(SAMS HNIVERCITV HinpeAy Civil Law Outlines OBLIGATIONS AND CONTRACTS JOEMER C. PEREZ ADAMSON IINIVERSITY HeeAn542F2 P49 et ar | ObUigodiont (Las) =» Acagperine . ‘Fi Philippine Copyright 2010 by Joemer C. Perez All rights reserved. No part of reproduced in any form or by any mechanical means, including infor! and retrieval systems, without w: from the author, except quoted brief passages in review or in judicial or other official proceedings 087619 151 Serial No, ‘Any copy of this book not bearing the signature ‘of the author shall be considered as proceeding ‘from an illegal source, ISBN 978.971-011-217-3 Published by Central Book Supply, Inc. 927 Quezon Avenue, Quezon City Philippines 1104 ‘TABLE OF CONTENTS Chapter 1: Introduction to Obligations Chapter 2: Nature and Effect of Obligations Chapter 3: Remedies Chapter 4: Kinds of Obligations Chapter 5: Extinguishment of Obligations Chapter 6: Introduction to Contracts Chapter 7; Essential Requisites of Contract Chapter 8: Form of Contracts Chapter 9: Reforimation of Instruments Chapter Chapter Chapter Chapter 13: Estoppel Chapter 14: Trusts \terpretation of Contracts jefective Contracts fatural Obligations] I Chapter 1 Introduction to Obligations L_ INGENERAL A. DEFINITION: An obi » 3. CONCEPTS: The notion of a civi is a juridical necessity to give, to do or not to do. (Art. conduct and, in case of breach, may obtain satisfaction from the assets of the debtor." Note that the obligation defined under Art, 1156 refers to civil obligations, ie., obligations which are enforceable by courts under the law, ‘They are different from natural which are not enforceable by the courts under th when performed, they are binding, under the principles of conscience or moral justice. A common example of a natural st which cannot be enforced in paid by the debtor, the payment becomes binding on the said debtor. igation imports three concepts 1. Credit — right of a person (creditor) to demand a prestation or the observance of a particular conduct, which the law will enforce; bservations on the New Civil Code,” Lawyers Joural, Vol. XVI, pp. 47-50, 1, 9-47, ching Aas Ramos, 12. Debt —duty of another person (debtor) to sender a ition or observe a particular: ‘conduct; and = Note that in oblige in which is enfo ns, the credit is a personal right, against a particular or definite necessary that such person be presently identified), as opposed to a real right, which is enforceable against the whole world (erga omnes). 3. Responsibility —right ofthe creditor to obtain satisfaction from the debtor's patrimony in case of the debtor's breach, - The debtor is liable with all his property, present and future, for the fulfillment of his obligations, subject to the exemptions provided by law. (Art. 2236) 1. The vinculum juris or juridical tie which is the efficient cause established by the various sources of (law, contracts, quasi-contracts, delicts and quasi 2. The object which is the prestation or conduct required to be observed (to give, to do or not to do); and 3. The subject-persons who, viewed from the demandability of the obligation, are the active (obligee) and the passive (obligor) subjects. I. SOURCES OF OBLIGATION Obligations arise from the following sources: (Art, 1 $ See Sps. Adorable v.CA,G.R. No, 11946, Nov + Aog Yu Asuncion v, CA, 238 SCRA 602 (199 A. LAW iG Not Presumed. Obligations derived from law are not presumed. Only those expressly determined in the Civil Code or in special laws are demandable, (Art. 1158) a. A legal norm can require that a particular party be ith a prestation or undertak to do or to rend law has no legal obligation to support his daughter-in-law. Such obligation cannot be Applicable Law. Obligations derived from law shall be regulated by the precepts of the law which establishes them; and as to what has not been foreseen, by the provisions of Book IV of the Civil Code. (Art. 1158) Examples of Obligations Created By Law: 8. Obligation between spouses or between parents and children to provide support under the Family Code; b. Obligation by employer to provide certain benefits to employees under the Labor Code; ©. Obligation to reimburse necessary expenses under the law on property; 4d. Obligations of the owners of a servient estate to the owners of the dominate estate under the law on easements; ete.B. Contracts | a. Negotiorum Gestio — Whoever voluntarily takes 1. Obligations arising from contracts have the force of law between the contracting parties and should be complied to with in good faith. (Art. 1159) the affair and its incidents, or to require the person i him, if the owner is in a | 2. Definition. A contract is a meeting of minds between two } to do so. (Art. 2144) / Persons whereby one binds himself, with respect to the i other, to give something or to render some service. (Art. b, Solutio Indebiti — If something is received when there et) is no right to demand it wes unduly delivered through mistake, the obligation to return it arises. (Art. | ~ See discussion on Contracts in Chapters 5, et seq 2152) | C. Quasi-conrracts D. ACTS OR OMISSIONS PUNISHED BY LAW 1. Applicable Law. i-contracts | 1. Applicable Law. Civil obligations arising from criminal shall be subject | ions of Chapter 1, XVu, offenses shall be governed by the penal laws, subject to the | ‘of Book IV of the Civil Code. (Art. 1160) I following provisions of the Civil Code: 2. Definition. Quasi-contracts are obligations arising ffom | a. Article 2177; certain lawful, voluntary and unilateral acts, to the end that I ; no one shall be unjustly enriched or benefited at the | b. The pertinent provisions of Chapter 2, Preliminary I expense of another. (Art. 2142) | Title, on Human Relations, and ~ Inquasi-contracts, there is no consent in the sense of a | ©. The pertinent provisions of Title XVII of Book IV, | ‘meeting of minds between the parties; thus there is no | regulating damages. (Art. 1161) ! 2. Civil Liability Arising From Crime, Under Art. 100 of hi the Revised Penal Code, every person criminally liable for favors resulting from lawful, voluntary and unilateral a felony is also civilly liable. The Civil Code also provides \ acts of another may not be unjustly enriched at the ‘that in crimes, the defendant shall be liable for all damages expense of another, which are the natural and probable es of the act or omission complained of. (Art: 2202) 3. Examples: that such damages have been forest reasonably been foreseen by the defendant. (Art. 2202) { - Civil liability arising from crime may be proved by " Pipoine National Bank v.CA, G.R. No, $7995, January 21,1968, 4 5 preponderance of evidence. (Arts. 29, 30, 35) Thus, itis possible that an accused who is a reasonable doubt may nonetheless be ‘based on preponderance of evidence. (/d) 3. Deemed Instituted. When a criminal action is instituted, the civil action for the recovery of civil Ii arising from the offense charged shall be deemed instituted with the criminal action, unless the offended party — a. Waives the civil action, b. Reserves the right to institute it separately or ©. Institutes the civil action prior to the eriminal action.® 4. Independent Civil Action. In the following cases provided by the Civil Code, the offended party may file an independent civil action, which shall proceed independently of the criminal action and shall require only « preponderance of evidence’; 8. Civil action based on an obligation not arising from the Act or omission complained of as a felony. (Art. 31) > Example: a civil action for breach of contract of deposit, independent of a criminal action for estafa."? b. Violation of civil or constitutional rights and liberties. (Art. 32) ©. Defamation, fraud and physical injuries, (Art. 33) + “Physical injuries” is used in the generic sense, It includes homicide (whether attempted, frustrated or consummated).!" 4, Failure of a policeman or peace officer to render aid or protection to any person in case of danger to life or property. (Art. 34) ~The peace officer is primarily liable for dar and the city or municipality is subsidiarily (Art. 34) No Double Recovery. In no case (even in independent civil actions) may the offended party recover damages twice for the same act or omission charged in the criminal action.” FE. QUASI-DELICTS Applicable Law. Obligations derived from quasi-delicts shall be governed by the provisions of Chapter 2, Title XVII of Book IV, and by special laws. (Art. 1162) Definition. Whoever by act or omission another, there being fault or negligence, for the damage done. Such fault or negli no pre-existing contractual relation between the parti called a quasi-delict. (Art. 2176) - Negligence is defined as the failure to exercise the2 Culpa contractual ~ the parties have a pre-existing contractual relations; the negligence is an incident of the perforinance of the contractual vbligation, and serves to “increase the liability arising from the contractual obligation." b. Culpa aguiliana (or extra-contractual or quasi-delict) ~ the parties generally have no pre-existing contractual which creates the 1d therefore the juridical relation between ~ However, it has been held that quasi-delict may arise even if there is pre-existing contractual elation, as the act which breaks the contract may also be a quasi-delict.”” ©. Culpa criminal — negligence punished by law, as under Art. 365 of the Revised Penal Code on criminal negligence, ‘The foregoing lisbilities (and the corcesponding liabilities) are independent of each other, provided that the offended Pasty cannot recover more than once.® “Thus, e.g, o taxi passenger who became a victim of a vehicular accident may sue the taxi operator under their contract of carriage (this is culpa contractual), and also Sue the driver of the other vehicle which collided with the taxi since they had no pre-existing contractual is culpa aquiliana). The negligent drivers 1 Sps, Baal. Sps.Toninaga, GR. No Air Erana v. Caras, 18 SCRA |, Sings SERA 1 (89, CooeGala tes Pg, ew CA GR. No MERE, Ose 18, i “San First Pilprine iteration Bark v. CA, GR. No, 118849, January 4, 1866. ‘ay also be criminally prosecuted for criminal negligence this is culpa criminal), which will also give rise to civil : te of the accused in the case sources of obligation. v. Calaunan, GR. No. 1! 25, 2007, Safeguard Secuy Agen V. No, 1572, OsoebeChapter 2 Nature and Effect of Obligations I. OBLIGATION TO GIVE A. OBLIGATION TO GIVE. A DETERMINATE THING me that has been specified or the same kind. For example, the car with plate number JCP-888, 2. When what is to be delivered is a determinate thing, the creditor may compel the debtor to make the delivery (in addition to damages). (Art. 1165) can compel the debtor to specified in the obligation, wed to substitute another deliver the thing actu If the obligor delays, or has promised to deliver the same thing to two ot more persons who do not have the same interest, he shall be re for any fortuitous event until he has effected the delivery. (Art. 1165) 3. The obligation to give a determinate thing includes the following accessory obligations: ‘good father of a family. (Art. 1163) 5 the law or the stipulation of the parties requires another standard of care. (Art. 1163) 10 fi, ‘Thus, the vendor has the obligation to preserve the thing from the perfection of the contract until the thing is delivered to the vende.” b. To deliver she fruits of the thing from the time the obligation to deliver the thing arises. (Art. 1164) - However, the creditor shall acquire no real right over the thing until the same has been delivered to him, (Art. 1164) (1) A personal right is the power of one person to t a passive subject individually determined?" (2) Delivery is required for a creditor to acquire a real right over the thing; before such delivery, the creditor only has a personal right to compel, the debtor to deliver the thing to him. ¢. To deliver all of the accessions and accessories of the thing, even though they may not have been mentioned. (Art. 1166) B. OBLIGATION TO GIVE AN INDETERMINATE THING 1, An indeterminate thing is one that is generic. only by its kind, without being specified from others of the same kind. For example, “a car.” 2 even Brothers Stipping Cap. v. CA, GR. No 1 1996, 2 Spe, Adorable v. CA, GR. No, 119468, Noveber n2. If the thing is indeterminate or generic, he may ask that the obligation be complied with at the expense of the debtor. (Art. 1165) The obligation is satisfied by giving to the creditor a generic thing, at the debtor’s expense. This is in addition to damages. b. The obligation to give a generic thing does not camry with it the accessory obligations to preserve the thing and deliver its i i because a generic thin Il. OBLIGATION TO DO AND NOT T0 DO ‘A. OBLIGATION To Do: If a person obliged to do something fails to doit, the same shall be executed at his cost, (Art. 1167) 1, This same rule shall be observed if he does it in contravention ofthe texor ofthe obligation, (Art. 1167) 2. ‘Furthermore, it may be decreed that what has been poorly done be undone. (Art, 1167) ~ Note that the debtor cannot be compelled 10 do the thing, since it would violate his personal liberty. He can only be held liable for damages. B. OBLIGATION Nor To Do: When the obligation consists in not doing, and the obligor does what has been forbidden him, it shall also be undone at his expense, (Art. 1168) + Thus, constructions which are made despite the prohibition ot restrictions in the Deed of Restrictions may be demolished.” 