UP 2010 Civil Law Obligations and Contracts

CIVIL LAW REVIEWER

TABLE of CONTENTS

OBLIGATIONS Table of Contents

Chapter II. Nature and Effect of Obligations93 I. Kinds of Prestations ............................93 II. Breach of Obligation............................94 III. Fortuitous Event (Force Majeure) .......96 IV. Remedies to Creditors ........................96 V. Usurious Transactions and Rules on Interest .........................................................97 Chapter III. Different Kinds of Obligations ..98 I. Pure and Conditional Obligations .......98 II. Reciprocal Obligations ......................100 III. Obligations with a Period ..................100 IV. Alternative and Facultative Obligations 101 V. Joint and Solidary Obligations ..........103 Effects of Prejudicial and Beneficial Acts (Art.1212) ...................................................105 VI. Divisible and Indivisible Obligations..106 VII. Oblligations with a Penal Clause ..106 Chapter IV. Extinguishment of Obligations .......................................................................107 I. Payment or Performance ..................107 II. Loss or Impossibility..........................109 III. Condonation or Remission of the Debt 109 IV. Confusion or Merger of Rights ..........110 V. Compensation ...................................110 VI. Novation ............................................111 Charts: Payment & Performance ................114

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Chapter I. General Provisions.......................91 I. Obligations ..........................................91 II. Sources of Obligations ........................91

Prof. Solomon Lumba Faculty Editor

Leo Ledesma Lead Writer Krizel Malabanan Ivy Velasco Tin Reyes Frances Domingo Hazel Abenoja Writers

CIVIL LAW Kristine Bongcaron Patricia Tobias Subject Editors

ACADEMICS COMMITTEE Kristine Bongcaron Michelle Dy Patrich Leccio Editors-in-Chief

PRINTING & DISTRIBUTION Kae Guerrero

DESIGN & LAYOUT Pat Hernandez Viktor Fontanilla Rusell Aragones Romualdo Menzon Jr. Rania Joya

LECTURES COMMITTEE Michelle Arias Camille Maranan Angela Sandalo Heads Katz Manzano Mary Rose Beley Sam Nuñez Krizel Malabanan Arianne Cerezo Marcrese Banaag Volunteers

MOCK BAR COMMITTEE Lilibeth Perez

BAR CANDIDATES WELFARE Dahlia Salamat

LOGISTICS Charisse Mendoza

SECRETARIAT COMMITTEE Jill Hernandez Head Loraine Mendoza Faye Celso Mary Mendoza Joie Bajo Members

Chapter I. General Provisions I. II.

OBLIGATIONS SOURCES OF OBLIGATIONS A. LAW B. CONTRACTS C. QUASI-CONTRACTS D. DELICTS E. QUASI-DELICTS

Article 1156, Civil Code. An obligation is a juridical necessity to give, to do or not to do.

I.

Obligations

Elements of an Obligation (De Leon, 2003)— 1. ACTIVE SUBJECT (Obligee/Creditor): the person who has the right or power to demand the prestation. 2. PASSIVE SUBJECT (Obligor/Debtor): the person bound to the perform the prestation. 3. PRESTATION (Object): the conduct required to be observed by the debtor/obligor (to give, to do or not to do). 4. VINCULUM JURIS (Juridical or Legal Tie; Efficient Cause): that which binds or connects the parties to the obligation.

II. Sources of Obligations A. Law Art. 1158, Civil Code. 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.

B. Contracts Art. 1159. Has the Force of Law Between Parties. Obligations arising from contracts have the force of law between the contracting parties and should be complied with in good faith C. Quasi-Contracts Art. 2142, Civil Code. Certain lawful, voluntary and unilateral acts give rise to the juridical relation of quasi-contract to the end that no one shall be unjustly enriched or benefited at the expense of another. Lawful Voluntary

Unilateral

Distinguished from crimes Distinguished from quasi-delict, which are based on fault and negligence Distinguished from contract which is based on agreement

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Chapter I. GENERAL PROVISIONS

OBLIGATIONS & CONTRACTS

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Chapter I. GENERAL PROVISIONS

Kinds of Quasi-Contracts  Negotiorum Gestio: officious or voluntary management of the property or affairs of another without the knowledge or consent of the latter.  Solutio Indebiti: undue payment. The juridical relation arises when: o a thing is received without any right; and o the thing delivered by mistake.  Others: See Arts. 2164-2175 (De Leon, 2003) D. Delicts (Acts or omissions punished by law; crimes) Extent of Civil Liability Governed by the Revised Penal Code and the Civil Code, includes: 1. Restitution; 2. Reparation of damages caused; and 3. Indemnity for consequential damages (Art. 104, Revised Penal Code). (Tolentino, 1987) Enforcement of Civil Liability 1. Independent: Criminal and civil action arising from the same offense may be instituted separately. 2. Suspended: However, after criminal action has been commenced prosecution for civil action is suspended in whatever stage it may be found, until final judgment in the criminal proceeding is rendered; 3. Impliedly Instituted: Civil action is impliedly instituted with the criminal action, when: ○ offended party expressly waives the civil action or reserves the right to institute a separate civil action; or ○ the law provides for an independent civil action Barredo v. Garcia, (1942): The same negligent act may give rise to an action based on delict or quasidelict and the injured party is free to choose which remedy to enforce. Mendoza vs. Arrieta, (1979): If the civil action is based on quasi-delict, there is no need to reserve the right to file a civil action in the criminal case.

action (res judicata)  if judgment of acquittal contained a declaration that no negligence can be attributed to the accused and that the fact from which civil action might arise did not exist

Quasi-Delict Private, against individual Criminal intent is not necessary

Crimes Public, against the State

Present in any act or omission where fault or negligence intervenes

An act can is only punishable when there is a law penalizing it

Gives rise to liability for damages to the injured party Reparation, compensation or indemnification of the injury suffered by the injured party

There are crimes from which no civil liability arises Fine or imprisonment or both, to public treasury

Preponderance of evidence Can be compromised

Proof of guilt beyond reasonable doubt Can never be compromised

No Effect  an independent civil action is allowed by law  acquittal is due to lack of proof beyond reasonable doubt

Criminal necessary liability

intent is for criminal

Requisites of Liability (DWD) 1. Wrongful act or omission by fault or negligence 2. Damage or injury proven by the person claiming recovery 3. Direct causal connection between the fault or negligence and the damage or injury Liability for QuasiDelict (Art. 2180, NCC) Primary, can be directly sued by the injured party

Liability for Crimes (Art. 103, RPC) Subsidiary, employee must first be convicted and sentenced to pay civil indemnity

All employers, whether engaged in some enterprise or not, are liable for acts of employees, even household helpers Avoid civil liability by proving exercise of diligence of a good father of a family

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

Effect of Acquittal on Civil Actions Barred  if based on the very same facts on which the criminal action which ended in acquittal was based  if the facts alleged in the civil case has been found to be nonexistent in the criminal

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E. Quasi-Delicts (Voluntary acts or omissions with fault or negligence causing damage to another; not a crime nor a contract)

Subsidiary liability is absolute and cannot be avoided by any proof of diligence

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Nature

and

I. II. III. IV. V.

KINDS OF PRESTATIONS BREACH OF OBLIGATIONS FORTUITOUS EVENTS REMEDIES USURIOUS TRANSACTIONS

I.

Kinds of Prestations

Effect

of

KINDS OF PRESTATION 1. TO GIVE: real obligation; to deliver either (1) a specific or determinate thing, or (2) a generic or indeterminate thing. 2. TO DO: positive personal obligation; includes all kinds of work or services. 3. NOT TO DO: negative personal obligation; to abstain from doing an act; includes the obligation not to give. Accessories: those joined to or included with the principal for the latter’s completion, better use, perfection or enjoyment

OBLIGATION TO GIVE Specific Thing

Generic Thing

Particularly designated or physically segregated from all other of the same class; identified by individuality.

Object is designated only by its class/ genus/ species. Debtor can give anything of the same class as long as it is of the same kind.

Cannot be substituted.

Can be substituted by any of the same class and same kind.

Personal Right Vested before delivery A right enforceable only against the debtor Right of the creditor to demand from the debtor, the fulfillment of a prestation to give, to do or not to do

Accessions: additions to or improvement upon a thing, either naturally or artificially

To Give Specific Thing (Asked in ’83, ’84, ’85 and ’86) To Give Generic Thing

Real Right Vested after delivery A right enforceable against the world Right pertaining to a person over a specific thing, without a passive subject individually determined against whom such right may be personally enforced

Duties of the Debtor  To preserve or take care of the thing due  To deliver the thing itself  To deliver the fruits of the thing  To deliver the accessions and accessories  To pay for damages in case of breach

Rights of the creditor  To compel specific performance  To recover damages in case of breach of the obligation, exclusive or in addition to specific performance  Entitlement to fruits and interests from the time the obligation to deliver arises

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 

  To Do

Limited Generic Thing When the generic objects are confined to a particular class.

   

To deliver a thing of the quality intended by the parties taking into consideration the purpose of the obligation and other circumstances Creditor cannot demand a thing of superior quality neither can the debtor deliver a thing of inferior quality To be liable for damages in case of breach To do it To shoulder the cost of having someone else do it To undo what has been poorly done To pay for damages in case of breach

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 

To ask for performance of the obligation To ask that the obligation be complied with by a third person at the expense of the debtor To recover damages in case of breach of obligation

To compel performance To recover damages where personal qualifications of the debtor are involved

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Chapter II. Obligations

Chapter II. NATURE and EFFECT of OBLIGATIONS

Not To Do

  

Chapter II. NATURE and EFFECT of OBLIGATIONS

Not to do what should not be done To shoulder the cost of undoing what should not have been done To pay for damages in case of breach

II. Breach of Obligation

 

To ask to undo what should not be done To recover damages, where it would be physically or legally impossible to undo what has been undone, because of : o the very nature of the act itself; o rights acquired by third persons who acted in good faith; o when the effects of the acts prohibited are definite in character and will not cease even if the thing prohibited be undone.

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Effect of Contributory Negligence Reduces or mitigates the recoverable damages, UNLESS, the negligent act or omission of the creditor is the proximate cause of the event which led to the damage or injury complained of. In this case, he cannot recover.

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Diligence Required (De Leon, 2003) a. By stipulation: that agreed upon by the parties. b. By law: in the absence of stipulation, that required by law in the particular case. c. Diligence of a good father of a family: if both the contract and law are silent. Future Negligence: may be waived except in cases where the nature of the obligation or the public requires another standard of care (i.e. extraordinary diligence as for a common carrier)

A. Voluntary – fraud, negligence, delay or contravention of tenor of the obligation B. Involuntary – fortuitous event TYPES OF BREACH Substantial Breach Total breach Amounts to NonPerformance; Basis for rescission under Art. 1191 and payment of damages

Slight or Casual Breach Partial breach Obligation is partially performed; Gives rise to liability for damages only

1. FRAUD (DOLO): deliberate or intentional evasion of the normal fulfillment of an obligation (De Leon, 2003).   

Future Fraud: Any waiver of action for future fraud is void (Art. 1171). Past Fraud: can be subject of a valid waiver by the aggrieved party (De Leon, 2003). Woodhouse vs. Halili, (1953): In order that fraud may vitiate consent, it must be the dolo causante and not merely the dolo incidente, inducement to the making of the contract. The false representation was used by plaintiff to get from defendant a bigger share of net profits. This is just incidental to the matter in agreement. Because despite plaintiff’s deceit, respondent would have still entered into the contract.

2. NEGLIGENCE or FAULT (CULPA): omission 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 (Art. 1173).



Fraud There is deliberate intention to cause damage Liability cannot be mitigated Waiver for future fraud is void

Negligence There is no deliberate intention to cause damage Liability may be mitigated Waiver for future negligence may be allowed in certain cases:  gross – can NEVER be excused in advance; amounts to wanton attitude; rules on fraud shall apply  simple – may be excused in certain cases

Mandarin Villa Inc. v. CA (1996): Test of Negligence: Did the defendant in doing the alleged negligent act use the reasonable care and caution which an ordinary and prudent person would have used in the same situation? If not, then he is guilty of negligence.

