajudicial, has been made by one of them, payment should be made to him. (1142a) Payment to Any of the Solidary Creditors: The rule is that the debtor may pay any one of the creditors. But when a demand is made by any of the creditors, payment should be made to him who made the demand, judicially or extra-judicially. Example: A is liable to B and C P5, 000. A may pay either B or C But if B made a demand then payment should only be made to him. If A paid C, B is still entitled to his share from A in case C does not turn over to B his share.

Art. 1215. Novation, compensation, confusion or remission of the debt, made by any of the solidary creditors or with any of the solidary debtors, shall extinguish the obligation, without prejudice to the provisions of Article 1219. The creditor who may have executed any of these acts, as well as he who collects the debt, shall be liable to the others for the share in the obligation corresponding to them. (1143) Liability of Solidary Creditor in case of Novation, Compensation, Confusion or Remission – When a creditor who executed any of these acts, it is logical that he is liable to the other solidary creditors for their corresponding shares considering that such acts are prejudicial to them. (Art. 1212, NCC)

Art. 1216. The creditor may proceed against any one of the solidary debtors or some or all of them simultaneously. The demand made against one of them shall not be an obstacle to those which may subsequently be directed against the others, so long as the debt has not been fully collected. (1144a) Creditor May Proceed Against Any Solidary Debtor – In a solidary obligation, the creditor may proceed against any, some or all of the solitary creditors simultaneously so long as it has not been fully collected. Example: Apatrick, Batonix and Cajack solidarily owe Daleo the amount of P9,000. Daleo can collect from Apatrick or Batonix or Cajack alone or from any two of them or all of them simultaneously. If demand is made on Apatrick, the latter cannot require Daleo to make a demand also on Batonix and Cajack or to include them as party defendants as Daleo has the right to proceed against any one of them.

Art. 1217. Payment made by one of the solidary debtors extinguishes the obligation. If two or more solidary debtors offer to pay, the creditor may choose which offer to accept. He who made the payment may claim from his co-debtors only the share which corresponds to each, with the interest for the payment already made. If the payment is made before the debt is due, no interest for the intervening period may be demanded. When one of the solidary debtors cannot, because of his insolvency, reimburse his share to the debtor paying the obligation, such share shall be borne by all his co-debtors, in proportion to the debt of each. (1145a) Effects of Payment by a Solidary Debtor – Payment is one of the ways by which an obligation is extinguished and consist in the delivery of the thing or the rendition of the service which is the object of the obligation. Example – Alleina, Baria and Calila are solidarily liable to Dann and Etonix in the amount of P9,000 due on Dec. 31. If both Alleina and Baria offer to pay Dann on Dec. 31, the latter may choose which offer to accept. If Alleina pays the entire amount of P9,000 on Dec. 31, the obligation is extinguished. University of Cebu College of Law

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The payment of A gives him the right of reimbursement from B and C P3, 000 each with interest from the date of payment. However, if C is insolvent, both A and B shall bear the insolvency in proportion to their shares.

Art. 1218. 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. (n) Effect of Payment After Obligation Has Prescribed or Become Illegal – Prescription – is one where one acquires ownership and other rights through the lapse of time in the manner and under the conditions laid down by law. Example – Ajack and Batonix are solidarily indebted to Calliena in the amount of P 10,000. The debt prescribed. If Ajack paid the debt, he cannot collect form Batonix his share of the debt. Neither can Ajack can recover from Calleina. Becomes Illegal – Ajack and Batonix are solidarily bound to deliver medical drugs to Calliena. the transaction of such medical drugs were later prohibited by law. Notwithstanding the prohibition, Batonix performed the obligation by delivering the prohibited drugs. Batonix is not anymore entitled to reimbursement from Ajack.

Art. 1219. The remission made by the creditor of the share which affects one of the solidary debtors does not release the latter from his responsibility towards the codebtors, in case the debt had been totally paid by anyone of them before the remission was effected. (1146a) Example: Jack and Lleina solidarily owe Ria P1,000,000. Jack paid Ria the whole amount. Later Ria remitted Lleina’s share. Can Jack still recover reimbursement of P500,000 from Lleina? Yes. Art. 1220. The remission of the whole obligation, obtained by one of the solidary debtors, does not entitle him to reimbursement from his co-debtors. (n) Remission by Creditor – 1.) If payment if made first, the remission is of no effect. There is no more to remit. 2.) If remission is made prior to the payment and payment is made, then there is payment by mistake. 3.) If one of the solidary debtors obtained remission on the whole obligation, he is not entitled to reimbursement from his co-debtors because remission is essentially gratuitous.

Art. 1221. If the thing has been lost or if the prestation has become impossible without the fault of the solidary debtors, the obligation shall be extinguished. If there was fault on the part of any one of them, all shall be responsible to the creditor, for the price and the payment of damages and interest, without prejudice to their action against the guilty or negligent debtor. If through a fortuitous event, the thing is lost or the performance has become impossible after one of the solidary debtors has incurred in delay through the judicial or extrajudicial demand upon him by the creditor, the provisions of the preceding paragraph shall apply. (1147a) Rules in Case thing has Been Lost or Prestation Has Become Impossible – If the thing is lost or has become impossible to perform through a fortuitous event without the fault of the debtor, the obligation is extinguished. University of Cebu College of Law

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Example: A, B and C are solidarily bound to deliver a determinate car to D. Without any fault on the part of any one of the debtors, the car was lost through the fortuitous event. The obligation is extinguished. If in the preceding paragraph, the car was lost through the fault of anyone of the solidary debtors, anyone of them may be held liable by D for the price of the car plus damages. The debtors who did not any fault on the lost of the car have the right to recover from the co-debtor who is at fault. The solidary debtors are likewise liable even if the thing is lost through fortuitous event if the loss occurs after anyone of the solidary debtors has been in delay. The debtors, however who were not in delay have the right to recover from their co-debtors who was responsible due to his delay.

Art. 1222. A solidary debtor may, in actions filed by the creditor, avail himself of all defenses which are derived from the nature of the obligation and of those which are personal to him, or pertain to his own share. With respect to those which personally belong to the others, he may avail himself thereof only as regards that part of the debt for which the latter are responsible. (1148a) Defenses available to a Solidary Debtor – The defenses available to the solidary debtors if the creditor proceeds against him alone for the payment of the entire obligation 1. The defenses derived from the nature of the obligation, such as fraud prescription, remission illegality or absence of consideration, payment or performance. Example: Jack and Lleina are solidarily liable to Canoy in the among to P6,000. The entire debt was paid by Jamero. In an action by Canoy against Jack, the latter can raise the defense of payment by virtue of which the obligation was extinguished. 2. Defenses personal to him or pertaining to his own share, such as minority, insanity and vitiated consent. 3. Defenses which are personal to others, such as minority, insanity and vitiated consent.

SECTION 5. - Divisible and Indivisible Obligations Art. 1223. The divisibility or indivisibility of the things that are the object of obligations in which there is only one debtor and only one creditor does not alter or modify the provisions of Chapter 2 of this Title. (1149) 1. A divisible obligation is one the object of which in its delivery or performance is capable of partial fulfillment. Example: Antonio agreed to pay Sky P10,000 in five monthly installments. The obligation of Antonio is divisible because it is payable in partial payments. 2. An indivisible obligation is one the object which in its delivery or performance is not capable of partial fulfillment. Example: Antonio agreed to deliver a determinate car to Sky on Dec. 31. This is an indivisible obligation because it is not subject to partial performance.

Art. 1224. A joint indivisible obligation gives rise to indemnity for damages from the time anyone of the debtors does not comply with his undertaking. The debtors who may have been ready to fulfill their promises shall not contribute to the indemnity beyond the

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corresponding portion of the price of the thing or of the value of the service in which the obligation consists. (1150) Art. 1225. For the purposes of the preceding articles, obligations to give definite things and those which are not susceptible of partial performance shall be deemed to be indivisible. When the obligation has for its object the execution of a certain number of days of work, the accomplishment of work by metrical units, or analogous things which by their nature are susceptible of partial performance, it shall be divisible. However, even though the object or service may be physically divisible, an obligation is indivisible if so provided by law or intended by the parties. In obligations not to do, divisibility or indivisibility shall be determined by the character of the prestation in each particular case. (1151a) Obligations Deemed Indivisible – The general rule of determining the divisibility or indivisibility of an obligation depend on the purpose of the obligation. 1. Obligation to give definite things Example: To give a particular house. Here the obligation is indivisible because of the nature of the subject matter. 2. Obligations which are not susceptible of partial performance Example: Saj is obliged to sing a song. Here the obligation is indivisible by reason its purpose which requires the performance of all the parts. 3. Obligation provided by law to be indivisible even if thing or service physically divisible. Example: Taxes should be paid within a definite period. Although money is physically divisible, the amount of tax payable must be delivered in Toto, not partially. 4. Obligations intended by the parties to be indivisible even if thing or service is physically divisible. Example: The obligation of Lleina to give P10,000 to Jack on a certain date. Money is physically divisible by the clear intention here for Lleina to deliver the amount at on time and as a whole. Obligations Deemed divisible 1. Obligations which have for their object the execution of a certain number of days of work. Example – Jack obliged himself to paint the house of Lleina to be finished in 10 days. The obligation is divisible because it will not be finished in one time. 2. Obligations which have for their object the accomplishment of work by metrical units. Example – Jack obliged himself to deliver 25 cubic meter of sand. 3. Obligations which by their nature are susceptible of partial performance Example – The obligation of Jack to pay a debt of P10,000 to Lleina in ten (10) monthly installments.

SECTION 6. - Obligations with a Penal Clause Art. 1226. In obligations with a penal clause, the penalty shall substitute the indemnity for damages and the payment of interests in case of noncompliance, if there is no stipulation to the contrary. Nevertheless, damages shall be paid if the obligor refuses to pay the penalty or is guilty of fraud in the fulfillment of the obligation.

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The penalty may be enforced only when it is demandable in accordance with the provisions of this Code. (1152a)

Meaning of Penal Clause – An obligation with a penal clause is one which contains an accessory undertaking to pay a previously stipulated indemnity incase of breach. It is attached to obligations in order to insure their performance. Purpose of the penal clause: 1.) To insure the performance of the obligation. 2.) To substitute for indemnity for damages and the payment of interest in case of noncompliance of the principal obligation. 3.) To penalize the obligor in case of breach of the principal obligation.

Art. 1227. The debtor cannot exempt himself from the performance of the obligation by paying the penalty, save in the case where this right has been expressly reserved for him. Neither can the creditor demand the fulfillment of the obligation and the satisfaction of the penalty at the same time, unless this right has been clearly granted him. However, if after the creditor has decided to require the fulfillment of the obligation, the performance thereof should become impossible without his fault, the penalty may be enforced. (1153a) Debtor Cannot Substitute Penalty For the Principal Obligation – The general rule is that the debtor is not allowed to just pay the penalty instead of fulfilling the obligation. He can do so if the right has been expressly reserved. The reason is that if he can just pay, fulfillment of the obligation will be considered an alternative one. The word expressly means that any implied reservation is not allowed.

Art. 1228. Proof of actual damages suffered by the creditor is not necessary in order that the penalty may be demanded. (n) Example: Arthur was obliged under a contract with Brad, not to sell shares of stock for one year. A penal clause was provided. But Arthur sold shares of stock within the period specified but damages were not proved by Brad to have been suffered by him. May Brad recover the penalty? Yes, Brad may lawfully recover the penalty.

Art. 1229. The judge shall equitably reduce the penalty when the principal obligation has been partly or irregularly complied with by the debtor. Even if there has been no performance, the penalty may also be reduced by the courts if it is iniquitous or unconscionable. (1154a) When Penalty May be Reduced by the Court – 1) When the obligation has been partly complied with by the debtor; 2) When the obligation has been irregularly complied with by the debtor 3) When the penalty is iniquitous or unconscionable, even if there has been no performance at all.

Art. 1230. The nullity of the penal clause does not carry with it that of the principal obligation. The nullity of the principal obligation carries with it that of the penal clause. (1155)

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Effect of Nullity of Penal Clause – The general principle that the accessory follows the principal. If only the penal clause is void, the principal obligation remains valid and demandable. The penal clause may be disregarded. Example: Arthur agreed to sell merchandise to Brad. It is provided in their agreement that in case of default, Arthur will deliver a prohibited drug as penalty. Here, the obligation to sell merchandise is valid by the penalty to deliver the prohibited drug is void. For failure of Arthur to comply with the obligation, Brad may recover damages.

CHAPTER 4 EXTINGUISHMENT OF OBLIGATIONS GENERAL PROVISIONS Art. 1231. Obligations are extinguished: (1) By payment or performance: (2) By the loss of the thing due: (3) By the condonation or remission of the debt; (4) By the confusion or merger of the rights of creditor and debtor; (5) By compensation; (6) By novation. Other causes of extinguishment of obligations, such as annulment, rescission, fulfillment of a resolutory condition, and prescription, are governed elsewhere in this Code. (1156a) SECTION 1. - Payment or Performance Art. 1232. Payment means not only the delivery of money but also the performance, in any other manner, of an obligation. (n) Payment- it should be the delivery of money and the performance in any other manner of an obligation. Ex. Ria is indebted to Emi P1,000.00. Her obligation is to deliver to Emi the amount and to perform his obligation which is to pay Emi the said amount.

Art. 1233. A debt shall not be understood to have been paid unless the thing or service in which the obligation consists has been completely delivered or rendered, as the case may be. (1157) The general rule is that, to be considered a valid payment, the thing or service contemplated must be paid and fulfillment must be complete.

Art. 1234. If the obligation has been substantially performed in good faith, the obligor may recover as though there had been a strict and complete fulfillment, less damages suffered by the obligee. (n) This is the exception to the general rule in Art. 1233, that if there is substantial performance in good faith by the debtor, the obligation is deemed to be fulfilled.

Art. 1235. 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. (n)

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Another exception to the general rule in Art. 1233, that when the creditor accepts the performance knowing its incompleteness and irregularities and without expressing any protest, the obligation is deemed complete. Ex. Karl agreed to paint the house of Jack. According to their stipulation, Karl would use a particular brand of paint. If Jack accepted the performance of Karl, knowing that the paint used was another brand and without expressing any protest or objection, the obligation is deemed fully complied with.

Art. 1236. The creditor is not bound to accept payment or performance by a third person who has no interest in the fulfillment of the obligation, unless there is a stipulation to the contrary. Whoever pays for another may demand from the debtor what he has paid, except that if he paid without the knowledge or against the will of the debtor, he can recover only insofar as the payment has been beneficial to the debtor. (1158a) The general rule is that, you cannot compel the creditor to accept payment by a third person whom he may dislike or distrust. However, if it is paid by the guarantor and mortgagors, creditor can accept it if is stipulated in their contract. Persons from whom creditor must accept payment: 1. Debtor 2. Any person who has an interest in the obligation (like guarantor). 3. A third person who has no interest in the obligation when there is stipulation that he can make payment. Effect of payment by a third person: 1. If made without the knowledge or against the will of the debtor, the person who paid can recover only insofar as the payment beneficial to him. Ex. Laila is indebted to Andrew P1,000.00. Richard, a third person paid the whole amount without the knowledge and consent of Laila, and did not know that Laila already paid P400.00, Richard is entitled to be reimbursed only on the amount of P600.00 from Laila since it is the only amount Laila benefited. Richard can recover P400.00 from Andrew who should not have accepted it. If Andrew acted in bad faith, he is liable also for interest in lieu of damages. 2. If made with the knowledge of the debtor, the third person shall have the rights of reimbursement and subrogation, that is to recover what he has paid. Full reimbursement-full amount down to the single centavo the third person has paid. Subrogation- the right to step on the shoes of the creditor. Ex. In the above case, if the payment of Richard was made with the knowledge or consent of Laila, Richard can recover from Laila the full reimbursement of P1,000.00 and the rights of subrogation.

Art. 1237. 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. (1159a) Subrogation- the act of putting somebody into the shoes of the creditor, hence, enables the former to exercise all the rights and actions that could have been exercised by the latter. Rights arising from: 1. A mortgage 2. A guaranty 3. A penalty or penal clause

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Art. 1238. Payment made by a third person who does not intend to be reimbursed by the debtor is deemed to be a donation, which requires the debtor's consent. But the payment is in any case valid as to the creditor who has accepted it. (n) Donation, in order to be valid it must be accepted. Since, no one should be compelled to accept the generosity of another. (Report of the Code of Commission, p. 132). However, if the creditor accepts the payment, it shall be valid as to him and the payor although the debtor did not give his consent to the donation. Ex. Jack owes Tonix P1,000.00. without the intention of being reimbursed, Sky, a third person paid Jack’s obligation. Jack had previously accepted Sky’s generosity. In this case, Jack is not liable to Sky and his obligation is extinguished. But if Jack did not consent to the donation, Sky may recover from Jack since there has been no donation, although originally Sky did not tend to be reimbursed. Nevertheless, the obligation of Jack to Tonix is extinguished because the payment is valid and he accepted it.

Art. 1239. In obligations to give, payment made by one who does not have the free disposal of the thing due and capacity to alienate it shall not be valid, without prejudice to the provisions of Article 1427 under the Title on "Natural Obligations." (1160a) Free disposal of the thing due- means that the thing to be delivered must not be subject to any claim or lein or encumbrance of a third person. Capacity to alienate- that the person is not incapacitated to enter into contracts. General rule in obligations to give, payment by one who does disposition and capacity to alienate is not valid.

not have the free

EXC. Is provided in ART. 1427. The creditor cannot be compelled to accept payment where the person paying it has no capacity to make it. Ex. Ria agreed to sell to Lleina a refrigerator. If the refrigerator to be delivered to Lleina belongs to Emi, the same can be recovered by Emi because the payment is not valid. Ria does not have free disposal of the refrigerator. The same right of recovery exist although the refrigerator belongs to Ria if she is a minor and therefore, has no capacity to alienate it.

Art. 1240. Payment shall be made to the person in whose favor the obligation has been constituted, or his successor in interest, or any person authorized to receive it. (1162a) Person to whom payment shall be made: 1. The creditor or oblige (person in whose favor obligation has been constituted). 2. His successor in interest (like an heir or assignee). 3. Any person authorized to receive it. Ex. Ria owes Emi P1,000.00. Ria must pay Emi or any person authorized by Emi or in case of his death, his heirs or any person authorized by law. Payment to any other person is not valid except as provided in Art. 1241, par. 2. If Ria acted in good faith in paying to the wrong party is not an excuse.

Art. 1241. Payment to a person who is incapacitated to administer his property shall be valid if he has kept the thing delivered, or insofar as the payment has been beneficial to him. Payment made to a third person shall also be valid insofar as it has redounded to the benefit of the creditor. Such benefit to the creditor need not be proved in the following cases: (1) If after the payment, the third person acquires the creditor's rights; (2) If the creditor ratifies the payment to the third person; University of Cebu College of Law

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(3) If by the creditor's conduct, the debtor has been led to believe that the third person had authority to receive the payment. (1163a) If the creditor is incapacitated to accept the payment, in order to be valid : 1. If the incapacitated person kept the thing delivered. 2. And if it is beneficial to the incapacitated person. Ex. Laila delivers P1,000.00 to Richard, a minor. Richard loses the P700.00 of the money in gambling, or due to negligence or ignorance. In this case, the payment should be considered as made only to the extent of P300.00. On the other hand, if Richard kept the money paid or spent it for purposes useful to him, the payment shall be valid; otherwise, and Richard would unduly enrich himself at the expense of Laila. The debtor is relieved from proving benefit to the creditor in case of: 1. Subrogation of the payer in the creditor’s right. 2. Ratification by the creditor. 3. Estoppel on the part of the creditor.

Art. 1242. Payment made in good faith to any person in possession of the credit shall release the debtor. (1164) This is another instance of a valid payment. Requisites: 1. Payment by payor must be made in good faith (this is presumed)(but payee may be good or bad faith). 2. The payee must be in possession of the credit itself (not merely the document evidencing the credit) Ex. Jack is indebted to Lleina the amount of P1,000.00 which is evidenced by a promissory note signed by Jack in favor of Lleina. Lleina lost the promissory note which was later found by Ria who demanded payment from Jack. Payment to Ria is not valid because Ria is the possessor merely of the document evidencing the credit and not of the credit itself.

Art. 1243. Payment made to the creditor by the debtor after the latter has been judicially ordered to retain the debt shall not be valid. (1165) When payment to creditor not valid: In an action against the debtor who is the creditor of another, the latter (the debtorstranger), during the pendency of the case, may be ordered by the court (or by any competent authority though it be administrative) to retain the debt until the right of the plaintiff, the creditor in the main litigation is resolved. Ex. Nico owes Ria P1,000.00. Emi, in turn owes Nico P1,000.00. In action by Ria against Nico, Emi, upon petition of Ria, may be ordered by the court not to pay Nico and to retain the debt in the meantime. In this case, the debt of Emi is said to be garnished or is subjected to payment to Ria. Garnishment- the proceeding by which a debtor’s creditor is subjected to the payment of his own debt to another.

Art. 1244. The debtor of a thing cannot compel the creditor to receive a different one, although the latter may be of the same value as, or more valuable than that which is due. In obligations to do or not to do, an act or forbearance cannot be substituted by another act or forbearance against the obligee's will. (1166a) The debtor cannot compel creditor to accept a different object.

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Ex. Richard is obliged to give to Laila a Toyota car. Not having a Toyota car, Richard wants to deliver a Honda car, more expensive. Richard cannot compel Laila to receive the Honda car even though it commands a higher price. Because, the subject matter of the contracting parties which is stipulated in their contract, cannot be changed without the consent of Laila.

Art. 1245. Dation in payment, whereby property is alienated to the creditor in satisfaction of a debt in money, shall be governed by the law of sales. (n) This is one of the special forms of payment. Dation in payment (dacion en pago) - it is the mode of extinguishing an obligation whereby the debtor alienates in favor of the creditor, property for the satisfaction of monetary debt. Ex. Sky owes Ivy P50,000.00. to fulfill his obligation, Sky with the consent of Ivy, delivers a piano. If the piano, however, is worth less than P50,000.00, the conveyance must be deemed to extinguish the obligation to the extent only of the value agreed upon unless it is stipulated in their contract that the piano is considered full payment.