2 Fajr v Freedom Bue re, GR Il. TRANSMISSIBILITY OF OBLIGATIONS A. GENERAL RULE: All rights acquired in virtue of an obligation are transmissible, subject to laws or stipulations to the contrary. (Art. 1178) B. EXCEPTIONS: Rights and obligations which are not ‘transmissible — 1. By mature; (Art. 1311) 2. By stipulation of the parties; (Art. 1311) or 3. By provision of law.” (Art. 1311) legal support (Article 300), parental 327), usufruct (Article 603), piece of work 1726), partnership (Article 1830) and agency (Article 191 IV. PERFORMANCE OF OBLIGATIONS ‘A. IN GENERAL: The thing or service in which the obligation consists must be completely delivered or rendered, as the case may be. (Art. 1233) See further discussion regarding Payment. B, RECEIPT OF PRINCIPAL: The receipt of the principal by the creditor without reservation with respect to the interest, shall give rise to the presumption that said interest has been paid. (Art. 1176) 2 Eelate of Hemady v. Luzon Surety Co, 100 Phi. 36 (195). B~ _ If the debt produces interest, payment of incipal shall not be deemed to have been made until the interests have been covered. (Art, 1253) C. RECEIPT OF LATER INSTALLMENT: The receipt of a later installment of a debt without reservation as to prior installments, shall likewise raise the presumption that such installments have been paid. (Art, 1176) D. USURIOUS TRANSACTIONS: They are governed by special laws, (Art. 1175) > Circular No. 905 of the Central Bank, adopted on December 22, 1982, has expressly removed the interest ceilings prescribed by the Usury Law. Thy ‘Law is now “legally inexistent” ot “inefectiv the Usury ~ However, courts may modify interest rates when found to be iniquit V. NON-PERFORMANCE OF OBLIGATION (BREACH OR DEFAULT) 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, ae liable for damages. (Art, 1170) Jn general, every debtor who fails in the performance of his obligations is bound to indemnify for the losses and damages caused thereby.2* ii br De ta Cov. Senay of Nani, 18 hi ) ; Del Cava v. Daz, 37 A, DELAY oR Mora n Reg In order forthe debtor to be in default (mora solvendi), the following requisites must be present”: a, That the obligation be demandable and already liquidated; b. That the debtor delays performance; and .. That the creditor requires the performance judicially or extrajudicially (demand), (Art, 2209) The debtor also assumes the risk for a thing (even for a fortuitous event) from the time of default. (Art. 1165) General rule on demand requirement. Those obliged to deliver or to do something incur in delay from the time the obligee judicially or extrajudicially demands from them the fulfillment of their obligation. (Art. 1169) = Filing of case in court isa judicial demand.” Exceptions to demand requirement. The demand by the creditor shall not be necessary in order that delay may exist in any of the following instances: (Art, 1169)2 By express provision or stipulation. When the obligation or the law expressly so declare; or ~ The fact that the contract fixes: the schedule of Payment does not dispense with the demand Tequirement”; the contract must specifically state that demand is not necessary or that the debtor is waiving the requirement of demand, b. Time is of the essence. When from the nature and the circumstances of the obligation it spears that the designation of the time when the thing is to be delivered or the service is to be rendered was a controlling motive for the establishment of the contract; or i. For example, delivery of wedding cake at a specified date of the wedding. fi, When a common carries undertakes to convey f: goods, they should be delivered at destination Within a reasonable time, in the absence of any agreement as to the time of delivery. © Demand is useless. When demand would be useless, as when the obligor has rendered it beyond his power to perform. + For example, when the obligor had already disposed of the thing to be delivered. 4. Creditor’s Default. The creditor may also incur default (mora creditoris or accipiendi) when he refuses to accept | a Socal Socuty System v. Moonwalk Development and Housing Co, GR. No, 7385, * Maersk Line CA, GR. No, 96761, May 17, 1998. 16 the performance without valid reason, A creditor in default bears the risk of accidental loss due to fortuitous event jot negated by the debtor's failure to consign the thing to be delivered.** 5. In reciprocal obligations, neither party incurs in delay if the other does not comply or is not ready to comply in @ proper manner with what is incumbent upon him. (Art 1169) - From the moment one of the parties fulfills his obligation, delay by the other begins. (Art. 1169) = Inreciprocal obligations, the performance of one is conditioned on the simultaneous fulfillment of the other obligation. rescission of the obligation. - It should be differentiated from “fraud” under Art 1338 (contracts) and Art, 839(5) (wills), which refers2. Always Demandable. Re: idability of the contract and invalidity of the demandable in all obligatc a. Any waiver of an action for future fraud is void, (Art. 1171) b, notwithstanding its bad faith, fault or negligence is void.” C. NEGLIGENCE Definition. The fault ity for Negligence. Responsibility arising from igence in the performance of every kind of obligation is also demandable, but such liability may be regulated by the courts, according to the circumstances. (Art. 1172) ligence of the obligor consists in the omission of igence which is required by the nature of the obl and corresponds with the circumstances of the persons, ofthe time and of the place. (Art. 1173) As previously discussed, negligence or cxipa ‘may be of three kinds: & Culpa contractual — the parties have a pre-existing contractual relations; the negli the performance of the « serves to increase the contractual obligation. &. Culpa aguiliana (or extra-contractual or quasi-delict) ~ the parties generally have no pre-existing contractual , as the act which breaks the contract may also be a quasi-delict.? ii, Note that in culpa aguiliana, the employer may avoid liability for the negligence of his employee by invoking the defense of due contractual, this defense is not available. ©. Culpa criminal - negligence punished by law, as under Art. 365 of the Revised Penal Code on criminal negligence. ‘ 7 — 3. Negligence with Bad Faith. When negligence shows pi the provisions of Articles 1171: (on fraud) and 2201, paragraph 2 (liability for all damages reasonably attributable to the non-performance), shall apply. igence in effecting the plans, designs, , and construction of a building is to bad faith.4. Ordinary Diligence. If the law or contract does not state the diligence which is to be observed in the performance, + that which is expected of a. good father of a family shall be Ld required, (Art. 1173) 5. Extraordinary Diligence. Certain businesses. or professions required the “highest degree of care” because of their nature. Examples: a. Common Carriers — for the protection of life and & This connotes reasonable care which an ordinarily property.” Prudent person would have observed when confronted with a similar situation. b. Banks — because of the fiduciary nature of their relationship with their depositors. >. Examples: ‘i ©. Pharmacies ~ because of their potential harm to human i, Placing a cellphone in a bag and holding on to that life” bag is ordinarily sufficient care of a cellphone ‘hile travelling on board the LRT D. OTHER VIOLATIONS OF THE OBLIGATION ii, A shipping company exercised due diligence when 1. The phrase “in any manner contravene the tenor” of the its vessel sailed only after the main engine, obligation includes any illicit act or omission which machineries, and other auxiliaries were checked impairs the strict and faithful fulfillment ofthe obligntion and found to be in good running condition; when and every kind of defective performance.” Examples: the vessel was manned by competent and ‘experienced officers; and when the master ordered a, Supplier failed to deliver the cinema films subject of a ‘an inspection upon the occurrence of vibrations.” ili. A store supervisor who did nothing even if it had been informed that a counter was unstable and posed a danger to customers, is negligent ** iv. A towing service which failed to ensure that its tugboat was free of mechanical problems is booking contract. Shipping company failed to deliver the cargo within a reasonable time (delay of two months from the estimated date of arrival Bank failed to keep a safety deposit box from being flooded and failed to inform the depositor of the flood, I negligent, particularly considering thatthe barge to be towed was wholly dependent on the tugboat for propulsion? i sent | |which led to the destruction of the stamp collection stored therein.** thereby unilaterally distributorship agreement to repair ‘a typewriter and even retumed it “in shambles,"** £ Construction company deviated from the plans and specification, and architect provided defective plans and specifications.” 2. When an obligation, regardless of its so contracts, quasi-contracts, delicts or quas breached, the contravenor can be hel r damages.” Ifthe obligor acted in good faith, he shall be liable for those damages that are the natural and probable ‘consequences of the breach of the obligation and which the parties have foreseen or have reasonably foreseen at the time the obligation was constituted. (Art. 2200) b, In case of fraud, bad faith, malice, or wanton attitude, the guilty par ‘VI EXCUSE FOR NON-PERFORMANCE: FORTUITOUS EVENT A. DEFINITION: A fortuitous event (also known as force majeure) is one which co en, or which, though foreseen, was inevitable. (Art, 1174), It may either be — 1. “Aet of God” epidemics or pesti used by nature, such as earthquakes, ve" floods or storms,” fire, etc., or 2, “Aet of man” if caused by humans (other than the obligor), such as war, robbery, rebellion, etc. B, GENERAL RULE - NO LIABILITY: No person shall be 1, The cause of the breach of the obligation must be independent of the will of the debtor; 2. The event must be either unforseeable or unavoidable; 3. The event must be such as to render it impos debtor to futfill his obligation in a normal man 4, The debtor must be free from any participation in, or aggravation of the injury to the creditor. C. EXCEPTIONS: The obligor is liable for breach even due to fortuitous events in the following cases:In cases expressly specified by the law. (Art. 1174) iii, The collapse of a building due to an earthquake would not absolve the architect and the constructor ) upon showing that there were defects in the design 2. When it is declared by stipulation, (Art. 3. When the nature of the obligation requires the assumption of risk. (Art. 1174) iv 4. If the obligor detays, or has promised to deliver the same supposed to know about the conditions of his thing to two or more persons who do not have the same vehicle and keep it off the street if mechanically ‘interest. (Art. 1165) defective.” 5. When the obligor is guilty of contributory fault or Tire blow-out is also not a fortuitous event if < negligence. (Art. 1170) caused by factors which could have been ¢ discovered with a thorough check-up of the i - If upon the happening of a fortuitous event, there vehicle.” | concurs a corresponding fraud, negligence, delay ot ’ violation or contravention nner of the tenor vi. A fire which occurred in a vessel is not a fortuitous of the obligation, whic in loss or damage, the event where it was shown to have originated from obligor cannot escape liabi crack in the fuel oil tank which should have been discovered upon inspection of the vessel.”” Street robbery resulting in the loss of jewelry entrusted to the vietim may be considered vii. A common carrier which proceeds with the sailing fortuitous event, but the victim must be fiee of of its vessel despite knowledge of an incoming. contributory fault or negligence (she must have typhoon is guilty of negligence and cannot invoke taken the nevessary precautior fortuitous event.”