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Chapter II. NATURE and EFFECT of OBLIGATIONS

Extent of Damages to be Awarded

Bad Faith Debtor is liable for all damages which can be reasonably attributed to the non-performance of the obligation. Any waiver or renunciation made in anticipation of such liability is null and void

Good Faith Debtor is liable only for the natural and probable consequences of the breach of obligation and fortuitous events

Culpa Contractual

Culpa Aquiliana Asked in ’83, ’84, and ’86) Negligence is substantive and independent

Negligence is merely incidental in the performance of an obligation There is always a preexisting contractual relation The source of obligation of defendant to pay damages is the breach or non-fulfillment of the contract Proof of the existence of the contract and of its breach or non-fulfillment is sufficient prima facie to warrant recovery Proof of diligence in the selection and supervision of the employees is NOT available as defense

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There may or may not be a pre-existing contractual obligation The source of obligation is the defendant’s negligence itself

The negligence of the defendant must be proved

Proof of diligence in the selection and supervision of the employee is a defense

Culpa Criminal: wrong or negligence in the commission of a crime

3. DELAY or DEFAULT (MORA): failure to perform an obligation on time which constitutes breach of the obligation (De Leon, 2003).  Mora Solvendi: delay on the part of the debtor to fulfill his obligation either to give (Ex re) or to do (Ex persona), (Asked in ’83, ’84, ’85, and ’86); No Mora Solvendi in:  Negative Obligations because delay is impossible (De Leon, 2003);  Natural Obligations (Tolentino, 1987).  

Mora Solvendi Requisites 1. Obligation must be liquidated, due and demandable 2. Non-performance by the debtor on period agreed upon 3. Demand, judicial or extra-judicial, by the creditor Effects 1. The debtor is liable for damages 2. The debtor is liable even if the loss is due to fortuitous events 3. For determinate objects, the debtor shall bear the risk of loss

Mora Accipiendi: delay on the part of the creditor to accept the performance of the obligation Compensatio Morae: delay of the parties in reciprocal obligations; effect: as if there is no default.

Mora Accipiendi Requisites 1. Debtor offers of performance 2. Offer must be in compliance with the prestation 3. Creditor refuses the performance without just cause Effects 1. The responsibility of the debtor is reduced to fraud and gross negligence 2. The debtor is exempted from risk of loss of the thing which is borne by the creditor 3. The expenses incurred by the debtor for the preservation of the thing after the mora shall be chargeable to the creditor 4. If the obligation bears interest, the debtor does not have to pay from the time of delay 5. The creditor is liable for damages 6. The debtor may relieve himself of obligation by consigning the thing

Rules on Mora, Delay or Default Unilateral Obligations General Rule: “No demand no delay”. The mere expiration of the period fixed by the parties is not enough in order that the debtor may incur in delay.

Exceptions 1. the obligation or law provides 2. time is of the essence 3. demand useless 4. debtor acknowledges that he is in default

Reciprocal Obligations General Rule: Delay occurs from the moment one party fulfills his undertaking, while the other does not comply or is not ready to comply in a proper manner with what is incumbent upon him. No delay if neither party performs his undertaking (Art. 1169, par. 2). Exception: different dates for the performance of respective obligations are fixed by the parties

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4. CONTRAVENTION OF THE TENOR: violation of the terms and conditions stipulated in the obligation, which must not be due to a fortuitous event or force majeure (De Leon, 2003).  “In any manner contravenes the tenor” means any illicit act, which impairs the strict and faithful fulfillment of the obligation, or every kind of defective performance (Tolentino, 1987).

Chapter II. NATURE and EFFECT of OBLIGATIONS

2. The event must be unforeseeable or inevitable 3. The event renders it impossible for debtor to fulfill his obligation in a normal manner 4. The debtor must be free from any participation in the aggravation of the injury to the creditor (Tolentino, 1987; De Leon, 2003) 5. It must be the only and sole cause, not merely a proximate cause.

III. Fortuitous Event (Force Majeure) IV. Remedies to Creditors Any event which could not be foreseen, or which though foreseen are inevitable (Art. 1174) A happening independent of the will of the debtor and which makes the normal fulfillment of the obligation impossible (De Leon, 2003). A. Act of God: an accident, due directly or exclusively to natural causes without human intervention, which by no amount of foresight, pains or care, reasonably to have been expected, cold have been prevented. B. Act of Man: force majeure is a superior or irresistible force, which is essentially an act of man; Includes unavoidable accidents, even if there has been an intervention of human element, provided that no fault or negligence can be imputed to the debtor (Asked in ’81, ’87 and ’88) Liability in case of Fortuitous Event No person shall be responsible for fortuitous events, UNLESS: 1. expressly specified by law (Arts. 552(2), 1942, 2147, 2148, 2159) 2. liability specified by stipulation 3. the nature of the obligations requires assumption of risk (Art. 1174) 4. when debtor is guilty of concurrent or contributory negligence 5. debtor has promised to deliver the same thing to two or more persons who do not have the same interests (Art. 1165 par. 3) 6. the thing is lost due to the obligor’s fraud, negligence, delay or contravention of the tenor of the obligation (Art. 1170) 7. the obligation to deliver a specific thing arises from a crime (Art. 1268) 8. the object is a generic thing, i.e. the genus never perishes Requisites for Exemption 1. The event must be independent of the debtor’s will (fraud or negligence)

Art. 1170, Civil Code. 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.

Transmissibility of Rights Art. 1178: Rights acquired by virtue of an obligation are transmissible in character, UNLESS prohibited: 1. by their very nature (i.e. personal obligations) 2. by stipulation of the parties 3. by operation of law (De Leon, 2003) Primary Remedies Arts. 1165-1168: PRESS 1. Specific Performance – performance by the debtor of the prestation itself 2. Substituted Performance – someone else performs or something else is performed at the debtor’s expense 3. Equivalent Performance – right to claim damages (in either performance or rescission) 4. Rescission – right to rescind or cancel the contract 5. Pursue the Leviable – to attach the properties of the debtor, except those exempt by law from execution Subsidiary Remedies of Creditor General Rule: Contracts are binding only between the parties thereto, and their heirs, assignees, and the estate, UNLESS: Accion Subrogatoria and Accion Pauliana 1. Accion Subrogatoria: right of creditor to exercise all of the rights and bring all of the actions which his debtor may have against third persons; Novation by change of debtor (Art. 1291, par.3).

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Chapter II. NATURE and EFFECT of OBLIGATIONS

Requisites a. Debtor to whom the right of action properly pertains must be indebted to the creditor b. The debt is due and demandable c. The creditor must be prejudiced by the failure of the debtor to collect his own rd debt from 3 persons either through malice or negligence d. The debtor’s assets are insufficient (debtor is insolvent) e. The right of action is not purely personal to the debtor 2. Accion Pauliana: Rescission, which involves the right of the creditor to attack or impugn by means of a rescissory action any act of the debtor which is in fraud and to the prejudice of his rights as creditor.

Siguan v. Lim, (1999): Petitioner cannot invoke the credit of a different creditor to justify the rescission of the subject deed of donation, because the only creditor who may benefit from the rescission is the creditor who brought the action; those who are strangers to the action cannot benefit from its effects.

V. Usurious Transactions and Rules on Interest USURY: stipulation of interest rates higher than the ceiling provided by law. Note: Usury Law (Act No. 2655, as amended) was repealed by Central Bank Circular No. 905, Dec. 10, 1982. INTEREST

Requisites: CASAL a. There is a credit in favor of plaintiff prior to alienation b. The debtor has performed a subsequent contract conveying a patrimonial benefit to third persons c. The creditor has no other legal remedy to satisfy his claim d. The debtor’s acts are fraudulent to the prejudice of the creditor e. The third person who received the property is an accomplice in the fraud Accion Subrogatoria Not necessary that creditor’s claim is prior to the acquisition of the right by the debtor No need for fraudulent intent No period for prescription

Accion Pauliana Credit must exist before the fraudulent act

Fraudulent intent is required if the contract rescinded is onerous Prescribes in 4 years from the discovery of the fraud

3. Accion Directa (Art. 1729, 1652, 1608, 1893): the right of lessor to go directly to a sublessee for unpaid rents of the lessee 4. The right of laborers or persons who furnish materials for a piece of work undertaken by a contractor to go directly to the owner for any unpaid claim due to the contractor 5. The right of vendor against every possessor whose right is derived from the vendee 6. The right of a principal against a substitution appropriated by an agent

Art. 1176, Civil Code. Receipt of the principal without reservation as to the interest shall give rise to a disputable presumption that the interest has been paid. Receipt of the latter installment without reservation as to prior installments shall likewise give rise to a disputable presumption that such prior installments have been paid.

Determination of Interests Eastern Shipping Lines v. CA (1961) Stage 1 For loan or forbearance NOT for loan or of money, goods or forbearance of money, credit, the interest rate goods or credit, the is 12% interest rate is 6% a) Interest = interest rate stipulated in writing + 12% legal interest, computed from date of judicial demand (filing of complaint) b) If there is no stipulated interest rate, the interest rate is 12% computed from date of default or demand (judicial or extrajudicial)

a) If date of demand is certain, compute from the date when demand is made (judicial or extra-judicial)

b) If date of demand is NOT certain, compute from the date of trial court decision (judicial demand)

Stage 2 Add 12% interest from finality of SC decision until fully paid (equivalent to a forbearance of credit)

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Chapter III. DIFFERENT KINDS of OBLIGATIONS



Chapter III. Different Kinds of Obligations I. II. III. IV.

PURE AND CONDITIONAL OBLIGATIONS RECIPROCAL OBLIGATIONS OBLIGATIONS WITH A PERIOD ALTERNATIVE AND FACULTATIVE OBLIGATIONS V. JOINT AND SOLIDARY OBLIGATIONS VI. DIVISIBLE AND INDIVISIBLE OBLIGATIONS VII. OBLIGATIONS WITH A PENAL CLAUSE

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I.

Pure and Conditional Obligations

(Asked in ’79, ’88, ’00, ’03) Pure Obligation (Art.1179): Effectivity or extinguishment does not depend upon the fulfillment or non-fulfillment of a condition or upon the expiration of a term or period and characterized by the quality of its being IMMEDIATELY DEMANDABLE. Conditional Obligation (Art.1181): Effectivity is subject to the fulfillment or non-fulfillment of a condition, which is characterized to be a FUTURE and UNCERTAIN event. Effects of Conditions 1. Suspensive Condition: Obligation shall only be effective upon the fulfillment of the condition (Art.1181). What is acquired by the obligee upon the constitution of the obligation is mere hope or expectancy, but is protected by law. Before Fulfillment The demandability and acquisition or effectivity of the rights arising from the obligation is suspended. Anything paid by mistake during such time may be recovered.

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After Fulfillment The obligation arises or becomes effective. The obligor can be compelled to comply with what is incumbent upon him.

Doctrine of Constructive Fulfillment of Suspensive Conditions Art. 1186: the condition shall be deemed fulfilled when the obligor actually prevented the obligee from complying with the condition, and that such prevention must have been voluntary or willful in character.  Applicable to suspensive conditions and not to resolutory conditions.  The article can have no application to an external contingency which is lawfully within the control of the obligor.

The mere intention of the debtor to prevent, without actually preventing fulfillment is not sufficient. Constructive fulfillment will not hold when the debtor acts pursuant to a right. There is constructive fulfilment: a. Intent of the obligor to prevent fulfilment; and b. Actual prevention of compliance

Principle of Retroactivity in Suspensive Conditions Art.1187, par.1: once the condition is fulfilled its effects must logically retroact to the moment when the essential elements, which gave birth to the obligation have taken place. The condition which is imposed is only accidental, not an essential element of the obligation.  Applied only to consensual contracts. No application to real contracts which can only be perfected by delivery.

To Give If reciprocal, the fruits and interests shall be deemed to have been mutually compensated as a matter of justice and convenience (Art. 1187, par. 1) If unilateral, the debtor shall appropriate the fruits and interests received, unless from the nature and circumstance it should be inferred that the intention of the persons constituting the same was different.

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To Do/Not To Do In obligations to do or not to do, the court shall determine the retroactive effect of the condition that has been complied with. (Art. 1187, par. 2) The power of the court includes the determination whether or not there will be any retroactive effects. This rule shall likewise apply in obligations with a resolutory condition (Art. 1190 par. 3)

Preservation of Creditor’s Rights Art.1188, par.1: The creditor may, before the fulfillment of the condition, bring the appropriate action for the preservation of his rights. However, this does not grant any preference of credit but only allows the bringing of the proper action for the preservation of the creditor’s rights.

2. Resolutory Condition: Obligation becomes demandable immediately after its establishment or constitution. The rights are immediately vested to the creditor, but always subject to the threat or danger of extinction by the happening of the resolutory condition (Tolentino, 1987).