Art. 1246. When the obligation consists in the delivery of an indeterminate or generic thing, whose quality and circumstances have not been stated, the creditor cannot demand a thing of superior quality. Neither can the debtor deliver a thing of inferior quality. The purpose of the obligation and other circumstances shall be taken into consideration. (1167a) It is a principle of equity in that it supplies justice in cases where there is lack of precise declaration in the obligation. It is always hard to find one thing that is exactly similar to another. If there is disagreement between the parties, the law steps in and determines whether the contract has been complied with or not according to the circumstances. (8 Manresa 280-281). The benefit is that it may be waived by the creditor or by accepting a thing of inferior quality, and by the debtor by delivering a thing of superior quality. Ex. If Tonix promised to deliver to Lance a horse. Lance cannot compel Tonix to deliver a price-winning race horse. Neither can Tonix require Lance to accept an old sickly horse.

Art. 1247. Unless it is otherwise stipulated, the extrajudicial expenses required by the payment shall be for the account of the debtor. With regard to judicial costs, the Rules of Court shall govern. (1168a) General rules the debtor has to pay for the extrajudicial expenses incurred during the payment. Exception: When there is a stipulation to the contrary.

Art. 1248. Unless there is an express stipulation to that effect, the creditor cannot be compelled partially to receive the prestations in which the obligation consists. Neither may the debtor be required to make partial payments. However, when the debt is in part liquidated and in part unliquidated, the creditor may demand and the debtor may effect the payment of the former without waiting for the liquidation of the latter. (1169a) General rule: the performance should be generally complete, delivered or rendered, as the case may be. Exceptions: 1.

When there is an express stipulation to that effect.

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2. When the debt is in part liquidated (definitely and determined or computed) and in part unliquidated. 3. When the different prestations in which the obligation consists are subject to different terms or conditions which affect some of them. 4. When a joint debtor pays his share or the creditor demands the same. 5. When a solidary debtor pays only the part demandable because the rest are not yet demandable on account of their being subject to different terms and conditions. 6. In case of compensation, when one debt is larger than the other, it follows that a balance is left. 7. When work is to be done by parts.

Art. 1249. The payment of debts in money shall be made in the currency stipulated, and if it is not possible to deliver such currency, then in the currency which is legal tender in the Philippines. The delivery of promissory notes payable to order, or bills of exchange or other mercantile documents shall produce the effect of payment only when they have been cashed, or when through the fault of the creditor they have been impaired. In the meantime, the action derived from the original obligation shall be held in the abeyance. (1170) Legal Tender- is that currency which a debtor can legally compel a creditor to accept in payment of a debt in money when tendered by the debtor in the right amount. (Black Law Dictionary) In the Philippines, all coins and notes issued by the Bangko Sentral Ng Pilipinas (BSP) constitute legal tender for all debts, both public or private. Unless otherwise fixed by Monetary Board of the BSP, coins are legal tender for amounts not exceeding P50.00 for denomination of P0.25 and above, and those of amounts not exceeding P20.00 for denominations of P0.10 or less. All coins and bills above P1.00 are, therefore, valid, legal tenders for any amount. Ex. Richard owes Laila P1,000.00 which is due today. Laila can refuse to accept check from Richard. If Laila accepts, there is no payment yet until the check has been cashed or when through his fault, it has been impaired as when he has delayed in presenting the check for payment for an unreasonable length of time and the check has lost its value by reason of the insolvency of the bank.

Art. 1250. In case an extraordinary inflation or deflation of the currency stipulated should supervene, the value of the currency at the time of the establishment of the obligation shall be the basis of payment, unless there is an agreement to the contrary. (n) Inflation- it is a sharp sudden increase of money or credit or both without a corresponding increase in business transactions. (Webster’s Dictionary). It causes a drop in the value of money, resulting in the rise of the general price level. Deflation- is the reduction in volume and circulation of the available money or credit, resulting in a decline of the general price level; it is the opposite of inflation. Ex. Ria borrowed from Emi P5,000.00 payable after five years. On the maturity of the obligation, the value of P5,000.00 dropped to P2,500.00 because of inflation (or increased to P10,000.00 because of deflation). In this case (assuming there is extraordinary inflation or deflation), the basis of payment shall be equivalent value of the currency today to that five years ago. Hence, Ria is liable to pay Emi P5,000.00 (or P2,500.00) unless there is an agreement to the contrary.

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Art. 1251. Payment shall be made in the place designated in the obligation. There being no express stipulation and if the undertaking is to deliver a determinate thing, the payment shall be made wherever the thing might be at the moment the obligation was constituted. In any other case the place of payment shall be the domicile of the debtor. If the debtor changes his domicile in bad faith or after he has incurred in delay, the additional expenses shall be borne by him. These provisions are without prejudice to venue under the Rules of Court. (1171a) Places where obligation shall be paid: 1. If there is stipulation, the payment shall be made in the palce designated. (par. 1, Art 1306) 2. If there is a stipulation and the thing to be delivered is specific, the payment shall be made at the place where the thing was, at the perfection of the contract. (par. 2) 3. If there is no stipulation and the thing to be delivered is generic, the place of payment shall be the domicile of the debtor. Venue- is the place where a court suit or action must be filed or instituted. (Secs. 1-4, Rule 4, rules of Court) Domicile- is the palce of a person’s habitual residence (Art. 50), the place where he has his true fixed permanent home and to which place he, whenever he is absent, has the intention of returning. (17 Am. Jur. 588). Residence- is only an element of domicile. It simply requires bodily presence as an inhabitant in a given place. Ex. Lleina is obliged himself to deliver to Karl a specific car. It was agreed that the car should be delivered at Karl’s house. The house of Karl shall be the place of delivery.

SUBSECTION 1. - Application of Payments Art. 1252. He who has various debts of the same kind in favor of one and the same creditor, may declare at the time of making the payment, to which of them the same must be applied. Unless the parties so stipulate, or when the application of payment is made by the party for whose benefit the term has been constituted, application shall not be made as to debts which are not yet due. If the debtor accepts from the creditor a receipt in which an application of the payment is made, the former cannot complain of the same, unless there is a cause for invalidating the contract. (1172a) Application of payments- is the designation of the debt to which should be applied a payment made by a debtor who owes several debts in favor of the same creditor. (Art. 1252,par. 1) It is important to know the rules on application of payments because otherwise, we may not know which one, of two or more debts, has been extinguished. Requisites of Application of Payments: 1. One debtor and one creditor 2. Two or more debts 3. Debts must be of the same kind 4. Debts to which payment made by the debtor has been applied must be due 5. Payment made must not be sufficient to cover all debts The application of payments as to debts not yet due cannot be made unless: 1. There is a stipulation that the debtor may so apply. 2. It is made by the debtor or creditor, as the case may be, for whose benefit the period has been constituted. (Art. 1196, also Art. 1792) Rules on application of payments: 1. The debtor makes the designation. University of Cebu College of Law

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2. If not, the creditor makes it, by so stating in the receipt that he issues”unless there is cause for invalidating the contract. ” (Art. 1251, Par. 2) 3. If neither the debtor nor the creditor has made the application, or if the application is not valid, then application is made by operation of law. (Arts. 1253 and 1254, Civil Code) 4. If the debts due are of the same nature and burden, the payment shall be applied to all of them proportionately.

Art. 1253. If the debt produces interest, payment of the principal shall not be deemed to have been made until the interests have been covered. (1173) This rule is mandatory. Hence, the debtor cannot insist that his payment be credited to the principal instead of the interest. However, if the creditor agrees, this is all right. (8 Manresa 317) Ex. Richard owes Laila P1,000.00 with P100.00 as accrued interest. Richard pays P1,000.00. The P1,000.00 will first applied to the interest earned by debt. Then the balance of P900.00 will be credited to the amount. Therefore, Richard will still owe Laila P100.00 of the principal.

Art. 1254. When the payment cannot be applied in accordance with the preceding rules, or if application can not be inferred from other circumstances, the debt which is most onerous to the debtor, among those due, shall be deemed to have been satisfied. If the debts due are of the same nature and burden, the payment shall be applied to all of them proportionately.(1174a) In case no application is made, the following rules shall be observed: 1. Apply it to the most onerous (in case the due and demandable debts are of different natures). 2. If the debts are of the same nature and burden, application shall be made proportionately.

SUBSECTION 2. - Payment by Cession Art. 1255. The debtor may cede or assign his property to his creditors in payment of his debts. This cession, unless there is stipulation to the contrary, shall only release the debtor from responsibility for the net proceeds of the thing assigned. The agreements which, on the effect of the cession, are made between the debtor and his creditors shall e governed by special laws. (1175a) Payment by cession- is another special form of payment. It is the assignment or abandonment of all the properties of the debtor for the benefit of his creditors in order that the latter may sell the same and apply the proceeds thereof to satisfaction of their credits. Requisites: 1. Must be two or more creditors 2. Debtor must be (partially) insolvent 3. Cession must be accepted by the creditors DACION EN PAGO

CESSION

Does not affect all the properties

In general, affects all the properties of the debtor

Does not require plurality of creditors

Requires more than one creditor

Only the specific or concerned creditor’s consent is required

Requires the consent of all the creditors

May take place during the solvency of the debtor

Requires full or partial insolvency

Transfers ownership upon delivery

Does not transfer ownership

This is really an act of novation

Not an act of novation

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Ex. Jack is indebted to several creditors in the total amount of P2 million. His assets are not sufficient to pay all his debts. With the consent of his creditors, Jack may assign his property to them to be sold to satisfy their credits. If the net proceeds of the sale amount only to P1.5 million, Jack is still liable for the balance of P500,000.00 unless there is stipulation that the assignment shall be in full satisfaction of all his debts.

SUBSECTION 3. - Tender of Payment and Consignation Tender of payment- the act of offering the creditor what is due him together with a demand that the creditor accept the same. Consignation- the act of depositing the thing due with the court or judicial authorities whenever the creditor cannot accept or refuses to accept payment. It generally requires a prior tender of payment.

Art. 1256. If the creditor to whom tender of payment has been made refuses without just cause to accept it, the debtor shall be released from responsibility by the consignation of the thing or sum due. Consignation alone shall produce the same effect in the following cases: (1) When the creditor is absent or unknown, or does not appear at the place of payment; (2) When he is incapacitated to receive the payment at the time it is due; (3) When, without just cause, he refuses to give a receipt; (4) When two or more persons claim the same right to collect; (5) When the title of the obligation has been lost. (1176a) Consignation is sufficient even without a prior tender: 1. When the creditor is Absent or Unknown or Does Not Appear at the place of payment. (the creditor need not be judicially declared absent). 2. When the creditor is Incapacitated to receive payment at the time it is due. (The rule does not apply if the creditor has a legal representative and this fact is known to the debtor). 3. When, without just cause, the creditor Refuses to give a receipt. 4. When two or more persons claim the same right to collect. (An action in Interpleader would be proper here). 5. When the title (written document) of the obligation has been Lost. 6. When the debtor had previously been notified by the creditor that the latter would not accept any payment. Ex. Sky owes Ivy a sum of money. On the due date, Sky offers to pay but Ivy refuses to accept the payment without any justifiable reason. In this case, Sky’s obligation will not be extinguished until he has made a valid consignation. Requirements for a valid tender of payment: 1. Tender of payment must comply with the rules on payment. (Arts. 1256-1258). The tender, even if valid, does not by itself produce legal payment, unless it is completed by consignation. (PNB vs Relativo, 92, Phil. 203). 2. It must be unconditional and for the whole amount. (Joe’s Radio Electrical Supply vs. Alto Electronics Corp. 104 Phil 333). 3. It must be actually made. The manifestation of a desire or intention to pay enough. (Catangcatng vs. Legayada, 84 SCRA 51) Art. 1257. In order that the consignation of the thing due may release the obligor, it must first be announced to the persons interested in the fulfillment of the obligation. The consignation shall be ineffectual if it is not made strictly in consonance with the provisions which regulate payment. (1177) Requisites of a valid consignation: 1. Existence of a valid debt which is due (Art. 1256, par. 1). University of Cebu College of Law

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2. Tender of payment by the debtor and refusal without justifiable reason by the creditor to accept. (Ibid) 3. Previous notice of consignation to persons interested in the fulfillment of the obligation. (Art. 1257, par 1). 4. Consignation of the thing or sum due. (Art. 1258, par. 1). 5. Subsequent notice of consignation made to the interested persons. (Ibid, par. 2)

Art. 1258. Consignation shall be made by depositing the things due at the disposal of judicial authority, before whom the tender of payment shall be proved, in a proper case, and the announcement of the consignation in other cases. The consignation having been made, the interested parties shall also be notified thereof. (1178) Consignation, by depositing the thing or sum due with the proper judicial authority, is necessary to effect payment. How consignation is actually made: 1. The things must be deposited with the proper judicial authorities (while ordinarily cashier or the cash officer should be the person to issue the receipt for the money consigned, a temporary receipt issued by the clerk of court said deposit would suffice). (Yap vs Tingin, L-18943, May 31, 1963). 2. There must be proof that: a.) Tender has previously been made. (General rule) b.) That the creditor has previously notified the debtor that consignation will be made (in case tender is not required.)

Art. 1259. The expenses of consignation, when properly made, shall be charged against the creditor. (1178) The consignation is made necessary because of the fault or unjust refusal of the creditor to accept payment. That being the case, it is but just that the expenses should be charged against him. Charge to the debtor if the consignation is not properly made. When consignation deemed properly made: 1. When the creditor accepts the thing or sum deposited, without objection, as payment of the obligation (Art. 1260, par. 2). 2. When the creditor questions the validity of the consignation, and the court, after hearing, declares that it has been properly made. (Ibid) 3. When the creditor neither accepts nor questions the validity of the consignation, and the court after hearing, orders the cancellation of the obligation. (Art. 1260, par.1, Salaria vs Buenviaje, 81 SCRA 722).

Art. 1260. Once the consignation has been duly made, the debtor may ask the judge to order the cancellation of the obligation. Before the creditor has accepted the consignation, or before a judicial declaration that the consignation has been properly made, the debtor may withdraw the thing or the sum deposited, allowing the obligation to remain in force. (1180) Effects if consignation is properly made: 1. The debtor may ask the judge to order the cancellation of the obligation. 2. The running of interest is suspended. 3. However, it should be observed that before the creditor accepts, or before the judge declares that consignation has been properly made, the obligation remains. (Padua vs Rizal Surety, 47 O.G. Supp. No 12 p. 308). University of Cebu College of Law

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The debtor however, may withdraw as a matter of right the thing or sum deposited: 1. Before the creditor accepted the consignation. 2. Before a judicial declaration that the consignation has been properly made, as he still the owner of the same. 3. When after the consignation had been properly made (the creditor having accepted or the court having declared it proper), the creditor authorizes the debtor to withdraw the thing. (Art. 1261)

Art. 1261. If, the consignation having been made, the creditor should authorize the debtor to withdraw the same, he shall lose every preference which he may have over the thing. The co-debtors, guarantors and sureties shall be released. (1181a) The consignation has been already made (that is, the creditor has accepted; or the court has approved the consignation.) The withdrawal by the debtor is a matter of privilege. Effects: 1. The obligation remains. 2. The creditor loses any preference (priority) over the thing. 3. The co-debtors, guarantors, and sureties are released (unless they consented). Ex. Richard is indebted to Laila the sum of P10,000.00 with Sky as the guarantor. On the due date, Richard offered payment but Laila refused to accept the same. So, Richard made a consignation. Subsequently, Richard withdrew the deposit after securing the consent of Laila. Under this article, Laila loses whatever preference she may have over the amount and Sky, the guarantor, shall be released.

SECTION 2. - Loss of the Thing Due Loss includes impossibility of performance. There is a loss when: 1. When the object perishes (physically, it is destroyed). 2. When it goes out of commerce 3. When it disappears in such way that the existence is unknown or it cannot be recovered. (Art. 1189, No. 2, Civil Code). Impossibility of performance includes: 1. Physical 2. Legal, which is either directly caused as when prohibited by law or indirectly caused as when the debtor is required to enter a military draft 3. Moral (impracticability) (Art. 1267)

Art. 1262. An obligation which consists in the delivery of a determinate thing shall be extinguished if it should be lost or destroyed without the fault of the debtor, and before he has incurred in delay. When by law or stipulation, the obligor is liable even for fortuitous events, the loss of the thing does not extinguish the obligation, and he shall be responsible for damages. The same rule applies when the nature of the obligation requires the assumption of risk. (1182a) In order that an obligation may be extinguished by the loss of the thing, requisites: 1. Obligation is to deliver a specific or determinate thing. 2. Loss of the thing occurs without the fault of the debtor. 3. Debtor is not guilty of delay. Will not extinguished liability due to fortuitous event: University of Cebu College of Law

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1. The law so provides 2. The stipulation provides 3. The nature of the obligation requires the assumption of risk 4. Obligation to deliver arises from a crime

Art. 1263. In an obligation to deliver a generic thing, the loss or destruction of anything of the same kind does not extinguish the obligation. (n) The obligation continues to exist because a generic thing does not really perish. However, exceptions are: 1.

if the generic thing is delimited (like 20 kilos of sugar from mu 1999 harvest, when such harvest is completely destroyed).

2. If the generic thing has already been segregated or set aside, in which case, it has become specific. Ex. Karl promised to deliver 100 cavans of rice to Vladimir. The 100 cavans of rice which Karl intended to deliver were lost in a flood. Karl is liable to Vladimir because his obligation is to deliver a generic thing, and it can still be paid from other sources.

Art. 1264. The courts shall determine whether, under the circumstances, the partial loss of the object of the obligation is so important as to extinguish the obligation. (n) Partial loss may indeed be equivalent to a complete loss, such as the loss of specific car. In other cases, the loss may be insignificant. Hence, judicial determination of the effect is needed. Ex. Lleina obliged to deliver to Ria a specific race horse. The horse met an accident as a result of which it suffered a broken leg. The injury is permanent. Here, the partial loss is so important as to extinguish the obligation. If the loss is due to the fault of Lleina, she shall be obliged to pay the value of the horse with indemnity for damages.

Art. 1265. Whenever the thing is lost in the possession of the debtor, it shall be presumed that the loss was due to his fault, unless there is proof to the contrary, and without prejudice to the provisions of article 1165. This presumption does not apply in case of earthquake, flood, storm, or other natural calamity. (1183a) Presumption that loss was due to debtor’s fault, is that the debtor is presumed to be at fault. Ex. If a person is entrusted with several heads of cattle and he cannot account for some missing ones, he is presumed to be at fault. (Palacio vs Sudario, 7 Phil. 275). Presumption of fault does not does not apply in the case of a natural calamity. Ex. Although the fire is not a natural calamity, if a tenant is able to prove that the fire caused in his apartment is purely accidental, he is not liable. (Lizares vs Hernaez & Alunan, 40 Phil. 981).

Art. 1266. The debtor in obligations to do shall also be released when the prestation becomes legally or physically impossible without the fault of the obligor. (1184a) Without the debtor’s fault, the obligation becomes legally or physically impossible. The impossibility of performance will result in the extinction of the obligation. The impossibility must take place after the constitution of the obligation. Kinds of Impossibility: 1. Physical- takes place when, for example the obligor dies or becomes physically incapacitated to perform the obligation.

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Ex. Richard obliged to paint a picture for Laila to be finished within a month. One week after the obligation was constituted, Richard met an accident, as a result of which, his arms were amputated. The obligation of Richard has become physically impossible. Richard is released from the obligation. 2. Legal- occurs when the obligation cannot be performed because it is rendered impossible by provision of law, although physically it may be possible of performance. Ex. Karl agreed to construct a commercial building for Vladz. The government refused to issue a building permit because the area has been declared by law as a residential zone. The obligation of Karl is extinguished because it has become legally impossible. The performance of the prestation is directly prohibited by law.

Art. 1267. When the service has become so difficult as to be manifestly beyond the contemplation of the parties, the obligor may also be released therefrom, in whole or in part. (n) General rule is that impossibility of performance releases the obligor. However, it is submitted that when the service has become so difficult as to be manifestly beyond the contemplation of the parties, the court should be authorized to release the obligor in whole or in part. The intention of the parties should govern and if it appears that the service turns out to be so difficult as to have been beyond their contemplation, it would be doing violence to that intention to hold the obligor still responsible. (Report of the Code Of Commission, p. 133) Ex. Laila agreed to construct a road near a mountain. A very strong typhoon caused an avalanche making the construction of the road dangerous to human lives, which was not foreseen or contemplated by the parties. Laila may release, in whole or in part, from his obligation to continue with the construction.

Art. 1268. When the debt of a thing certain and determinate proceeds from a criminal offense, the debtor shall not be exempted from the payment of its price, whatever may be the cause for the loss, unless the thing having been offered by him to the person who should receive it, the latter refused without justification to accept it. (1185) This article gives one instance where a fortuitous event does not extinguished the obligation. However, it is exempted if the creditor is in mora accipiende. Ex. A stole the jeep of B. here, A has the obligation to return to B. The obligation of A arises from an act punishable by law. (Art. 1157). Even if the jeep is destroyed without the fault of A, he shall be liable for the payment of its price. The exception to the rule is when B is in mora accipiende. (Art. 1169). In either case, A is liable if the loss is due to his fault.

Art. 1269. The obligation having been extinguished by the loss of the thing, the creditor shall have all the rights of action which the debtor may have against third persons by reason of the loss. (1186) The creditor is given the right to proceed against the third person responsible for the loss. There is no need for an assignment by the debtor. The rights of action of the debtor are transferred to the creditor from the moment the obligation is extinguished, by operation of law to protect the interest of the latter because of the loss. Ex. Sky is obliged to deliver to Ivy a specific car. The car is lost through the fault of Tonix. The obligation of Sky is extinguished and he is not liable to Ivy. Such being the case, Sky would not be interested in going after Tonix. The law, however, protects Ivy by giving him the right to bring an action against Tonix to recover the price of the specific car with damages.