* ii. Camapping per se is not a fortuitous event. Thus, a Sufficient to exonerate the obligor who lost a car due to the camapping, It must be established that the event was an act of God or was done solely by third parties, and that the obligor had no fault or participation therein.” % Aus v.CA, GR. No, 29 {Nak & Sons v. CA, GR. No, & Austiav.CA, GR No. 20640, ( irmy Cov. CA, GR. No. 124922,e ‘may ask that it be undone at the expense of the debtor. Chapter 3 (Art. 1168) Remedies Note: If the obligation is reciprocal, breach by one party entitle the other party to demand rescission (as an. alternative to performance). (Art. 1191) See further 1. INGENERAL discussion below. Civil obligations necessarily entaf the availability of remedies by fe 2. Damages. The creditor may also ask for damages in case which they can be enforced by the creditor. of breach or non-performance by the debtor. (Art. 1170) ‘A. PRINCIPAL REMEDIES: In general, to enforce an obligation, B. SATISFACTION OF CLAIMS: When a creditor avails himself of ‘he creditor may demand performance and/or indemnity for the remedies allowed by law (supra), and he succeeds in damages. obtaining a favorable judgment, he will naturally be interested in getting satisfaction of the award in his favor. He may do so 1. Performance. by taking the following successive measures against his debtor.” (see Art. 1177) 4. In obligation to give a determinate thing, the creditor may demand specific performance, ot to compel 1. Exhaust the properties of the debtor through levying by delivery of the thing due. (Art. 1165) attachment and execution upon all the property of the debtor, except such as are exempt by law from execution; 5. In obligation to give a genecic thing, the creditor may demand substituted performance, ie., that the 2, Exercise all the rights and actions of the debtor, save those obligation be complied with at the expense of the personal to him (accion subrogatoria), and debtor. 3. © In obligation to do, the creditor may demand fraud of their rights (accion pauliana). substituted performance that the obligation be executed at the cost of of the debtor. The a. The foregoing remedies are suce creditor may also demand that what has been poorly creditor ean resort to accion subrogator done be undone, (Art. 1167) a a ree eer ane only resort to accion pauliana after he has resorted the d. In obligation not to do, the creditor may demand first two remedies.”* desistance (or “negative performance,” as it were) by the debtor from doing the forbidden thing. The credttor may ask for an injunction for this purpose. If the forbidden thing has already been done, the creditor " Adorable v. CA, GR, "™ Adorabev.CA, GR. No. 26b. Thus, accion subrogatoria and accion pauliana are red “subsidiary remedies,” ©. Another measure which the creditor may take is to file an action to declare the mullity of absolutely simulated often confused with ion, the transfer by the debtor is real or simulation, the transfer is fictitious and merely apparent. fi, In rescission, there must be intent to defraud ( ‘ti, In rescission, the creditor must have first exhausted the assets of the debtor; in’simulation, this is not required. 's claim; in simulation, the entire transfer is set aside. ¥. In rescission, the action prescribes in 4 years; in simulation, the action to set aside the transfer does not prescribe, I, REMEDIES IN BREACH OF RECIPROCAL OBLIGATIONS Reciprocal obligations are defined as those that arise from the same cause, and in which each party is a debtor and a creditor of the other, such that the obligation of one is dependent upon the 8.6) (hereaer WV tion of the other.” Example: In a contract of sale, the buyer's tion to pay the purchase price and the seller’s obligation to deliver the thing sold are reciprocal." In case of breach of the injured party may choose filment of the obligation (specific performance) mn of the obligation, with the payment of damages in either ease. (Art, 1191) ‘A.’ RESCISSION (OR RESOLUTION) 1. The power to rescind obligations is implied im reciprocal ‘ones, in case one of the obligors should not comply with ‘what is incumbent upon him. (Art. 1191) a. This is predicated on the breach of faith by the jolative of the reciprocity between the parties. retaliatory in character, it being unjust that a party be held bound to fulfil ‘when the other violates his." ion or resolution under Art, 1191 is for breach tions, and should not be confused withee ° Universal Food Corporation v CA, GR, Ong v. CA, GR. No rescission under Art. 1381, et seq, which isthe setting aside of contracts due to lesion or economic damage suffered by the plaintifi® (e.g, a creditor seeks the rescission of a fraudulent disposition of property made by his insolvent debtor in favor of third persons), - Re mn under Art. 1191 is a pri rescission under Art. 138: . is subsidiary (in the latter, the plaintiff must show that he has no other recourse to repair the damage he suffered). ©. Rescission presupposes that the obligation or contract exists. Thus, one cannot ask for the declaration of nullity of a contract, and at the same seek its rescission under Art, 1191.7 2. The injured party may also seek rescission, even after he hhas chosen specific performance, if the latter should become impossible. (Art. 1 ‘The court shall decree the rescission claimed, unless there ‘be just cause authorizing the fixing of a period, (Art. 1191) a. The right to rescind is not absolute. It is not permitted for a slight or casual breach, but only for such breaches as are so substantial and fundamental as to defeat the object of the parties in entering into the agreement. In lease, however, if the lessee fails to pay the rent within the stipulated period, the court cannot grant him 4. Generally, the power to it cannot be exercised an extended period because Art. 1659 does not give the court such discretion.” ind must be invoked judi then the court which will nally determine sion should be set aside or affirmed. speaking, extrajudicial rescission is feasible wed party has not yet performed; he can ‘and simply refuse to perform his own a buyer can simply withhold payment if the seller is not ready to deliver. However, if the injured party has already performed, such as a buyer who has already paid the purchase price, he would have to seek judicial rescission so the court can compel the infractor to make him whole (e.g, for the buyer to recover the price he has already paid). Also, in the sale of immovables, a demand for rescission must be made either judicially or by notarial act, even if it is stipulated that rescission shall take place upon failure to pay on time. (Art, 1592)Of by the injured party. & party the was the one who prevented the obligation.” the other party from 6. In exceptional cases, partial rescission may be ordered. Example: when a construction is already 75% complete, rescission may be ordered as to the portion which remains unfinished.* 7. The right to rescind may be waived, expressly ot impliedly. Example: unqualified acceptance of late payments is an implied waiver of the right to rescind on the basis of such late payments. 8. In case of rescission, mutual restitution is required. This means bringing the partes back to theit original status Prior to the inception of the contract. They must return to cach other what they respectively reserved (less damages, ifproper). B. SPECIFIC PERFORMANCE 1. Specific performance is a remedy which is alternative to rescission. The injured party cannot have both. Thus, eg, the lessor cannot rescind the contract and recover 2. The breach contemplated in Art, i failure to comply with an obligation already extant. If the obligation is subject to a suspensive condition which has not been fulfilled, the obligation did not even arise or exist, and could not have been breached. Thus, the other party cannot demand specific performance (or even rescission under Art. * If the price is not paid, the obligation to convey title does not arise, and the buyer ‘cannot compel performance? ‘Also, in @ contract to sell scrap iron upon the buyer's f a letter of credit, the seller cannot be to sell if the buyer failed to open a letter of ‘Where the plaintiff is the party who did not perform his undertaking under the contract, he is not entitled to ins upon the performance ofthe contract by the defendant, or recover damages by reason of his own breach. The right to demand specific performance is without i ve ed judice to the rights of third persons who have acquir the hing in accordance with Articles 1385 and 1388 and the Mortgage Law. (Art. 1) ifie ~ Thus, the oblige may no longer demand speci performance if the thing to be given has already been sold by the obligor to a third party in good faith No, 83851, March, 1998, i. 581; Boysaw v. nterphil Promotions, lnc, GR. No, Le 2580, March 20, 1987 3C. Damaces Chapter 4 Kinds of Obligations 1. Damages shall be awarded in ei performance or rescission of the obli ~ In case of rescission, the damages must be those consistent with the abrogation of the contract, and not } L_ PURE AND CONDITIONAL OBLIGATIONS those which effectively amount to specific performance. Thus, in case a lease is rescinded, the A. DISTINCTION BETWEEN PURE AND CONDITIONAL | lessor may demand rental arrears and damages done to | the leased property, but not future rents.!"? 1 tion whose performance does not depend on ., a future and uncertain event, or a past 2. Interest may, in the discretion of the court, be allowed upon i a future day damages awarded for breach of contract. (Art. 2210) 1193) 3. In case both parties have committed a breach of the a. A pure obligation is demandable at once. (Art. 1179) obligation — ~ The necessity of an actual demand is not a. The liability of the first infractor shall be equitably considered a condition, because nothing can tempered by the courts, (Art. 1192) prevent a creditor from making a demand any time." ~The second infractor is not liable for damages at | all; the damages for which he would have been , Examples: a loan which provides no condition or liable are compensated by the mitigation of the period for repayment," a “demand note” which is first infractor’s liability." payable upon demand. - This is subject to the discretion of the court on what js equitable under the circumstances.'™ (' . If it canmot be determined which of the partes first condition. (Art. | violated the contract, the same shall be deemed \ extinguished, and each shall bear his own damages, a. A condition is a future and uncertain event, or a past (Ar 1192) event unknown to the parties: (Art, 1179) f i, “Future and uncertain event” SIV Totnina 14, 19 Fleiano v, Delgado,If the condition is suspensive, the ol condition must be both future and uncertain. If the clement of uncertainty is lacking, it becomes @ period, which is @ “day certain” or that which ‘must necessarily come, although it may not be known when. (Art. 1193) ‘Thus, a condition is uncertain to happen, while 8 period is certain to come. Passing the bar is 4 condition; while death of a particular person is period, fi, “Past event unknown to the parties” ~ A past event, having happened already, is always certain, It is only the parties’ knowledge of that event which may be uncertain. Example: after bar exam results were released but before they were published, a father says to his son, “I will give you a car if ‘you passed the bar exam demandable until the performance of the e¢ ‘When the consent of @ party to a contract is given subject to the fulfillment of a suspensive condition, the contract is not perfected unless that condition is first complied with.” If the condition is resolutory, the obligation is demandable at once, but without prejudice to the effects of the happening of the event. (Art. 1179). 6 Fh 27, December 4 1913; Gmzlsv. Hei of Cra, GR. No 36 B, KINDS OF CONDITIONS. 1. Suspensive and Resolutory known as condition the condition. b. Resolutory condition (also known as condition subsequent) ~ if the extinguishment of rights already acquired is dependent on the condition. 