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Chapter III. DIFFERENT KINDS of OBLIGATIONS

Before Fulfillment Preservation of creditor’s rights (Art. 1188, par. 1) also applies to obligations with a resolutory condition

After Fulfillment Whatever may have been paid or delivered by one or both of the parties upon the constitution of the obligation shall have to be returned upon the fulfillment of the condition. There is no return to the status quo. However, when condition is not fulfilled, rights are consolidated and they become absolute in character

3. Potestative Condition Exclusively upon the Creditor’s Will

Condition obligation valid

and is

Exclusively upon the Debtor’s Will in case of a Suspensive Condition (Art. 1182) Condition and obligation are void because to allow such condition would be equivalent to sanctioning obligations which are illusory. It also constitutes a direct contravention of the principle of mutuality of contracts.

Exclusively upon the Debtor’s Will in case of a Resolutory Condition (Art. 1179, par 2) Condition and obligation is valid because in such situation, the position of the debtor is exactly the same as the position of the creditor when the condition is suspensive. It does not render the obligation illusory.

4. Casual Condition: The fulfillment of the condition depends upon chance and/or upon the will of a third person (Art. 1182) 5. Mixed Condition: The fulfillment of the condition depends partly upon the will of a party to the obligation and partly upon chance and/or will of a third person Osmena v. Rama: Defendant executed an endorsement saying that she’ll pay her debt if the house in which she lives is sold. Such condition depended upon her exclusive will thus it is void. Hermosa v. Longara: The condition that payment should be made by Hermosa as soon as he receives funds from the sale of his property in Spain is a mixed condition. The condition implies that the obligor already decided to sell the house and all that was

needed to make the obligation demandable is that the sale be consummated and the price thereof remitted to the islands. There were still other conditions that had to concur to effect the sale, mainly that of the presence of a buyer, ready, able and willing to purchase the property under the conditions set by the intestate.

6. Impossible Condition: conditions which are impossible, contrary to good customs, or public policy and those prohibited by law shall annul the obligations which depend upon them (Art. 1183).  If pre-existing obligation, only the impossible condition is void, but not the obligation.  If divisible obligation, that part which is not affected by the impossible or unlawful condition shall be valid.  If the condition is not to do an impossible thing, it shall be considered as not having been agreed upon (Art 1183, par. 2). Consequently, it becomes pure and immediately demandable.  If attached to a simple or remuneratory donation (Art. 727), or testamentary disposition (Art. 873), condition is considered as not imposed while the obligation is valid. 7. Positive Condition: Obligation shall be extinguished as soon as the time expires or if it becomes indubitable that the event will not take place (Art.1184) 8. Negative Condition: Obligation shall be rendered effective from the moment the time indicated has lapsed, or if it has become evident that the event will not occur (Art.1185)  When no period has been fixed, the intention of the parties is controlling, and the time shall be that which the parties may have contemplated, taking into account the nature of the obligation (Art 1185, par. 2).

Effects of Loss, Deterioration, and Improvement in Real Obligations Pending the Condition (Art. 1189)

Loss

Without Debtor’s Fault/Act Obligation extinguished

With Debtor’s Fault/Act is

Obligation is converted into one of indemnity for damages

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Improvement

Impairment to be borne by the creditor

Improvement at the debtor’s expense, the debtor shall ONLY have usufructuary rights

Creditor may choose between bringing an action for rescission of the obligation OR bringing an action for specific performance with damages in either case. Improvement by the thing’s nature or by time shall inure to the benefit of the creditor

Loss, defined: when the thing perishes; goes out of commerce; disappears in such a way that its existence is unknown or it cannot be recovered

II. Reciprocal Obligations Obligations which are established from same cause, such that one obligation is correlative to the other. It results in mutual relationship between the creditor and the debtor. It is performed simultaneously, so that the performance of one is conditioned upon the simultaneous fulfillment of the other. Tacit Resolutory Condition: if one of the parties fail to comply with what is incumbent upon him, there is a right on the part of the other to rescind the obligation. The power to rescind is given to the injured party (Tolentino, 1987). Rescission of Reciprocal Obligations (Art. 1191, CC)  Right to rescind is implied in reciprocal obligations thus where one party fails to comply with this obligation under a contact, the other party has the right to either demand the performance or ask for the resolution of the contract.  Based on the breach of faith committed by the person who is supposed to comply with the obligation as compared to the rescission referred to in Art. 1308 which involves the damage or lesion, or injury to the economic interest of a person.  Where both parties have committed a breach of obligation, the liability will be

shouldered by the first infractor. This shall be determined by the courts. However, if it cannot be determined who was the first infractor, the contract shall be deemed extinguished and each shall bear his own damages (Art.1192). UP v. Delos Angeles (1970): The injured party may extra-judicially rescind the contract on account of the breach of the other party. However, this is without prejudice to the option of the other party to resort to the courts in order to determine if the rescission made is valid, if not, the party who rescinded the contract will be sentenced to pay damages.

 

Where the other party does not oppose the extra-judicial declaration of rescission, such declaration shall produce legal effect. Effect is retroactive therefore invalidating and unmaking the juridical tie between the contracting parties, leaving things in their status before the celebration of the contract.

III. Obligations with a Period Period or Term (Asked in ’84, ’86 and ’91): Interval of time, which either suspends demandability or produces extinguishment. The period must be: future, certain, and possible (Tolentino, 1987). 



Fortuitous event does not interrupt the running of the period. It only relieves the contracting parties from the fulfillment of their respective obligations during the period. Kinds of Period (Art. 1193): 1. Ex die - period with a suspensive effect. Obligation becomes demandable after the lapse of the period. 2. In diem - period with a resolutory effect. Obligation is demandable at once but is extinguished upon the lapse of the period.

Art. 1180, Civil Code. 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.

Term/Period and Condition Distinguished Term/Period Interval of time which is future and certain

Condition Fact or event which is future and uncertain

Must necessarily come, although it may not be known when

May or may not happen

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Deterioration

Chapter III. DIFFERENT KINDS of OBLIGATIONS

CIVIL LAW REVIEWER Exerts an influence upon the very existence of the obligation itself Has retroactive effect

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

Benefit of the Period Presumption: Period in an obligation is presumed to be established for the benefit of both the creditor and debtor, UNLESS: If from the tenor of the obligation or other circumstances, it shall appear that the period has been established in favor of either the creditor or debtor (Art. 1196). Period for the Benefit of either Creditor or Debtor Creditor Creditor may demand the fulfillment or performance of the obligation at any time but the obligor cannot compel him to accept payment before the expiration of the period

Debtor Debtor may oppose any premature demand on the part of the oblige for the performance of the obligation, of if he so desires, he may renounce the benefit of the period by performing his obligation in advance

When court may fix period Art. 1197: as general rule, the court is not authorized to fix a period for the parties (De Leon, 2003). Araneta v. Phil. Sugar Estates, provides: First, the Court shall determine:  If the obligation does not fix a period, but from its nature and circumstances, it can be inferred that a period was intended  If the period is void, such as when it depends upon the will of the debtor  If the debtor binds himself when his means permit him to do so. Second, it must decide what period was “probably contemplated by the parties”.



The only action that can be maintained under Art. 1197 is the action to ask the courts to fix the term within which the debtor must comply with his obligation. The fulfillment of the obligation itself cannot be demanded until after the court has fixed the period for compliance, therewith, and such period has arrived.



Art. 1197 does not apply to contract of services and to pure obligations.  The court, however, to prevent unreasonable interpretations of the immediate demandability of pure obligations, may fix a reasonable time in which the debtor may pay. (Tolentino, 1987) When Debtor Loses Right to Use Period Art.1198: I GIV A LA 1. Debtor becomes Insolvent, unless he gives a guaranty or security for his debt, after obligation is contracted 2. Debtor fails to furnish the Guaranties or securities promised 3. Debtor by his own acts Impaired said guaranties or securities after their establishment, and when through a fortuitous event they disappear, unless he immediately gives new one equally satisfactory 4. Debtor Violates any undertaking, in consideration of which the creditor agreed to the period 5. Debtor attempts to Abscond 6. By Law or stipulation 7. Parties stipulate an Acceleration Clause In the cases provided, the obligation becomes immediately due and demandable even if the period has not yet expired. The obligation is thus converted into a pure obligation (Tolentino, 1987).

IV. Alternative Obligations

and

Facultative

Alternative Obligations Several objects are due May be complied with by delivery of one of the objects or by performance of one of the prestations which are alternatively due Choice may pertain to debtor, creditor, or third person

Facultative Obligations Only one object is due May be complied with by the delivery of another object or by the performance of another prestation in substitution of that which is due Choice pertains only to the debtor

Loss/impossibility of all objects/prestations due to fortuitous event shall extinguish the obligation. The loss/impossibility of one of the things does not extinguish the obligation. Culpable loss of any of the objects alternatively

Loss/impossibility of the object/prestation due to fortuitous event is sufficient to extinguish the obligation

Culpable loss of the object which the debtor

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

Chapter III. DIFFERENT KINDS of OBLIGATIONS

CIVIL LAW REVIEWER may deliver in substitution before the substitution is effected does not give rise to any liability on the part of the debtor

Effect of Loss of Objects Art. 1204: Debtor’s Choice All Lost

A. Alternative Obligations

Fortuitous Event Debtor is released from the obligation

Several prestations are due but the performance of one is sufficient (De Leon, 2003). Right of Choice Art. 1200: to the debtor, UNLESS: 1. when it is expressly granted to the creditor 2. when it is expressly granted to a third person Limitations to the right of choice 1. impossible prestations 2. unlawful prestations 3. those which could not have been the object of the obligation 4. only one prestation practicable (Art. 1202) (De Leon, 2003) When choice shall produce effect Art. 1201: Choice shall produce no effect except from the time it has been communicated. The effect of the notice is to limit the obligation of the object or prestation selected. Notice of selection or choice may be in any form provided it is sufficient to make the other party know that the selection has been made. It can be: o oral o in writing o tacit o any other equivocal means  Choice of the debtor when communicated to the creditor does not require the latter’s concurrence.  When the choice is rendered impossible through the creditor’s fault, the debtor may bring an action to rescind the contract with damages (Art.1203).  Obligation is converted into a simple obligation when: o When the person who has the right of choice has communicated his choice (Art. 1201) o When only one prestation is practicable (Art. 1202)

Some

Debtor to deliver that which he shall choose from among the remainder

One Remains

Debtor to deliver that which remains

Debtor’s Fault Creditor shall have a right to indemnity for damages based on the value of the last thing which disappeared or service which become impossible Debtor to deliver that which the creditor shall choose from among the remainder without damages Debtor to deliver that which remains

Art. 1205: Creditor’s Choice All Lost

Fortuitous Event Debtor is released from the obligation

Some

Debtor to deliver that which he shall choose from among the remainder

One Remains

Creditor may claim any of those subsisting without a right to damages OR price/value of the thing lost with right to damages

Debtor’s Fault Creditor may claim the price/value of any of them with indemnity for damages creditor may claim any of those subsisting without a right to damages OR price/value of the thing lost with right to damages Creditor may claim the remaining thing without a right to damages OR the price/value of the thing lost with right to damages

B. Facultative Obligation Only one prestation has been agreed upon but the debtor may render another in substitution (De Leon, 2003) Effect of Loss of Substitute Before Substitution is Made If due to bad faith or fraud of obligor: obligor is liable

After Substitution is Made The loss or deterioration of the substitute on account of the obligor’s delay, negligence or fraud

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due before the choice is made may give rise to liability on the part of the debtor

Chapter III. DIFFERENT KINDS of OBLIGATIONS

CIVIL LAW REVIEWER obligor is liable because once substitution is made, the obligation is converted into a simple one with the substituted thing as the object of the obligation.