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SECTION 3. - Condonation or Remission of the Debt Art. 1270. Condonation or remission is essentially gratuitous, and requires the acceptance by the obligor. It may be made expressly or impliedly. One and the other kind shall be subject to the rules which govern inofficious donations. Express condonation shall, furthermore, comply with the forms of donation. (1187) Remission- is an act of liberality by which the obligee, without receiving any price or equivalent, renounces the enforcement of the obligation, as a result his right against the debtor. (4 Sanchez Roman 422) Requisites of Condonations OR Remissions: 1. it must be gratuitous; 2. it must be accepted by the debtor; 3. the parties must have capacity; 4. must not be inofficious; and 5. if made expressly, it must comply with the forms Effect of inofficious Remission While a person may make donations, no one can give more than that which he can give by a testamentary will, otherwise, the excess shall be inofficious and shall be reduced by the Court accordingly. Like for example, a part of the testator’s property called legitimate cannot be disposed of because the law has reserved it from certain heirs called the compulsory heirs. Ex. Richard owes Laila P1,000.00. When the debt matured Laila told Richard that he not pay the debt since he was condoning it. Richard, in turn, expressed his gratitude. Here, the debt has been extinguished by remission.

Art. 1271. The delivery of a private document evidencing a credit, made voluntarily by the creditor to the debtor, implies the renunciation of the action which the former had against the latter. If in order to nullify this waiver it should be claimed to be inofficious, the debtor and his heirs may uphold it by proving that the delivery of the document was made in virtue of payment of the debt. (1188) Art. 1272. Whenever the private document in which the debt appears is found in the possession of the debtor, it shall be presumed that the creditor delivered it voluntarily, unless the contrary is proved. (1189) Presumption In Case Document Found In the Possession Of Debtor: If the document is found in the hands of the debtor and it is not known how he came into possession of the same, the presumption is that there was payment by virtue of the payment of the debt. Or it was voluntarily delivered to the debtor, which gives rise to the remission of the obligation. Ex. Richard owes Laila P10, 000 evidenced by a promissory note. The note as signed by Richard was given to Laila. If the promissory note is voluntarily delivered to Richard, the presumption is that the debt must have been paid by Richard. It is known that Richard has not yet paid Laila, it must be presumed that the obligation has been remitted. Suppose it is not known how Richard came into possession of the promissory note, the presumption is that it was voluntarily delivered by Laila unless Laila proves to the contrary.

Art. 1273. The renunciation of the principal debt shall extinguish the accessory obligations; but the waiver of the latter shall leave the former in force. (1190) Of Effect Renunciation Of the Principal Debt: The above provision follows the rule that the accessory follows the principal. accessory cannot exist without the principal obligation. University of Cebu College of Law

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Ex. Jack owes Sky P10, 000 with Tonix as guarantor. The principal debt here is the P10, 000 while the accessory obligation is the guaranty of Tonix. The remission of the debt of Jack by Sky extinguishes the guaranty of Tonix. But if only the guaranty of Tonix is condoned, the obligation of Jack shall remain in force.

Art. 1274. It is presumed that the accessory obligation of pledge has been remitted when the thing pledged, after its delivery to the creditor, is found in the possession of the debtor, or of a third person who owns the thing. (1191a) Pledged- is a contract by virtue of which the debtor delivers to the creditor or to a third person a movable or instrument evidencing incorporeal rights for the purpose of securing the fulfillment of a principal obligation with the understanding that when the obligation is fulfilled, the thing delivered shall be returned with all its fruits and accessions. If the thing pledged is found in the hands of debtor or the third person, only the accessory obligation of pledge is presumed remitted, not the obligation itself. Ex. Sky delivers to Ivy his diamond ring in pledge to guarantee the payment of loan. If later on the ring is found in the possession of Sky, the presumption is that Ivy has agreed to the loan without the pledge. Ivy may prove that she returned the ring to Sky upon the latter’s request to be delivered back to him.

SECTION 4. - Confusion or Merger of Rights Art. 1275. The obligation is extinguished from the time the characters of creditor and debtor are merged in the same person. (1192a) Confusion is the meeting in one person of the qualities of creditor and debtor with respect to the same obligation. (4Sanchez Roman 421) Requisites of A Valid Confusion 1. The merger of the qualities of creditor and debtor must be in the same person; 2. It must take place in the person of either the principal debtor and principal creditor; and 3. It must be complete, clear and definite; and 4. The very obligation must be the same. Ex. Lleina issued a promissory note for P10, 000 in favor of Emi payable 30 days after sight. Before the maturity of the note, Emi indorsed it to Ria; Ria indorsed it to Jack; Jack indorsed it to Lleina. The obligation of Lleina to Emi is extinguished because there is here a merger of the qualities of the debtor and creditor in one and the same person with respect to one and the same obligation cannot demand and collect payment from himself.

Art. 1276. Merger which takes place in the person of the principal debtor or creditor benefits the guarantors. Confusion which takes place in the person of any of the latter does not extinguish the obligation. (1193) Effect of Merger This article reiterates the principles established in Articles 1176, 1274, NCC, that accessory follows the principal. The extinguishment of the principal obligation extinguishes the accessory obligation; but the extinguishment of the accessory does not extinguish the principal obligation Ex. Richard obtains P10, 000 loan from Laila which loan was guaranteed by Rhorie. Later, Laila assigned the credit to Tonix, who in turn assigned it to Richard. The principal debt is extinguished and Rhorie is released from his obligation as guarantor. University of Cebu College of Law

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If, in this same example, the credit was assigned by Laila to Tonix and Tonix to Rhorie. The contract of guaranty is extinguished but the principal obligations remains. Richard has now the obligation to pay Rhorie.

Art. 1277. Confusion does not extinguish a joint obligation except as regards the share corresponding to the creditor or debtor in whom the two characters concur. (1194) Effect of Merger in Joint Obligation In a joint obligation, the debts are distinct and separate from each other. In case there is merger in a joint obligation, it affects only the share corresponding to the creditor or debtor in whom the two characters concur. The co-debtor will not owe his corresponding share to this former joint co-debtor. Ex. Jack, Sky and Tonix are jointly indebted to Lance in the amount of P15, 000. Lance assigns his credit to Tony who in turn assigned it to Jack. There is here a merger between Jack and Lance but Sky and Tonix would now owe Jack P5, 000 each.

SECTION 5. - Compensation Art. 1278. Compensation shall take place when two persons, in their own right, are creditors and debtors of each other. (1195) Compensation- shall take place when two persons, in their own rights are creditors and debtors of each other. Compensation

Confusion

As to number of persons

there must be two persons

there is only one person in whom the quality of creditor and debtor is merged

As to number of obligation

there must be two obligations

there is only one obligation

Kinds of Compensation: 1. As to cause a. Legal – takes effect by operation of law provided all the requisites prescribed by law are present. b. Voluntarily – takes place by virtue of the agreement of the parties. c. Judicial – takes place only through court orders. 2. As to effect a. Total – when both debts are completely extinguished because the debt are the same amount b. Partial – the debts are not the same amount hence after compensation, a balance remains outstanding. Ex. Richard owes Laila the amount of P10,000. Laila owes Richard the amount of P7,000.00. Both debts are due and demandable today. Here, the compensation takes place partially, that is, to the concurrent amount of P7,000.00. So, Richard is liable to Laila for only P3,000.00.

Art. 1279. In order that compensation may be proper, it is necessary: (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; (3) That the two debts be due; University of Cebu College of Law

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(4) That they be liquidated and demandable; (5) That over neither of them there be any retention or controversy, commenced by third persons and communicated in due time to the debtor. (1196) Requisites of a Proper Compensation or Legal Compensation: 1. The parties are principal creditor and principal debtor of each other; Ex. Lleina owes Jack P10, 000 payable on Dec. 20, 2000. Jack on the other hand owes Lleina P10, 000 also due and payable on Dec. 30, 2000. These two obligation become due on Dec. 30, 2000 compensation takes place because both Lleina and Jack are principal creditor and principal debtor of each other. 2. Both debts consists in a sum of money or of consumable things of the same kind and quality; Ex. Sky obliged himself to deliver to Ivy 100 sacks of rice on October 30, 2000. Ivy, on the other hand, has an obligation to deliver 100 sacks of rice to Sky on October 20, 2000. There is compensation because they are consisting of consumable things. 3. The two debts are due and demandable; Ex.Richard owes Laila P10, 000 payable on October 30, 2000. Laila owes richard P10, 000 payable also on October 30, 2000. There is compensation when the obligation becomes due on October 30, 2000. 4. The two debts liquidated; and the liquidated means that the amount of debt has already been fixed and determined, while the word demandable means when it is due; 5. There be no retention or controversy means a third person who is claiming to be a creditor. Ex. Jack woes Sky P10, 000 and Sky owes Jack P10, 000 but Jack’s credit of P10, 000 has been garnished by Tonix who claims to be an unpaid creditor of Jack. Sky has been duly notified of the controversy. Any possible compensation is in the meantime suspended. If Tonix wins her claim, there can be no compensation. If he loses, the controversy is resolved, and then compensation can take place.

Art. 1280. Notwithstanding the provisions of the preceding article, the guarantor may set up compensation as regards what the creditor may owe the principal debtor. (1197) Guarantor May Set Up Compensation This is an exception to Article 1279, part. 1 because the article allows setting up compensation as regard what the creditor may owe to the principal debtor. Ex. Lance owes Tony P10, 000. Inot is the guarantor of lance. tony owes Lance P10, 000. When Lance sues Tony for P 4,000 and Tony cannot pay, Inot will be liable for only P6, 000 because he can set the P4, 000 credit of Toni as the basis of partial compensation.

Art. 1281. Compensation may be total or partial. When the two debts are of the same amount, there is a total compensation. (n) Total compensation- is when the amount due are equal or of the same amount, hence both obligations are extinguished. Ex. Karl is indebted to Vladz the amount of P10, 000 due on Dec. 19, 2000. Vladz is likewise indebted to Karl in the amount of P10, 000 due on Dec. 19, 2000. There is here a total compensation; hence, both debts will be extinguished. Partial compensation- is when the amount are not the same after compensation took place, there is a balance remains. Ex. Karl owes Vladz P10, 000 due on Dec. 19, 2010. On the other hand, Vladz owes Karl P6,000 due also on Dec. 19, 2010 and when the due date arrives, there is a balance of P4, 000 that will remain after compensation takes place.

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Art. 1282. The parties may agree upon the compensation of debts which are not yet due. (n) Compensation by Agreement Of the Parties This is a voluntary compensation as an execution to the general rule that only debts which are due and demandable can be compensated.(Art.1279) Ex. Jack owes Lleina P10, 000 due on Nov. 30, 2001. On the other hand, Lleina owes Jack P10, 000 due on Dec. 30, 2011. There can be no compensation since the debt of Lleina is not yet due, however by voluntary agreement that there will be compensation between the two of them, then compensation will take place.

Art. 1283. If one of the parties to a suit over an obligation has a claim for damages against the other, the former may set it off by proving his right to said damages and the amount thereof. (n) Judicial Compensation A judicial compensation- is one whereby a money debt of a person may be allowed by the court to be compensated with a claim of damages by another. Ex. Richard owes Ronniel P1, 000. When Richard demanded payment, Ronniel failed to pay. In anger, Richard damaged the property of Ronniel to the extent of P800. Ronniel can set off the obligation of Richard to pay him damages in the amount of P800 against his debt of P1, 000.

Art. 1284. When one or both debts are rescissible or voidable, they may be compensated against each other before they are judicially rescinded or avoided. (n) Compensation Of Rescissible or Voidable Debts Rescissible and voidable obligations are valid until they are judicially rescinded or avoided and prior rescission or annulment, the debts may be compensated. Ex. Lleina owes Ria P 10, 000. Subsequently, Lleina, through fraud was able to make Ria sign a promissory note that Ria is indebted to Lleina for the same amount. The debt of Lleina is valid, but that of Ria is voidable. Before the debt of Ria is nullified, both debts may be compensated against each other if all the requisites for legal compensation are present. If suppose the debt of Ria is later annulled by the court, Lleina is still liable considering compensation had already taken place because the effect of annulment is retroactive, it is as if there was no compensation.

Art. 1285. The debtor who has consented to the assignment of rights made by a creditor in favor of a third person, cannot set up against the assignee the compensation which would pertain to him against the assignor, unless the assignor was notified by the debtor at the time he gave his consent, that he reserved his right to the compensation. If the creditor communicated the cession to him but the debtor did not consent thereto, the latter may set up the compensation of debts previous to the cession, but not of subsequent ones. If the assignment is made without the knowledge of the debtor, he may set up the compensation of all credits prior to the same and also later ones until he had knowledge of the assignment. (1198a) When Compensation has taken place before assignment: If an extinguished obligation has been assigned by the creditor to third person, the debtor can raise the defense of compensation with respect to the debt. The remedy of the assignee is against the assignor.

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Ex. Sky owes Ivy P5, 000 due yesterday. Ivy owes Sky P3, 000 due also yesterday. Both debts are extinguished up to amount of P3, 000. Hence, Sky still owes Ivy P2, 000 today. If Ivy assigns his right to Tonix, latter can collect only P2, 000 from Sky. However, if Sky gave his consent to the assignment before it was made on he will be liable to Tonix for P5, 000 but he can still collect the P2, 000 owed by Ivy. It is as if no compensation took place. Where Compensation has taken place after assignment: There are three cases of compensation which take place after an assignment of rights made by the creditor. They are: 1. Assignment with consent of debtor Ex. Sky owes Ivy P5, 000 due Dec. 19. Ivy owes Sky P3, 000 due Dec. 19. Ivy assigned his right to Tonix, the assignee, the compensation which would pertain to him against Ivy, the assignor. Sky is still liable to Tonix for P5, 000 but he can still collect the P2, 000 debt from Ivy. However, if Sky while consenting to the assignment, reserved his right to the compensation, he would be liable only P2, 000 to Tonix. 2. Assignment with the knowledge but without the consent of debtor Ex. Sky owes Ivy P1, 000 due Dec. 1. Ivy owes Sky P2, 000 Dec. 10. Sky owes Ivy P1, 000 due Dec. 15. Ivy assigned his right to Tonix on Dec. 12. Sky notified Ivy but the latter did not give his consent to the assignment, how much can Tonix collect from Sky? Ivy can set up the compensation of debts on Dec. 10 which was before the cession on Dec. 12. There being partial compensation, the assignment is valid only up to the amount of P1, 000 but Ivy cannot raise the defense of compensation with respect to the debt of Sky due on Dec. 15 which has not yet matured. So, on Dec. 12, Ivy is liable to Tonix for P1, 000. Come Dec. 15, Sky will liable for his debt of P1, 000 to Ivy. 3. Assignment without the knowledge of the debtor Ex. In the preceding example, let us suppose that the assignment was made without the knowledge of Ivy who learned of the assignment only on Nov. 16. In this case, Ivy can set up the compensation of credits before and after the assignment. The crucial time is when Ivy acquired knowledge of the assignment and not the date of the assignment. If Ivy learned of the assignment after the debts had already matured, he can raise the defense of compensation, otherwise, he cannot.

Art. 1286. Compensation takes place by operation of law, even though the debts may be payable at different places, but there shall be an indemnity for expenses of exchange or transportation to the place of payment. (1199a) Compensation where debts payable at different places This legal compensation does not refer to the difference in the value of the things in their respective places but to the expenses of monetary exchange and expenses of monetary exchange and expenses in transportation. Once these expenses are liquidated, the debts also become compensated. The indemnity shall be paid by the person who raises the defense of compensation. Ex. Ricahrd owes Laila $1, 000 payable in Manila. Laila owes Richarcd P38, 000(equivalent amount) payable in Manila. If Sky claim compensation, he must pay for the expenses of exchange.

Art. 1287. Compensation shall not be proper when one of the debts arises from a depositum or from the obligations of a depositary or of a bailee in commodatum. Neither can compensation be set up against a creditor who has a claim for support due by gratuitous title, without prejudice to the provisions of paragraph 2 of Article 301. (1200a) Art. 1288. Neither shall there be compensation if one of the debts consists in civil liability arising from a penal offense. (n) University of Cebu College of Law

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Instances when legal compensation is not allowed by law: 1. Where one of the debts arises from a depositum- a deposit constituted from the moment a person receives a thing belonging to another with the obligation of safely keeping it and of returning it the same. (Art. 1962) Ex. Richard owes Laila P1,000. Laila in turn owes Richard P1,000 representing the value of a diamond ring deposited by Richard with Laila which failed to return. In this case, Laila, who is the depository, cannot claim legal compensation even if Richard fails to pay his obligation. The remedy of Laila is to file an action against Richard for the recovery of the amount of P1,000. 2. Where one of the debts arises from a commodatum – Commodatum is a gratuitous contract whereby one of the parties delivers to another something not consumable so that the latter may use the same for a certain time and return it. (Art. 1993) Ex. In the preceding case, if Laila borrowed the ring of Richard, Laila cannot refuse to return the ring on the ground for compensation because no compensation can take place when one of the debts arises from a commodatum. 3. Where one of the debts arises from a claim for support by gratuitous title- Support compromises everything that is indispensable for sustenance, dwelling, clothing, medical attendance, education and transportation, in keeping with the financial capacity of the family. (Art. 194, FC) Ex. Sky donates to Ivy an allowance of P2,000 a month for five years for the latter’s support. However, previous to the donation, Ivy already owed Sky P10,000 which was due and unpaid. In this case, Sky cannot say that Ivy “In as much as you owe me P10,000, I will not pay your allowance from ten months.” (Memorandum Of the Code of Commision, March 8, 1951, pp 13-14). 4. Where one of the debts consists in civil liability arising from a penal clause. “If one of the debts consists in civil liability arising from a criminal offense, compensation would be improper and inadvisable because the satisfaction of such obligation is imperative.” (Report of the Code Commision, p. 134) Ex. Tonix owes Sky P1,000. Sky stole the ring of Tonix worth P1,000. Here, compensation by Sky is not proper. But Tonix, the offended party, can claim the right of compensation. The prohibition in Art. 1288 pertains only the accused but not to the victim of the crime.

Art. 1289. If a person should have against him several debts which are susceptible of compensation, the rules on the application of payments shall apply to the order of the compensation. (1201) Rules on application of payments apply to order of compensation Compensation is similar to payment. If a debtor has various debts which are susceptible of compensation, he must inform the creditor which of them shall be the object of compensation. In case he fails to do so, then the compensation shall be applied to the most onerous obligation. (Arts. 1252, 1254) Ex. Jack is indebted to Lleina in the amount of: a. P1, 000 without interest due today; b. P1,000 with interest of 18% due also today; c. P1,000 with interest of 16% due yesterday. Lleina owes Jack P1,000 due today. For purposes of the application of payment, Jack is the debtor. He must specify to Lleina which of the three debts should be compensated. If he fails to inform Lleina, then Lleina should apply the compensation to the second obligation of Jack which the obligation bearing the 18% interest because it is the most onerous obligation.

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Art. 1290. When all the requisites mentioned in Article 1279 are present, compensation takes effect by operation of law, and extinguishes both debts to the concurrent amount, even though the creditors and debtors are not aware of the compensation. (1202) Consent of parties not required in legal compensation: 1. Compensation takes place automatically by mere operation of law- from the moment all the requisites mentioned in Art. 1279 concur, compensation takes place automatically even in the absence of agreement between the parties, and extinguishes reciprocally both debts to the amount of their respective sums. It takes place by operation of law from the day all the necessary requisites concur, without need of consent on the part of the parties, and even without their knowledge. 2. Full legal capacity of parties not required- As it takes place by operation of law and without any act of the parties, it is not required that the parties have full legal capacity (see Art. 37) to give or to receive, as the case may be.

SECTION 6. - Novation Art. 1291. Obligations may be modified by: (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. (1203) Novation- is the extinction of an obligation through the creation of a new one which substitutes it. Dual function of novation: Is a contract containing two stipulations; one to extinguish or modify existing obligation, the other to substitute a new one in its place. Kinds of novation: A. According to its object or purpose 1. Real or objective- (changing the object or the principal conditions of the obligation). (Art. 1291, par. 1) 2. Personal or Subjective- (change of persons) a. Substituting the person of the debtor (Expromision or Delegacion) b. Subrogating a third person in the rights of the creditor (change of creditor may be by agreement- “conventional subrogation,” or by operation of law- “legal subrogation”). 3. Mixed (Change of object and parties) B. According to the form of its constitution 1. Express 2. Implied (when the two obligations are essentially incompatible with each other) C. According to its extent or effect 1. Total or extinctive novation ( when the old obligation is completely extinguished) 2. Partial or modificatory- (this is also termed imperfect or improper novation) Ex. Richard agreed to deliver to Laila a car. Later, they entered into anther contract whereby, instead of Richard delivering a car, he would deliver ten air conditioners. The obligation to deliver the car is extinguished by the obligation to deliver the ten air conditioners. The change may involve the principal terms of the obligation.

Art. 1292. In order that an obligation may be extinguished by another which substitute the same, it is imperative that it be so declared in unequivocal terms, or that the old and the new obligations be on every point incompatible with each other. (1204) Requisites of novation: 1. A previous valid obligation University of Cebu College of Law

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2. Capacity and intention of the parties to modify or extinguish the obligation 3. The modification or extinguishment of the obligation 4. The creation of a new valid obligation Novation is not presumed. It must be clearly and unmistakably established either by the express agreement of the parties or acts of equivalent import (Aboitiz vs De Silva, 45 Phil. 883) or by the incompatibility of the two obligations with each other in every material aspect. Ex. Suppose the obligation of Sky is to construct a house on a certain parcel of land. Subsequently, Sky agreed t construct an apartment on the same parcel of land. The area of the land is such both the house and the apartment as per the building plans cannot be constructed on the same site. There is novation in this case even in the absence of an express agreement to that effect because the two obligations are absolutely incompatible with each other.