2. Potestative, Casual or Mixed a. Potestative Condition - if the fulfillment of the condition depends on the will of one of the parties. i. The conditional obligation (not just the condition) is void when the fulfil of the condition depends upon the sole will of the debtor. (Art 1182) (D Eg, when the obligor says “I will pay you when I like it (or when I consider it proper).” In this case, the obligation is illusory or not ‘meant to be fulfilled." ‘An offer to pay the value of the stock subscription after the offeror had harvested fish is a condition dependent upon her sole will and, therefore, potestative in nature and renders the obligation void.” (2) However, 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 ‘Vda De Mt v. Spouses Naga, GR No. 137908, December 11,2008, ‘ Thlara v. uezon College ne, 95 Phi. 383 (195). 37is subject to the 97, i.e, the creditor’s remedy isto file an action to fix a petiod, @) This rule applies only when the condition is suspensive.'" When the potestative condition is resolutory, the obligation is valid'” You 10 use my house sunt Twant to get it back.” ii, The conditional obligation is valid if the will of the creditor. ‘give you P500 if you want it” you my house if you enter the 9. Casual Condition — if the fulfillment of the condition depends upon chance or the will of third persons (not the will of any of the contracting pi son learns how to drive.” . Mixed Condition — if the fulfillment of the condition depends upon the will of one of the contracting and other circumstances, including the will of third persons. i, The conditional obligation is valid, (Art. 1182) ii. Examples: “I will pay you as soon as I receive the proceeds from the sale of my property in Spain”, ‘ie, the debtor had already decided to sell his property, which is dependent on external factors like the availability of a buyer.'”” will give you this ring if you marry my son.” 3. Impossible and Unlawful Conditions a. These conditions refer to: i. Conditions which are physically impossible - Example: condition that a man give birth; ii, Conditions which are unlawful or juridically because contrary to good custo licy or prohibited by law. (Art. 1183) - Example: payment of money conditioned upon. Killing someone or seducing. third person’s wife. The impossible or unlawful conditions shall annul the obligation which depends upon them. (Art. 1183) = Note that this rule applies only to contracts or ‘onerous obligations. In gratuitous obligations (simple/remuneratory donations and testamentary provisions) with impossible or unlawful condition, ‘true consideration is the liberality of the donor or testator. "7 Hermosa v. Lngora, 93 Ph. 97part thereof which Le or unlawful condition P1,000 if you give me ‘P500 ifyou can make tion is valid, but the second is not 4. The condition not to do an impossible thing shall be considered as not having been agreed upon, 183) ‘The obligation remains valid and becomes a pure one. - Example: “I will pay you P1,000 if you do not ‘make this car swim.” © An. 1183 refers to the impossibility of condition existing at the time of such a case, the obligation is rendered void ab initio, Tt should not be confuse: extinguishment of the obligation due of performance (Art become certain that the led (Art, 1184),1 C. ConsTRUcTIVE FULFILLMENT 1 The condition that some event happen at a determinate ‘ime shall extinguish the obligation as soon as the time expires or if it has become indubitable that the event will not take place. (Art. 1184) ~ Example: psyment of money 08 the condition that X the bar exams by 2015 — the obligation is hed if 2015 expires without X passing the bar, or ifX dies before then, "9 1V Tolentino 188-158 2. The condition thar some event will not happen at a determinate time shall render the obligation effective from become evident that the event cannot occur. (Art. 1185) = Example: payment of money to X and Y on the condition that they will not marry each other until they are both 25 years old effective if they both reach their 25th birthday without marrying each other, or if Y dies before her 25th birthday. be - If no time has been fixed, the condition si deemed fulfilled at such time as may have prol been contemplated, bearing in mind the nature of the obligation. (Art, 1185) ‘The condition shall be deemed fulfilled when the obligor voluntarily prevents its fulfillment. (Art. 1186) a. Example: the manager under a management contract who is unjustly prevented by the other party to perform his management duties is still entitled to his ‘management fees." b. The obligor’s prevention justifiable for it to constitute constructive ful f there is legal or contractual basis for the prevention, there is no constructive fulfillment. '"* ~ Examples: if the owner of the house stops work on his house because the contractor violated certain city ordinances, or if the obligor cancels a contract, ‘upon a an stipulation that he has a right to do so.""* Lepanto Consolidated Mining, G.R. No. 21601, December 17, a©. By analogy, if the condition is resolutory and the obligor voluntarily causes its fulfillment, the condition is not considered fulfilled. D. EFFECTS 1 s Before Fulfillment of Suspensive Condition. Before the suspensive condition is fulfilled, the following rules govern: a. The creditor may bring the appropriate actions for the reservation of his right, (Art. 1188) from doing things that would cat deterioration of the object of the obligat join debtor from concealing his property ‘compel execution of public instrument; (iv) creditor may also cause the registration of deeds of sale or mortgage. 9. If the debtor has paid by mistake, he may recover the same, (Art. 1188) In case of obligation to give (a determinate thing), the following rules shall be observed in case of the improvement, loss or deterioration of the thing during the pendency of the condition the obligation fi, If the thing is lost through the fault of the debtor, he shall be obliged to pay damages; (Art. 1189) ~The thing is lost — a (@) when it perishes (e.g., house is bumed down), or (©) when it goes out of commerce (e.g., land is expropriated by the government), or en it disappears in such a way that its existence is unknown recovered (e.g,, jewelry |. When the thing deteriorates without the fault of the debtor, the impairment is to be bome by the creditor; (Art, 1189) - This means that the creditor must accept the thing in its deteriorated condition. sriorates through the fault of the debtor, the If the thing is improved by its nature, or by time, all inure to the benefit of the creditor; (Art. 1189) = Appreciation in value of land-is generally a consequence of nature and time.""” If it is improved at the expense of the debtor, he shall have no other right than that granted to the usufuctuary. (Art. 1189) = In this case, the debt improvements, but damage to the thing. (Art. 579) The debtor may also set off the improvements against thedamage or deterioration he may have caused, (Art. 580) 2. Upon Fulfillment of Suspensive Condition the day of over acts or dispositions made by the debtor during the pendency of the condition, ii, However, the debtor is generally not obliged to give the fruits or interests received during the pendency of the condition. (1) If the obligation is reciprocal, the fruits and interests during the pendeney of the condition shall be deemed to have been mutually ‘compensated. (Art, 1187) (2) If the obligation is unitaterat, the debtor shall appropriate’ the fruits and interests received, (Art. 1187) - Exception, if there is a contrary intention, ‘whether express or implied from the nature and circumstances of the obligation. (Art. 1187) . In obligations 10 do and not to do, the courts shall determine, in each case, the retroactive effect of the condition that has been complied with, (Art. 1187) 3. Upon Fulfillment of Resolutory Condition a. In obligations to give - upon the fulfillment of resolutory condition, the obligation ise hed and riorstion or improvement of the thing, the provisions of Art. 1189 (supra) shall be applied to the party who is bound to return, ns to do and not to do ~ upon the ‘the resolutory condition, the courts shall , the effect of the extinguishment of the obligation, (Art. 1190, in rel. to Art. 1187) IL, OBLIGATIONS WITH A PERIOD A. INGENERAL 1. Period or Term. Obligations with-a period or term are those Which become demandable or which terminate upon the arrival of a “day certain". A day certain is that which must necessarily come, although it may not be known when. (Art a. Examples: January 1, 2025 is a day certain because it must necessarily come. The death of a certain person, X, is also a day certain, because it must necessarily ‘come, although itis not known when. ». Ifthe uncertainty consists in whether the day will come or not, the obligation is conditional, and it shall be regulated by the rules of Art. 1193. Examples: the sale 45by the debtor of his other properties’ or the obtaining ofa loan from a bank." = Otherwise put, a period is a future and certain event, as opposed to a condition which is a future and uncertain event. 2, Period may be Suspensive or Resolutory. Obligations with Suspensive Period (ex die) — they are obligations for whose fulfillment a day certain has been fixed, and ¢ demandable only when that day comes. (Art. 3) - Examples: A promissory note payable on 1 January 2025; a service which must be performed ‘one year from the execution of the contract. b. Obligations with Resolutory Period (in diem)— they take effect at once, but terminate upon arrival of the day certain, (Art - Example: A usufruet that will end on 1 January 2025, B. EFFECTS Loss, Deterioration or Improvement. In case of loss, deterioration or improvement of the thing before the arrival of the day certain, the rules in Article 1189 on conditional obligations shall be observed. (Art. 1194) ‘Advance Payment by Mistake. If the of the period or believes that the oblig: and demandable, and thus pays or delivers before the - 3. Retroactivit arrival of the period, he may recover the thing paid or delivered, with the fruits and interests. (Ast. 1195) Unlike a condition, a period has no effect fon the existence of the obligation, but only on their demandability or performance. Thus, the arrival of a period does not have a retroactive effect." C. BENEFIT OF THE PERIOD 1, Im General. Whenever in an obligation a period is, benefit of both the creditor and the debtor. (Art. 1196) a. Thus, in such a case, the debtor may not be compelled to perform the obligation before the arrival of the period, and the creditor may not be compelled to accept performance before the arrival of the period, b, Also, because the term is generally for the benefit of both creditor and debtor, a contract whose term has already expired may only be renewed if both parties consent." 2. Exception. The period may b either the creditor or the debt the tenor of the obligation 1196) jrcumstances. (Art. a. Ifthe period is for the benefit ofthe debtor, he may not bbe compelled to perform the obligation before the ~ arrival of the period, but he may validly do so (pre- payment) if he so wishes. LL and Go, v. Huang Cheo Chun, GR. No. 142378, GR No, 163429, March 3, 2006 ”- Example: If the obligation provides that payment may be made “within” the stipulated period, or before” the stipulated date, the period is benefit of the debtor. The debtor then right, but not the duty, to pay before the deadline. b. If the period is for the benefit of the eredizor, he may not be compelled to accept performance before the arrival of the period, but he may validly demand performance if he so wishes. - The creditor may decline pre-payment for various reasons — he may want the interest on his money, he may want to avoid the risk of holding his money, or the risk of near-term depreciation in currency, etc. 3. Loss of the Benefit of the Period. The debtor shall lose the right to make use of the period (i.e, the ereditor may demand performance by the debtor even before the arrival of the period) in any of the following cases: (Art. 1198) a. When after the obligation has been contracted, he becomes insolvent, unless he gives a guaranty or security for the debt; . When he does not furnish to the creditor the guaranties or securities which he has promised; ©. When by his own acts he has impaired said guaranties oF securities after their establishment, and when ‘through a fortuitous event they disappear, unless he immediately gives new ones equally satisfactory; - Example: Debtor’s failure to renew or extend the surety bond he furnished,' 8 Gate v Fonacir, No, L182 d. When the debtor violates any undertaking, in consideration of which the creditor agreed to the period; or ¢. When the debtor attempts to abscond. D. FIXING OF PERIOD 1. When Applicable. The courts may fix the duration of the period in the following cases: a. If the obligation does not fix a period, but from its nature and the circumstances it can be inferred that a period was intended. (Art. 1197) i. Examples: When the debtor undertakes to pay “as or as soon as he has money," or “little or when his means permit him to do so. (Art. 1180) ii, Example: When a donation imposes conditions but does not fix the period within which to comply with them, the court must fix the period." = In one case, the Supreme Court held that compliance with condition to build a school had already been delayed for more than 50 years, it was no longer necessary period. The correctness of this ruling is 907, * Central Pigpine Universi v.CA, 246 SCRA St (1985). 