V. Joint and Solidary Obligations A. Joint Obligations One where a concurrence of several creditors, or of several debtors, or of several creditors and debtors, by virtue of which, each of the creditors has a right to demand, and each of the debtors is bound to render compliance with his proportionate part of the prestation which constitute the object of the obligation (Obligacion Mancomunada). Presumption: Obligation is presumed joint if there is a concurrence of several creditors, of several debtors, or of several creditors and debtors in one and the same obligation (Art. 1207). Exceptions: 1. When the obligation expressly stated that there is solidarity 2. When the law requires the solidarity 3. When the nature of the obligation requires solidarity 4. When the nature or condition is imposed upon heirs or legatees, and the testament expressly makes the charge or condition in solidum 5. When the solidary responsibility is imputed by a final judgment upon several defendants Principal Effects of Joint Liability 1. Demand by one creditor upon the debtor, produces the effects of default only with respect to the creditor who demanded and the debtor on whom the demand was made, but not with respect to others 2. Interruption of prescription by the judicial demand of one creditor upon a debtor, does not benefit the other creditors nor interrupt the prescription as to other debtors 3. Vices of each obligation arising from the personal defect of a particular debtor or creditor does not affect the obligation or right of the others 4. Insolvency of a debtor does not increase the responsibility of his co-debtors, nor does it

authorize a creditor to demand anything from his co-debtors 5. Defense of res judicata is not extended from one debtor to another Joint Divisible Obligation Art. 1208: Each creditor can demand only for the payment of his proportionate share of the credit, while each debtor can be liable only for the payment of his proportionate share of the debit Presumption: Credit or debt shall be presumed to be divided into as many equal shares as there are creditors or debtors.  Joint creditor cannot act in representation of the others, neither can a joint debtor be compelled to answer for the liability of others. Joint Indivisible Obligation Art. 1209: no creditor can act in representation of the other; no debtor can be compelled to answer for the liability of the others.  If there are two or more debtors, the fulfillment of or compliance with the obligation requires the concurrence of all the debtors, although each for his own share and for the enforcement of the obligation  In case of breach where one of the joint debtors fails to comply with his undertaking, the obligation can no longer be fulfilled or performed. Consequently, it is converted into one of indemnity for damages.  In case of insolvency of one of the debtors, the others shall not be liable for his shares. To hold otherwise would destroy the joint character of the obligation. Joint Divisible Obligations In case of breach of obligation by one of the debtors, damages due must be borne by him alone



Joint Indivisible Obligations In case of breach where one of the joint debtors fails to comply with his undertaking, the obligation can no longer be fulfilled or performed. Thus action must be converted into indemnity for damages.

Plurality of Creditors: If one or some of the creditors demands the prestation, the debtor may legally refuse to deliver to them, he can insist that all the creditors together receive the thing, and if any of them refuses to join the others, the debtor may deposit the thing in court by way of consignation (Tolentino, 1987).

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If due to the negligence of the obligor: obligor is not liable

Chapter III. DIFFERENT KINDS of OBLIGATIONS

Chapter III. DIFFERENT KINDS of OBLIGATIONS

B. Solidary Obligation An obligation where there is concurrence of several creditors, or of several debtors, or of several creditors and several debtors, by virtue of which, each of the creditors has the right to demand, and each of the debtors is bound to render, entire compliance with the prestation which constitutes the object of the obligation (Obligacion Solidaria). Indivisibility Refers to the prestation which constitutes the object of the obligation

Plurality of subjects is not required In case of breach, obligation is converted into indemnity for damages because the indivisibility of the obligation is terminated



Solidarity Refers to the legal tie or vinculum, and consequently to the subjects or parties of the obligation Plurality of subjects is indispensable When there is liability on the part of the debtors because of the breach, the solidarity among the debtors remains

The indivisibility of an obligation does not necessarily give rise to solidarity. Nor does solidarity itself imply indivisibility. (Art. 1211)

Kinds of Solidary Obligations 1. Active (solidarity among creditors): Each creditor has the authority to claim and enforce the rights of all, with the resulting obligation of paying everyone of what belongs to him.  Creation of a relationship of mutual agency among co-creditors.

A solidary creditor cannot assign his rights without the consent of the others. (Art. 1213)  Each debtor may pay to any solidary creditor, but if any demand, judicial or extrajudicial, has been made by one of them, payment must be made to him. (Art. 1214) 2. Passive (solidarity among debtors): Each debtor can be made to answer for the others, with the right on the part of the debtor-payor to recover from the others their respective shares.  Creation of a relationship of mutual guaranty among co-debtors  The total remission of the debt in favor of a debtor releases all the debtors  All the debtors are liable for the loss of the thing due, even if such loss is caused by the fault of only one of them and for delay, even if it is caused by just one of them  The interruption of prescription as to one debtor affects all the others; but the renunciation by one debtor of prescription already had does not prejudice the others 3. Mixed: Solidarity among creditors and debtors  Solidarity is not destroyed by the fact that the obligation of each debtor is subject to different conditions or periods. The creditor can commence an action against anyone of the debtors for the compliance with the entire obligation minus the portion or share which corresponds to the debtor affected by the condition or period.

____________________________________________________________________________________ Effects of Modes of Extinguishment Assignment of Rights in Solidary Obligations  The solidary creditor cannot assign his right because it is predicated upon mutual confidence, UNLESS, the (1) the assignment is to a co-creditor; (2) assignment is with consent of co-creditor

Novation

Compensation & Confusion

Remission

 If prejudicial, the solidary creditor who effected the novation shall reimburse the others for damages incurred by them;  If beneficial and secured by one, he shall be liable to the others for the share (obligation & benefits) which

 If it is partial, the rules regarding application of payment shall apply (w/o) prejudice to the right of other creditors who have not caused the confusion or compensation to be reimbursed to the extent that their rights are diminished or

 If entire obligation, obligation is totally extinguished.  If for the benefit of one of the debtors covering his entire share, he is completely released from the creditor/s.  If for the benefit of one of the debtors and it covers only part

Loss or Impossibility  If not debtors’ fault, the obligation is extinguished  If thru debtors’ OR fortuitous event after delay, the obligation is converted into indemnity for damages but the solidary character of the obligation remains.

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CIVIL LAW REVIEWER

CIVIL LAW REVIEWER

Chapter III. DIFFERENT KINDS of OBLIGATIONS affected  If total, the obligation is extinguished, what is left is the ensuing liability for reimbursement

Effects of Prejudicial and Beneficial Acts (Art.1212) 1. Each one of the solidary creditors may do whatever may be useful or beneficial to the others, but not anything which may be prejudicial to the latter. 2. As far as the debtors are concerned, a prejudicial act performed by a solidary creditor is binding. 3. As between the solidary creditors, the creditor who performed such act shall incur the obligation of indemnifying the others for damages. Defenses Available to a Solidary Debtor (Art. 1222) 1. Those derived from the nature of the obligation 2. Those personal to him 3. Those pertaining to his own share 4. Those personally belonging to other codebtors but only as regards that part of the debt for which the latter are responsible. Effects Demand Upon a Solidary Debtor 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. (Art. 1216)

Payment by a Debtor Full payment made by one of the solidary debtors extinguishes the obligation. (Art. 1217)

of his share, his character as a solidary debtor is not affected.

105 OBLIGATIONS

corresponds to them  If by substituting the debtor, the solidary creditor who effected the novation is liable for the acts of the new debtor in deficiency or damages  If by subrogating a third person in creditor’s rights, the obligation is not in reality extinguished as the relation between the other creditors and the debtor/s is maintained.

The creditor may proceed against any one of the solidary debtors or all simultaneously (Art. 1216) A creditor’s right to proceed against the surety exists independently of his right to proceed against the principal

 



If two or more solidary debtors offer to pay, the creditor may choose which offer to accept. (Art. 1217) The solidary debtor who made the payment shall have the right to claim from his co-debtors the share which corresponds to them with interest, UNLESS barred by prescription or illegality. (Art. 1218)

When a solidary debtor pays the entire obligation, the resulting obligation of the codebtors to reimburse him becomes joint. If payment was made before the debt became due, no interest during the intervening period may be demanded. (Art. 1217 par. 2) When one of the solidary debtors cannot reimburse his share to the debtor paying the obligation due to insolvency, such share shall be borne by all his co-debtors, in proportion to the debt of each. (Art. 1217, par. 2)

Inchausti v. Yulo, (1914): Debtors obligated themselves solidarily, so creditor can bring its action against any of them. Remission of any part o fthe debt, made by the creditor in favor of one of the solidary debtors, inures to the benefit of the rest of them.

CIVIL LAW REVIEWER

Chapter III. DIFFERENT KINDS of OBLIGATIONS



VI. Divisible and Indivisible Obligations A. Divisible Obligations

Purposes of Penalty 1. 2.

B. Indivisible Obligations One which cannot be validly performed in parts (Tolentino, 1987).  Divisibility/indivisibility refers to the performance of the prestation and not to the thing which is the object thereof. The thing may be divisible, yet the obligation may 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 (Art.1225, par. 2).  When there is plurality of debtors and creditors, the effect of divisibility/indivisibility of the obligation depend upon whether the obligation is joint or solidary.  A joint indivisible obligation give rise to indemnity for damages from the time anyone of the debtors does not comply with is undertaking. (Art. 1224) Effect Creditor cannot be compelled partially to receive the prestation in which the obligation consists; neither may the debtor be required to make the partial payment (Art. 1248), UNLESS:  The obligation expressly stipulates the contrary  The different prestations constituting the objects of the obligation are subject to different terms and conditions The obligation is in part liquidated and in part unliquidated

VII. Oblligations with a Penal Clause Penal Clause: An accessory undertaking to assume greater liability in case of breach (De Leon, 2003). It is attached to an obligation in order to ensure performance. The enforcement of the penalty can be demanded by the creditor only when the non-performance is due to the fault or fraud of the debtor.

3.

Funcion coercitiva de garantia - to insure the performance of the obligation. Funcion liquidatoria - to liquidate the amount of damages to be awarded to the injured party in case of breach of the principal obligation (compensatory). Function estrictamente penal - to punish the obligor in case of breach of the principal obligation (punitive).

Effects of Penalty 1. The penalty shall substitute the indemnity for damages and payment of interest in case of non-compliance (Art. 1226), UNLESS: a. b. c.

There is a stipulation to the contrary The obligor refuses to pay the penalty The obligor is guilty of fraud

2. Debtor cannot exempt himself from the performance of the principal obligation by paying the stipulated penalty unless this right has been expressly reserved for him (Art. 1227). 3. Creditor cannot demand the fulfillment of the principal obligation and demanding the satisfaction of the penalty at the same time unless the right has been clearly granted to him (Art. 1227). Tacit or implied grant is admissible. a.

b.

c.

If creditor has chosen fulfillment of the principal obligation and performance thereof become impossible without his fault, he may still demand the satisfaction of the penalty. If there was fault on the part of the debtor, creditor may demand not only satisfaction of penalty but also the payment of damages. If creditor chooses to demand the satisfaction of the penalty, he cannot afterwards demand the fulfillment of the obligation.

Proof of Actual Damage Art. 1228: Proof of actual damages is not necessary is applicable only to the general rule stated in Art. 1226 and not to the exceptions. The penalty is exactly identical with what is known as “liquidated damages” in Art. 2226. When Penalty may be Reduced Art. 1229: 1. 2. 3.

If the principal obligation has been partly complied with. If the principal obligation has been irregularly complied with. If the penalty is iniquitous or unsconscionable even if there has been no performance.

106 OBLIGATIONS

One which is susceptible of partial performance; that is, the debtor can legally perform the obligation by parts and the creditor cannot demand a single performance of the entire obligation (Tolentino, 1987).

If the principal obligation is void, penal clause shall also be void. However, the nullity of the penal clause does not carry with it the nullity of the principal obligation (Art.1230).

CIVIL LAW REVIEWER

Chapter IV. Obligations

Chapter IV. EXTINGUISHMENT of OBLIGATIONS

Extinguishment

of

singular. There must be full and faithful compliance with the terms of the contract.

B. Payment by Cession (Art. 1255) PAYMENT OR PERFORMANCE LOSS OF THE THING DUE OR IMPOSSIBILITY OF PERFORMANCE III. CONDONATION OR REMISSION OF THE DEBT IV. CONFUSION OR MERGER OF RIGHTS V. COMPENSATION VI. NOVATION

I.

Payment or Performance

Art. 1232, Civil Code. Payment means not only delivery of money but also performance, in any manner, of the obligation.

See Diagrams of Prof. Labitag at the end section of Obligations. SPECIAL FORMS OF PAYMENT A. Application of Payment (Art. 1252) Designation of the debt to which should be applied a payment made by a debtor who owes several debts to the same creditor Rules on Application— 1. Preferential right of debtor - debtor has the right to select which of his debts he is paying. 2. The debtor makes the designation at the time he makes the payment 3. If not, the creditor makes the application, by so stating in the receipt that he issues, unless there is cause for invalidating the contract. 4. If neither the creditor nor debtor exercises the right to apply, or if the application is not valid, the application is made by operation of law. 5. If debt produces interest - payment not deemed applied to the principal unless interests are covered. 6. When no application can be inferred from the circumstances of payment, it is applied to: to the most onerous debt of the debtor; or if debts due are of the same nature and burden, to all the debts in proportion 7. Rules of application of payment may not be invoked by a surety or solidary guarantor. Reparations Commission vs. Universal Deep Sea Fishing Corp. (1978): Rules on application of payment cannot be made applicable to a person whose obligation as a mere surety is both contingent and

Act whereby a debtor abandons all his property to his creditors, so that the latter may apply the proceeds (of its sale) to their credits. C. Dation in payment (Art. 1245) Delivery and transmission of ownership of a thing by the debtor to the creditor as an accepted equivalent of the performance of the obligation (dacion en pago). Dation in payment

Payment by cession

In favor of only one creditor Payment extinguishes the obligation to the extent of the value of the thing delivered, unless the parties agree that the obligation be totally extinguished Transfer of ownership of thing alienated to creditor

There are various creditors Extinguishes credits only up to the extent of proceeds from sale of assigned property, unless otherwise agreed upon

Not necessarily in state of financial difficulty Assignment of only some specific thing

Only possession and administration with authorization to convert property to cash with which the debts shall be paid Assignment presupposes insolvency of debtor. Assignment involves all the property of the debtor.