Art. 1293. Novation which consists in substituting a new debtor in the place of the original one, may be made even without the knowledge or against the will of the latter, but not without the consent of the creditor. Payment by the new debtor gives him the rights mentioned in Articles 1236 and 1237. (1205a) Kinds of personal novation: 1. Substitution- when the person of the debtor is substituted. (Art. 1291, par. 2) 2. Subrogation- when a third person is subrogated in the rights of the creditor. (Ibid, {3}; Art. 1300.) Substitution of Debtor: 1. Expromision (where the initiative comes from a third person)(Art. 1294) 2. Delegacion (where the initative comes from the debtor, for it is he who delegates another to pay the debt, and thus, he excuses himself. Here the 3 parties concerned- the old debtor, the new debtor,and the creditor- must agree).(Art. 1295) Ex. Jack tells Sky that Tonix will pay Jack’s debt. Sky agrees. It does not necessarily mean that there is delegacion here. But if Jack tells Sky that Tonix will pay his debt and he asks Sky to release him from his obligation, to which Sky agrees, delgacion results.

Art. 1294. If the substitution is without the knowledge or against the will of the debtor, the new debtor's insolvency or non-fulfillment of the obligations shall not give rise to any liability on the part of the original debtor. (n) In expromision, the new debtor’s insolvency or non-fulfillment of the obligation will not revive the action of the creditor against the old debtor whose obligation whose obligation is extinguished by the assumption of the debt by the new debtor. In expromision, the replacement of the old debtor is not made to his own initiative.

Art. 1295. The insolvency of the new debtor, who has been proposed by the original debtor and accepted by the creditor, shall not revive the action of the latter against the original obligor, except when said insolvency was already existing and of public knowledge, or known to the debtor, when the delegated his debt. (1206a) General rule: Is that old debtor is not liable to the creditor in case of the insolvency of the new debtor. Exceptions: 1. The said insolvency was already existing and of public knowledge (although it was not known to the old debtor) at the time of the delegacion. 2. The insolvency was already existing and known to the debtor (although it was not of public knowledge) at the time of the delegacion. The exceptions are intended to prevent fraud on the part of the old debtor. University of Cebu College of Law

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Ex. Richard owes Laila P1,000. Richard proposed to Laila that Jack would substitute him as debtor. Laila agreed to the proposal. If ,at the time of the delegacion, jack was already insolvent but his insolvency was neither of public knowledge nor known to Richard, then Richard is not liable. Neither is Richard liable if the insolvency of Jack took place after he delegated his debt. It is believed that Richard is also not liable if Laila had knowledge that Jack was insolvent at the time the debt was delegated to him.

Art. 1296. When the principal obligation is extinguished in consequence of a novation, accessory obligations may subsist only insofar as they may benefit third persons who did not give their consent. (1207) It follows the general rule that the extinguished of the principal obligation carries with it that of the accessory obligations. (Arts. 1230,1273,1280). It provides, however, an exception in the case of an accessory obligation created in favor of a third person which remains in force unless said third person gives his consent to the novation. (Art. 1311, par.2 ). This is so because a person should not be prejudiced by the act of another without his consent. Ex. Sky owes Ivy P2,000 with interest at 14 %. Ivy owes Tonix P280.00. It was agreed among the parties that Sky would pay the interest of P280 to Tonix. In this case, besides the principal obligation of Sky, there is a stipulation in favor of Tonix, a third person. (see Art. 1311, par. 2). Later on, Sky and Ivy executed another contract whereby they agreed that Sky would deliver to Ivy a television set in payment of the loan. Inspite of yhr novation, the accessory obligation to pay the interest of P280 to Tonix will subsist unless Tonix gives his consent to the novation.

Art. 1297. If the new obligation is void, the original one shall subsist, unless the parties intended that the former relation should be extinguished in any event. (n) One of the essential requisites of a valid novation, namely, the new obligation must be valid and effective. Thus, if the new obligation is void, there is no novation, and the old obligation generally will subsist. If the new obligation is only voidable, novation can be take place. But the moment it is annulled, the novation must be considered as not having taken place, and the original one can be enforced, unless the intention of the parties is otherwise.

Art. 1298. The novation is void if the original obligation was void, except when annulment may be claimed only by the debtor or when ratification validates acts which are voidable. (1208a) If the obligation is void- there is no valid novation. If the old obligation was voidable and has already been annulled, there is no more obligation. Therefore, the novation is also void. Ex. Sky agreed to deliver prohibited drugs to Ivy. Later on, it was agreed that Sky would pay Ivy P100,000 instead of delivering the drugs. The obligation is void because the original obligation is void.

Art. 1299. If the original obligation was subject to a suspensive or resolutory condition, the new obligation shall be under the same condition, unless it is otherwise stipulated. (n) General rule: The conditions attached to the old obligation are also attached to the new obligation. Exceptions: If there is a contrary stipulation. University of Cebu College of Law

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Reason for the general rule: If, for example, the suspensive condition attached to the obligation is not fulfilled, the old obligation never arose. Therefore, there would be nothing to novate, since novation requires the existence of a previous valid and effective obligation. Ex. Richard to give Laila a car if Laila should pass the bar exams. Later, both agreed that what should be given would be a diamond ring. Nothing was mentioned in the second contract regarding the condition. Is the new obligation also subject to a suspensive condition? Yes, unless it was otherwise stipulated in the new contract. The delivery of the diamond ring would, therefore, be due only after Laila has passed the bar exams.

Art. 1300. Subrogation of a third person in the rights of the creditor is either legal or conventional. The former is not presumed, except in cases expressly mentioned in this Code; the latter must be clearly established in order that it may take effect. (1209a) Subrogation is the transfer to a third person of all the rights appertaining to the creditor, including the right to proceed against guarantors, possessors of mortgages, subject to any legal provision. Kinds of subrogation: From the viewpoint of cause or origin:  Conventional or voluntary subrogation – this requires an agreement and the consent of the original parties and of the creditor.  Legal subrogation – takes place by operation of law From the viewpoint of extent:  Total subrogation  Partial subrogation

Art. 1301. Conventional subrogation of a third person requires the consent of the original parties and of the third person. (n) For conventional or legal subrogation, the consent of all the parties is required: The debtor – because he becomes liable under the new obligation and because his old obligation ends The old creditor – because his credit affected The new creditor – because he becomes a party to the obligation

Art. 1302. It is presumed that there is legal subrogation: (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. (1210a) In the three cases enumerated, subrogation takes place by operation of law even without the consent of the parties. University of Cebu College of Law

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When a creditor pays another creditor who is preferred. Example: Arthur owes Brad P1,000 secured by a first mortgage on the land of Arthur. Arthur also owes Carl P2,000. This debt is unsecured. Under the law, Brad is a preferred creditor, has preference to payment with respect to the land as against Carl who is merely an ordinary creditor. If Carl pays the debt of Arthur to Brad, Carl will be subrogated in Brad’s right so that he can have the mortgage foreclosed in case Arthur fails to pay the P1,000 debt. When a third person without interest in the obligation pays with the approval of the debtor. Example: Arthur owes Brad P1,000. Carl pays Brad with the express or implied consent of Arthur. Carl will be subrogated in all the rights of Brad. When a third person with interest in the obligation pays even without the knowledge of the debtor. Example: Arthur and Brad are joint debtors of Carl for the amount of P1,000. Without the knowledge of Arthur, Brad pays the debt of P1,000. In this case, Brad becomes a creditor of Arthur for P500, the latter’s share of the debt but not for the remaining P500, the portion of the debt which corresponds to Brad, which is extinguished by confusion or merger of rights.

Art. 1303. Subrogation transfers to the persons subrogated the credit with all the rights thereto appertaining, either against the debtor or against third person, be they guarantors or possessors of mortgages, subject to stipulation in a conventional subrogation. (1212a) Credit and all the appurtenant rights, either against the debtor, or against third persons are transferred. Example: Jamero owes Canoy P1,000,000. Gene is the guarantor. A stranger Steve paid Canoy the P1,000,000 with the consent of Jamero and Canoy. Steve is now subrogated in the place of Canoy. If Jamero cannot pay the P1,000,000, Steve can proceed against the guarantor Gene. It is understood that if the transferred credit is subject to a suspensive condition, the new creditor cannot collect until after said condition is fulfilled.

Art. 1304. 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. (1213) Partial Subrogation 1.) The old creditor, who still remains a creditor as to balance 2.) The new creditor who is a creditor to the extent of what he had paid the creditor. Example: Andrew owes Bobby P500,000. With the consent of both, Carl pays Bobby P250,000. Now Bobby and Carl are the creditor of Andrew to the amount of P250,000. Suppose Andrew has only P250,000 who should be preferred? Bobby, the original creditor, should be preferred inasmuch as he is granted by the law preferential right to recover the remainder, over the person subrogated in his place by virtue of the partial payment of the same credit.

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Title II. - CONTRACTS CHAPTER 1 GENERAL PROVISIONS 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. (1254a) The above article defines the term Contract. In a contract, one or more persons bind themselves with respect to another or reciprocally, to the fulfillment of a presentation to give, to do or not to do. Elements of a contract: 1. Essential elements – those elements without which there can be no valid contract. This element are consent, object or subject matter and cause or consideration 2. Natural elements – those elements which are found in a contract by its nature and presumed by law to exist, such as Warranty of hidden defects or eviction in contract of sale. 3. Accidental elements - those which exist by virtue of an agreement for the purpose of expanding, limiting, or modifying a contract. Such accidental elements are condition, clauses, terms, modes of payment, or penalties. Stages of a contract: 1. Preparatory or conception – process of formation such as bargaining, negotiation to arrive at a define contract. 2. Perfection or birth – there is now a meeting of minds to arrive at a definite agreement as to the subject matter, cause or consideration, terms and conditions of contract. 3. Consumption or death – which is the fulfillment or performance of the terms and conditions agreed upon in the contract may be said to have been fully accomplished or executed. Characteristics of a contract: 1. Freedom to contract – they may establish terms and conditions as they may deem convenient. 2. Relativity – it is binding only upon the parties and their successors. 3. Obligatory force – it constitutes the law as between the parties. 4. Mutuality – its validity and performance cannot be left to the wil of only one of the parties. Classifications of a contract: 1. As to perfection a. Consensual – one which is perfected by mere consent (Art. 1315 b. Real Contract – perfected by mere consent and by the delivery of the object or subject matter. Ex. Deposit, pledge, or commodatum. 2. As to dependence to other contract. a. Principal – one which can stand alone. Ex. A contract of sale, lease. b. Accessory – those which are dependent upon another contract. Ex. Contract of mortgage, pledge of guaranty. c. Preparatory – those which is created in order that a future transaction or contract may be entered into by te parties. Ex. Contract of partnership or agency. University of Cebu College of Law

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3. According to name or designation a. Nominate – one which has particular name or designation such as sale, agency, etc. b. Innominate – those without particular name. 4. According to the nature of obligation a. Unilateral – where only one has an obligation to perform. Ex. Contract of donation, commodation. b. Bilateral – where both parties have reciprocal obligation to perform. Ex. Sale. 5. According to risk involved a. Commutative - where there is an exchange of values, such as lease. b. Aleatory - one which the fulfillment of the obligation depends upon chance. Ex. Contract of insurance. 6. According to cause a. Onerous – one which imposes valuable consideration such as sale, mortgage. b. Gratuitous – one which one of the parties does not receive any valuable consideration, such as commodatum. 7. According to form a. Oral – by word of mouth of the parties b. Written – the agreement which is reduced in writing which may be public or private or private document

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. (1255a) Limitations on the Nature of Stipulations: a.) b.) c.) d.) e.)

the law morals good customs public order public policy

Example: Dan lost in gambling and as payment, executed a promissory note in favor of the winner Carl. Carl then assigned the note to Art. May Art successfully recover from Dan? No, because the promissory note is void. Just as the winner cannot recover, so also cannot the assignee.

Art. 1307. Innominate contracts shall be regulated by the stipulations of the parties, by the provisions of Titles I and II of this Book, by the rules governing the most analogous nominate contracts, and by the customs of the place. (n) Governing rules for innominate contracts a.) b.) c.) d.)

stipulations Titles I & II of Book IV – Obligations & Contracts Rules on the most ANALOGOUS nominate contracts Customs of the place

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4 Kinds of Innominate Contracts a.) do ut des ( I give that you may give) b.) do ut facias (I give that you may do) c.) Facio ut des (I do that you may give) d.) Facio ut facias (I do that you may do) Example: In a contract, the provisions of which were very similar to a lease contract, both parties agreed that the same should not be regarded as a lease. I the stipulation valid? Yes because, there is no legal provision prohibiting such a stipulation. Generally, whatever is agreed upon is binding, particularly in a consensual contract such as lease.)

Art. 1308. The contract must bind both contracting parties; its validity or compliance cannot be left to the will of one of them. (1256a) Contracts entered by and between the parties mush bind both parties in order that it can be enforced against each other. This is also known as “mutuality of contract”. Hence, its validity or compliance cannot be left to the will of one of them. This principle is based on the essential equality of the parties. It is elementary rule that no party can renounce or violate the law of the contract without the consent of the other. (11 Manresa 380) Example: Lleina and Ria entered into a contract to sell whereby Lleina binds herself to sell her only parcel of land to Ria if Lleina decides to leave for States. The contract is void because the fulfillment of the condition depends on the will of Lleina.

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. (n) Example: In a contract of sale, the fixing of the price and the delivery date can be left to a third person. The decision binds the parties only after it is made known to both.

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. (n) As a rule, compliance with a contract cannot be left to the will of one of the contracting parties. However, the determination of its performance may be left to a third person after it has been made known to both contracting parties. Provided, further, the parties are not bound by the determination if it is evidently inequitable or unjust when the third person acted in bad faith or by mistake, the courts shall decide what is equitable under the circumstances. Example, Ria sold her parcel of land to Lleina. It was agreed that May, a real estate appraiser would be the one to determine the reasonable price of the land. May, then, fixed the price after considering the factors affecting the value of the land, and informing both contracting party that the decision is just and suitable. If the decision made by May is manifestly inequitable, the court may be called upon to decide what is equitable.

Art. 1311. 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. 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. (1257a) University of Cebu College of Law

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Cases Where Third person May Be Affected By a Contract 1. In determining the performance of both parties (Art. 1309). 2. In contracts containing a stipulation in favor of a third person (Art. 1311). 3. In contracts creating real rights (Art. 1312). 4. In contracts entered into to defraud creditor (Art. 1313). 5. In contracts which have been violated at the inducement of the third person (Art. 314). Example: Ria mortgaged her parcel of land in favor of Lleina as collateral for her debt. The mortgage is duly registered. Later on, Ria sold the same land to Tonix. In this case, Tonix bought the land subject to the mortgage constituted thereon. Tonix, although a stranger in the mortgage, being a real right follows the property on the right of Lleina to the mortgage.

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. (n) This article constitutes one of the exceptions to the general rule that a contract binds only the parties. Example: If Art should purchase an apartment house from the owner but there is a lease thereon, Art must respect the lease, if the same is registered in the Registry of Property, or if Art has actual knowledge of the existence and duration of the lease. Similarly, the purchaser of land must respect a mortgage constituted thereon, under the same circumstances given hereinabove.

Art. 1313. Creditors are protected in cases of contracts intended to defraud them. (n) This Article represents another instance when an outsider can in a sense interfere with another’s contract. Example: If Lleina gratuitously gives Jack a parcel of land, and Lleina has no other property or cash left to satisfy his creditors, sad creditors may ask for the recission of the contract, to the extent that they have been prejudiced

Art. 1314. Any third person who induces another to violate his contract shall be liable for damages to the other contracting party. (n) Example: Steff, a move actress, has a one-year contract with XY studio. If Franco, a friend of Steff induces her, without any justifiable cause, to break the contract, then XY can sue Franco for damages.

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. (1258) This article stresses the consensuality of contracts (perfection of contract by mere consent). Salvador P. Malbarosa v. CA and S.E.A Development Corp, GR # 125761 Fact: From March 16, 1990 to April 3, 1990, petitioner had more than two weeks to accept the offer of respondent. Although petitioner avers that he had accepted the offer

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of respondent on March 28, 1990, however, he failed to transmit to respondent the copy of the March 14, 1990 letter-offer bearing his conformity thereto. Held: Unless and until the respondent received said copy of the letter-offer, it cannot be argued that a contract had already been perfected between petitioner and respondent.

Article 1317. No one may contract in the name of another without being authorized by the latter, or unless he has by law a right to represent him. A contract entered into in the name of another by one who has no authority or legal representation, or who has acted beyond his powers, shall be unenforceable, unless it is ratified, expressly or impliedly, by the person on whose behalf it has been executed, before it is revoked by the other contracting party. REQUISITE for a Person to Contract in the Name of Another If a person wants to contract in the name of another: 1. He must be duly authorized (expressly or impliedly); OR 2. He must have by law a right to represent him (like the guardian, or the administrator); OR 3. The contract must be subsequently RATIFIED (expressly or impliedly, by word or by deed). RATIFICATION means that one under no disability voluntarily adopts and gives sanction to some unauthorized act or defective proceeding, which without his sanction would not be binding on him. Effect of RATIFICATION: Ratification cleanses the contract from all its defects from the moment the contract was entered into. Hence there is retroactive effect. NOTE: There can be no more ratification if the contract has previously been revoked by the other contracting party. NOTE: An UNAUTHORIZED CONTRACT is a form of an UNENFORCEABLE CONTRACT. ESSENTIAL REQUISITES OF CONTRACTS Article 1318. There is no contract unless the following requisites concur: (1) Consent of the contracting parties; (2) Object certain which is the subject matter of the contract; (3) Cause of the obligation which is established. ESSENTIAL REQUISITES OF CONSENSUAL CONTRACTS The THREE essential requisites for consensual contracts are enumerated in this Article. NOTE: Under the OLD Civil Code, “consideration” was the word used instead of “cause of the obligation.” REAL CONTRACTS Real contracts require a FOURTH REQUISITE – DELIVERY. SOLEMN OR FORMAL CONTRACTS This requires a FOURTH REQUISITE - Compliance with the formalities required by law. Example: A simple donation inter vivos of land requires a public instrument for its perfection. What CONSENT Presupposes CONSENT presupposes LEGAL CAPACITY and the FULFILMENT of CONDITIONS, should any be attached.

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EFFECT OF NON-CONSENT If there is ABSOLUTELY NO CONSENT, there is NO CONTRACT. The agreement may be considered inexistent or non-existent or void. The same rule applies as in the case of ABSOLUTELY SIMULATED CONTRACT, one where the parties never intended to be bound. If there is a VICE OF CONSENT (vitiated consent), such as error, fraud, or undue influence, the contract is not void; it merely VOIDABLE. Lack of Consent VERSUS Lack of Consideration One of the three essential requisites of a valid contract is consent of the parties on the object and cause of the contract. In a contract of sale, the parties must agree not only on the price, but also on the manner of payment of the price. An agreement on the price but a disagreement on the manner of its payment will not result in consent, thus, preventing the existence of a valid contract for LACK of CONSENT. This lack of consent is different from LACK OF CONSIDERATION where the contract states that the price has been paid when in fact, it has never been paid. CONSENT Article 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. (CONSENT) The offer must be certain and the acceptance absolute. A qualified acceptance constitutes a COUNTEROFFER. ACCEPTANCE MADE BY LETTER OR TELEGRAM does not bind the offerer except from the time it came to his knowledge. The contract, in such a case, is presumed to have been entered into in the place where the offer was made. (ACCEPTANCE THRU CORRESPONDENCE) CONSENT as an ESSENTIAL REQUISITE This Article emphasizes CONSNET, which is the first essential requisite of every contract. CONSENT is the meeting of the minds between the parties on the subject matter, and the cause of the contract, even if neither one has been delivered. It is the manifestation of the meeting of the offer and the acceptance upon the thing and the cause which are to constitute the contract. (Article 1319, 1st Paragraph) REQUISITES OF CONSENT (5) 1. There must be two or more parties. 2. One person may represent two or more parties, UNLESS there are uncontradictory or prejudicial interests involved. 3. The parties must be capable or capacitated. 4. There must be NO vitiation of consent. 5. There must be NO CONFLICT between what was expressly declared and what was really intended. 6. Otherwise the remedy may be reformation, as when the parties really intended to be bound, or else the contract is void, as when the contract is fictitious or absolutely simulated. 7. The INTENT must de declared properly (that is, whatever legal formalities are required must be complied with). REQUISITES OF THE MEETING OF THE MINDS (2) 1. An OFFER must be CERTAIN. In order than on offer may be considered certain, it must not be vague, misleading, or made as a joke. If the offer is withdrawn before it is accepted, there is no meeting of the minds

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NOTE: If two contracts are offered, but they are independent of each other, acceptance of one does not imply acceptance of the other. BUT if one contract depends upon another, like a contract of loan provided it is secured by a contract of mortgage, it is essential that there be an agreement on both transactions. Otherwise, there can be as yet no meeting of the minds. 2. And an ACCPETANCE that must be UNQUALIFIED and ABSOLUTE. NOTE: If the acceptance is qualified, let us say by a condition, this merely constitutes a COUNTER-OFFER. If there is COMPLETELY NO ACCEPTANCE, or if the OFFER IS EXPRESSLY REJECTED, there is NO MEETING OF THE MINDS. If the acceptance is QUALIFIED or not absolute, there is no concurrence of minds. This merely constitutes a COUNTER-OFFER. A COUNTER-OFFER as a matter of fact extinguishes the offer. Moreover, it may or may not be accepted by the original offeror. QUERY: A offered 20 fountain pens to B for P1,000 each. B answered by letter that he was willing to purchase 30 fountain pens at said price at P1,000 each. Is the contract perfected? ANSWER: It depends. If B wanted 30 pens and would not be satisfied with less, the acceptance can be considered as qualified, so there has been no perfection yet. If B was contented with 20 pens, but desired, if possible to get 10 more, there is perfected sale regarding the original 20, and an offer with respect to the extra ten. Unless accepted in turn, there would be no contract yet with respect to the additional 10 fountain pens. NOTE: If an offeror offers several distinct and separate items, and the offeree accepts one of them, the contract is perfected as to the item accepted. ACCEPTANCE THRU CORRESPONDENCE RULE: Acceptance made by letter or telegram DOES NOT BIND the offeror, EXCEPT from the time it came to his knowledge. The knowledge may be actual or constructive (as when the letter of acceptance has been received in the house of the offeror by a person possessed of reasonable discernment). If actual knowledge be required, proof of this would almost impossible, for even when the letter containing the answer has been opened and read, the offeror can always claim, in some cases truthfully, that while he was reading the same, his mind was elsewhere, and he did not actually know the contents of the letter. The contract in such a case is presumed to have been offered into in the place where the offer was made. CASE: On February 5, 1919, Arias wrote Laudico a letter, offering a lease contract. On March 6, 1919, Laudico wrote a letter of complete acceptance, which was received by Arias that same afternoon. But that same morning Arias had already written Laudico a letter withdrawing the offer. ISSUE: Was there a contract here?