0First, there is no such exception in requiring the fixing of a period necessary to fix a period if only to fix the time from which the 4-year prescriptive period for revocation should be reckoned." b. If the period depends upon the will of the debtor, (Art. 1197) - But if the performance of the obligation depends upon the sole will of the debtor (purely potestative), the obligation is void. (see Art. 1182) ©. In case of breach of reciprocal obligation, the court may fix a period (instead of ion) if there isa just cause for the same, ( 2, Premature Until Period is Fixed. Until the period is first determined, there can be no breach of contract or failure to perform the obligation.” Before the fixing of the period, it would be premature for the creditor to complain of the debtor's alleged breach." 3. Standard in Fixing the Period. In every case, the courts shall determine such period as may under the circumstances have been probably contemplated by the parties, (Art. 1197) 4, Finality, Once fixed by the courts, the period cannot be changed by the courts, (Art. 1197) 2 Sx des ot Din Catia Petey. CA 248 CRASH ™ ‘Lopez, 50 Of. icepecior “f 148754, November 18,2004; Spouses Eada, gust 3, 2005. 50 I. ALTERNATIVE AND FACULTATIVE OBLIGATIONS A, ALTERNATIVE OBLIGATIONS, IN GENERAL 1. Alternative Obligation. In an alternative obligation, there is more than one object, and the fulfillment of one is sufficient, determined by the choice of the party who has ‘the right to choose." a. Examples: (i) obligation to deliver a TV or a refrigerator — it is sufficient for the debtor to deliver either a TV or a reftigerator, no igation of, a fire insurance company to ¢ insured house destroyed by fire or to pay its value - Example: Obligation to deliver a TV and a reftigerator — the debtor must deliver both TV and reftigerator. ©. Contrast with Facultative Obligation: There is only one object, but the debtor may substitute another object. Complete Performance. A person altematively bound by different prestations shall completely perform one of them, (Art. 1199) ~The creditor cannot be compelled to receive part of one and part of the other undertaking. (Art. 1199) "2 Se0 Chavez. PEAmar, GR, +8. Ong Guan Can v. Century insure ‘IV Toletne 208 250, May 8, 2003, J Ynares-Satiago, dissenting, 824), stB. RIGHT To CHOOSE, BY DEBTOR General Rule, The right of choice belongs to the debtor. (Art, 1200) = Exception: Unless it has been expressly granted to the creditor. . Limitations. a, The debtor cannot choose part of one prestation and part of another prestation. (Art. 1199) b, The debtor shall have no right to choose those prestations which are impossible, unlawful or which could not have been the object of the obligation. (Art. 1200) ~ Thus, if the obligation permits payment in local or foreign currency, but the government outlawed all foreign currency, the debtor may only pay in the local currency." ©. The debtor shall lose the right of choice when among the prestations whereby he is alternatively bound, only ‘one is practicable. (Art, 1202) |. Effeetivity. The choice shall produce no effect except from the time it has been communicated. (Art. 1201) ~The selection may be made in any form, as long as it is unequivocal. It may even be made taci actually performing the chosen prestation. |. Impairment of Right to Choose. If through the creditor's - acts the debtor cannot make a choice according to the terms "8 Tambuning de Logarta v Mie, 88 Phi 637 32 of the obligation, the latter may rescind the contract with damages. (Art. 1203) 5. In Case of Loss of Alternative Prestations. a, Loss of All i, Due to Debtor's Fault — When, through the fault the object of the obli comptiance of the impossible — the creditor shall have @ right to indemnity for damages. (Art. 1204) ~The indemnity shall be fixed taking as a basis the value of the last thing which disappeared, for that of the service which last became impossible. (Art. 1204) + Damages other than the value of the last thing or service may also be awarded. (Art. 1204) ii es Due to Debtor's Fault — If the is niot due to the debtor's example, because of fortuitous event, or because of the creditor) the debtor is telieved of liability (Arts. 1174, 1203) or b. Loss of Some i. Ifonly some of the altemative prestations are lost, the debtor is not liable even if the lass is due to his fault, because he can still comply by choosing the remaining prestations available. ii, Ifthe loss of one or some of the prestations is due to the creditor’s fault, however, the debtot may 3choose to rescind the obligation with damages (Art. 1203). C, RIGHT To CHOosE, By CREDITOR ‘When Applicable, The creditor has the right to choose between alternative prestations only when it is expressly given to him. (Arts. 1200, 1205) ._Effectivity. When the choice has been expressly given to the creditor, the obligation shall cease to be alternative from the day when the selection has been communicated to the debtor. (Art, 1205) a. If one of the things is lost through a fortuitous event, he shall perform the obligation by delivering that which the creditor should choose from among the remainder, or that which remains if only one subsists; b. If the foss of one of the things occurs through the fault of the debtor, the creditor may claim either — i. Any of those subsisting, or ii, The price of that which, through the fault of the debtor, has disappeared, with a right to damages; ©. Tfall the things are lost th the choice by the credi any one of them, also the fault of the debtor, upon the price of for damages. Note: The same rules shall be applied to obligations to do ‘or not to do in case one, some or all of the prestations should become impossible. (Art. 1205) 54 D. FACULTATIVE OBLIGATIONS i; A ‘This is when only one prestation the obligor may render another Facultative Obligat hhas been agreed up. in substitution. (Art. 1206) available, Before Substitution — The loss or deterioration of the thing intended as a substitute, through the negligence of the obligor, does not render him liable. (Ast. 1206) Once the substitution has been le for the loss of the substitute on account of his delay, negligence or fraud. (Art. 1206) Upon Substitution IV. JOINT AND SOLIDARY OBLIGATIONS IN GENERAL: In both joint and solidary obligations, there is a concurrence ot plurality of debtors and/or creditors in the same obligation, They differ, however, in the extent ofthe obligation to which each debtor can be held liable and/or the extent which each creditor can demand. 1. Ina joint obligation (mancomunada or pro rata), each of the debtors only for a proportionate part of the debt; and each of the creditors is entitled only to a 3sproportionate part of the credit." Otherwise put, each creditor can recover only his share of the each debtor can be made to pay only his part.” a, The credit or debt shall be presumed to be divided into as many shares as there are creditors or debtors, the “We promise to pay P300 to X”. A,B, and C are liable credits or debts being considered distinct from one only for P100 each, another, subject to the Rules of Court governing the - Example: The obligatio multiplicity of suits. (Art. 1208) 2. In a solidary obligation (joint and several or juntos 0 ‘separadamente or in solidtam), each of the debtors is liable b. Thus, if the ot for the entire obligation, and cach of the creditors is persons ‘entitled to demand the whole obligatio liability, sue each creditor may enforce the ent debtor may be obliged to pay it in ful jon or judgment holding several to the nature of extent of their considered joint." (Ant. 1207) 2. Exception. There liability only in any of the following instances - Example: The obligation is solidary if A, B, and C say, “We jointly and ise t0 pay P300 to X”, a, When the obligation expressly so states, in which case A (or B or C) can be made to pay the entire P300. The 30 solidary if it = Itis not required that the party use the precise word “individwall “or “together igh that the obligation state, for separate Promise to pay"? example, that each of the debtors can be compelled signed by two or more persons. to pay the entire debt." B, JOINT OBLIGATION IS THE GENERAL RULE b. When the law requires solidarity, 1. General Rule In case of concurrence of two or more + Examples: Liability for quasi-delict (Art. 2194) creditors or of two or more debtors in one and the same ibility arising from crime (Art. obligation, the presumption is that the obligation is joint so Iso Arts. 927, 1824, 1911, 1915, 2157 of the igation requires solidarity. forts or other wrongful acts isSR RSSM MS! Teme! see eS considered solidary,'* bees cannot be divided into parts directors and officers are sol corporation for the te with malice or bad fai C, EFFECTS OF JOINT OBLIGATION ‘e Worester v. Ocampo, 22 Phi CComporation, GR. No. 155173, Nover WN Teention 22. ‘#8 Malayang Samahan ng mga Manggagawa sa Mt. Greenfield v. Ramos, GR. No, 113907, 20 In a joint obligation, the debt/credit is legally divided into as many shares as there are creditors or debtors, the credits ‘or debts being considered distinet from one another. (Art. 1208) Thus, because the shares are distinct from each other & A. joint creditor cannot act in representation of the sr can a joint debtor be compelled to ity of the others. b. The effect of a demand or interruption of prescription is limited only to the particular creditor or debtor who made or received the demand or interruption. c. The extinguishment of the obligation of one of the debtors does not affect the shares of his co-debtors. 4. The nullity or vices of obligation affecting one of the debtors do not necessarily extend to the shares of his co-debtors. 2. The indivistbility of performance does not prevent the obligation from being considered joint. f an obligation does not necessarily it does solidarity of itself b. The le obligation is still presumed joint. However, in such a case of joint indivisible obligation i, The right of the creditors may be prejudiced only by their collective acts, (Art. 1209) and ii, The debt can be enforced only by proceeding against all the debtors. (Art, 1209) (1) Since the prestation can only be performed by all of the debtors, they must all be sued. if one. of the debtors cannot perform, the prestation becomes. inci of performance and is for damages. The le only for their proportionate damages. (2) If one of the debtors should be insolvent, the others shall not be liable for his share. (Art. 1209) (3) Example: If X, Y and Z are compelled to deliver the A must sue X, Y, and Z together. IfZ cannot perform, the obligation is converted to liability for the value of the Altis, which X, Y, and Z must all pay, but only pro rata (1/3 of the value for each). 