D. Tender of payment and consignation 1. Tender of payment: Manifestation made by debtor to creditor of his desire to comply with his obligation, with offer of immediate performance  Preparatory act to consignation  Extrajudicial in character 2. Consignation: Deposit of the object of obligation in a competent court in accordance to the rules prescribed by law, whenever the creditor unjustly refuses payment or because of some circumstances which render direct payment to the creditor impossible or inadvisable.  Principal act which constitutes a form of payment.  Judicial in character.

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I. II.

Chapter IV. EXTINGUISHMENT of OBLIGATIONS

When Tender and Refusal Not Required (Art. 1259)— 1. Creditor is absent or unknown, or does not appear at the place of payment 2. Creditor is incapacitated to receive the thing due at time of payment 3. Without just cause, creditor refuses to give receipt 4. Two or more persons claim the same right to collect 5. Title of the obligation has been lost Effects of Withdrawal by Debtor Arts. 1260- 1261 1. Before approval of the court - Obligation remains in force.

2. After approval of the court or acceptance by the creditor, with the consent of the latter Obligation remains in force, but guarantors and co-debtors are liberated. Preference of the creditor over the thing is lost. 3. After approval of the court or acceptance by the creditor, and without creditor’s consent Obligation subsists, without change in the liability of guarantors and co-debtors, or the creditor’s right of preference. Art. 1259, Civil Code. Expenses of consignation, when properly made, shall be charged against the creditor.

Requisites and Effects Application of Payment Requisites 1. Plurality of debts 2. Debts are of the same kind 3. Debts are owed to the same creditor and by the same debtor 4. All debts must be due 5. Payment made is not sufficient to cover all debts Effects Payment of debt designated as to corresponding amount

Cession

Dation

Tender and Consignation

Requisites 1. Plurality of debts 2. Plurality of creditors 3. Partial insolvency of the debtor 4. Abandonment of the totality of the debtor’s properties for the benefit of the creditors 5. Acceptance by the creditors

Requisites 1. Should not be prejudicial to other creditors 2. Should not constitute a pactum commissorium

Requisites 1. There is a debt due 2. consignation is made because of some legal cause 3. previous notice of consignation was given to those persons interested in the performance of the obligation 4. amount or thing due was placed at the disposal of the court 5. after the consignation has been made, the persons interested were notified thereof

Effects Assignment liberates debtor up to the amount of the net proceeds of the sale of his assets Assignment does not vets title to the property in the creditors, who are only authorized to sell it.

Effects Extinguishment of debt from as an equivalent of the performance of the obligation

Effects If accepted by the creditor or declared properly made by the Court: 1. Debtor is released in same manner as if he had performed the obligation at the time of consignation 2. Accrual of interest is suspended from the moment of consignation. 3. Deterioration or loss of the thing or amount consigned, occurring without the fault of debtor, must be borne by creditor from the moment of deposit 4. Any increment or increase in the value of the thing after consignation inures to the benefit of the creditor

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CIVIL LAW REVIEWER

Chapter IV. EXTINGUISHMENT of OBLIGATIONS

II. Loss or Impossibility (Asked in ’83, ’84, ’85, and ’94) A. Loss A thing is lost when it perishes, goes out of commerce or disappears in such a way that its existence is unknown or it cannot be recovered (Art. 1189, par. 2)

Loss of the thing when in possession of the debtor: Loss was due to the debtor’s fault. Burden of explaining the loss of the thing falls upon him, UNLESS, due to a natural calamity: earthquake, flood, storm, etc. Subjective impossibility: Where there is no physical or legal loss, but the thing belongs to another, the performance by the debtor becomes impossible. The debtor must indemnify the creditor for damages.

Effects of Loss Obligation to Deliver a Specific Thing Extinguishment of the obligation if the thing was destroyed w/o fault of the debtor and before he has incurred delay.

Obligation to Deliver a Generic Thing Loss of a generic thing does not extinguish an obligation, UNLESS, Delimited generic things: kind or class is limited itself, and the whole class perishes

rd

Action against 3 persons - creditor shall have all the rights of action the debtor may have rd against 3 persons by reason of the loss. Presumption: The loss was due to the debtor’s fault, UNLESS: 1. Law provides that the debtor shall be liable even if the loss is due to fortuitous events (Arts. 1942, 1979, 2147, 2159) 2. Obligor is made liable by express stipulation 3. Nature of the obligation requires an assumption of risk 4. Fault or negligence concurs with the fortuitous event 5. Loss occurs after delay 6. Debtor has promised to deliver the same thing to two or more different parties 7. Obligation arises from a criminal act 8. Borrower in commodatum: saves his own things and not the thing of the creditor during a fortuitous event In Reciprocal Obligations Extinguishment of the obligation due to loss of the thing or impossibility of performance affects both the creditor and debtor; the entire juridical relation is extinguished. Partial loss Art. 1264: Partial loss due to a fortuitous event does not extinguish the obligation; thing due shall be delivered in its present condition, without any liability on the part of the debtor, UNLESS, the obligation is extinguished when the part lost was of such extent as to make the thing useless.

B. Impossibility of Performance (Arts. 12661267, CC) When prestation becomes legally or physically impossible (by fortuitous event or force majeure), the debtor is released.Impossibility must have occurred without fault of debtor, and after the obligation has been constituted. PARTIAL IMPOSSIBILITY 1. Courts shall determine whether it is so important as to extinguish the obligation. 2. If debtor has performed part of the obligation when impossibility occurred, creditor must pay the part done as long as he benefits from it. 3. If debtor received full payment from creditor, he must return excess amount corresponding to part which was impossible to perform. Doctrine of Unforeseen Events When the service has become so difficult as to be manifestly beyond the contemplation of all the parties, the obligor may be released in whole or in part (De Leon, 2003). Requisites: 1. Event could not have been foreseen at the time of the constitution of the contract. 2. Event makes performance extremely difficult but not impossible. 3. Event not due to any act of the parties. 4. Contract is for future prestation.

III. Condonation or Remission of the Debt CONDONATION: An act of liberality, by virtue of which, without receiving any equivalent, creditor renounces the enforcement of the obligation. The obligation is extinguished either in whole or in such part of the same which to remission refers.

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Requisites 1. Debt must be existing and demandable 2. Renunciation must be gratuitous; without any consideration 3. Debtor must accept the remission Effect Art. 1273: Renunciation of the principal debt shall extinguish the accessory obligations, but remission of the latter leaves the principal obligation in force. Presumptions Arts. 1271, 1272, 1274:  Whenever the private document in which the debt is found in the possession of the debtor, it shall be presumed that the creditor delivered it voluntarily, unless contrary is proved.  Delivery of a private document evidencing credit, made voluntarily by the creditor to the debtor, implies the renunciation of the action of creditor against the latter. Kinds 1. As to form (Art. 1270)  Express: made formally; in accordance with forms of ordinary donations  Implied: inferred from the act of the parties 2. As to extent  Total: entire obligation  Partial: may refer only to amount of indebtedness, or to an accessory obligation, or to some other aspect of the obligation 3. As to constitution  Inter vivos: effective during the lifetime of the creditor  Mortis causa: effective upon death of the creditor; must be contained in a will or testament

IV. Confusion or Merger of Rights CONFUSION: The meeting in one person of the qualities of creditor and debtor of the same obligation. Requisites 1. It should take place between principal debtor and creditor 2. It must be complete and definite- Parties must meet all the qualities of creditor and debtor in the obligation/ in the part affected.

Chapter IV. EXTINGUISHMENT of OBLIGATIONS

Effects Arts. 1275- 1277: 1. The obligation is extinguished from the time the characters of the debtor and creditor are merged in the same person. 2. In joint obligations, confusion does not extinguish the obligation except as regards the corresponding share of the creditor or debtor in whom the two characters concur. 3. In solidary obligations, confusion in one of the solidary debtors extinguishes the entire obligation. 4. Obligation is not extinguished when confusion takes place in the person of subsidiary debtor (e.g. guarantor), but merger in the person of the principal debtor shall benefit the former.

V. Compensation COMPENSATION: Offsetting of two obligations which are reciprocally extinguished if they are of the same value, or extinguished to the concurrent amount if of different values. (Asked in ’80, ’81, ’98, and ’02) Compensation

Confusion

There must always be 2 obligations

Involves only one obligation

There are 2 persons who are mutually debtors and creditors of each other in 2 separate obligations, each arising from the same cause.

There is only one person whom the characters of the creditor and debtor meet

Kinds 1. As to extent  Total: Debts are of the same amount  Partial: Amounts are not equal 2. As to origin  Legal: takes place by operation of law  Conventional: parties agree to compensate their mutual obligations even when some requisite in Art. 1279 is lacking (Art. 1282).  Judicial: decreed by court when there is counterclaim; effective upon final judgment (Art. 1283).  Facultative: when it can be claimed by one of the parties who, however, has the right to object to it.

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2.

3. 4. 5.

6.

Requisites Each obligor is bound principally, and at the same time a principal creditor of the other Both debts must consist in a sum of money, or if the things due are FUNGIBLE, of the same kind & quality Both debts are due Debts are liquidated and demandable There must be no retention or controversy over either of the debts, rd commenced by 3 persons and communicated in due time to the debtor Compensation is not prohibited by law

1.

2.

3.

4.

Effects Effects rise from the moment all the requisites concur. Debtor claiming its benefits must prove compensation; once proven, effects retroact from the moment when the requisites concurred. Both debts are extinguished to the concurrent amount, eventhough the creditors and debtors are not aware of the compensation. Accessory obligations are also extinguished.

Compensation is prohibited in: 1. Contracts of depositum 2. Contracts of commodatum 3. Future support due by gratuitous title 4. Civil liability arising from a penal offense 5. Obligations due to the government 6. Damage caused to the partnership by a partner ASSIGNMENT OF CREDIT (Art. 1285): No effect and does not bind the debtor unless and until the latter is notified of the assignment or learns of it. With Debtor’s Consent

With Debtor’s Knowledge

Debtor’s consent to assignment of credit constitutes a waiver of compensation, unless he reserved his right to compensation.

Debtor may set up compensation of debts (maturing) before the assignment of credit but not of subsequent ones

Without Debtor’s Knowlege Debtor may setup compensation of all credits (maturing) prior to the assignment and also latter ones until he had knowledge of the assignment.

Facultative compensation: Compensation which can only be set up at the option of a creditor, when legal compensation cannot take place because some legal requisites in favor of the creditor are lacking. Creditor may renounce his right to compensation, and he himself may set it up.As opposed to conventional compensation, facultative compensation is unilateral and does not depend upon the agreement of the parties.

VI. Novation NOVATION: Extinguishment of an obligation by the substitution or change of the obligation by a subsequent one which extinguishes or modifies the first either by changing the object or principal conditions, or by substituting the person of the debtor, or by subrogating a third person in the rights of the creditor. A juridical act of dual function—it extinguishes an obligation, and at the same time, it creates a new one in lieu of the old. (Asked in ’78, ’88, ’94 and ’01) Requisites 1. A previous valid obligation 2. Agreement of all the parties to the new obligation 3. Extinguishment of the old obligation 4. Validity of the new obligation Novation is not presumed.  Express novation: Parties must expressly disclose their intent to extinguish the old obligation by creating a new one.  Implied novation: No specific form is required. There must be incompatibility between the old and new obligation or contract. (Asked in ’79, ’82, ’88, and ’94) California Bus Line v. State Investment (2003): In the absence of an unequivocal declaration of extinguishment of the pre-existing obligation, only proof of incompatibility between the old and new obligation would warrant a novation by implication. The restructuring agreement merely provided for a new schedule of payments and authority giving Delta to take over management and operations of CBLI in case it fails to pay installments. There was no change in the object of prior obligations.

Test of Incompatibility Whether or not the old and new obligation can stand together, each one having an independent existence. No incompatibility exists when they can stand together. Hence, there is no novation. Incompatibility exists when they cannot stand together. Hence, there is novation. Effects In General

1.

Old obligation is extinguished and replaced by the new one stipulated.