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ANSWER: No, because prior to receipt of the letter of acceptance, the offer had already been withdrawn. In other words, it does not matter that the letter of withdrawal may have been received later by the offeree than receipt of the letter of acceptance by the offeror. What is important is that the letter of withdrawal was made prior to the knowledge of acceptance. RULE IF LETTER OF ACCEPTANCE IS WITHDRAWN OR REVOKED A letter of acceptance may in turn be withdrawn or revoked. Example: Ajohn offered on January 1. Bobby accepted on January 8. The letter of acceptance was received by Ajohn on January 15. But on January 12, B had already written a letter revoking the acceptance. Was there a meeting of the minds? If the letter revoking the acceptance was received by Ajohn before January 15 (receipt of the letter of acceptance), there is no question that there was no meeting of the minds. BUT if the letter revoking the acceptance, although made previously, was nevertheless received by Ajohn only after January 15 (receipt of the letter of acceptance), Reyes, Puno, and Tolentino believe that there was already a meeting of the minds. According to them, the REVOCATION OF THE ACCEPTANCE must reach and be learned by the offeror ahead of the acceptance.

Article 1320. An acceptance may be express or implied. FORMS OF ACCEPTANCE 1. EXPRESS 2. IMPLIED – from conduct, or acceptance of unsolicited services. 3. PRESUMED BY LAW – as when there is a failure to repudiate hereditary rights within the period fixed by law; or when there is silence in certain specific cases as would tend to mislead the other party and thus place the silent person in estoppel. IMPLIED REJECTION Upon the other hand, REFUSAL or REJECTION of an offer may also be inferred from acts and circumstances like the failure to act on offer of compromise before the court enters a final judgment on a case.

Article 1321. The person making the offer may fix the time, place, and manner of acceptance, all of which must be complied with. THINGS THAT MAY BE FIXED BY THE OFFEROR 1. The time 2. The place 3. The manner of acceptance. NOTE: Any act contrary to the prescribed terms really constitutes a counter-offer or counterproposal.

Article 1322. An offer made through an agent is accepted from the time acceptance is communicated to him. ACCEPTANCE OF AN OFFER THRU AN AGENT This Article applies when BOTH the offer and the acceptance are made thru an agent (who is an extension of the principal). Any other intermediary (who is not an agent, with power to bind) is merely a sort of messenger, who must communicate to the person who sends him; otherwise, there is as yet no meeting of the minds. University of Cebu College of Law

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QUERY: Suppose the principal himself made the offer, and acceptance is communicated to his agent, would the Article apply? In other words, would there already be a meeting of the minds? ANSWER: It is submitted that as a GENERAL RULE, there would as yet be no meeting of the minds, for the agent may be an ordinary one, not authorized to receive the acceptance for the particular transaction. HOWEVER, if the agent was expressly authorized to receive the acceptance, or if the offeree had been told that acceptance could be made direct with the agent, who would then be given freedom to act or proceed, there can be a meeting of the minds and a perfection of the contract. Article 1323. An offer becomes ineffective upon the death, civil interdiction, insanity, or insolvency of either party before acceptance is conveyed. WHEN OFFER BECOMES INEFFECTIVE – 4 Instances When either party: 1. Died; 2. Suffers civil interdiction; 3. Insanity 4. Insolvency Before the acceptance is conveyed. Other Instances: 1. When the offeree expressly or impliedly rejects the offer; 2. When the offer is accepted with a qualification or condition (for here, there would be merely a counter-offer) 3. When before acceptance is communicated, the subject matter has become illegal or impossible; 4. When the period of time given to the offeree within which he must signify his acceptance has already lapsed. 5. When the offer is revoked in due time (that is, before the offeror has learned of its acceptance by the offeree).

Article 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. (OPTIONS) GENERAL RULE ON OPTIONS If the offeror has allowed the offeree a certain period to accept, the offer may be withdrawn at any time before acceptance (or the thing being offered) by communicating such withdrawal. To be binding on the person who made a unilateral promise, the promise must be supported by a cause or consideration distinct from the price. EXCEPTION When the option is founded upon a consideration as something paid or promised, the offeror cannot withdraw the offer to sell until after the expiration of the period given. OPTION DEFINED It is a contract granting a person the privilege to buy or not to buy certain objects at any time within the agreed period at a fixed price. The Contract of Option is a SEPARATE and DISTINCT CONTRACT from the contract which the parties may enter into upon the consummation of the contract.

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Therefore, an option must have its own cause or consideration, a cause distinct from the selling price itself. Of course, the consideration may be pure liberality. PERFECTION of an OPTION Since an option is by itself a contract, it is not perfected unless there is a MEETING OF THE MINDS on the option. Thus, the offer to grant an option, even if founded on a distinct cause or consideration, may itself be withdrawn before the acceptance of the offer of an option. NOTE: There is therefore a difference between acceptance of the offer of option (which results in the contract of option) and acceptance of the object being offered for sale or acceptance of the offer of sale (which results in the contract of sale.

Article 1325. Unless it appears otherwise, business advertisements of things for sale are not definite offers, but mere invitations to make an offer. BUSINESS ADVERTISEMENTS Are business advertisements of things for sale definite offers? ANSWER: It depends. a. If it appears to be a definite offer containing all the specific particulars needed in a contract, it really is a definite offer. b. If important details are left out, the advertisement is not a definite offer, but a mere invitation to make an offer.

Article 1326. Advertisements for bidders are simply invitations to make proposals, and theadvertiser is not bound to accept the highest or lowest bidder, unless the contrary appears. ADVERTISEMENT FOR BIDDERS As a GENERAL RULE, the advertiser is not bound to accept the highest or lowest bidder, UNLESS the contrary appears. ACCEPTANCE OF A BID The mere determination of a public official or board to accept the proposal of a bidder does not constitute a contract; the decision must be communicated to the bidder. Definition of Terms 1. LOWEST BIDDER - is he who offers the lowest price (as in the case of purchase by the bidder, or a contract for work by the bidder. 2. LOWEST RESPONSIBLE BIDDER – includes not only financial ability but also the skill and capacity necessary to complete the job for which the bidder would become answerable. 3. LOWEST AND BEST BIDDER – is even wider and includes not only financial responsibility, skill, and capacity, but also the reputation of the bidders for dealing fairly and honestly with the government, their mechanical facilities, and business organization tending to show dispatch in their work and harmonious relations with the government, the magnitude and urgency of the job, the kind and quality of materials to be used, and other factors, as to which a bidder may offer greater advantages than another. Article 1327. The following cannot give consent to a contract: (1) Unemancipated minors; (2) Insane or demented persons, and deaf-mutes who do not know how to write. TWO CLASSES OF VOIDABLE CONTRACTS 1. Those were one party is incapacitated to give consent;

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2. Those were the consent of one party has been vitiated (such as by error, fraud, violence, intimidation and undue influence). NOTE: These contracts in general are valid until annulled; however annulment cannot prosper when they have been ratified. PERSONS INCAPACITATED TO GIVE CONSENT (3) 1. Unemancipated Minors; 2. Insane or Demented Persons (unless they acted during a lucid interval), drunks and those hypnotized (Article 1328 of the Civil Code); 3. Deaf-Mute, who do not know to write (and read). NOTE: If they know how to read, but do not know how to write, it is submitted that the contract is valid for then they are capable of understanding, and therefore capaciated to give consent. Unemancipated Minors These are the minors who have not been emancipated by attainment of the legal age of majority. In GENERAL, the contracts which they enter into are VOIDABLE, UNLESS: a. Upon reaching the age majority, they ratify the same; b. They were entered into thru a guardian, and the court having jurisdiction had approved the same; c. They were contracts of life insurance in favor of their parents, spouse, children, brothers, sisters, and provided furthermore, that minor is 18 years old or above. d. They were in the form of savings account provided furthermore that the minor was at least seven years old. e. They were contracts for necessities such as food, but here the people who are legally bound to give them support should pay therefor. f. They were contracts where the minor misrepresented his age, and pretended to be one of major age and is, thus in ESTOPPEL. It is however, essential here that the other party have been misled. NOTE: If both parties to a contract are minors, the contract is UNENFORCEABLE. (Article 1403, No. 3 of the Code – where both parties are incapable of giving consent to a contract) Insane or Demented Persons UNLESS, they acted during a lucid interval. REASON: People who contract must know what they are entering into. NOTE: No proper declaration of insanity by the court is required, as long as it is shown that at the time of contracting, the person was really insane. PRESUMPTION OF SANITY: If the contract was made before the declaration of insanity, the presumption is that he was still sane at the time of contracting. He who alleged the insanity of another at the time of contracting is duty-bound to prove the same, otherwise, the latter’s capacity must be presumed. Deaf-Mutes Who Do Not Know How to Write (and Read) If a deaf-mute does not know how to write but he knows how to read, he should be considered capacitated. PERSONS SPECIALLY DISQUALIFIED There are people who are specially disqualified in certain things. Here the transaction is VOID because the right itself is restricted, that is, the right is withheld. In the case of mere legal incapacity, the transaction is voidable because the right itself is not restricted, but merely its exercise, that is, it can still be exercised but under certain conditions.

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Article 1328. Contracts entered into during a lucid interval are valid. Contracts agreed to in a state of drunkenness or during a hypnotic spell are voidable. LUCID INTERVALS Even if a person has already been judicially declared insane, and is actually now under guardianship, he may still enter into a valid contract, provided that it can be shown that at the time of contracting, he was in a lucid interval. Of course here, he is already presumed insane, and therefore the sanity must be proved. Article 1329. The incapacity declared in article 1327 is subject to the modifications determined by law, and is understood to be without prejudice to special disqualifications established in the laws. INCOMPETENT PERSONS Under the Rules of Court Under the Rules of Court, the following are considered incompetents, and may be placed under guardianship: 1. Those under civil interdiction; 2. Hospitalized lepers; 3. Prodigals (spendthrifts); 4. Deaf and dumb who are unable to read and write; 5. Those of unsound mind 6. Those who by reason of age, disease, weak mind, and other similar causes, cannot without outside aide, take care of themselves and manage their property, becoming thereby an easy prey for deceit and exploitation.

Article 1330. A contract where consent is given through mistake, violence, intimidation, undue influence, or fraud is voidable. CAUSES of VITIATED CONSENT 1. Mistake or Error 2. Fraud 3. Violence 4. Intimidation 5. Undue Influence Mistake and Fraud affect the intellect. They thus affect cognition. Cognition must be intelligent. Violence, Intimidation, and Undue Influence affect the will. They thus affect the volition. Volition must be free. Mistake and Fraud result in the defects of the intellect. The others result in the defects of the will. NATURE OF VOIDABLE CONTRACTS A voidable contract is binding and valid, unless annulled by a proper action in court. It is however, susceptible of ratification before annulment. Annulment may be had even if there be no damage to the contracting parties. Clear and Convincing Evidence on the Vice of Consent There must be clear and convincing evidence of the presence of vitiated consent. Mere preponderance of evidence on this matter is not sufficient.

Article 1331. 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. University of Cebu College of Law

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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. A simple mistake of account shall give rise to its correction. MISTAKE or ERROR It is a false belief about something. REQUISITES FOR MISTAKE TO VITIATE CONSENT (3) 1. The error must be substantial regarding: a. The object of the contract b. The conditions which principally moved or induced one of the parties (error in quality or in quantity) c. Identity or qualifications (error in personae) but only if such was the principal cause of the contract. The error is substantial if because of it, the party gave his consent. Therefore, if a party would still have entered into the contract even if he had known of the error, the error is not substantial. NOTE: Error as to personal motive does not vitiate consent. NOTE: A simple mistake as to account, caused for example by wrong arithmetical computation, would ordinarily give rise merely to correction and not annulment of the contract. Note, however the difference between error in quantity and error in account. He who alleges must prove the same. 2. The error must be excusable (not caused by negligence); The error does not vitiate consent if the party in error was negligent, or if having had an opportunity to ascertain the truth, he did not do so. There is no mistake if the party alleging it knew the doubt, contingency or risk affecting the object of the contract. Error as to how much the profit a person can make because of the transaction cannot annul the contract because in many cases, this is merely speculative. 3. The error must be a mistake of fact, and not of law. This is because ignorance of the law excuses no one from compliance therewith. Error of law, however, on a doubtful or difficult question can exist together with good faith. NOTE: Mutual error as to the legal effect of an agreement when the real purpose of the parties is frustrated, may vitiate consent. (Article 1334, NCC) Legal effect here refers to the rights of the parties as stated in the legal provisions.

Article 1332. When one of the parties is unable to read, or if the contract is in a language not understood by him, and mistake or fraud is alleged, the person enforcing the contract must show that the terms thereof have been fully explained to the former. RULE IN CASE OF INABILITY TO READ OR UNDERSTAND Reason for the Article: This rule is especially necessary in the Philippines where unfortunately there is still a fairly large number of illiterates, and where documents are usually drawn up in English. Presumption The natural presumption, of course, is that one always acts with due care and signs with full knowledge of all the contents of a document. And this is true even if the mind of the party signing was confused at the time of signing, as long as he still knew what he was doing. He, thus, cannot repudiate the transaction. When Presumption Does Not Apply The presumption referred to cannot apply in the cases contemplated under this Article: 1. When one of the parties us unable to read (including a blind person); 2. Or if the contract is in language not understood by one of the parties. University of Cebu College of Law

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In both cases, the person enforcing the contract must show that the terms thereof have been fully explained to the former.

Article 1333. There is no mistake if the party alleging it knew the doubt, contingency or risk affecting the object of the contract. Knowledge of Doubt or Risk Does Not Vitiate Consent It is to be assumed here that the party was willing to take the risk. This is particularly true in contracts which are evidently aleatory in nature. Mistake Caused by Inexcusable Negligence If mistake is caused by inexcusable negligence, the contract cannot be annulled.

Article 1334. Mutual error as to the legal effect of an agreement when the real purpose of the parties is frustrated, may vitiate consent. (MUTUAL ERROR) REQUISITES FOR MUTUAL ERROR TO VITIATE CONSENT (3) 1. There must be mutual error; 2. The error must refer to the legal effect of the agreement. 3. The real purpose of the parties is frustrated. Example: Antonio and Babing entered into a contract, which they intended should result in coownership between him, but which turned out later to be a mortgage, as a result of their mutual error as to the legal effect of the agreement. Here the contract is voidable. REASON for the ARTICLE: Mistake of law does not generally vitiate consent, BUT when there is a mistake on a doubtful or difficult question of law, or on the construction or application of law, this is analogous to a mistake of fact. DISTINGUISHED FROM THE REMEDY OF REFORMATION This Article must be distinguished from Article 1361 where the remedy is reformation, not annulment. Thus, Article 1361 of the Civil Code reads: “When a mutual mistake of the parties causes the failure of the instrument to disclose their real agreement, said instrument may be reformed.” NOTE: Under Article 1361, the real agreement of the parties is not disclosed; in Article 1334, the error is as to legal effect of the agreement. Article 1335. There is violence when in order to wrest consent, serious or irresistible force I employed. (VIOLENCE) There is intimidation when one of the contracting parties is compelled by a reasonable and wellgrounded 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. (INTIMIDATION) To determine the degree of intimidation, the age, sex and condition of the person shall be borne in mind. A threat to enforce one's claim through competent authority, if the claim is just or legal, does not vitiate consent. VIOLENCE and INTIMIDATION

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VIOLENCE refers to physical coercion; INTIMIDATION to moral coercion. Example: If a person signs a contract only because a gun is pointed at him, this is intimidation because he is afraid he would be killed. But if he signs because his left hand is being twisted painfully, this is violence or force. REQUISITES for VIOLENCE TO VITIATE CONSENT (2) 1. Employment of serious or irresistible force; 2. It must have been the reason why the contract was entered into. REQUISITE for INTIMIDATION TO VITIATE CONSENT (5) 1. Reasonable and well-grounded fear. Whether the fear is reasonable and well-grounded or not depends upon many circumstances, including the age, condition, and sex of the person concerned. The fear is reasonable and well-grounded when those who threaten have power, and when maltreatment has accompanied the threat. 2. Of an imminent and grave evil This again depends on the circumstances, particularly, the age, sex, or condition of the person threatened. 3. Upon his person, property, or upon the person or property of his spouse, descendants, or ascendants It is believed that threat to honor, chastity, and dignity may be classified under threat to “person”. THREAT TO THE LIFE OF ONE’S FIANCEE: It is submitted that the provision is to be liberally interpreted for indeed consent here is vitiated just the same. 4. It must have been the reason why the contract was entered into 5. The threat must be of unjust act; an actionable wrong. NOTE: A threat to enforce one’s claim thru competent authority, if the claim is just and legal, does not vitiate consent. A THREAT TO PROSECUTE is not considered as intimidation. But, of course, an agreement not to prosecute on account of crime is against public policy. REVERENTIAL FEAR If a contract is signed merely because of “fear of displeasing persons to whom obedience and respect are due,” the contract is still valid for by itself reverential fear is not wrong.

Article 1336. Violence or intimidation shall annul the obligation, although it may have been employed by a third person who did not take part in the contract. (VIOLATION OR INTIMIDATION CAUSED BY THIRD PERSON) Article 1337. 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. (UNDUE INFLUENCE) The following circumstances shall be considered: the confidential, family, spiritual and other relations between the parties, or the fact that the person alleged to have been unduly influenced was suffering from mental weakness, or was ignorant or in financial distress.

REQUISITES FOR UNDUE INFLUENCE TO VITIATE CONSENT (3) University of Cebu College of Law

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1. Improper advantage 2. Power over the will of another 3. Deprivation of the latter’s will of a reasonable freedom of choice. The influence exerted must be of a kind that overpowers the mind as to destroy the party’s free agency. FACTORS TO BE CONSIDERED: 1. Confidential, family, spiritual and other relations between the parties; 2. Mental weakness; 3. Ignorance; 4. Financial distress NOTE: To vitiate consent, the influence must be UNDUE. If the influence is due or allowable, as when caused by solicitation, importunity, argument, and persuasion, same is not prohibited by law, morals, or equity. UNDUE INFLUENCE CAUSED BY THIRD PERSONS It also vitiates consent, just like in the case of violence and intimidation. Contracts of Adhesion Contracts where one party merely signs carefully prepared contracts by big companies (adhesions contracts or contract of adherence) should be strictly interpreted against the company, and liberally in favor of the individual, because the individual is usually helpless to bargain for better terms.

Article 1338. 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. (FRAUD) KINDS OF FRAUD 1. Fraud in the Celebration of the Contract – this is fraud proper a. Dolo Causante (CAUSAL FRAUD) – here, were it not for the fraud, the other party would not have consented. The contract is voidable. b. Dolo Incidente (INCIDENTAL FRAUD) – here, even without the fraud, the parties would have agreed just the same, hence the fraud was only incidental in causing consent. Effect of this kind of fraud: The contract is valid, but there can be action for damages. 2. Fraud in the Performance of the Obligations Stipulated in the Contract This kind of fraud presupposes the existence of an already perfected contract. DOLO CAUSANTE (Causal Fraud) This is the use of insidious words and machinations by one of the contracting parties to induce the other party to enter into a contract, without them, he would not have agreed to. REQUISITES of DOLO CAUSANTE (4) 1. The fraud must be material and serious, that is, it really induced that consent. 2. The fraud must have been employed by only one of the contracting parties, because if both committed fraud, the contract would remain valid. 3. There must be a deliberate intent to deceive or to induce; therefore, misrepresentation in good faith is not fraud. 4. The other party must have relied on the untrue statement, and must himself not be guilty of negligence in ascertaining the truth. Entrance into a Ridiculous Contract Suppose a man enters into a ridiculous contract because of a wrong judgment although he is well in possession of his mental faculties, will the court grant a relief by annulling the contract? University of Cebu College of Law

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ANSWER: NO, for in this case, it was the man’s own fault. The Supreme Court said: “All men are presumed to be sane and normal and subject to be moved by substantially the same motives. When of age and sane, they must take care of themselves.” The fact that one may be worsted by another, of itself, furnishes no cause of complaint. One man cannot complain because another is more able, or better trained, or has a better sense of judgment than he has; and when the two meet on FAIR FIELD, the inferior cannot murmur if the battle goes against him. The law furnishes no protection to the inferior simply because he is inferior, anymore than it protects the strong because he is strong. The law furnished protection to both alike, to one no more or less than the other.

Article 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 OF FACTS) FAILURE TO DISCLOSE FACTS (CONCEALMENT) a. Failure to disclose facts (CONCEALMENT) constitutes fraud, when there is a duty to reveal them. b. There is a DUTY TO REVEAL, for example, when the parties are bound by confidential relations as in the case of partners.

Article 1340. The usual exaggerations in trade, when the other party had an opportunity to know the facts, are not in themselves fraudulent. USUAL EXAGGERATIONS IN TRADE This Article stresses the RULE of “CAVEAT EMPTOR”, let the buyer beware. The maxim simply means that a buyer must be on his guard. It is his duty to check the title of the seller; otherwise the buyer gets the object at his own risk. The USUAL EXAGGERATIONS IN TRADE (dealer’s talk) constitutes tolerated fraud when the other party had an opportunity to know the facts.

Article 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. MERE EXPRESSION OF AN OPINION RULE: The mere expression of an opinion is not fraudulent. EXCEPTION: If the opinion was given by an expert, and other party relied on his special knowledge, the contract is voidable on the ground of fraud. REASON for the EXCEPTION: The opinion of an expert is almost in the same category as a fact, particularly when this expert’s knowledge is relied upon by the other party.