9amigaemmar riser meee. D. EFFECTS OF SOLIDARY OBLIGATION 1. Classification as to Subject. Solidarity may be classified a. Active Solidarity, or solidarity in the creditors — each creditor has the authority to claim and enforce the rights of all, with the resulting obligation of paying his co-creditors their respective shares; there is. mutual representation or agency." i, Each of the solidarity creditors may sue alone, and payment to the suing creditor is sufficient to discharge the entire obligation." Each of the solidary creditors may do whatever may be useful to the others, but not anything which ‘may be prejudicial to the latter. (Art. 1212) (0) Thus, a solidary creditor may interrupt prescription or make a demand (for the debtor to be in default and for interest to run), winich is beneficial to his co-creditors. (2) Note, however, that under Art. 1215, a solidary creditor may effect. the novation, compensation, confusion or remission of the debt, which shall extinguish the obligation, However, the creditor who extinguished the le to the others for the corresponding to them. iii. A solidary creditor cannot assign his rights without the consent of the others. (Art. 1213) This is ‘8 Quiombing v. CA, 189 SCRA 325, 328, August 30,1990, "2 Quiombingv. CA, 189 SCRA 325, 328, August 30, 190. Ca because active solidarity is essentially a mutual agency, which involves a relation of confidence. , Passive Solidarity, or solidarity in the debtors — each of the debt with the resulting right to recover from the other co- ‘can be made to answer for the others, ir respective shares; there is a mutual Mixed Solidarity, or solidarity in both the creditors and the debtors. 2. Varied Solidarity. Solidarity may exist although the creditors and the debtors may not be bound in the same manner and by the same periods and conditions. (Art 1211) and Z’s in Year 3. Solidarity still exists in such a le), but only for P10,000 (the portion which matures in Year 1). In Year 2, J may sue X or ¥ or Z (because they are solidarity liable), but only for P20,000 (the portion which matures by Year 24 3. Extinguishment of the Obligation, In General '9§ Tolentino 228, chaust Cov. In general, payment of the debt to one of the solidary creditors, or made by one of the solidary debtors, is sufficient to extinguish the debt. (Arts. 1214, 1217) i, The paying debtor is generally entitled to reimbursement of the shares of his co-debtors. (Art 1217) Yio, 34 Pi. 878 J may sue X or ¥ or Z (because _SR RSEARE! TSERR ASE pemm «x. ii, The give lecting creditor is generally responsible to co-creditors their corresponding shares. (Ast. 1215) remission of the or with any f surety) will extinguish the of the surety.1*° (Art. 2079) i. With such extinguishment, the debtors are released - But mere delay by the creditor. in from their obligation to the creditors, However — collecting from the debtor is not an extension which will discharge the a. As among the creditors, the ereditor who may surety." (Art, 2079) have extinguished or collected the debt shall be j liable to the others for their corresponding 3. Payment to Solidary Creditors share in the credit. (Art. 1215) If no demand has been made by the solidary er b, As among the debtors, the debtor who caused the debtor may pay any one of them ( the extinguishment of the obligation is entitled such payment will be sufficient to extingui to recover from his co-debtors their shares ia whatever he may have paid or given up to extinguish the obligation. (see Art. 1217) b. Tfany demand, judicial or extrajudicial, has been made Example: If X, Y and Z are solidarily liable to by one of them, payment should be made to him. (Art. 'N for P30,000, which debt is extinguished by 1214) ‘compensation with X's credit against N for the same amount, then N is entitled to recover 4, Payment by Solidary Debtors 10,000 each from Y and Z as their share in the obligation ‘a. Payment made by one of the solidary debtors extinguishes the obligation. (Art. 1217) ii, In case the remission was made after the debt had already been totally paid, apply Art. 1219 (infra). iii, Novation — generally, a mere extension of time for payment given to some of the sotidary debtors does not constitute a novation which will Radio Corp. ofthe R&B Surly andSRASERAGT FIBIERR AGRE: 6m 2 ae = If two or more solidary debtors offer to pay, the itor may choose which offer to accept. (Art. 1217) b. Right of Debtor-Payor to Reimbursement He who made the payment may claim from his co-debtors only the share which corresponds to each, with the interest for the payment already made. (Art. 1217) (1) If the payment is made before the debt is due, no interest for the intervening period may be demanded. (Art. 1217) (2) When one of the solidary debtors cannot, because of his insolvenc} to the debtor paying the pay PA5,000. X pays the ent thus extinguished, X can then reco from ¥ and P15,000 from Z as their respective each) in the debt In case Z is share shall be borne by X and Y. Y will therefore reimburse P7,500 (in addition to his original share of P15,000), while the other P7.500 will be a loss shouldered by X. may generally recover from the principal debtors the entire payment he has made." ‘#8 See Inciong, Jv. CA, GR. No, 96406, June 26,1996 64 co-debtors if his payment is made after tion has prescribed or become illegal. (Art. 1218) (1) The debtor already been extingui remitted) (eg. already paid or @) In case of prescribed debt, the debtor-payor cannot recover tis payment from the creditor under the rules on nafural obligations. (Art 1424) But in other cases where the obligation fo pay does not exist, the debtor-payer may recover his payment from the creditor under the rules on quasi-contracts. (Art. 2154) Enforcement against Solidary Debtors. The creditor left to the solidary creditor to gainst_ whom he will enforce collection." The creditor may sue any of the solidary co- debtors; he need not implead all of them as they are not indispensable parties." The creditor may also choose to collect only part of the debt from some of the solidary debtors, and the remaining part from the other solidary debtors.Such course of action does not convert the solidary obligation into a joint one.’ iii, 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) 6. Remission of Debt debtors does not release the latter from his ity towards the co-debtors; in case the debt totally paid by anyone of them before the remission was effected. (Art. 1219) i, The debtor whose share was “remitted” must still pay his share to reimburse the debtor-payor. Strictly speaking, there can be no “remis debt which had already been exting payment. b. Remission of the Entire Debt. The remission of the whole obligation, obtained by one of the solidary debtors, does not entitle him to reimbursement from his co-debtors. (Art. 1220) ERASER AE HRHUIPRAIRE) cree 2 xe = Because the debtor who obtained the remission did not pay or lose anything. 7. Loss or Impossibility of Performance 8. Without Fault or Delay — If the thing has been lost or if the prestation has become impossible without the ** Republic Gass Comp. v. Qua, GR. No , 2004 449 SORA 522 fault of the solidary debtors, the obligation shall be extinguished, (Art. 1221) With Fault or Delay — If there we any one of them, all shall be responsi for the price and the payment of dam: (Art. 1221) i. But the faultless debtors may recover against the guilty or negligent debtor. (Art. 1221) ii, The same rule applies if the thing is lost or the performance has become impossible after one of the solidary debtors has incurred in delay through the judicial or extrajudicial demand upon him by the creditor, even if the loss or impossibility was due to fortuitous event. (Art. 1221) 8. Defenses of Solidary Debtors a. As mentioned, the creditor may proceed against any . A solidary debtor may, in actions filed by the creditor, avail himself of the following defenses": i, Defenses which are derived from the nature of the obligation — these are defenses which pertain to the validity or enforceability of the obligation, oOMAREMMEL HBMEPRAIPE free 2 oe 1 Inchast & Cov. Yul, 34 1 Inch & Cov. Yup, 34 They are liable at defenses (the debtor cannot be held . Defenses which are personal fo him or pertain to tis own share: (1) Defenses which are personal to the defendant- @Q) Defenses which pertain to the share of the defendant-debtor (e.g, that his share is not yet due or has already been extinguished) are partial defens the defendant cannot be held liable for the portion corresponding to him, but he can still be held liable for the shares of his co-debtors." Defers which personally belong to the other (ox pertain to ther share) — these ae for P30,000. X’s Y's in Year 2 and Z’s in Year 3, Y was insane at the time the obligation was contracted, (@) If is sued, he can invoke his insanity and be excused altogether (a defense personal to him, and a total defense. fX in Year 2, he can only be held liable for As to the share of Y, X can invoke Y’s insanity (a defense personal to Y, and a partial defense). As to the share of Z, X can raise the defense that it has not yet become due (a defense pertaining to Z’s share, and a partial defense). © sued in Year 2, he can be held liable for P10,000 corresponding to X, which had already become due, As to the share of Y, Z can invoke Y’s insanity (a defense personal to Y, and a partial defense). As to become due (a defense pertaining to his own share, and a partial defense). Y. DIVISIBLE AND INDIVISIBLE OBLIGATIONS ‘A. INGENERAL 1. Indivisible Obligation. An obli it cannot be validly performed in the nature of the thing which is the object thereof. 2. Divisible Obligation. An obligation is divisble when it can be validly performed in parts, B, DISTINGUISHED FROM DIVISIBILITY OF THING 1, The divistbility of the obligation refers to the prestation, and not to the object thereof." Divisibility of obligation refers to its susceptibility of partial - performance. Divisibility of the object refers to its capacity to be divided into parts without diminishing its value disproportionately.QPASEAAE TEHEIFRAIPW tim 2 ac. - An obligation may be considered indivisible even divisible. For example, the surance premium is generally even if the sum of money to ity or indivisibility of the things that are the object of obligations in which there is only one debtor and ‘only one creditor does not alter or modify the nature or effects of the obligation. (Art. 1223) C. JOINT INDIVISIBLE OBLIGATION: A joint indivisible is ‘bors where each debtor 1¢ obligation cannot be Thus, it must be be enforced only by performed by all of the debtors, and proceeding against all of them. (Art. Ifany of the debtors does not comply with his undertaking, the obligation gives rise to indemnity for damages. ‘The debtors who may have been ready to fulfill their promises, shall not contribute to the indemnity beyond the corresponding portion of the price of the thing or of the value of the service in which the obtigetion consists. (Art. 1224) Example: A, B, and C are jointly liable to deliver a laptop computer valued at P30,000 to X. The delivery can only be done by all of the debtors. If C cannot deliver, the dbligation to deliver the laptop gives rise to an obligation to indemnify X for 30,000. A and B, who were ready to perform, can only be held liable for P10,000 each. Pry Coreoraton v. PAGCOR, GR. No, 157480, D. DETERMINING DIVISIBILITY 1, Indivisible. (@) Obligations to give definite things and (b) those which are not tible of partial performance shall be deemed to be indivisible (see Art, 1233) 2. Divisible, When the obligation has for its object the execution of @ certain mumber 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) In obligations not to do, divisibility or indivisibil be determined by the character of the prestation in each particular case. (Art, 1225) VI. OBLIGATIONS WITH A PENAL CLAUSE ‘A. INGENERAL 1, Definition. A penal clause is an accessory obligation which the parties attach to a principal obligation for the purpose of insuring the performance thereof by imposing ‘on the debtor a special prestation (generally consisting in the payment of a stim of money) in case the obligation is not fulfilled or is irregularly or inadequately fulfilled." Example: A lease contract may provide that in case of breach, the lessee would forfeit his rental deposit,'” or 208. ‘County SankersInsuranoe Corp v Cour of. GIR. No. Bt, @ September 1991, "® Makat Tuscany Cendominum Carp. v. Cou of Appeal, G.R. No. 95546, 6 November 1962, SCRA 458, 464-465; Fort Sonfacio Development Cap. v. Yas Lending Carp, GR No. 215 SCRA 462,488 158997, October 6, 2008, 0 raLIGHT RRRETW FF 8 wes aTARENTE should pay the rentals corresponding to the remaining Period of the lease.’” A stipulation for attorney’s fees is also considered a penal clause. 2. Funetions. A penal clause serves strengthen the coercive force of the obligation; (b) to provide for ted damages resulting from a breach of mn; and (c) to punish the obligor.” 