If Original Obligation is Void Novation is void if the original obligation was void, except when annulment may be claimed only by the

If New Obligation is Void New obligation is void, the old obligation subsists, unless the parties intended that the former realations

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1.

Chapter IV. EXTINGUISHMENT of OBLIGATIONS

Chapter IV. EXTINGUISHMENT of OBLIGATIONS

debtor, or when ratification validates acts that are voidable. (Art. 1298) 1. Original obligation is void: No novation 2. Original obligation voidable: Effective if contract is ratified before novation



shall be extinguished in any event. (Art. 1297) 1. New obligation void: No novation 2. New obligation voidable: Novation is effective

Accessory obligations are also extinguished, but may subsist only insofar as they may rd benefit 3 persons who did not give their consent to the novation OR may not be affected upon agreement between the parties.

Original or new obligation with suspensive or resolutory condition Art. 1299: If original obligation was subject to a suspensive or resolutory condition, the new obligation shall be under the same condition, unless it is otherwise stipulated. Compatible Conditions 





Fulfillment of both conditions: new obligation becomes demandable Fulfillment of condition concerning the original obligation: old obligation is revived; new obligation loses force Fulfillment of condition concerning the new obligation: no novation; requisite of a previous valid and effective obligation lacking

 

Incompatible Conditions Original obligation is extinguished, while new obligation exists Demandability shall be subject to fulfillment/ nonfulfillment of the condition affecting it

OBJECTIVE NOVATION 1. Change of the subject matter 2. Change of causa or consideration 3. Change of the principal conditions or terms SUBJECTIVE NOVATION 1. Substitution of the Debtor: Consent of creditor is an indispensable requirement both in expromision and delegacion.

Expromision Initiative for change does not emanate from the debtor, and may Even be made without his knowledge.

Requisites 1. Consent of the creditor and the new debtor 2. Knowledge or consent of the old debtor is not required Effects 1. Old debtor is released 2. Insolvency of the new debtor does not revive the old obligation in case the old debtor did not agree to expromision 3. If with knowledge and consent of old debtor, new debtor can demand reimbursement the entire amount paid and w/ subrogation of creditor’s rights 4. If without knowledge of the old debtor, new debtor can demand reimbursement only up to the extent that the latter has been benefited w/o subrogation of creditor’s rights

Delegacion Debtor (delegante) offers or initiates the change, and the creditor rd (delegatorio) accepts 3 person (delegado) as consenting to the substitution Requisites 1. Consent of old debtor, new debtor, and creditor

Effects 1. Insolvency of the new debtor revives the obligation of the old debtor if it was anterior and public, and known to the old debtor. 2. New debtor can demand reimbursement of the entire amount he has paid, from the original debtor. He may compel creditor to subrogate him to all of his rights.

rd

2. Subrogation of a 3 person in the rights of the creditor a. Conventional subrogation: by agreement of the parties; rd

Requisites: the consent of the 3 person, and of the original parties (Art. 1301). Conventional subrogation Debtor’s consent is necessary Extinguishes an obligation and gives rise to a new one

Assignment of credit Debtor’s consent is not required Refers to the same right which passes from one person to another, without modifying or extinguishing the obligation

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CIVIL LAW REVIEWER Defects/ vices in the old obligation are cured

Chapter IV. EXTINGUISHMENT of OBLIGATIONS Defects/ vices in the old obligation are not cured

b. Legal subrogation: by operation of law

Effects Total 1. Transfers to the person subrogated the credit with all the rights thereto appertaining, either against the debtor or rd 3 persons. 2. Obligation is not extinguished, even if the intention is to pay it. 3. Defenses against the old creditor are retained, unless waived by the debtor

Partial 1. A creditor, to whom partial payment has been made, may exercise his right for the remainder, and shall be preferred to the person subrogated in his place in virtue of the partial payment.

113 OBLIGATIONS

Legal subrogation is not presumed, except in the following circumstances: 1. When creditor pays another creditor who is preferred, even without the debtor’s knowledge rd 2. When a 3 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 without prejudice to the effects of confusion as to the latter’s share effects of confusion as to the latter’s share

CIVIL LAW REVIEWER

Charts: PAYMENT & PERFORMANCE

Charts: Payment & Performance by Professor Eduardo A. Labitag UP College of Law (Asked in ’75, ’84, ’88, ’95, and ’98)

1. 2. 3. 4.

Legend: G = General Rule  = Exception C = Creditor D = Debtor

In GENERAL Debtor or his: Authorized Agent Heir Successor-in- interest

3rd PERSON Interested in obligation (creditor cannot refuse to accept valid payment)

Payment w/ or w/o debtor’s knowledge Effects: 1. Valid payment; obligation extinguished 2. Debtor to reimburse fully 3rd person interested in obligation 3. 3rd person subrogated to rights of creditor

In Obligation to Give, if PAYOR has

Not interested in obligation (creditor may refuse to accept payment [1236])

Payment with debtor’s consent (express/tacit) Effects: 1. 3rd person is entitled to full reimbursement 2. Legal subrogation (novation) – 3rd person is subrogated/step into the shoes of creditor

3rd person (whether or not interested in obligation) does not intend to be reimbursed (1238)

Payment without debtor’s knowledge or against the will of D Effects: 3rd person can only be reimbursed only insofar as payment has been beneficial to debtor(1236, 2nd. par.) burden of proof on 3rd person cannot compel C to subrogate him (1237)

Debtor must give consent

Effects: 1. Payment is deemed as a donation/offer of donation 2. Donation must be in proper form (if above P5Th must be in writing

No free disposal & no capacity to alienate

Effects: Payment is invalid  w/o prejudice to natural obligations

Minor who entered contract w/o consent of parent or guardian

Effects: No right to recover fungible thing delivered to creditor who spent or consumed it in good faith

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WHO CAN PAY?

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Charts: PAYMENT & PERFORMANCE

TO WHOM PAYMENT MAY BE MADE In GENERAL

•

Creditor /person in whose favor obligation was constituted, or

• •

His successor in interest, or

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G – NOT valid

Payment to Incapacitated Creditor (1241)

Payment to 3rd PERSON (1241, 2nd par.)

In Case of ACTIVE SOLIDARITY

 1) If C has kept the thing delivered 2) Insofar as payment benefited C

G VALID if 3rd person proves that it redounded to C’s benefit

 Exception to proof of benefit: .3rd person acquires C’s rights after payment .C ratifies payment .C’s conduct leads D to believe that 3rd person had authority to receive payment .Assignment of credit without notice to D

If no demand is made, D may pay to ANY of solidary creditors

If any judicial/extrajudicial demand is made by any one of the creditors who made the demand (1214)

Effect: No extinguishment If payment is made to a WRONG PARTY

OBLIGATIONS

Any person authorized to received payment (1240)

 Extinguishment if fault or negligence can be imputed to creditor

 Payment in good faith to person in possession of credit = debtor released (1242)

If debtor pays creditor after being judicially ordered to retain debt = payment not valid (1243) Payment made in good faith to any person in possession of credit Effect: D released (1242)

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Charts: PAYMENT & PERFORMANCE

WHAT IS TO BE PAID?  IDENTITY

In GENERAL The very prestation (thing or service Debtor cannot compel C to receive a different specific thing even latter has same value or more valuable than that due (1244)

G: C cannot demand a thing of superior quality; can demand inferior D cannot deliver a thing of inferior quality

Obligation to give a GENERIC thing

 Unless quality & circumstances have been stated (1246) purpose and other circumstances of obligation considered Obligation to pay sum of money, if D alienates property to C = DACION EN PAGO governed by law on SALES (1245)

Obligation to DO or NOT to DO

Payment of MONEY

Payment of INTEREST

Identity: The very same act promised to be done or not to be done  Substitution cannot be done against C’s will (1244, 2nd par.)

1. Payment of domestic obligations in Phil. Currency  Exceptions under R.A. 4100; R.A. 8183 – Foreign currency if agreed to by parties 2. In case of extraordinary inflation/deflation, basis of payment is value of currency at the time of obligation was established (1250) No interest (i.e., for the use of someone’s money) shall be due unless expressly stipulated in writing

116 OBLIGATIONS

Obligation to give a SPECIFIC thing

Give: 1. Specific thing itself 2. Accessions & accessories 3. If with loss, improvements, deterioration  Apply Art. 1189

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Charts: PAYMENT & PERFORMANCE

HOW IS PAYMENT TO BE MADE  INTEGRITY

 Exceptions: 1. Contrary stipulation 2. When debt is in part liquidated & in part unliquidated 3. When there are several subjects/parties are bound under different terms/conditions

In Case of SUBSTANTIAL PERFORMANCE IN GOOD FAITH (1234)

PRESUMPTIONS in payment of INTERESTS & INSTALLMENTS

 Effect if C accepts incomplete performance (1235): WAIVER

-

May be express or implied If C knows the incompleteness/ irregularity of the payment, and he still accepts it w/o objection, then obligation is deemed extinguished (estoppel) * There must be intent to waive  Except if C has no knowledge of the incompleteness

D may recover as if there had been complete fulfillment - Less damages suffered by C

INTEREST – If principal amount is received w/o reservation as to interest  interest is presumed to have been paid (1176; 1253) INSTALLMENTS  If a latter installment of a debt is received w/o reservation to prior installments  Prior installments are presumed paid (1176, 2nd par.)

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In GENERAL 1233 – Complete delivery or rendering 1248 – C cannot be compelled to received partial prestations; D cannot be compelled to give partial payments

CIVIL LAW REVIEWER

Charts: PAYMENT & PERFORMANCE

WHERE PAYMENT IS TO BE MADE (ART. 1251)

In GENERAL In the place designated in the obligation

In any other case  Domicile of debtor

If D changes his domicile in bad faith or after he has incurred in delay  Additional expenses shall be borne by D

Expenses Payment

of

Making

In GENERAL Extrajudicial expenses required by the payment shall be borne by DEBTOR

 Unless otherwise stipulated

As to JUDICIAL expenses  Rules of Court shall govern

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If no place is designated

If obligation is to deliver a SPECIFIC thing  Place of performance is wherever the thing was at the moment obligation was constituted  Unless there is a contrary express stipulation

CIVIL LAW REVIEWER

Charts: PAYMENT & PERFORMANCE

WHEN PAYMENT IS TO BE MADE?

When obligation is due and demandable but D may pay before due date if period is for benefit of D

 Exceptions wherein demand of creditor is not necessary for delay to exist: 1. When obligation/law expressly declares 2. Nature & circumstances of the obligation designation of time is controlling motive or establishment of contract 3. When demand would be useless

WHY SHOULD PAYMENT BE MADE?

Because C may compel D to pay, and failure to pay will allow C to satisfy credit from properties of D that are not exempt from execution

- end of Obligations -

119 OBLIGATIONS

In GENERAL Payment to be made when the creditor makes a demand (judicially/extrajudicially)

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TABLE of CONTENTS

CONTRACTS Table of Contents Chapter I. General Provisions.....................122 I. Classification of Contracts.................122 II. Elements of Contracts.......................123 III. Stages of Contracts...........................123 IV. Charactertics of Contracts (MARCO) 123

Chapter III. Forms of Contracts ..................129 I. Rules .................................................129 II. Kinds of Formalities...........................129 Chapter IV. Reformation of Contracts........130 Chapter V. Interpretation of Contracts.......130 Chapter VI. Defective Contracts .................131 I. Rescissible Contracts (Arts. 1380-1389) 131 II. Voidable Contracts (Arts. 1390-1402) 132 III. Unenforceable Contracts (Arts. 14031408) ..........................................................133 IV. Void or Inexistent Contracts (Arts. 14091422) ..........................................................134

121 CONTRACTS

Chapter II. Essential Requisites .................125 I. Consent .............................................125 II. Object ................................................127 III. Cause ................................................127

Prof. Solomon Lumba Faculty Editor

Leo Ledesma Lead Writer Krizel Malabanan Ivy Velasco Tin Reyes Frances Domingo Hazel Abenoja Writers

CIVIL LAW Kristine Bongcaron Patricia Tobias Subject Editors

ACADEMICS COMMITTEE Kristine Bongcaron Michelle Dy Patrich Leccio Editors-in-Chief

PRINTING & DISTRIBUTION Kae Guerrero

DESIGN & LAYOUT Pat Hernandez Viktor Fontanilla Rusell Aragones Romualdo Menzon Jr. Rania Joya

LECTURES COMMITTEE Michelle Arias Camille Maranan Angela Sandalo Heads Katz Manzano Mary Rose Beley Sam Nuñez Krizel Malabanan Arianne Cerezo Marcrese Banaag Volunteers

MOCK BAR COMMITTEE Lilibeth Perez

BAR CANDIDATES WELFARE Dahlia Salamat

LOGISTICS Charisse Mendoza

SECRETARIAT COMMITTEE Jill Hernandez Head Loraine Mendoza Faye Celso Mary Mendoza Joie Bajo Members

Chapter I. General Provisions I. II. III. IV.