Article 1342. Misrepresentation by a third person does not vitiate consent, unless such misrepresentation has created substantial mistake and the same is mutual. MISREPRESENTATION BY THIRD PERSON How does the participation of a third person in force and in fraud/misrepresentation differ? a. FORCE and INTIMIDATION BY A THIRD PERSON makes the contract voidable. b. FRAUD BY A THIRD PERSON does not make the contract voidable, UNLESS: University of Cebu College of Law

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1. The representation has created substantial mistake; and 2. The mistake is mutual. In this case, the contract can be annulled, not principally on the ground of fraud, but on the ground of error or mistake. Example: Amy and Andrew entered into a contract with Xavi. Amy’s consent was obtained only because Andrew had deceived or defrauded him. May Amy ask for annulment of the contract with Xavi? No, because X was not party to the fraud.

Article 1343. Misrepresentation made in good faith is not fraudulent but may constitute error. MISREPRESENTATION MADE IN GOOD FAITH Example: A bought a certain article from B. The article was needed for A’s radio. B honestly but mistakenly assured A that the Article was the proper object. May the contract be annulled? Answer: Yes, not on the ground of fraud, for the misrepresentation was honest, but on the ground of mistake or substantial error.

Article 1344. In order that fraud may make a contract voidable, it should be serious and should not have been employed by both contracting parties. Incidental fraud only obliges the person employing it to pay damages. (INCIDENTAL FRAUD) REQUISITES FOR FRAUD TO VITIATE CONSENT 1. The fraud must be serious; 2. The parties must not be in pari delicto (mutual guilt); otherwise, neither party may ask for annulment. The contract would, therefore, be considered valid. INCIDENTAL FRAUD This should not be confused with causal fraud. Incidental fraud is not a cause for annulment.

Article 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 OF CONTRACT It is the process of intentionally deceiving others by producing the appearance of a contract that really does not exist (absolute simulation) or which is different from the true agreement (relative simulation). REQUISITES FOR SIMULATION 1. An outward declaration of will different from the will of the parties; 2. The false appearance must have been intended by mutual agreement; 3. The purpose is to deceive third persons.

Article 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.

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KINDS OF SIMULATED CONTRACT (2) 1. ABSOLUTELY Simulated Contracts (Fictitious Contract)  Here the parties do not intend to be bound;  Effect: The contract is VOID. 2. RELATIVELY Simulated Contracts (Disguised Contract)  Here the parties conceal their true agreement.  Effect: The parties are bound to the real or true agreement, except: a. If the contract should prejudice a third person; b. Or if the purpose is contrary to law, morals, good customs, public order, or public policy. NOTE: Third persons should not be prejudiced; therefore as to them, the apparent or ostensible contract is the one valid. Reason: The contracting parties are in estoppel, and they should be penalized for their deception. ABSOLUTELY SIMULATED CONTRACT versus ILLEGAL CONTRACT In SIMULATION, the contract is not really desired to produce an illegal effect or in any way alter the juridical relation or situation of the parties. ILLEGAL CONTRACT is intended to be real and effective, and entered in such form as to circumvent a prohibited act.

OBJECTS OF CONTRACTS Article 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. No contract may be entered into upon future inheritance except in cases expressly authorized by law. All services which are not contrary to law, morals, good customs, public order or public policy may likewise be the object of a contract. OBJECT (SUBJECT MATTER) OF A CONTRACT The object of a contract is really to create or to end obligation, which in turn, may involve things or services. Hence, elliptically, it may be said that the object of a contract is a thing or service. REQUISITES (5) 1. The thing or service must be within the commerce of man; 2. It must be transmissible; 3. IT must not be contrary to law, morals, good customs, public policy, or public order; 4. It must not be impossible; 5. It must be determinate as to its kind or determinable without the need of a new contract or agreement. Future Things as Object of a Contract FUTURE THINGS may be the object of a contract; thus, the future harvest of sugarcane in a specific field may be sold, BUT by express provision of law, said future property may not be donated. FUTURE INHERITANCE (one where the source of property is still alive) cannot be the subject of a contract, except: 1. In the case of marriage settlement; 2. In the case of partitions or property inter vivos by the creased. University of Cebu College of Law

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Future inheritance is any property or right not in existence or capable of determination, at the time of the contract, that a person may in the future acquire by succession.

Article 1348. Impossible things or services cannot be the object of contracts. IMPOSSIBILITY OF THINGS OR SERVICES Impossibility may be: 1. Because of the nature of the transaction or because of the law; 2. Absolute (objectively impossible) – here, no one can do it 3. Relative (subjectively impossible) – here, the particular debtor cannot comply NOTE: Generally, the impossibility referred to by the law is absolute impossibility. Impossibility VERSUS Mere Difficulty IMPOSSIBLITY must not be confused with difficulty. Hence, a showing of mere inconvenience, unexpected impediments, or increased expenses is not enough.

Article 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. DETERMINATE OR DETERMINABLE OBJECT OF A CONTRACT The object must be DETERMINATE or DETERMINABLE (without need of a new agreement); If the object is not determinate or determinable, the contract is void for want of essential requisite – the object of the contract. CAUSE OF CONTRACTS Article 1350. In ONEROUS CONTRACT, 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. CAUSE Defined It is the essential and impelling reason why a party assumes obligation. Strictly speaking, there is no cause of contract, but there is a cause for an obligation. CAUSE versus SUBJECT MATTER The difference is only a matter of viewpoint in some way, because what may be the subject matter for one party will be the cause and consideration for the other party. Example: A is obliged to sing at a concert, in return for which she will receive a car from B. Regarding A, the subject matter is the singing, and the cause is the car. Regarding B, the subject matter is the car, and the cause is the singing. Hence, we can form this GENERAL CONCLUSION: In reciprocal contracts, the subject matter for one is the cause for the other, and vice versa. CLASSIFICATION OF CONTRACTS AS TO CAUSE 1. ONEROUS CONTRACT – here, the cause is, for each contracting party, the prestation or promise of a thing or service by the other. Example: Contract of Sale 2. REMUNERATORY CONTRACT – that past service or benefit which by itself is a recoverable debt. 3. GRATUITOUS (Contract of Pure Beneficence) – here, the cause is mere liberality or generosity. University of Cebu College of Law

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Example: Pure Donation CAUSE IN ACCESSORY CONTRACTS Like in mortgage or pledge, the cause is the same cause for the principal contract of loan. CAUSE IN ACCESSORY CONTRACTS OF PERSONAL GUARANTY (like guaranty or suretyship), generally is gratuitous, unless there is stipulation to the contrary. Moral Obligation as a Valid Cause of a Civil Obligation A moral obligation may be the cause of a civil obligation. Of course, if the moral obligation really does not exist, there is no valid cause, as when the promise was made on the erroneous belief that one was morally responsible for the failure of a certain particular enterprise.

Article 1351. The particular motives of the parties in entering into a contract are different from the cause thereof. MOTIVES OF THE PARTIES for ENTERING INTO A CONTRACT Motives do not enter at all in the validity or invalidity of cause or consideration of a contract. MOTIVE versus CAUSE 1. The MOTIVE of a person may very although he enters into the same kind of contract; the CAUSE is always the same. 2. The MOTIVE may be unknown to the other; the cause is always known. 3. The presence of MOTIVE cannot cure the absence of CAUSE. NOTE: The motives which impel one to sale or purchase are not always the consideration (cause) of the contract as that term is understood in law. With one’s motives the law cannot deal in civil actions of this character, while with the consideration the law is always concerned. (Supreme Court’s Statement) ILLEGAL CAUSE versus ILLEGAL MOTIVE An ILLEGAL CAUSE makes a contract void; an ILLEGAL MOTIVE does not necessarily render the transaction void. Article 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. REQUISITES FOR A VALID OF CAUSE (3) 1. It must be PRESENT (at the time the contract was entered into); 2. It must be TRUE (not false); 3. It must be LAWFUL (not contrary to law, morals, good customs, public order, and public policy). Existing Cause If there is no cause whatsoever, the contract is void. NOTE: The cause must exist at the time of the perfection of the contract; it need not later exist. Just because the seller was not the owner of the thing sold, it does not mean that there was lack of cause, for after all, there is warranty; nor does a failure to pay the price, result in a lack of cause. True Cause If the cause is false, the contract is not valid UNLESS some other cause which is lawful really exists. Lawful Cause

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If the cause is unlawful, the transaction is null and void. If a person claims that some parts of a contract are illegal but the rest are valid, he has the burden of showing which parts are supported by a lawful cause; otherwise the whole contract shall be considered void. While an absolutely simulated contract can have no effect, a contract with an illegal cause may produce effect under certain circumstances where the parties are not of equal guilt. EFFECT IF THE CAUSE IS ILLEGAL 1. If one party is innocent, he cannot be compelled to perform his obligation, and he may recover what he has already given; 2. If both parties are guilty, in general, neither can sue the other, the law leaving them as they are. But certain exceptions exist.

Article 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. STATEMENT OF FALSE CAUSE Just because the cause stated is false does not necessarily mean that the contract is void. REASON: The parties are given a chance to show that a cause really exists, and that said cause is true and lawful. Thus, under this Article, it would seem that the contract with a statement of a false cause is not void, but merely revocable or voidable.

Article 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. PRESEUMPTION THAT CAUSE EXISTS It is necessary that the cause must exist. BUT it is not necessary to state the cause in the contract. REASON: It is presumed that the cause exists and is lawful, unless the debtor proves the contrary.

Article 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. LESION It is inadequacy of cause, like an insufficient price for a thing sold. RULES ON LESION GENERAL RULE: Lesion or inadequacy of price does not invalidate a contract. EXCEPTIONS: 1. When together with lesion, there has been fraud, mistake, or undue influence. 2. In cases expressly provided by law (in the following, the contracts may be rescinded): a. Those which are entered into by guardians whenever the wards they represent suffer lesion by more than one-fourth of the value of the things which are the objects thereof. b. Those agreed upon in representation of absentees, if the latter suffer the lesion stated in the preceding paragraph; c. Partition among co-heirs when anyone of them received things with a value less by at least one-fourth than the share to which he is entitled.

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NOTE: Mere inadequacy of a price when both parties are in a position to form an independent judgment concerning the transaction, is not a sufficient ground for the cancellation of a contract. Lesion may be evidence of the presence of fraud, mistake, or undue influence. CHAPTER 3 FORM OF CONTRACTS Article 1356. Contracts shall be obligatory, in whatever form they may have been entered into, provided all the essential requisites for their validity are present. However, when the law requires that a contract be in some form in order that it may be valid or enforceable, or that a contract be proved in a certain way, that requirement is absolute and indispensable. In such cases, the right of the parties stated in the following article cannot be exercised. GENERAL RULE: Form does not matter for the validity of a contract. It is enough that there be consent, subject matter, and cause. This rule applies, however to CONSENSUAL CONTRACTS. NOTE: FORMAL CONTRACTS (Solemn Contracts) – require a certain specified form, in addition to consent, subject matter, and cause. REAL CONTRACTS require delivery to be valid as a real contract even as between the parties, in addition to consent, subject matter, and cause. Under Article 1356, all contracts are valid regardless of form. There are only TWO EXCEPTIONS: 1. When the contractual form is needed for validity as in the case of donation of a real property which needs a public instrument; 2. When form is needed for enforceability under the Statute of Frauds. NOTE: When a party admits the genuineness of the document, he also admits that the words and figures of the document are set out correctly, and that he waives all formal requisites required by law, such as the oath, acknowledgement, or revenue stamps. WHEN FORM IS IMPORTANT 1. For VALIDITY: This is true in formal or solemn contracts 2. For ENFORCEABILITY: This is true for the agreements enumerated under the Statute of Frauds, but of course this requirement may be waived by acceptance of benefits (partial) or by failure to object to the presentation of oral (parol) evidence. 3. For CONVENIENCE: This is true for the contracts enumerated for example under Article 1385, Civil Code. EXAMPLES OF FORMAL CONTRACTS: 1. Donations of real property – these require a public instrument 2. Donations of personal property if donation exceed P5,000 requires a written contract 3. Stipulation to pay interest on loans, interest for the use of the money which must be in writing 4. Sale of land thru agent – here, the authority 5. Contracts of antichresis

Article 1357. If the law requires a document or other special form, as in the acts and contracts enumerated in the following article, the contracting parties may compel each other to observe that form, once the contract has been perfected. This right may be exercised simultaneously with the action upon the contract. RIGHT OF ONE PARTY TO COMPEL THE OTHER TO EXECUTE THE NECESSARY FORM The Article applies only when form is need only FOR CONVENIENCE, not for validity or enforceability. In other words, before the contracting may be compelled to execute the needed the form, it is ESSENTIAL that the contract be: University of Cebu College of Law

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a. Perfected (valid) b. Enforceable under Statute of Frauds NOTE: Under Article 1356 says that when the law requires that a contract be in some form in order that it may valid and enforceable, that requirement is absolute and indispensable. In such cases, the right of the parties stated in the following Article (1357) – the right to compel – cannot be exercised. NOTE: A contract partly written and partly oral is, in legal effect, an ORAL CONTRACT.

Article 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 are governed by articles 1403, No. 2, and 1405; (2) The cession, repudiation or renunciation of hereditary rights or of those of the conjugal partnership of gains; (3) The power to administer property, or any other power which has for its object an act appearing or which should appear in a public document, or should prejudice a third person; (4) The cession of actions or rights proceeding from an act appearing in a public document. All other contracts where the amount involved exceeds five hundred pesos must appear in writing, even a private one. But sales of goods, chattels or things in action are governed by articles, 1403, No. 2 and 1405. FORM FOR CONVENIENCE The necessity for the public document in the contracts enumerated here is only for convenience, not for validity or enforceability. Article 1358, which requires the embodiment of certain contracts in a public instrument, is only for convenience, and registration of the instrument only adversely affects third parties. Formal requirements are for the benefit of third parties. NON-COMPLIANCE therewith does not adversely affect the validity of the contract nor the contractual rights and obligations of the parties thereunder. PROBLEM: A loan was contracted orally. If the amount is P800, may the lender recover the sum lent? ANSWER: Yes, because although the law says that contracts involving more than P500 must appear in writing, even a private one, still this requirement is only for convenience, not for validity. NOTE: All the lender has to do here is to avail of himself of Article 1357, the right to compel the execution of the needed instrument. Moreover, “this right may be exercised simultaneously with the action upon the contract.” NOTE: A stipulation, however, to pay interest on loans must be in writing. If not, Article 1357 cannot be availed of. If not in writing, the stipulation as to interest is void, but the loan itself is valid. CHAPTER 4 REFORMATION OF INSTRUMENT REFORMATION is that remedy by means of which a written instrument is made or construed so as to express or conform to the real intention of the parties when some error or mistake has been committed. University of Cebu College of Law

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Reason for Reformation: EQUITY orders the reformation of an instrument in order that the true intention of the contracting parties may be expressed. The courts do not attempt to make another contract for the parties. The RATIONALE of the doctrine is that it would be unjust and inequitable to allow the enforcement of a written instrument which does not reflect or disclose the real meeting of the minds of the parties. The purpose of reformation is to forestall the effects of mistake, fraud, inequitable conduct or accident.

Article 1359. When, there having been a meeting of the minds of the parties to a contract, their true intention is not expressed in the instrument purporting to embody the agreement, by reason of mistake, fraud, inequitable conduct or accident, one of the parties may ask for the reformation of the instrument to the end that such true intention may be expressed. (REFORMATION) If mistake, fraud, inequitable conduct, or accident has prevented a meeting of the minds of the parties, the proper remedy is not reformation of the instrument but annulment of the contract. (ANNULMENT instead of REFORMATION) REFORMATION versus ANNULMENT REFORMATION Where there has been a meeting of the minds, but there is mistake or fraud, inequitable conduct or accident in the contract as written, the remedy is REFORMATION. REFORMATION does not invalidate the contract.

ANNULMENT When there has been no meeting of the minds, because of vitiated consent, the proper remedy is ANNULMENT. ANNULMENT invalidates a contract.

Example: If the seller was selling for one million but the buyer though he was buying for P500,000 and the contract states one million, there has been no meeting of the minds and the remedy is ANNULMENT. Example: But, if both agreed on P500,000 and the contract as written states one million, the remedy is REFORMATION, because here, there has been a meeting of the minds. REQUISITES FOR THE ACTION OF REFORMATION (5) 1. There must be meeting of the minds; 2. The true intention of the parties is not expressed in the instrument; 3. There must be a clear and convincing proof thereof. NOTE: Mere preponderance off evidence here would not be sufficient. 4. It must be brought within the proper prescriptive period. 5. The document must not refer to a simple unconditional donation inter vivos or to wills or to a contract where the real agreement is void.

Article 1360. The principles of the general law on the reformation of instruments are hereby adopted insofar as they are not in conflict with the provisions of this Code. Article 1361. When a mutual mistake of the parties causes the failure of the instrument to disclose their real agreement, said instrument may be reformed. WHEN REFORMATION MAY BE ASKED BECAUSE OF MUTUAL MISTAKE Under this Article, the mistake must be mutual. The mistake may be unilateral under conditions set forth in Articles 1362 and 1363 of the Civil Code. The mistake must be of fact. Therefore, generally, an error of law is not enough. University of Cebu College of Law

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Example: Lleina sold to Jack a house at 16 San Isidro, Malate. In the written public document, both forgot the true number of the house and instead wrote on the instrument “No. 18 San Isidro, Malate.” Here reformation of the instrument is proper. REQUISITES: 1. The mistake should be of fact; 2. The mistake should be proved by clear and convincing evidence; 3. The mistake should be common to both parties to the instrument (where mutual mistake is alleged).

Article 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. UNILATERAL MISTAKE In this Article, the mistake is unilateral but the other party acted fraudulently or inequitably. The person who acted by mistake may ask for the reformation of the instrument.

Article 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. Here again, the mistake is UNILATERAL but the other party is guilty of concealment. Only the party in good faith can ask for reformation.

Article 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. FAILURE TO CONVEY THE TRUE INTENT The COURT may order the reformation of the instrument if the instrument does not convey the true intention of the parties BECAUSE of the: a. Ignorance b. Lack of Skill c.Negligence d. Bad faith of the DRAFTER of the instrument; or the CLERK; or the TYPIST.

Article 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. How to Judge the Parties Intent: The intention of the parties can be judged from their contemporaneous and subsequent acts. Article 1366. There shall be no reformation in the following cases: (1) Simple donations inter vivos wherein no condition is imposed; (2) Wills; (3) When the real agreement is void. WHEN REFORMATION IS NOT ALLOWED (3) 1. In simple donations inter vivos wherein no condition is imposed.

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REASON: Donations are generally acts of pure liberality. However, if the donation is conditional, reformation may be resorted to so that the real or true conditions intended by the donor might be brought out. 2. In wills. REASON: The making of a will is strictly a personal one. Moreover, a will may be revoked anytime. However, after the death of the testator, errors or imperfections in descriptions may be corrected under Article 789 of the Civil Code but not the manner of property disposal. 3. When the real agreement is void. REASON: Reformation would be useless. 4. When one of the parties has brought an action to enforce the instrument, he cannot subsequently ask for its reformation.

Article 1367. When one of the parties has brought an action to enforce the instrument, he cannot subsequently ask for its reformation. Effect of An Action To Enforce the Instrument: This Article presents another instance when reformation cannot prosper. BASIS: Estoppel, waiver, or ratification.

Article 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. PLAINTIFFS IN ACTION FOR REFORMATION 1. If the MISTAKE is MUTUAL – either party or his successors-in-interest 2. In all other cases – the injured party; his heirs or assigns. What Complaint Must Allege Before reformation can be granted, the complaint must allege: 1. That the instrument to be reformed does not express the real agreement or intention of the parties; 2. What real agreement or intention was. NOTE: Courts do not reform instruments merely for the sake of reforming them, but only to enable some party to assert rights under them as reformed. The period of prescription for the reformation of a contract is TEN (10) YEARS.

Article 1369. The procedure for the reformation of instrument shall be governed by rules of court to be promulgated by the Supreme Court.

CHAPTER 5 INTERPRETATION OF CONTRACTS Article 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. University of Cebu College of Law

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RULE IN CASE OF CONFLICT In case of conflict between the words of the contract and the evident intentions of the parties which one must prevail? ANSWER: The INTENTION of the parties must PREVAIL. “Let us interpret not by the letter that killeth but by the spirit that giveth life.”

Article 1371. In order to judge the intention of the contracting parties, their contemporaneous and subsequent acts shall be principally considered. (HOW TO JUDGE THE INTENT OF THE PARTIES) Article 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. (EFFECT OF THE USE OF GENERLA TERMS) NOTE: Special intent prevails over general intent. Article 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. EFFECT OF AN INTERPRETATION UPHOLDING THE VALIDITY OF THE CONTRACT If one interpretation makes a contract valid and illegal, the former interpretation must prevail. Article 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. Article 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. If this cannot be determined, then the “terms of a writing are presumed to have been used in their primary and general acceptation.” NOTE: Evidence is admissible to show that WORDS have a local, technical, or otherwise peculiar signification and were so used and understood in the particular instance, in which case the agreement must be construed accordingly.

Article 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. Pleading and Proof of Customs and Usages a. If the customs and usages are GENERAL, they need not be pleaded. Hence, even without previously being alleged, they may be proved in court. b. If the customs and the usages are merely LOCAL, then they have to be both alleged (pleaded and proved)

Article 1377. The interpretation of obscure words or stipulations in a contract shall not favour the party who caused the obscurity.

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REASON for the Law: Since he caused the obscurity, the party who drew up the contract with ambiguous terms should be responsible therefor; so the obscurity must be construed against him. The drafter of the terms of the contract should, therefore, be careful.

Article 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. (RULE IN CASE OF DOUBTS AS TO THE PRINCIPAL OBJECT) Article 1379. The principles of interpretation stated in Rule 123 of the Rules of Court shall likewise be observed in the construction of contracts.

CHAPTER 6 FOUR KINDS OF DEFECTIVE CONTRACTS 1. RESCISSIBLE CONTRACT – This is valid until rescinded; there is a sort of extrinsic defect consisting of economic damage or lesion. 2. VOIDABLE CONTRACT – This is valid until annulled; it cannot be annulled, however, if there has been ratification. The defect is more or less intrinsic, as in the case of vitiated consent. 3. UNENFORCEABLE CONTRACT – This contract cannot be sued upon or enforced unless it is ratified. In a way, it may be considered a voidable contract, that is, it has no effect now, but it may be effective upon ratification. 4. VOID CONTRACT – This is really inexistent or illegal. It has no effect at all. It cannot be ratified or validated.