3. Effect of Nultity. The nullity of the penal clause does not carry with it that of the principal obligation. (Art, 1230) a. But the nullity of the principal obligation carries with it that of the penal clause. (Art, 1230) , This is because the penal clause is just an accessory obligation. B. ERVECT 1, General Rule: Penalty as Alternative. In obligations with penal clause, the penalty shall substitute the indemnity for damages and the payment of interests in case of noncompliance. (Art. 1226) a, Proof of actual damages suffered by the credit necessary in order that the penalty may be d (Art, 1228) - Thus, there is no difference between penalty and liquidated damages in terms of their legal results. . The penalty may be enforced only when it is demandable in accordance with the provisions of the Civil Code. (Art. 1226) tions: Penalty as Cumulative Remedy. Damages bbe demanded (in addition to the penalty") in the following exceptional cases: a. Ifthere is stipulation for this; . of fraud in the fulfillment of the obligation. (An. 1226) In the foregoing cases, the purpose of the penalty is to punish the obligor for the breach.'” 3. Limitations. a. The debtor cannot exempt himself fom the performance of the obligation by paying the penalty. (art. 1227) = Except in ease where this right has been expressly reserved for the debtor. (Art. 1227) b. The creditor cannot demand the fulfillment of the obligation and the satisfaction of the penalty at the same time. (Art, 1227) 1. Except in case this right has been clearly granted to the creditor. (Art. 1227) b, However, if after the creditor has decided to require the fulfillment of the obligation, the performance thereof should become impossible 138677, February 12,2002. 1 Pryce Corpraton v, PAGCOR, GR. NSPARSE LIT ARITY 11am bee "Pryce Corporation v. PAGCOR, G.R No. 187480, Ma 138677, February 12, 2002 without his fault, the penalty may be enforced (Art. 1227) C. REDUCTION OF PENALTY 1, Partial or Irregular Compliance. The judge shall equitably reduce the penalty when the principal obligation has been partly or irregularly complied with by the debtor. (Art. 1228) 2. Inlquitous or Unconscionable Penalty. Even if there has been no performance, the penalty may also be reduced by the courts if it is iniquitous or unconscionable. (Art. 1228) + The question of whether a penalty is reasonable or iniquitous is addressed to the sound discretion of the courts. To be considered in fixing the amount of penalty are factors such as: . The type, extent and purpose of the penalty; i. The nature of the obligation; . The mode of the breach and its consequences; /. The supervening sand cing Ligutan v. A, GR. No, " L Chapter 5 Extinguishment of Obligations IN GENERAL A. Art. 1231 enumerates the following causes of extinguishment of obligations which ate governed by Chapter 4, Title V of - Book IV of the Civil Code: ‘Sy v. Euler 1, Payment or performance; 2. Loss of the thing due; 3. Condonation or remission of the debt; 4. 5. 6. Confusion or merger of the rights of creditor and debtor, ‘Compensation; and Novation, support; criminal liability and the civil i), obligation arising from crime' aver Seurty Special Watchman erat |STLARRETBE LIBUTNMITW Frm 8 ee: 2. Arrival of resolutory period; 3. Mutual desistance — since mutual agreement can create a contract, mutual desistance by the parties can’ cause its I desistance — some contracts, such as agency and ip, may be terminated by the will of one of the 1. PAYMENT OR PERFORMANCE A. IN GENERAL, 1, Definition, Payment means not only the delivery of money but also the performance, in any other manner, of an obligation. (Art. 1232) 2. Requisites. A debt shall not be understood to have been paid unless the thing or service in which the obligation consists has been completely delivered or rendered, as the cease may be. (Art, 1233) ‘ Requisites for the payment to extinguish the obligation (see discussion below):"* a. Identity of the prestation — the very thing due must be delivered or released. (See Art. 1244; infra) b. Integrity of the prestation — the prestation must be fulfilled completely. (see Art. 1248; infra) ©. Payor — payment must be made by the proper person. 4. Payee — payment must be made to the proper person. 1 Soura Import & Expot Co, Ine. ¥. DBP, GR. No. ‘01 See Alonzo v. Sp. San Juan, GR. No. 13754, Fe 16 B. PAYMENTSYTHE PROPER PERSON 1. In General. Th the creditor ation myst be paid by the debtor, and jed to demand payment by the debtor. due; and (b) capacity = Without these two re be valid. (Art. 1239" tes, the payment shall not 2. Third Party Payor. The creditor is not bound to accept payment or performance by a third person who has no interest it the fulfillment of the obligation. (Art. 1236) a, Exception: If there is a stipulation to the contrary. (Art. 1236) b. A partial payment made by a stranger without the authorization of the debtor running of the period of prescription with respect to the remainder of the debt." 3. Rights of the Third Party-Payor. a, Ifthe payment was with the knowledge and consent of the debtor — i, The payor can demand from the debtor what he has paid (full reimbursement). (Art. 1236) 1% nt, 1239 provides thatthe ‘mina between whut prejudioe to Art. 1427, which proves for payments 2" Since the age of minoly is now 18 years, nAAATEAAT HENUPAAITY fim fox = If the payor does not intend to be reimbursed by the debtor, the payment is deemed to be a donation, which requires the debtor's consent, But the payment is in any case valid as to the creditor who has accepted it. (Art, 1238) = The intert aot to be reimbursed must be ii, ‘The payor is legally subrogated to the rights of the litor, such as those arising from a mortgage, or penalty. (Art. 1237; see also Art. 1302(1)) 1. Tf the payment was without the knowledge or against the will of the debtor — i, ‘The payor can demand from the debtor what he has paid, but only insofar as the payment has been ‘beneficial to the debtor. (Art, 1236) (1) Thus, the payor cannot recover overpayment, or payment of a debt that had already been prescribed, remitted, compensated, paid or otherwise extinguished.’ = The payor may, in proper cases, recover from the recipient of the payment which is not due. (2) An insurance agent who pays the claim of the insured out of his personal money may be barred from obtaining reimbursement under his contract of agency with the insurer (if he disobeyed the latter's instruction or exceeded hhis authority), but such agent may get reimbursement from the insurer insofar as the latter was benefited by the payment (under Art, 1236, 2" par). ii, The payor cannot compel the creditor to subrogate hhim in his rights, such as those arising from a ‘mortgage, guaranty, or penalty. (Art. 1237) = Actually, even if the creditor is willing to C. PAYMENT 70 THE PROPER PERSON 1. In General. Payment shall be made to any of the following: a. The person in whose favor the obligation has been constituted, or his successor in interest; (Art. 1240) b. Any person authorized to receive the payment. (Art 1240) 2. Payment to Wrong Party. Payment made to a wrong party does not extinguish the obligation, if there is no fault cor negligence on the part of the creditor. Such payment is void even when the debtor acted in utmost good faith, or by ‘mistake, or through error induced by the fraud of a third person. Such payment does not prejudice the creditor, and accrual of interest is not suspended by 3. Capacity. Payment to person wh administer his property shall be ' Dominion insurence Cop. CA, GR. No 129819, February 8, 2002ATLARREUTURE CRBTTLED REET Df Cees A eee thing delivered, or insofar as the payment has been beneficial to him. (Art. 1241) Payment to a Third Party. In general, payment to a third a, Payment made to a third person shall be valid insofar as it has redounded to the benefit of the creditor. (Art 1241) ‘Such benefit to the creditor need not be proved in the following cases: i. If after the payment, the third person acquires the creditor's rights; ii, If the creditor ratifies the payment to the third person; If by the creditor's conduct, the debtor has been led to believe that the third person had authority to receive the payment. (Art. 1241) Payment made in good faith to any person in ‘possession of the credit shall release the debtor. (Art. 1242) i, The “person in possession of the credit” refers to the person who, under the circumstances, appears to be entitled to the payment. (1) Example: The lessee may pay rentals to the registered owner of the leased premises." 8 Orla V-IAC, GR No.7 80 (2) Other examples": (a) heir who collects the credits of the estate but is later found to be incapacitated to succeed; (b) assignee of a credit who collects the assignment is later rescinded or annulled; and (c) holder of ‘an instrument payable to bearer, who merely found it. Possession of the credit is not the same as possession of the document evidencing the credit, Thus, the physical holder of a promissory note is not necessarily in possession of the credit, if such holder is not the creditor named in the note. rder to Retain the Debt. Payment made to a yy the debtor after the latter has be to retain the debt shall not be valid. (Art = This refers to a situation where the credit has been gamished by a court (by virtue of a writ of execution or - Example: Jhas a credit of P1,000 against K. Jis then sued by X, who obtained a writ of preliminary attachment on J’s properties. ‘Thus, the sheriff gamished J's credit by notifying K. K should refrain from paying the P1,000. If K pays J despite the garnishment, such payment would not be valid as far as X is concerned, and X may hold K liable (assuming X eventually obtains a judgment against 08 D. IDENTITY OF PRESTATION ga Lumber Co, 54 Phi. 48 (1880):Tec Bi & Co. v. Chartered 7 a1YW PERRY aT ATARAOIR HEUTE "¥ Alonaov. Sp. San Juan, GR. No. 1. In General. For payment to be valid, the very thing due must be delivered or released.’ (Art. 1233) 8. In obligations to give a determinate thing —the debtor of a thing cannot compel the creditor to receive & different one, although the latter may be of the same value as, or more valuable than that, which is due. (Art. 1244) Example: If X is obligated to deliver his Toyota Altis (Plate Number JCP 888) to Y, X cannot compel Y to accept another Toyota Altis, or even a Mercedes Benz. In obligations 10 give an indeterminate or generic thing — i, The debtor must deliver must-deliver a thing which meets the quality and circumstances stipulated. (Art. 1246) thing of inferior g - The purpose of the obligation and other circumstances shall be taken into consideration. (Art. 1246) b. In obligations to do or not to do — an act ot forbearance cannot be subs another act or forbearance against the obligee's will. (Art. 1244) 2. Dation in Payment. While the debtor is required to deliver or perform the very thing due, the debtor and creditor may of course agree otherwise. For instance, they of a debt in money. 1245). Dation in payment requires delivery and transmission of ownership of a thing owned by the debtor to the creditor as an accepted equivalent of the performance of the obli a a. Dation in payment is govemed by the Jaw on sales. (Art. 1245) The creditor is deemed to be buying the thing or property of the debtor, the payment for which is to be charged against the debtor's debt." 1odemn concept, what actually takes place in ‘en pago is an objective novation of the igation where the thing accepted as an equivalent of the performance of an obligation is considered as the object of the contract of sale, debt is considered as the purchase ii, In any case, common consent is an essential it sale or novation, to have the tally extinguishing the debt or b. There is no dation in payment when there is no transfer of ownership in the creditor's favor, as when the possession of the thing is merely given to the creditor by way of security" (eg, as pledge, mortgage," or under trust receipts arrangement!"), No. L79271, 29 May 1967, 180 uly 30, 2008,ATA GRUCERS EEREEDEE FEESE DO E-RSEEY A Exe 1. In General. The prestation must be fulfilled co Capt Indust Construct c, Requisites for dation in payment: i, There must be a performance of the prestation in liew of payment (animo solvendi) which may in the delivery of a corporeal thing or a real Tight or a eredit against the third person; ii, There must be some difference between the prestation due and that which is given in substitution (aliud pro alio); and iii, There must be an agreement between the creditor iat the obligation is immediately extinguished by reason of the performance of a prestation different from that due. E, INTEGRITY OF THE PRESTATION ‘A person entering into a contract has a right to performance in all particulars." a. Partial performance is generally not allowed. The creditor cannot be compelled partially to receive the prestations in which the obligation consists. Neither may the debtor be required to make partial payments (Art. 1248) b. Examples: In an obligation to pay certain amount of ‘money, the full amount must be paid; in an obligation to construct a house, the construction must be completed, 2, Exceptions/Qualifications. a. b, ‘When there isa stipulation to the contrary. (Art. 1248) When the debt is in part liquidated and in part unliquidated, the may demand and the debtor may effect the payment of the former without waiting for the liquidation of the latter. (Art. 1248) ‘Substétitial Performance. When the obligation has been substantially performed in good faith, the obligor may recover as though there had been a strict and complete fulfillment, less damages suffered by the obligee. (Art. 1234) i, Example: A construction which is 97.5% complete.” ii, ‘There must be an attempt in good faith to perform the obligation, without any willful or intentional departure therefrom."