CLASSIFICATION ELEMENTS STAGES CHARACTERISTICS

Article 1305, Civil Code. 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.

I.

Classification of Contracts

A. To formation: 1. Consensual: consent is enough; e.g. sale 2. Real: consent and delivery is required; e.g. deposit, pledge 3. Solemn or formal: special formalities are required for perfection e.g. donation of realty B. To relation to other contracts: 1. Principal: may exist alone; e.g. lease 2. Accessory: depends on another contract for its existence; e.g. guaranty 3. Preparatory: a preliminary step towards the celebration of a subsequent contract; e.g. agency C. To nature of vinculum 1. Unilateral: only one party is bound by the prestation; e.g. commodatum 2. Bilateral (synallagmatic): where both parties are bound by reciprocal prestations; e.g. sale D. To fulfillment of prestations 1. Commutative: fulfillment is determined in advance 2. Aleatory: fulfillment is determined by chance E. By equivalence of prestations 1. Gratuitous: no correlative prestation is received by a party 2. Onerous: there is an exchange of correlative prestations 3. Remuneratory: the prestation is based on services or benefits already received F. By the time of fulfillment 1. Executed: obligation is fulfilled at the time contract is entered into 2. Executory: fulfillment does not take place at the time the contract is made G. To their purpose

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OBLIGATIONS & CONTRACTS TEAM

Chapter I. GENERAL PROVISIONS

OBLIGATIONS & CONTRACTS

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Chapter I. GENERAL PROVISIONS

H. To their subject matter 1. Things, e.g. sale, deposit 2. Services, e.g. agency I.

To their designation 1. Nominate: the law gives the contract a special designation or particular name e.g. deposit 2. Innominate: the contract has no special name

Article 1305, Civil Code. INNOMINATE CONTRACTS shall be regulated by the stipulations of the parties, by the general provisions of Titles I and II of [the Civil Code], by the rules governing the most analogous nominate contracts, and by the customs of the place.

Classes of Innominate Contracts 1. Do ut des: I give so that you may give 2. Do ut facias: I give so that you may do 3. Facio ut facias: I do so that you may do 4. Facio ut des: I do so that you may give

III. Stages of Contracts A. Preparation, conception or generation: period of negotiation and bargaining, ending at the moment of agreement B. Perfection or birth: the moment when the parties come to agree on the terms of the contract C. Consummation or death: the fulfillment or performance of the terms agreed upon

IV. Charactertics of Contracts (MARCO) A. MUTUALITY The contract must bind both contracting parties; its validity or compliance cannot be left to the will of one of them (Art.1308). Taylor v. Uy Teng Piao, 1922: [BUT] a contract may expressly confer upon one party the right to cancel the contract because the exercise of that right is a fulfillment of the provisions of the contract itself

 

II. Elements of Contracts A. Essential: Those without which the contract would not exist (consent, object, causa). B. Natural: Those which are derived from the nature of the contract and ordinarily accompany the same-they are presumed to exist unless the contrary is stipulated e.g. warranty in sales C. Accidental: stipulated Common Elements Special Elements Example

Those

which

exist

only

Solemn Real Consensual Consent, subject matter, causa Formality

Delivery

None

Donationo f personal property more than P5K

Loan, pledge

Others

if

The release must be binding on both parties. The determination of the performance may rd be left to a 3 person, whose decision shall NOT be binding if:  It is evidently inequitable (the courts will decide)  The decision had not been made known to both parties (Art.1309)

B. AUTONOMY 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 (Art. 1306).

C. RELATIVITY Contracts take effect only between parties, their assigns and heirs UNLESS, obligations arising from the contract are not transmissible by their (1) nature, (2) by stipulation or (3) by provision of law. The heir is not liable beyond the value of the property he received from the decedent. (Art. 1311) Exception: Strangers may enforce the contract in their favor in the ff. cases: 1. Stipulations Pour Autrui— If a contract should contain some stipulation in favor of a third person, he may demand its fulfilment provided he communicated his

123 CONTRACTS

1. Transfer of ownership, e.g. sale 2. Conveyance of Use, e.g. Commodatum 3. Rendition of Service, e.g. agency

Chapter I. GENERAL PROVISIONS

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 favour upon a third person (Art.1311).

Requisites: a. Existence of a valid contract b. Knowledge of the third person of the existence of the contract; and c. Interference by third person without legal justification or excuse

Requisites: a. There must be a stipulation in favor of a third person b. The stipulation must be part, not the whole of the contract c. The contracting parties must have clearly and deliberately conferred a favor upon a third person, NOT a mere incidental benefit or interest. d. The third person must have communicated his acceptance to the obligor before its revocation e. No relation of agency exists between any of the parties and the third person favored

D. CONSENSUALITY 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 consequences which, according to their nature, may be in keeping with good faith, usage and law, (Art.1315) EXCEPT real contracts, such as deposit, pledge and commodatum, are not perfected until the delivery of the object of the obligation. (Tolentino)

Florentino v. Encarnacion, 1977: a. Contracts to perform personal acts which cannot be as well performed by others are discharged by the death of the promissor. Conversely, where the service or act is of such a character that it may as well be performed by another, or where the contract, by its terms, shows that performance by others was contemplated, death does not terminate the contract or excuse nonperformance. b. In this case the stipulation is a stipulation pour atrui because the true intent of the parties is to confer a direct and material benefit upon a third party. Accion Directa: Where the statute authorizes the creditor to sue on his debtor’s contract, e.g. lessor v. sublessee (Art. 1651,1652) (J.B.L. Reyes) 2. Third Person In Possession— When the third person comes into possession of the object of a contract creating real rights (Art 1312) 3. Fraud— Where the contract is entered into in order to defraud a person (Art. 1313) 4. Tortuous Interference— Where the third person induces a contracting party to violate his contract (Art.1314).

E. OBLIGATORY FORCE Art. 1159, Civil Code. Obligations arising from contracts have the force of law between the contracting parties and should be complied with in good faith. Art. 1308, Civil Code. The contract must bind both contracting parties; its validity or compliance cannot be left to the will of one of them. Art. 1315, Civil Code. 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. Art. 1356, Civil Code. 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.

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Chapter II. Essential Requisites I. CONSENT II. OBJECT III. CAUSE

I.

Consent

Conformity of the parties to the terms of the contract; the acceptance by one of the offer made by the other. (Manresa) Requisites: 1. It must be manifested by the concurrence of the offer and acceptance (Arts. 1319-1326) 2. The contracting parties must possess the necessary legal capacity (Arts. 1327-1329) 3. It must be intelligent, free, spontaneous, and real (not vitiated) (Arts. 1330-1346) A. Concurrence 1. Offer: a unilateral proposition which one party makes to the other for the celebration of the contract. (Tolentino) Requisites: a. Definite b. Intentional c. Complete Invitations to make offers (advertisements)  Business advertisements of things for sale, are NOT definite offers, just invitations to make an offer, UNLESS the contrary appears (Art. 1325)  Advertisements for bidders are invitations to make proposals, advertiser is NOT bound to accept lowest or highest bid, UNLESS contrary appears; the bidder is the offeror (Art. 1326).  Statements of intention: no contract results even if accepted Rosenstock v. Burke, 1924: FACTS: Elser, in a letter, informed Burke that he was ‘in a position and is willing to entertain’ the purchase of the yacht under some terms. HELD: The word “entertain” applied to an act does not mean the resolution to perform said act, but simply a position to deliberate for deciding to perform or not to perform said act. It was merely a position to deliberate whether or not he would purchase the yacht and invitation to a proposal being made to him, which might be accepted by him or not.

Chapter II. ESSENTIAL REQUISITES

OFFER TERMINATES upon: a. Rejection by the offeree b. Incapacity (death, civil interdiction, insanity, or insolvency) of the offeror or offeree before acceptance is conveyed c. Counter-offer d. Lapse of the time stated in the offer without acceptance being conveyed e. Revocation of the offer before learning of acceptance f. Supervening illegality before acceptance (J.B.L. Reyes) 2. Acceptance Requisites: a. Unqualified and Unconditional, i.e. it must conform with all the terms of the offer, otherwise it is a counter-offer (Art. 1319) b. Communicated to the offeror and learned by him (Arts. 1319, 1322). If made through an agent, the offer is accepted from the time the acceptance is communicated to such agent. c. Express/Implied, but is not presumed OPTION CONTRACT: A preparatory contract in which one party grants to the other, for a fixed period, the option to decide whether or not to enter into a principal contract. (Art. 1324) With consideration Offeror cannot unilaterally withdraw his offer

Without consideration Offeror may withdraw by communicating withdrawal to the offeree before acceptance

B. Capacity 1. Incapacitated to Give Consent a. Minors, UNLESS, the minor’s consent is operative in contracts:  For necessaries (Art.1427)  Where the minor actively misrepresents his age (estoppel) 

Mercado v. Espiritu, 1917: Minors held in estoppel through active misrepresentation  Bambalan v. Maramba, 1928: There is no estoppel if the minority was known. b. Insane or demented persons, UNLESS, they contract during a lucid interval c. Deaf-mutes who do not know how to read and write.

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Chapter II. ESSENTIAL REQUISITES

2. Disqualified to Contract (Art. 1329): a. Those under Civil interdiction for transactions inter vivos (RPC Art. 34) b. Undischarged insolvents (Insolvency Law, Sec.24) c. Husband and wife: cannot donate (Art. 123 FC) to each other, nor sell if the marriage is under ACP (Art.1490) d. The ff. cannot purchase (Art. 1491):  The guardian: his ward’s property  The agent: the principal’s property  Executors and administrators: property under administration  Public officers-state property under their administration  Justices, judges, prosecutors, clerks of court, lawyers-property attached in litigation. e. Members of Ethnic Minorities: their contracts (excluding sale of personal property or personal service contracts) must be approved by the Governor or his representative. (Public Land Act) Incapacity to Give Consent (Art. 1327) Restrains the exercise of the right to contract Based on subjective circumstances of certain persons

Disqualification to Contract (Art.1329) Restrains the very right itself Based on public policy and morality

Voidable

Void

C. Vices of Consent (Art. 1330, CC) (MIVUF) 1. Mistake Inadvertent and excusable disregard of a circumstance material to the contract. (J.B.L. Reyes)  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 (Art.1331) Mistake of Fact

Mistake of Law

Mutual Mistake

When one or both contracting parties believe that a fact exists when in reality it does not, or vice versa

When one or both parties arrive at an erroneous conclusion on the interpretation of a question of law or the legal effects

 Must be as to the legal effect of an agreement  Must be mutual  Real purpose of the parties must have been frustrated

2. 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 (Art. 1335). Martinez v. HSBC, 1910: The conveyance of several properties by to her husband’s creditors, though reluctant is still consent. She assented to the requirements of the defendants, the civil and criminal actions against them would be dropped. A contract is valid even though one of the parties entered into it against his wishes and desires, or even against his better judgment. Contracts are also valid even though they are entered into by one of the parties without hope of advantage or profit.

3. Violence Irresistible force used to extort consent (J.B.L. Reyes) 4. Undue Influence When a person takes improper advantage of his power over the will of another, depriving the latter of a reasonable freedom of choice (Art. 1337). Circumstances: a. Relationship of the parties (family, spiritual, confidential etc.) b. That the person unduly influenced was suffering from infirmity (mental weakness, ignorance etc.) (Art.1337) 5. Fraud When through insidious words or machinations of one of the contracting parties, the other is induced to enter into a contract which, without them, he would not have agreed to (Art. 1338). Art. 1339, Civil Code. Failure to disclose facts, when there is a duty to reveal them, as when the parties are bound by confidential relations, constitutes fraud. Art. 1340, Civil Code. The usual exaggerations in trade, when the other party had an opportunity to know the facts, are not in themselves fraudulent. Art. 1341, Civil Code. 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. Art. 1342, Civil Code. Misrepresentation by a third person does not vitiate consent, unless, such misrepresentation has created substantial mistake

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Chapter II. ESSENTIAL REQUISITES

Art. 1343, Civil Code. Misrepresentation made in good faith is not fraudulent but may constitute error.