RESCISSIBLE CONTRACTS Contracts are valid because all the essential requisites of a contract exist but by reason of injury or damage to one of the parties or to third persons, such as creditors, the contract may be rescinded. Art. 1380. Contracts validly agreed upon may be rescinded in the cases established by law. (1290) Rescission- is a remedy granted by law to the contracting parties and sometimes even to third person in order to secure reparation of damages caused them by a valid contract, by means of the restoration of things to their condition in which they were prior to the celebration of said contract. (8Manresa 748) Requisites of Rescission: 1. The contract must be validly agreed upon; 2 .There must be lesion on pecuniary prejudice to one of the parties or to a third person; University of Cebu College of Law

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3. The rescission must be based upon a case especially provided by law; 4. There must be no other legal remedy to obtain reparation for the damage; 5. The party asking for rescission must be able to return what he is obliged to restore by reason of the contract. 6. The object of the contract must not legally be in the possession of third person who did not act in bad faith; 7. The period for filing the action for rescission must not have prescribed

Art. 1381. The following contracts are rescissible: (1) Those which are entered into by guardians whenever the wards whom they represent suffer lesion by more than one-fourth of the value of the things which are the object thereof; (2) Those agreed upon in representation of absentees, if the latter suffer the lesion stated in the preceding number; (3) Those undertaken in fraud of creditors when the latter cannot in any other manner collect the claims due them; (4) Those which refer to things under litigation if they have been entered into by the defendant without the knowledge and approval of the litigants or of competent judicial authority; (5) All other contracts specially declared by law to be subject to rescission. (1291a) Cases of rescissible contracts: 1. Contracts entered into in behalf of wards- A ward is a person under guardianship by reason of some incapacity. Example: Grant is the guardian of Mark (minor). Grant sells the property of Mark worth P20,000 for only P15,000. The contract of sale cannot be rescinded because the lesion. (Art. 1355) is not more than 1/4. However, if the property is sold for less than P15,000, M can rescind the sale by proper action in court upon reaching the age of majority. 2. Contracts agreed upon in the representation of absentees – An absentee is a person who disappears from his domicile his whereabouts being unknown; and without leaving an agent administer his property. (Art. 381) Likewise, the absentee must suffer lesion by more than ¼ of the value of the property object of the contract to entitle him to the remedy of rescission. 3. Contracts undertaken in fraud of creditors- In order that fraud of creditors may be a valid ground for rescission, the following requisites must also be present: A. There must be an existing credit prior to the contract be rescinded, although it is not yet due or demandable; B. There must be fraud on the part of the debtor which maybe presumed or proved. (Art. 1387) C. the creditor cannot recover his credit in any other manner, it not being required that the debtor be insolvent. 4. Contracts which refer to things under litigation Ex. Lleina sues Tonix for the recovery of a parcel of land. In this case, the land is a “thing under litigation.” If, during the pendency of the case, Tonix sells the land to Jack without the approval of Lleina or of the court, the sale is rescissible at the instance of Lleina in a case he wins in his suit for the recovery of said land unless Jack is in legal possession of the land in good faith. (Art. 1385, par. 2). Lleina, University of Cebu College of Law

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however, may protect his right by filing a notice of lis pendens. If the action involves personal property, Jack may petition the court for the issuance of an order of attachment or the appointment of a receiver to place the property in custodia legis. 5. Other instances- Some of the specific contracts subject to rescission are examples of agreements referred to in Arts. 1098, (partition), 1189 (result of deterioration),1526 and 1534 (right given ti an unpaid seller), and 1539 (sale of real estate) of the Civil Code.

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. (1292) Requisites: 1. The debtor-payor must have been insolvent (the insolvency need not be a judicially declared one) 2. The debt was not yet due and demandable. Both conditions are required; otherwise, Article 1382 cannot apply. Article 1382 does not speak of a contract; it refers to payment; thus, it is not included in Article 1381.

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. (1294) Nature of rescission as a remedy: Rescission is not a principal remedy; it is only a subsidiary remedy and may only be availed of by the injured party if it has no other legal means of seeking redress or reparation for the damages caused. When a creditor seeks to set aside a contract as fraudulent, he must prove that he really is a creditor, and secondly, that he cannot collect his debt in any way.

Art. 1384. Rescission shall be only to the extent necessary to cover the damages caused. (n) Partial Rescission: The only purpose of rescission is to repair or cover the damages caused. Complete rescission will not therefore be allowed, if it is not justified by the circumstances of the case. Insofar as it is not rescinded, the alienation is valid. Persons Benefited: Only the creditor who asked for rescission, not the other creditors, benefits from rescission.

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. (1295)

Necessity of mutual restitution: The obligation of restitution does not obviously apply to creditors who seek to impugn fraudulent transactions of their debtors. The obligation of mutual restitution applies to others so that the status quo may be restored. University of Cebu College of Law

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Requisites before the action for rescission can be brought: 1. Generally, the plaintiff must be able to return what has been received by virtue of the rescissible contract; Exception: prejudiced-creditors The thing object of the contract is not in the legal possession of third person in good faith. In order that the property may not be taken away from a third person, said person must not only be in legal possession; he must also be in good faith. Good faith alone, however, without legal possession is not sufficient. 1. There must be no other legal remedy. 2. The action must be brought within the proper prescriptive period. Should be returned in rescing a contract: 1. The object of the contract, with its fruits must be returned. 2. The price, with its interest, must be returned. 3. If return of the things is not possible, indemnity for damages from the person causing the loss must be given. 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. (1296a) Contracts approved by the courts If a contract entered into in behalf of a ward or absentee has been approved by the court, rescission cannot take place because it is valid whether there is lesion or not. The law presumes that the court is acting in the interests of the ward or absentee when it approves the contract inspite of the lesion. (See Sec. 1, Rule 95, Rules of Court)

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. 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. In addition to these presumptions, the design to defraud creditors may be proved in any other manner recognized by the law of evidence. (1297a) Presumptions of Fraud 1. Gratuitous alienations; 2. Onerous alienations. Gratuitous Alienations: Presumed Fraudulent– when the debtor did not reserve sufficient property to pay all debts contracted before the donation. This presumption may be rebutted by adequate proof. Example: Anton made a donation to Bobby. Later Anton contracted several debts. Anton has left as assets are much less than his present liabilities. May the donation be rescinded? No, because the debts here of Anton were incurred after the donation had been made. As a matter of fact, the presumption of fraud does not even arise in this case. However, under the DOCTRINE OF ANTICIPATORY FRAUD, rescission may still prosper if it can be shown that the donation had been deliberately made beforehand to avoid the payment of debts still to be contracted. University of Cebu College of Law

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Onerous Alienations: Presumed Fraudulent– when made by persons: a. Against whom some judgment has been rendered in any instance (thus, even if not yet a final judgment); b. Against whom some writ of attachment has been issued.

The decision or attachment need not refer to the property alienated, and need not have been obtained by the party seeking the rescission. Example: After a judgment had been rendered against him, Anton sold his property to Bobby. Is the sale presumed fraudulent? Yes, the sale is presumed fraudulent because it was made after a judgment had been issued against Upon the other hand, if the sale had been made before the judgment, the presumption of fraud does not apply. This is even if, unknown to the buyer, the suit had already been brought, but still pending, as long as of course no attachment had been issued. Badges of Fraud: There are some circumstances indicating that certain alienation has been made in fraud of creditors. These are called badges of fraud. In determining whether or not a certain conveyance is fraudulent, the question in every case is whether conveyance was bona fide transaction or a trick and contrivance to defeat creditors, or whether it conserves to the debtor a special right. Relationship alone does not by itself constitute a badge of fraud. If there is a great disparity between the price and the real value of the property, this is an indication of badges of fraud. Rule in Case of Registered Lands Rescission will not prosper for the presumption established under Article 1387 does not apply in this case for TWO REASONS: a. The spouses Jongco had no complicity at all in the fraud imputed to Enriquez; b. The encumbrance of the judgment and the attachment, not having been registered and annotated on the certificate (TCT), cannot prejudice an innocent purchaser for value of registered land. Presumption of Validity A gratuitous conveyance or donation is, on its face (prima facie), presumed valid and good as between the parties UNLESS it can be shown that at the time of the execution of the conveyance, there was a creditor or creditors whom said transaction was affected adversely. Fraud Alone – Not Sufficient for Rescission For after all the transferee may have been in good faith and is now in legal possession of the property.

Art. 1388. Whoever acquires in bad faith the things alienated in fraud of creditors, shall indemnify the latter for damages suffered by them on account of the alienation, whenever, due to any cause, it should be impossible for him to return them. If there are two or more alienations, the first acquirer shall be liable first, and so on successively. (1298a) Effect of bad faith: University of Cebu College of Law

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1. The acquirer must return or indemnify. 2.“Due to any” includes a fortuitous event. Example: To defraud his creditors, Xam sold his to Yam, who knew of Xam’s purpose. If the sale is rescinded, Yam must indemnify, even if the house be destroyed by a fortuitous event, but only if Xam himself cannot pay. REMEMBER that rescission is merely a secondary remedy available only when Xam cannot pay. Subsequent Transfers: RULE 1: If the first transferee is in good faith, the good or bad faith of the next transferee is not important. RULE 2: If the first transferee is in bad faith, the next transferee is liable only if he is also in bad faith. Example: Fred, in fraud of his creditors, sold his house to Ted, who is in bad faith. Ted in turn alienated it in favor of Candice, who later sold it to Debbie. Both Candice and Debbie were also in bad faith. The contract is rescinded but the house is destroyed. Who are liable for damages? Ted is liable first. If he cannot pay, then Candice will be liable. If Candice cannot, Debbie will be liable. The law says that “if there are two or more alienations, the first acquirer shall be liable first, and so on successively.”

Art. 1389. The action to claim rescission must be commenced within four years. For persons under guardianship and for absentees, the period of four years shall not begin until the termination of the former's incapacity, or until the domicile of the latter is known. (1299) Prescriptive period for prescription General rule: FOUR years from the date the contract was entered into. Exceptions: 1. Persons under guardianship – 4 years from termination of incapacity; 2. Absentees – 4 years from the time the domicile is known. They can bring the action: 1.) The injured party (or the defrauded creditor); 2.) His heir or successor-in-interest; 3.) Creditors of (1) and (2) by virtue of Article 1177 of the Civil Code (in case of accion subrogatoria)

CHAPTER 7 VOIDABLE CONTRACTS 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. These contracts are binding, unless they are annulled by a proper action in court. They are susceptible of ratification. (n)

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RESCISSIBLE CONTRACTS versus VOIDABLE CONTRACTS RESCISSION

ANNULMENT

The BASIS here is LESION or damage.

The BASIS here is incapacity or vitiated consent.

The DEFECT here is external or intrinsic.

The DEFECT here is intrinsic (in the meeting of the minds).

The ACTION is SUBSIDIARY.

The ACTION is PRINCIPAL.

This is a remedy.

This is a sanction.

Private interest governs.

Public interest governs.

Equity predominates.

Law predominates.

Plaintiff may be a party or a third person.

Plaintiff must be a party to the contract whether bound principally or subsidiarily.

There must be damage to plaintiff.

Damage to the plaintiff is immaterial.

If plaintiff is indemnified, cannot prosper.

Indemnity is not a barrier prosecution of the action.

rescission

for

the

Compatible with the perfect validity of the contract.

Defect is pre-supposed.

To prevent rescission, ratification is not required.

To prevent annulment, ratification is required.

VOIDABLE CONTRACT – Not Void Ab Initio A contract were consent is vitiated is not void ab initio but ONLY VOIDABLE, and is binding upon the parties unless annulled by proper action in court. GROUNDS FOR ANNULMENT (Declaration of Nullity of a Voidable Contract) 1. Incapacity to consent; 2. Vitiated Consent Repentance at having entered into the transaction is NOT a ground for annulment. IT is not the function of the law to protect or relieve a man from the consequences of his bad bargain. The ACTION TO BRING 1. For POSITIVE REDRESS, an action must be filed, otherwise, the contract remains binding. 2. For use AS A DEFENSE, ordinarily, no affirmative action is needed.

Art. 1391. The action for annulment shall be brought within four years. This period shall begin: In cases of intimidation, violence or undue influence, from the time the defect of the consent ceases. In case of mistake or fraud, from the time of the discovery of the same. And when the action refers to contracts entered into by minors or other incapacitated persons, from the time the guardianship ceases. (1301a)

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If the action has prescribed, the contract can no longer be set aside. Art. 1392. Ratification extinguishes the action to annul a voidable contract. (1309a) CONFIRMATION- is to cure a defect in a voidable contract. RATIFICATION- is to cure the defect for lack of authority in an authorized contract. ACKNOWLEDGMENT -is to remedy a deficiency of proof. Under the New Civil Code, all the three are now uniformly called RATIFICATION. EFFECTS OF RATIFICATION: 1. The action to annul is extinguished. Thus, the contract becomes a completely valid one. 2. The contract is cleansed of its defect from the beginning. REQUISITES OF RATIFICATION 1. The contract must be a voidable one. 2. The person ratifying must know the reason for the contract being voidable. That is, the cause must be known. 3. The cause must not exist or continue to exist anymore at the time of ratification. 4. The ratification must have been expressly or by an act implying a waiver of the action to annul. 5. The person ratifying must be the injured party.

Art. 1393. Ratification may be effected expressly or tacitly. It is understood that there is a tacit ratification if, with knowledge of the reason which renders the contract voidable and such reason having ceased, the person who has a right to invoke it should execute an act which necessarily implies an intention to waive his right. (1311a) KINDS OF RATIFICATION: 1. Express (Oral or Written) Ratification 2. Tacit (Implied) Ratification – as from conduct implying a waiver. Mere lapse of time does not legalize a voidable contract, BUT it was held in case, that remaining silent for a certain period of time ratifies such contract.

Art. 1394. Ratification may be effected by the guardian of the incapacitated person. (n) This Article refers to the ratification of a contract entered into by the incapacitated person. Since the person entitled to ratify is still incapacitated, his guardian acts in his behalf. Ratification can be made the injured party himself, provided he is capacitated, or has become capacitated. Article 1394 does not refer to a rescissible contract entered into by the guardian in behalf of his ward.

Art. 1395. Ratification does not require the conformity of the contracting party who has no right to bring the action for annulment. (1312) Art. 1396. Ratification cleanses the contract from all its defects from the moment it was constituted. (1313) Once ratification has taken place, annulment based on the original defects cannot prosper. Although there is a retroactive effect, the right of innocent third persons must not be prejudiced. University of Cebu College of Law

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Example: Andrew minor sold his land to Xam. When be became legally of age, he became indebted to Yam. To avoid paying Yam, the former minor decided to ratify the sale of the land. He then had no other property. May Yam still rescind the sale although at the time it was made he was not yet a creditor? Yes. Although ratification has a retroactive effect, still his rights as an innocent third person must not be prejudiced.

Art. 1397. The action for the annulment of contracts may be instituted by all who are thereby obliged principally or subsidiarily. However, persons who are capable cannot allege the incapacity of those with whom they contracted; nor can those who exerted intimidation, violence, or undue influence, or employed fraud, or caused mistake base their action upon these flaws of the contract. (1302a) The VICTIM (principal or subsidiary party) may ask for annulment, not the guilty person or his successor. Reason is the he who comes to equity must come with clean hands. General rule: Action for annulment of contracts can only be maintained by those who are bound either principally or subsidiarily by virtue thereof.= Exceptions: A person who is not obliged principally or subsidiarily in a contract may exercise an action for nullity of the contract if he is PREJUDICED in his rights with respect to one of the contracting parties, and can show the detriment which could positively result to hi from the contract in which he had no intervention. The creditors of the victim cannot ask for annulment for they are not bound by contract. Example: Anton was forced by Bobby to sign a contract. Cecil, a creditor of Anton, wants to annul the contract. Is Cecil allowed to do so? No. C is not allowed to do so. If the contract prejudices him, and A has no other property, then C may ask for the rescission of the contract, not its annulment. C cannot ask for annulment because he is not obliged by the terms of said contract, either principally or subsidiarily. Intimidation or fraud by a Minor Example: Anton minor forces X to sign a contract. May the minor later on ask for annulment? No, because he himself is at fault. If a minor misrepresents his age and the other party is misled as to his age, may the minor later on sue for annulment? No, because of estoppels.

Art. 1398. An obligation having been annulled, the contracting parties shall restore to each other the things which have been the subject matter of the contract, with their fruits, and the price with its interest, except in cases provided by law. In obligations to render service, the value thereof shall be the basis for damages. (1303a) EFFECTS OF ANNULMENT 1. If the contract has not yet been complied with, the parties are excused from the obligation. 2. If the contract has already been performed, there must be MUTUAL RESTITUTION (in general) of: a. The thing, with fruits b. The price, with interest Innocent third parties cannot be obliged to restore. A guilty party, who for example, used force can be held liable for damages. EFFECT OF ANNULMENT IN PERSONAL OBLIGATIONS Here, the value of the service shall be the basis for damages. University of Cebu College of Law

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Art. 1399. When the defect of the contract consists in the incapacity of one of the parties, the incapacitated person is not obliged to make any restitution except insofar as he has been benefited by the thing or price received by him. (1304) Generally, No Restitution by Incapacitated Persons a. This Article applies only if the defect is INCAPACITY. b. This constitutes an exception to the obligation of mutual restitution. c. Here, in Article 1399, restitution is only to the extent of enrichment (pecuniary or otherwise). No Presumption of Enrichment The law does not presume this enrichment or benefit; therefore, the capacitated person has the burden of showing such enrichment. Just because the property had been delivered, it does not necessarily follow that there was enrichment. Of course, if the incapacitated person still has the property, this by itself is a benefit which he must return and not squander; otherwise, this will amount to ratification.

Art. 1400. Whenever the person obliged by the decree of annulment to return the thing can not do so because it has been lost through his fault, he shall return the fruits received and the value of the thing at the time of the loss, with interest from the same date. (1307a) In the duty of mutual restitution, the value of the thing with interest substitutes for the thing itself that was lost thru the party’s fault.

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. (1314a) EFFECT OF LOSS OF OBJECT THROUGH FRAUD OR FAULT OF THE VICTIM Rule: If the plaintiff is at fault; he cannot annul the contract. Example: Andrew was forced to sign a contract with Brad. In said contract, Andrew was given a house. But Andrew destroyed the house. May Andrew still bring the action for annulment? No more. His act of destroying the house extinguished his right to bring the action for annulment. Rule: If the plaintiff was guilty of fraud for the loss of the object, he can no longer annul the contract. Avast, a minor, was sold a house by Boer. The house was destroyed by a fortuitous event. May Avast still annul the contract to recover from the Boer the price (and interest) he had given? Yes. As a rule, if the right of action is based upon the incapacity of anyone of the contracting parties, the loss of the thing shall not be an obstacle to the success of the action. Here, the minor was not guilty of fraud or fault.

Art. 1402. As long as one of the contracting parties does not restore what in virtue of the decree of annulment he is bound to return, the other cannot be compelled to comply with what is incumbent upon him. (1308)

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CHAPTER 8 UNENFORCEABLE CONTRACTS (n) Unenforceable contracts are those that cannot be enforced in court or sued upon by reason of defects provide by law until unless they are ratified according to law. They are contracts either entered into without or in excess of authority or do not comply with the statue of frauds or both of the contracting parties do not possess the required legal capacity. Art. 1403. The following contracts are unenforceable, unless they are ratified: (1) Those entered into in the name of another person by one who has been given no authority or legal representation, or who has acted beyond his powers; (2) Those that do not comply with the Statute of Frauds as set forth in this number. In the following cases an agreement hereafter made shall be unenforceable by action, unless the same, or some note or memorandum, thereof, be in writing, and subscribed by the party charged, or by his agent; evidence, therefore, of the agreement cannot be received without the writing, or a secondary evidence of its contents: (a) An agreement that by its terms is not to be performed within a year from the making thereof; (b) A special promise to answer for the debt, default, or miscarriage of another; (c) An agreement made in consideration of marriage, other than a mutual promise to marry; (d) An agreement for the sale of goods, chattels or things in action, at a price not less than five hundred pesos, unless the buyer accept and receive part of such goods and chattels, or the evidences, or some of them, of such things in action or pay at the time some part of the purchase money; but when a sale is made by auction and entry is made by the auctioneer in his sales book, at the time of the sale, of the amount and kind of property sold, terms of sale, price, names of the purchasers and person on whose account the sale is made, it is a sufficient memorandum; (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. (3) Those where both parties are incapable of giving consent to a contract. UNAUTHORIZED CONTRACTS These are “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.” Ex. Without my authority, my brother sold my car, in my name to X. The contract is unauthorized and cannot affect me unless I ratify the same expressly or implicitly, as by accepting the proceeds of the sale. NOTE: Mere lapse of time, no matter how long, is not the ratification required by law of an unenforceable contract. Without ratification, the “agent” assumes personal liability. THE STATUTE OF FRAUDS: The PURPOSE is to prevent fraud, and not to encourage the same. Thus, certain agreements are required to be in writing so that they may be enforced. NOTE: The Statute of Frauds applies only to executor contracts and not to consummated sales where oral evidence may be admitted.