SIMULATION OF CONTRACTS (Art. 13451346): Declaration of a non-existent will made deliberately for the purpose of producing the appearance of a transaction that does not exist, or which is different from the one which actually arose. (J.B.L. Reyes) Absolute No real transaction is intended Fictitious contract Void

Relative Real transaction is hidden Disguised contract Bound as to hidden agreement, so long as it does not prejudice a third person and is not contrary to law, morals, good customs, public order or public policy

II. Object The thing right or service which is the subject matter of the obligation arising from the contract. Requisites: a. Lawful: Not contrary to law, morals, good customs, public order or public policy. b. Actual or possible c. Transmissible: Within the commerce of man d. Determinate or determinable All things or services may be the object of contracts, EXCEPT:  Things which are outside the commerce of men  Intransmissible rights  Future inheritance except in cases authorized by law  Impossible things or services  Objects which are indeterminable as to their kind, the genus should be expressed In order that a thing, right or service may be the object of a contract, it should be in existence at the moment of the celebration of the contract, or at least, it can exist subsequently or in the future. A FUTURE THING may be the object of a contract, such contract may be interpreted as a:  Conditional contract: where its efficacy should depend upon the future existence of the thing

Aleatory contract: where one of the contracting parties assumes the risk that the thing will never come into existence, e.g. insurance

III. Cause It is the impelling reason for which a party assumes an obligation under a contract. Requisites: a. Existing b. Licit or Lawful c. True

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Cause in: Onerous Contracts As to each of the contracting parties is understood to be the undertaking or the promise of the thing or service by the other party

Renumeratory Contracts The service benefit which remunerated

or is

Pure Beneficence Mere liberality of the benefactor

In Villaroel v. Estrada (1940), where a moral obligation is based upon a previous civil obligation, which has already been barred by the statute of limitations at the time the contract is entered into, it constitutes a sufficient cause or consideration to support a contract (Natural Obligation). BUT, In Fisher v. Robb (1939), if the moral obligation arises wholly from ethical consideration, it cannot constitute a sufficient cause to support an onerous contract, as when the promise is made on the erroneous belief that one was morally responsible for the failure of an enterprise (Moral Obligation). Cause Lack Cause

of

Illegality Cause

of

Falsity cause

of

Lesion or inadequacy of cause

Defined Absence or total lack of cause

Contrary to law, morals, good customs, public policy and public order Cause is stated but is untrue

Cause is not proportionate to object

Effect The contract confers no right and has no legal effect Null and Void

Void if it should not be proved that it was founded upon another cause which was true and lawful Shall not invalidate the contract except when

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and the same is mutual.

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Chapter II. ESSENTIAL REQUISITES a)there is fraud, mistake, undue influence b)when parties intended a donation

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Liguez v. CA (1957): In making the donation in question, Lopez was not moved exclusively by the desire to benefit Liguez, but also to secure her cohabiting with him, so that he could gratify his sexual impulses. The donation was an onerous transaction and clearly predicated upon an illicit causa.

Chapter III. Forms of Contracts I. RULES II. KINDS OF FORMALITIES

I.

Rules

Contracts shall be obligatory, in whatever form they may have been entered into, provided all the essential requisites for their validity are present. (Art. 1356)

Chapter III. FORMS OF CONTRACTS

d. The cession of actions or rights proceeding from an act appearing in a public document. e. 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. 2. Donation of immovable properties (Art. 749)

Spiritual System of the Spanish Code: The law looks more on the spirit rather than the form of contracts.

3. Partnership where immovable property or real rights are contributed to the common fund (Arts.1771 and 1773)

Exceptions:  When the law requires that a contract be in some form for validity (Arts. 1357-1358)  When the law requires that contract be in some form to be enforceable (Statute of Frauds)

BF Corporation v. CA, 1998: A contract may be encompassed in several instruments even though every instrument is not signed by the parties since it is sufficient if the unsigned instruments are clearly identified or referred to and made part of the signed instruments.

II. Kinds of Formalities A. Contracts Which Must Appear in Writing: 1. Donation of personal property whose value exceeds five hundred pesos (Art 748) 2. Sale of a piece of land or any interest therein through an agent (Art 1874) 3. Antichresis (Art 2134) 4. Agreements regarding payment of interests in contracts of loans (Art. 2314) B. Contracts Which Must Appear in a Public Document 1. Art. 1358: a. Acts and contracts which have for their object the creation, transmission, modification or extinguishment of real rights over immovable property; sales of real property or of an interest therein a governed by Articles 1403, No. 2, and 1405; b. The cession, repudiation or renunciation of hereditary rights or of those of the conjugal partnership of gains; c. 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;

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Chapter IV. REFORMATION OF CONTRACTS Chapter V. INTERPRETATION OF CONTRACTS

Chapter IV. Reformation of Contracts

Chapter V. Interpretation of Contracts

Reformation of Contracts (Art 1359-1369) REFORMATION: is that remedy in equity 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. (J.B.L. Reyes)

RULES ON DOUBTS (Art. 1378)

Requisites (Art 1359): 1. There must be a meeting of the minds of the contracting parties; 2. Their true intention is not expressed in the instrument; 3. Such failure to express their true intention is due to mistake, fraud, inequitable conduct, or accident; and 4. There is clear and convincing proof of mistake, fraud, inequitable conduct, or accident. If the mistake, fraud, inequitable conduct, or accident has prevented the meeting of the minds of the parties, the proper remedy is not reformation but annulment of the contract. (See also Art 1390)

Who May Ask for Reformation (Art. 1368): 1. Either party or his successors in interest, if the mistake was mutual; otherwise, 2. Upon petition of the injured party, or his heirs and assigns. NO REFORMATION in (Art. 1366): 1. Simple donations inter vivos wherein no condition is imposed; 2. Wills; 3. When the real agreement is void. Implied Ratification (Art. 1367): The action to enforce the instrument bars subsequent action to reform.

Principal Objects

Gratuitous Contracts

Onerous Contracts

Doubts where it cannot be known what may have been the intention or will of the parties, the contract shall be null and void.

Absolutely impossible to settle doubts by the rules and only refer to incidental circumstances the least transmission of rights and interests shall prevail.

Absolutely impossible to settle doubts by the rules and only refer to incidental circumstances the doubt shall be settled in favor of the greatest reciprocity of interests.

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Chapter VI. DEFECTIVE CONTRACTS

Chapter VI. Defective Contracts RESCISSIBLE VOIDABLE UNENFORCEABLE VOID OR INEXISTENT

I.

Rescissible Contracts (Arts. 1380-1389)

What are the rescissible contracts? (Art 1381; see also Art 1382) What makes it defective?

Effect on the Contract How to rescind?

Who can rescind?

When to rescind (Art 1389)

Contracts of guardians

Contracts in representation of absentees

Contracts are entered into to defraud existing creditors

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When the acts of administration cause LESION or damage to the WARD they represent by more than 25% of the value of the thing

When the acts of administration cause LESION or damage to the ABSENTEE they represent by more than 25% of the value of the thin Valid until rescinded (Art 1380)

When the creditors cannot in any other manner collect the claims due them

Direct Action (different from action for rescission under Art 1191)

Accion Pauliana for Contracts in Fraud of Creditors

NO rescission if: 1. Injured party has other legal means to obtain reparation (Art 1383). 2. Plaintiff cannot return his part of the obligation (Art 1385 par 1) 3. Object of the contract is in the hands of third person, onerously acquired by him in good faith (Art 1385 par 2) 4. If the court approves the contracts under Art 1381 par 1 and 2 (Art 1386) In general, by By absentee injured party

NO rescission if: 1. Injured party has other legal means to obtain reparation (Art 1383) 2. Plaintiff cannot return his part of the obligation (Art 1385 par 1) 3. Object of the contract is in the hands of third person, onerously acquired by him in good faith (Art 1385 par 2)

By ward, or by guardian ad litem of ward during incapacity of ward in an action against the original guardian Within four years from [re-] gaining capacity

Within 4 years from knowledge of domicile of absentee

If entered into by the defendant without the knowledge & approval of the litigants or competent judicial authority

By creditor(s)

By party litigant

Within 4 years from knowledge of fraudulent contract

Within 4 years from knowledge of fraudulent contract

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I. II. III. IV.

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Chapter VI. DEFECTIVE CONTRACTS

II. Voidable Contracts (Arts. 1390-1402)

Who can/cannot annul? (Art 1397)

When? (Art 1391)

Effect Annulment

of

How to Cure Defect? (Arts 1392 - 1396)

Incapacity of one party to the contract

Consent vitiated by mistake, violence, intimidation, undue influence or fraud

Valid until annulled by competent court (Art 1390 last par) 1. Directly, by an action for annulment 2. Indirectly, by counterclaim asking for positive action of the court to set aside the contract Annulment cannot proceed when: 1. the object of the contract is lost through fraud or deceit of the person with right to institute proceedings (art 1401 par 1); 2. the right of action is based upon the incapacity of any one of the contracting parties and the thing is lost through the fault or fraud of the plaintiff (Art 1401 par 2) 1. Parties who are obliged principally or subsidiarily 2. Persons who are capable cannot allege the incapacity of those with whom they contracted 3. Persons who exerted intimidation, violence, or undue intimidation, or employed fraud, or caused mistake, cannot base their action upon these flaws of the contract Within four years after guardianship of Within four years minors or incapacitated persons 1. After intimidation, violence or undue ceases influence ceases 2. From the time of discovery of mistake or fraud 1. Mutual restitution of the things delivered, along with fruits and price paid with interest (Art 1398) 2. Damages to be paid by party who caused defect of the contract, by virtue of Article 20 and 21 of the Civil Code 1. Express (written or oral manifestation) or tacit ratification (acts or conduct) by injured party, or guardian of incapacitated person. Ratification does not require the conformity of the contracting party who has no right to bring the action for annulment (Art 1395)

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What makes it defective? (Art 1390) Effect on the Contract How to annul?

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Chapter VI. DEFECTIVE CONTRACTS

III. Unenforceable Contracts (Arts. 1403-1408)

Contract entered into without authority of, or in excess of authority given by owner

Contracts covered by Statute of Frauds which did not comply with the written memorandum requirement (See Art 1403 par 2)

Contract where both parties are incapable of giving consent to contract

Effect on the Contract How to assail?

No effect unless ratified. Cannot be enforced by a proper action in court.

Who can assail? *an unenforceable contract cannot be assailed by third persons (Art 1408) When?

By person whose name the contract was entered into; By owner of property.

How to Defect? 1403)

1. Ratification by person whose name the contract was entered into

Cure (Art

Not by direct action. 1. As a defense, by motion to dismiss the complaint on the ground that the contract is unenforceable

Not by direct action. 1. As a defense, by motion to dismiss the complaint on the ground that the contract is unenforceable; 2. Objection to the presentation of oral evidence to prove an oral contract (See Art 1405) By party against whom the contract is being enforced; or his privies.

Not by direct action. 1. As a defense, by motion to dismiss the complaint on the ground that the contract is unenforceable

By party against whom the contract is being enforced; or his privies; or parents or guardians persons, as it is a personal defense

When a party asks the court to enforce the contract

1. Ratification by party 1. By ratification of party against whom against whom the the contract is being contract is being enforced; or his enforced privies; or parents or 2. By failure to object to the presentation of oral evidence to prove an oral contract or by the acceptance of benefits under the contract (Art 1405)

guardians  The ratification by one party converts the contract into a voidable contract (Art 1407)

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What are the unenforceable contracts? (Art 1403)

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Chapter VI. DEFECTIVE CONTRACTS

IV. Void or Inexistent Contracts (Arts. 1409-1422) it

Contracts which are inconsistent and void from the beginning (Art 1409)

How to assail?

Who can assail?

When?

Contract’s Cause, Object of Purpose is contrary to morals, good customs, public order or public policy (Art 1409 par 1)

Inexistent contracts, or contracts whose essential elements are absent (Art Art 1409 par 2, 3, 4,5)

Contracts expressly prohibited or declared void by law (Art 1409 par 7); contracts which are direct results of a previous illegal contract (art 1422) 1.Those whose Cause, Object of Purpose is contrary to 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

1. File for action for declaration of inexistence or nullity of contract 2.As a defense during trial (Art 1409 last par). Such defense not available to third persons not directly affected by contract (Art 1421) 3.In pari delicto applies when cause or object of contract constitutes a criminal offense (Art 1411) 1. Innocent party Art 1. Any of the parties 1. Any person whose 1411 par 2; Art 1412 2. Any person whose interests are par2) interests are directly directly affected by 2. Less-guilty party, upon affected by the contract the contract Art court discretion (Art 1421) (1421) 3. Incapacitated person 2. By party for whose who is a party to an protection the illegal contract, upon prohibition of the court discretion (Art law is designed (Art 1415) 1416) 4. Any person whose interests are directly affected by the contract (Art 1421) The action or defense does not prescribe (Art 1410)

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What makes defective?