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HOW THE STATUTE OF FRAUDS PREVENTS FRAUD Since memory is many times unreliable, oral agreements may sometimes result in injustices. To aid human memory, to prevent the commission of injustices dues to faulty memory, to discourage intentional misrepresentations, are the principal aims of the Statute of Frauds. CHIEF CHARACTERISTIC Its chief characteristic is the provision that no suit or action shall be maintained on certain classes of contracts or engagements unless there is a note or memorandum thereof in writing signed by the party to be charged or by his authorized agent. BASIC AND FUNDAMENTAL PRINCIPLES CONCERNING THE STATUTE OF FRAUDS 1. The Statute of Frauds applies only EXECUTORY CONTRACTS (contracts where no performance has yet been made) and not to partially or completely executed contracts. REASON: The possibility for fraud in executor contracts is much greater. 2. The Statute of Frauds cannot apply if the action is neither for damages because of the violation of an agreement nor for the specific performance of said agreement. 3. The Statute of Frauds is exclusive, that is, it applies only to the agreements or contracts enumerated herein. NOTE: Contract of loan is not one those enumerated in the Statute. 4. The defense of the Statute of Frauds may be waived. 5. TWO WAYS to Waive the Defense of Statute of Fraud: a. Timely failure to object to the presentation of oral evidence to prove the oral agreement; b. Acceptance of benefits under them 6. The Statute of Frauds is a personal defense, that is, a contract infringing it cannot be assailed by third persons. 7. Contracts infringing the Statute of Frauds are not void; they are merely unenforceable. 8. The Statute of Frauds is a Rule of Exclusion. Oral evidence might be relevant to the agreement enumerated therein and might therefore be admissible were it not for the fact that the law or the statute excludes said oral evidence. 9. The Statute of Frauds does not determine the credibility or weight of evidence. It merely concerns itself with the admissibility thereof. 10. The Statute of Frauds does not apply if it is claimed that contract does not express the true agreement of the parties. As long as the true or real agreement is not covered by the Statute of Frauds, it is provable by oral evidence. NOTE: Contracts infringing the Statute of Frauds are ratified by the acceptance of benefits under them. THE SPECIFIC AGREEMENTS UNDER THE STATUTE OF FRAUDS 1. An agreement that by its terms is not to be performed within a year from the making thereof. The broad view is that the Statute of Frauds applies only to agreement not to be performed on either side within a year from the making thereof. Agreements to be University of Cebu College of Law

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fully performed on one side within a year are taken out of the operation of the Statute of Frauds. NOTE: It would seem that while in general partially executed contracts are not covered by the Statute of Frauds, still under No. 1 SPECIFIC AGREEMENT, only full or complete performance by one side will take the case out of the operation of the Statute. 2. A special promise to answer for the debt, default, or miscarriage of another.

Example: Jack borrowed money from Sky, with Tonix as guarantor. The contract of guaranty must be in writing to be enforceable. “SPECIAL PROMISE” refers to a subsidiary or collateral promise to pay, like a contract of guaranty. 3. An agreement made in consideration of marriage, other than a mutual promise to marry. Examples of Agreements Made in Consideration Marriage: a. Marriage Settlements b. Donations Propter Nuptias When the law says “in consideration of marriage”, it really means “by reason of marriage”. Thus the cause of the donation propter nuptias is not the marriage but the liberality or the generosity of the giver. NOTE: The law says “other than a mutual promise to marry”. Hence, a oral mutual promise to marry is not embraced by the Statute of Frauds. The injured party may present oral evidence of the promise in an action to obtain actual damages for breach thereof. Ex. A and B mutually promised to marry each other. The promise need not be in writing, UNLESS the marriage be deferred till after the lapse of one year from the agreement. 4. An agreement for the sale of goods, chattels or things in action, at a price not less than five hundred pesos. THINGS IN ACTION means incorporated or intangible personal property. NOTE: The law says “SALES” not other contracts. NOTE: If the price is exactly P500, the contract must be in writing to be enforceable. PARTIAL PAYMENT takes the contract away from the Statute of Frauds except if said part payment corresponds to the part delivered, in which case, the contract is divisible, the remaining is covered by the Statute. RULE IN CASE OF AUCTION SALE: 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: a. b. c. d.

The amount and kind of property sold; The terms of the sale; The price; The names of the purchasers and persons on whose amount the sale is made...

The entry is considered a sufficient memorandum even if the same is not signed by the party sought to be charged. University of Cebu College of Law

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5. An agreement for the leasing for a longer period than one year, or for the sale of real property or of an interest therein. TWO KINDS OF AGREEMENT REFERRED TO: a. Lease of real property for more than one year (not a personal property); b. Sale of Real property (regardless of price) NOTE: If lease of real property is exactly one year, and made orally, lease is still enforceable, for the period here does not exceed one year. INTEREST in REAL PROPERTY may include easement or usufruct. 6. A representation as to the credit of a third person. Example: Joel was borrowing money from George, and gave Izzi as his reference. When Izzi was asked regarding Joel’s credit, Izzi said: “You can safely lend money to Joel because Joel is the owner of a parcel of land and I have the title deeds in my possession.” This was made orally. Incidentally, Joel was Izzi’s client, Izzi being a lawyer. This representation by Izzi is not enforceable against him it is not in writing. Joel representation as to the credit of a third person must be in writing to be enforceable. DUTY OF ATTORNEY FOR THE DEFENDANT – If an agreement violates the Statute of Frauds a. File a motion to dismiss; b. Plead the Statute of Frauds as an affirmative defense; c. Make a timely objection in the course of the trial. DUTY OF THE ATTORNEY FOR THE PLAINTIFF – who seeks to enforce a contract embraced under the Statute of Frauds a. Present the written agreement or contract; b. If this cannot be done, as when the contract is lost, present a MEMORANDUM or NOTE IN WRITING where the important details of the contract are set forth but most important of all, the party sought to be charged or his agent must have signed the note or memorandum, UNLESS it is an auction sale where entry need not be signed by the party being charged. c. If the written agreement has been lost and there is no note or memorandum, there is still a remedy; present SECONDARY EVIDENCE OF THE WRITTEN CONTRACT in the form of oral testimony or parol evidence. But this does not mean that an oral contract is being proved. The fact is, a written contract now lost or destroyed, is being proved orally. SUFFICIENT MEMORANDUM No particular form or language or instrument is necessary to constitute a memorandum or note in writing under the Statute of Frauds; any document or note in writing under the contract or for another purpose, which complies will all the statutory requirements of the statutes as to contents and signature may be considered as sufficient memorandum. RULE ON AUTHORITY OF THE AGENT TO SELL LAND OR ANY INTEREST THEREIN Under the Civil Code, “when a sale of a piece of land or any interest therein is thru an agent, the authority of the latter shall be in writing; otherwise, the sale shall be void.” (Article 1874) Note that the law says “void”, not merely unenforceable. THE THIRD KIND OF UNEFORCEABLE CONTRACT – where both parties are incapacitated to give consent Example: A contract entered into by two unemancipated minors without parental consent.

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Art. 1404. Unauthorized contracts are governed by Article 1317 and the principles of agency in Title X of this Book. Art. 1405. Contracts infringing the Statute of Frauds, referred to in No. 2 of Article 1403, are ratified by the failure to object to the presentation of oral evidence to prove the same, or by the acceptance of benefit under them. Two ways of ratification of contracts infringing the Statute of Frauds: a. Failure to object the presentation of oral evidence – this is deemed a waiver. b. Acceptance of benefits under them – thus the Statute does not apply to executed or partially executed or performed contracts.

Art. 1406. When a contract is enforceable under the Statute of Frauds, and a public document is necessary for its registration in the Registry of Deeds, the parties may avail themselves of the right under Article 1357. It must be stressed here that the right of one party to have the other to execute the public document needed for convenience in registration, is given only when the contract is both valid and enforceable. Example: An oral sale of real property is not enforceable; hence, one party cannot compel the other party to execute the public document. However, if said oral sales of real property has been ratified, then it is now valid and enforceable, and a public document may be made so that the sale can be registered.

Art. 1407. In a contract where both parties are incapable of giving consent, express or implied ratification by the parent, or guardian, as the case may be, of one of the contracting parties shall give the contract the same effect as if only one of them were incapacitated. If ratification is made by the parents or guardians, as the case may be, of both contracting parties, the contract shall be validated from the inception. Art. 1408. Unenforceable contracts cannot be assailed by third persons. VOIDABLE CONTRACTS versus VOID CONTRACTS VOIDABLE

VOID

This may be ratified.

It cannot be ratified.

It produces effects till annulled.

Generally, effects are not produced at all.

Defect is due to incapacity or vitiated The Defect here is that ordinarily, public consent. policy is militated against. Valid until annulled.

Void from very beginning, so generally, no action is required to set it aside, unless the contract has already been performed.

May be cured by prescription.

Cannot be cured by prescription.

Defense may be invoked only by the Defense may be availed of by anybody, parties or their successors-in-interest and whether he is a party to the contract or privies. not, as long as his interest is directly affected. Referred to a relative or conditional nullity.

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UNENFORCEABLE CONTRACTS versus VOID CONTRACTS UNENFORCEABLE This may be ratified.

VOID It cannot be ratified.

There is a contract but it cannot be No contract at all. enforced by a court action. It cannot be assailed by third parties.

It can be assailed by anybody directly affected.

CHAPTER 9 VOID AND INEXISTENT CONTRACTS 1. It cannot be ratified. (Art 1409) 2. The right to set up the defense of illegality cannot be waived. 3. The action or defense for the declaration of its inexistence does not prescribed. (art. 1410) 4. The defense of illegality is not available to third persons whose interests are not directly affected; and 5. it cannot give rise to a valid contract. (Art. 1422) Art. 1409. The following contracts are inexistent and void from the beginning: (1) Those whose cause, object or purpose is contrary to law, morals, good customs, public order or public policy; (2) Those which are absolutely simulated or fictitious; (3) Those whose cause or object did not exist at the time of the transaction; (4) Those whose object is outside the commerce of men; (5) Those which contemplate an impossible service; (6) Those where the intention of the parties relative to the principal object of the contract cannot be ascertained; (7) Those expressly prohibited or declared void by law. These contracts cannot be ratified. Neither can the right to set up the defense of illegality be waived. TWO KINDS OF VOID CONTRACTS 1. The INEXISTENT ones, like those where essential formalities are not complied with. 2. The ILLEGAL or ILLICIT ones, like a donation because of immoral condition, such as illicit sexual intercourse. Here, in some way, the donation produces some effect in that he who gave the donation cannot get back what he has given. Some Characteristics of a Void Contract 1. The right to set up the defense of illegality cannot be waived and may be considered on appeal even if not raised in the trial court. 2. The action or defense for their declaration as inexistent does not prescribe.

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3. The defense of illegality of contracts is not available to third persons whose interests are not directly affected. 4. It cannot give rise to a contract; thus a contract which is the direct result of a previous illegal contract is also void and inexistent; 5. It generally, produces no effect; 6. Generally, no action to declare them void is needed, since they are inexistent from the very beginning; 7. They cannot be ratified;

Art. 1410. The action or defense for the declaration of the inexistence of a contract does not prescribe. NOTE: While it is true that technically, the action to annul a void or inexistent contract does not prescribe; it may nonetheless, be barred by laches. Example: If a void contract is void from the very beginning, what is the use of its being declared inexistent? Strictly speaking, there is no use. BUT for purposes of convenience, or to avoid taking the law into our own hands, there is nothing wring in having a void contract declared really void.

Art. 1411. When the nullity proceeds from the illegality of the cause or object of the contract, and the act constitutes a criminal offense, both parties being in pari delicto, they shall have no action against each other, and both shall be prosecuted. Moreover, the provisions of the Penal Code relative to the disposal of effects or instruments of a crime shall be applicable to the things or the price of the contract. This rule shall be applicable when only one of the parties is guilty; but the innocent one may claim what he has given, and shall not be bound to comply with his promise. (1305) Pari Delicto- means both parties are equally at fault or are equally guilty. The principle of pari delicto, means that when the defect of avoid contracts consists in the illegality of the cause or object f the contract and both parties are at fault or in a pari delicto, the law refuse them every remedy, or the parties have no action against each other. Illegal contract with Criminal Offense 1. When both parties are in pari delicto – Rules a. the parties shall have no action against each other; b. both shall be prosecuted; and c. the things of the price of the contract, shall be confiscated in favor of the government. 2. Where only one party is guilty. The innocent one or less guilty may claim what he has given and shall not be bound to comply with his promise

Art. 1412. If the act in which the unlawful or forbidden cause consists does not constitute a criminal offense, the following rules shall be observed: (1) When the fault is on the part of both contracting parties, neither may recover what he has given by virtue of the contract, or demand the performance of the other's undertaking;

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(2) When only one of the contracting parties is at fault, he cannot recover what he has given by reason of the contract, or ask for the fulfillment of what has been promised him. The other, who is not at fault, may demand the return of what he has given without any obligation to comply his promise. (1306) TWO KINDS OF ILLEGAL CONTRACT a. Those where there is a criminal offense; b. Those where there is no criminal offense. ILLEGAL AND CRIMINAL CONTRACTS Those contracts where there is a criminal offense may be of two kinds: a. Those were both parties are guilty (in pari delicto) b. Those were only one party is guilty and the other is innocent. A. EFFECTS Where BOTH parties are GUILTY: 1. Since they are in pari delicto, they shall have no action against each other; 2. Both shall prosecuted; 3. The effects or the instruments of the crime shall be confiscated in favor of the government B. EFFECTS Where ONLY ONE is GUILTY (or where, even if both are guilty, they are not equally guilty, therefore not “in pari delicto”) 1. The guilty party will be prosecuted; 2. The instrument of the crime will be confiscated; 3. The innocent arty may claim what he has given (like the price he had paid for) or he has not yet given anything, he shall not be bound to comply with his promise. NOTE: Even if a contract involves a crime, still if a cause of action can be established without referring to the illegal act or motive, relief can be granted by the courts. ILLEGAL BUT NOT CRIMINAL CONTRACTS Those contracts which are unlawful or forbidden but where there is no criminal offense may be of two kinds: a. Those where both are guilty b. Those where only one party is guilty or at fault.

A. EFFECT if BOTH parties are GUILTY: Neither may recover what he has given by virtue of the contract or demand the performance of the other’s undertaking. The law will leave them as they are in pari delicto. B. EFFECTS if only ONE party is GUILTY: 1. The guilty party cannot recover what he has given by reason of the contract, or ask the fulfilment of what has been promised to him. 2. The party not at fault may demand the return of what he has given, without any obligation to comply with his promise. PARI DELICTO DOCTRINE

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If the two parties to a contract are in pari delicto, the doctrine applies even to the spouse of one of them, who although not a signatory to the contract, has sufficiently manifested by affirmative act her unequivocal concurrence to the contract in controversy. The doctrine does not apply to fictitious or absolutely simulated contracts since these contracts are inexistent. This principle does not apply with respect to inexistent and void contracts. In pari delicto, it denies all recovery to the guilty parties inter se. It applies to cases where the nullity arises from the illegality of the consideration or the purpose of the contract. The doctrine does not apply where a superior public policy intervenes. RULES AS TO GAMBLING No action can be maintained by the winner for the collection of what he has won in a game of chance. But any loser in a game of chance may recover his loss from the winner, with legal interest from the time he paid the amount lost, and subsidiarily from the operator or manager of the gambling house. If there was cheating or deceit committed by the winner, he and subsidiarily the operator or manager of the gambling house shall pay by way of exemplary damages, not less than the equivalent of the sums lost, in addition to the latter amount. If both winner and the loser have perpetrated fraud, no action for recovery can be brought by either. If the loser refuses or neglects to bring an action to recover what has been lost, his or her creditors, spouse, descendants or other persons entitled to be supported by the loser may institute the action Gambling VERSUS Betting While generally, gambling on the results of a game of chance is prohibited, betting which concerns itself with the games of skill, like chess, is ordinarily allowed. Thus the law says: “the loser in any game which is not one of chance, when there is no local ordinance which prohibits betting therein, is under obligation to pay his loss, unless the amount thereof is excessive under the circumstances.”

Art. 1413. Interest paid in excess of the interest allowed by the usury laws may be recovered by the debtor, with interest thereon from the date of the payment. Art. 1414. When money is paid or property delivered for an illegal purpose, the contract may be repudiated by one of the parties before the purpose has been accomplished, or before any damage has been caused to a third person. In such case, the courts may, if the public interest will thus be subserved, allow the party repudiating the contract to recover the money or property. This is one case where recovery can be had even if the parties be in pari delicto. Note, however, that recovery can be has only: a. If the purpose has not yet been accomplished; b. Or if damage has not been caused to any third person. NOTE: The Article also applies if the parties are not equally guilty, and where public policy would be advanced by allowing the suit for relief.

Art. 1415. Where one of the parties to an illegal contract is incapable of giving consent, the courts may, if the interest of justice so demands allow recovery of money or property delivered by the incapacitated person. University of Cebu College of Law

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Example: An insane man gave money to another to kill Xavi. May the insane man recover what he has paid? Yes, since the interest of justice demands.

Art. 1416. When the agreement is not illegal per se but is merely prohibited, and the prohibition by the law is designated for the protection of the plaintiff, he may, if public policy is thereby enhanced, recover what he has paid or delivered. ILLEGAL PER SE CONTRACTS are those forbidden because of public interest. MERELY PROHIBITED CONTRACTS are those forbidden because of private interests. Here recovery is permitted provided that: a. The contract is not illegal per se; b. The prohibition is designed for the protection of the plaintiff; c. And public policy would be enhanced by allowing the recovery.

Art. 1417. When the price of any article or commodity is determined by statute, or by authority of law, any person paying any amount in excess of the maximum price allowed may recover such excess. PURPOSE OF THE ARTICLE: To curb the evils of profiteering.

Art. 1418. When the law fixes, or authorizes the fixing of the maximum number of hours of labor, and a contract is entered into whereby a laborer undertakes to work longer than the maximum thus fixed, he may demand additional compensation for service rendered beyond the time limit. Art. 1419. When the law sets, or authorizes the setting of a minimum wage for laborers, and a contract is agreed upon by which a laborer accepts a lower wage, he shall be entitled to recover the deficiency. Art. 1420. In case of a divisible contract, if the illegal terms can be separated from the legal ones, the latter may be enforced. ILLEGAL TERMS OF A CONTRACT RULE 1: If the contract is INDIVISIBLE, the whole contract is void, even if only some terms are illegal. RULE 2: If the contract is DIVISIBLE, the legal terms may be enforced is same can be separated from the illegal terms. He who wants to enforce a contract must show how much of the cause is legal; otherwise, if partly legal and partly illegal, it will result in the contract being considered wholly void.

Art. 1421. The defense of illegality of contract is not available to third persons whose interests are not directly affected. Art. 1422. A contract which is the direct result of a previous illegal contract, is also void and inexistent.

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Title III. - NATURAL 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 of obligations from the viewpoint of sanction. a. Civil obligations – Those obligations whereby the creditors are given a right of action to compel their performance. b. Natural obligations – They are not based on positive law but on equity. They 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. The term voluntary is understood to mean the execution of an act free from coercion or compulsion. The act is voluntary or thru his own free will, with knowledge that the other party cannot compel him anymore, yet he executes the act willfully. Therefore, if payment or delivery of money as payment is made thru a court process, natural obligation cannot be made to apply because this is not voluntary fulfillment.

Art. 1424. 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. Example: Durk owes Cowell P10,000, evidenced by a promissory note, due on June 10, 2011. On the date of maturity, Durk failed to pay. Cowell files an action for collection, but the same was unsuccessful because the evidence of the obligation which is the promissory not got lost. No appeal was made, and the judgment becomes final. If later, Durk still paid Cowell voluntarily, can Durk still recover what he paid? No more, because the law says that 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.

Art. 1425. 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. Here, a third person pays: without the knowledge of the debtor or against the will of the debtor. Example: Aira owes Ben P700,000. but the debt soon prescribes. Later Cooch, against the consent of Aira, pays the P700,000. Aira here does not have to reimburse Cooch because he (Aira) has not at all been benefited by the transaction. However, Aira later voluntarily reimburses Cooch. May Aira now recover what he has given to Cooch? No more.

Art. 1426. When a minor between eighteen and twenty-one years of age who has entered into a contract without the consent of the parent or guardian, after the annulment of the contract voluntarily returns the whole thing or price received, notwithstanding the fact the he has not been benefited thereby, there is no right to demand the thing or price thus returned. University of Cebu College of Law

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Contracts by minors between 18 and 21 – when there has been annulment a. This applies to minors within the age described, enter into contract without parental consent b. After annulment, there was a voluntary return. Example: Adonis, a minor, entered into a contract with a sui juris, without the consent of his (Adonis’) parents. In said contract, A received a car. This car was afterwards destroyed by a fortuitous event. Later when the contract was annulled, Adonies returned voluntarily the value of the car although he had not profited or benefited a single centavo from the car. Has he now have the right to demand that price be returned? No more.

Art. 1427. When a minor between eighteen and twenty-one years of age, who has entered into a contract without the consent of the parent or guardian, voluntarily pays a sum of money or delivers a fungible thing in fulfillment of the obligation, there shall be no right to recover the same from the obligee who has spent or consumed it in good faith. (1160A) Contract by Minors – No annulment yet a. Generally, annulment requires mutual restitution. Here, the obligee who has spent or consumed the object in good faith is not required to restore. b. Good faith of the oblige must be present at the time of spending or consuming. c. Note that the majority age today is 18. And fungible means consumable. Example: If the object is non-consumable, does the Article apply? Yes if there has been loss by fortuitous event or alienation in good faith, if the proceeds thereof have already been spent in good faith.

Art. 1428. 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. Example: Lleina owes Jack P500,000. Jack brings a suit against Lleina, but Jack loses the case for insufficient evidence. No appeal was made from the decision, and the judgment becomes final. Later, Lleina paid Jack voluntarily the debt. May Lleina now recover from Jack what he has paid? NO.

Art. 1429. 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. Heirs inherit obligations only to the extent of the value of the inheritance. This is the for the Article, coupled with the basis for the natural obligation. Example: A dies, leaving an estate of P10,000,000 and debts amounting to P15,000,000. His heir here is not expected to make up for the difference, but if he does so voluntarily, then he cannot recover said difference. After all, one does have a moral duty to see to it that the dead relative’s or friend’s obligation in life are all carried out. Here, the heir is not really required by law to shoulder the deficit, but since he does so voluntarily, he cannot now back out.

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Art. 1430. 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. If the will is void, the legacy would also be void and the deceased is considered to have died without a will. This is the reason for the existence of the Article. Example: In a will defective for lack of the needed legal formalities, Xam a friend, was given a legacy. The legacy is void, and the whole estate should go the intestate heirs. If however, the intestate heirs give Xam the legacy, he cannot get it back now, provided that the debts of the deceased have been settled.

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