* iii, Where there has been substantial performance, proper.” Acceptance Without Protest. When the obligee accepts the performance, knowing its incompleteness or irregularity, and without expressing any protest or objection, the obligation is deemed fully complied 1235) based on the principles of waiver and GR. No, 154885, March 24,ADAIDTE TEIITHEITY (iA As ii, The law does not require the protest or objection of the creditor to be made in a particular manner or at a particular time. So fong as the acts of the bbe deemed fully extinguishes iii, Am oblige is deemed to have waived strict (1) An intentional acceptance of the defective or incomplete performance; 2) With actual knowledge of the incompleteness or defect; and G) Under circumstances that would indicate an intention to consider the performance as complete and renounce any claim arising from the defect. = Mere receipt of partial payment is not per se equivalent to a waiver of the balance or acceptance of incomplete performance," Examples: (a) the bank accepted delayed payments of a loan on several occasions without objection." (b) The obligee, without protest, took over an unfinished construction, deducted the value of the unfinished work from the payment to the’ 1967. Esqueav.Vilanueve, GR. No, L- contractor, and hired another contractor — the obligee may no longer recover from the contractor the cost to finish the constructior (©) The obligee, knowing that the construction is unfinished, barred the contractor's workers and stopped payment of the progres not demand completion of the cannot demand the cost of the completion works.”"* F. OTHER PROVISIONS 1 . Currency. The payment of debi Expenses. Unless extrajudicial expenses the account of the debtor. With regard to judi Rules of Court shall govern. (Art. 1247) ‘money shall be made in the currency stipulated, and if it is not possible to deliver such currency, then in the currency which is legel tender in the Philippines. (Art. 1249) a. R.A. $29 prohibited the stipulation of a currency other jine currency, but R.A. 8183 removed this . Thus, obligations or transactions may now ‘the currency agreed upon by the parties.”!* b. Obligations in foreign currency may be discharged in Philippine currency based on the prevailing rate at theAULA BREUER EURITESE FRESE EW V-aoeRa 2 ease 3. Payment in Legal Tender. The delivery of promissory notes payable to order, or bills of exchange or other ‘mercantile documents shall produce the effect of payment when they have been cashed, or (b) when through the fault of the creditor they have been impaired. (Art. 1249) a. In the meantime, the action derived from the original obligation shall be held in the abeyance: (Art. 1249) ©. A check, whether a manager's check or ordinary check, is not legal tender, and an offer of a check in payment of a debt is not a valid tender of payment and may be refused receipt by the oblige or creditor.”"* ~The creditor's acceptance of the check, however, presenting it for payment. If such ‘wanting, and debtor sustains loss as be held to operate as actual payment of the debtor obligation for which it was given” 4. The clause of Article 1249 relative to the impairment of commercial paper by the fault of the creditor, is generally applicable only to instruments executed by 3, third persons and delivered by the debtor to the creditor, and does not apply to instruments executed by the debtor himself and delivered'to the creditor.” =~ = Impairment may happen if a bill of exchange (issued by third party) is dishonored and is not protested on time, resulting in the loss of right of €. A check may be used for the exercise of the right of redemption, the same being a right and not an obligation. The tender of a check is sufficient to compel redemption (but is not in itself a payment that relieves the redemptioner from his liability to pay the redemption price) Extraordinary Inflation or Deflation. In case an extraordinary inflation or deflation of the currency stipulated should supervene, the value of the currency at the time of the establishment of the obligation shall be the basis of payment, unless there is an agreement to the contrary. (Art. 1250) a. Extraordinary inflation exists when there is a decrease or increase in the purchasing power of the Philippine currency which is unusual or beyond the common fluctuation in the value of said currency, and such increase or decrease could not have been reasonably foreseen or was manifestly beyond the contemplation of the parties at the time of the establishment of the 2 Nato Martin Cov Fea of Ud NAMARCO Dior, eG, NeSUR ABWUIRE Sumer eer vans one obligation.” It does not include a normal “erosion” in the value of the currency which is a universal trend. b. For Art. 1250 to apply, the inflation (or deflation) must be extraordinary, such as in Germany where the USS. dollar in 1921, 1923.75 c. The economic crisis in the 1980's (50.34% inflation rate in 1984), or in 1997 (the Asian financial crisis, rate by 17 points), does not constitute extraordinary inflation. @. The existence of extraordinary inflation must be officially proclaimed by competent authorities, ie, the Bangko Sentral.””” 4, Place of Payment. a, Payment shall be made in the place designated in the obligation. (Art, 1251) b. If there is no express stipulation on the place, the following rules apply — 2 Sigoon v. Calter, GR. No. 197738, October 4, 2000; Hibonhua vs. Coutof Appeals, GR. ‘Nos. 95607 and 102604, December 14,1999; Sia vs. Cout of Appeals, 229 SCRA 60; Hato vs. Court of Appeals, 173 SCRA 67; Fino Pipe and Foundry Corporation vs. NAWASA, 161 22 Figno Pipe and Foundry Corporation vs. NAWASA, 161 SCRA 92; Sngsonv. Caltex, GR. GR. No, 156132, February 6, 2007. 82, February 6, 2007; Telengtan Bros. & Sons ary 28, 2006; Ramos v. Cout of Appeals, G.R. No. 5; Mobil OF Prilppines, lnc. v. Court of Appeals, 180 90 i. Ifthe undertaking is to deliver a determinate thing, the payment shall be made wherever the thing might be at the moment the obligation was constituted. (Art, 1251) fi, In any other case, the place of payment shall be the domicile of the debtor. (Art. 1251) If the debtor changes his domicile in bad faith or after he has incurred in delay, the additional expenses shall be bome by him. (Art, 1251) G. APPLICATION OF PAYMENTS 1. In General, The rules on application of payments apply to a person owing several debts of the same kind of a single creditor. (Art. 1252) ‘They are not applicable to a person whose obligation as jere surety is both contingent and singular; his lity is confined to such obli and he is entitled to have all payments made applied exclusively to said obligation and to no other.#* 2. General Rule - Debtor’s Right. The debtor who has various debts of the same kind in favor of one and the same creditor may declare at the time of making the payment, to which of them the payment must be applied. (Art. 1252) In other words, the right to specify which among his various obligations to the same creditor is to be satisfied first rests with the debtor.” Exceptions/Limitations: a, Ifthe parties stipulate otherwise. (Art. 1252) 2 Magdalena Estates, cv. Rosiquez, GR, No. 418411, December 17, 196, *)Pacudov. CA, GR. No. 123855, Noverber 20, 200, aPOG eg 3. b. Application shall not be made as to debts which are not yet due. (Art, 1252) = Unless the application is made by the ‘party for whose benefit the term has been constituted. (Art 1252) c. If the debtor accepts from the creditor a receipt in which an application of the payment is made, the former cannot complain of the same, unless there is a cause for invalidating the contract. (Art, 1252) = The debtor is deemed to have waived his right to apply payments and acquiesced to the creditor's application. |. If the debt produces interest, payment of the principal shall not be deemed to have been made until the interests have been covered. (Art. 1253) ~ Thus, if the creditor agrees to apply a payment to the principal, it may be assumed that the interest had already been paid or waived?” In Default of the Foregoing Rules. When the payment ‘cannot be applied in accordance with the preceding rules, or if application can not be inferred from other ff neither the debtor nor the creditor ply the following rules: ich is most onerous to the debtor, among deemed to have been satisfied. (Art, 1253) In general — i, A debt incurred as a principal is more onerous than a debt as a mere surety or guarantor. 22 Swagman Hotes and Travel nc v. CA, GR No, 161195, Ap, 2005; Arama v. CA, GR. No 128808; ay 29,2008 2 fi,_An interest-bearing debt is more onerous than one without interest.”" iii, The older debt is more onerous than a more recent one™* (unless the more recent debt bears interest, while the older one does not™). iv. A secured debt is more onerous than an unsecured debt b. Ifthe debts due are of the same nature and burden, the payment shall be applied to all of them proportionately. (Art, 1253) HL. PAYMENT BY CESSION 1. In General. The debtor may cede or assign his property to his creditors in payment of his debts. (Art. 1255) a, This cession is voluntary on the part of the debtor. It is also subject to the acceptance by the creditors. b, The creditors do not become owners of the property assigned (unlike in dation in payment). ‘The creditors merely become authorized to convert the property into cash, which will be used to pay their credits ¢. Payment by cession contemplates the existence of two or more creditors, and involves the assignment of all the debtor's property.”"*AVINARC TIRE Times at eaten en less there is. stipulation to the creditor cannot accept or refuses to accept payment.” ¢ the debtor from responsibilty (Art. 1258) i, If the tender of payment (which has been refused) ~The agreements which, om the effect of the cession, are is not followed by consi the debtor is not made between the debtor and his creditors shall be | discharged from the obl govemed by special laws. (Art, 1255) | fi, Tender of payment 1m J, TENDER OF PAYMENT AND CONSIGNATION consignation. Tender consignation, # be distinguished from the antecedent of act preparatory 10 the 1. In General. consignation, which is the principal act with results in the discharge of the obligation, Tender of a. Tender of payment is the manifestation by the debtor payment may be extrajudicial, while consignation a is necessarily judicial.™ 10m tender of payment has been just cause to accept it, the debtor 2, Consignation Without Prior Tender. As a rule, the consignation must be preceded by tender of payment to consignation of the thing or sum due, (Art. 1256) discharge the obligation, However, in the following cases specified by Art. 1256, consignation alone shall discharge i, Tender of payment must be made in legal tender to the obligation: be valid.”” = However, payment in check may be considered valid, if no prompt objection to said form of payment is made.** b. ii, A letter merely expressing intent to pay, but not accompanied by payment, is not equivalent to e. st cause, he refuses to give a receipt; tender of payment.” j 4. When two or more persons claim the same sight to b. Consignation is the act of depositing the thing due cottect; with the court or judiciat authorities whenever the When the tile of the obligation has been lost. (Art 1256) 4AVINGAWHORE TIRETTLGS tt gees 8 oR 3. Requisites. In order that cons mu may be effective, the debtor must show compliance with the following requisites: a, There was a debr due; e = Consignation is not necessary where the payor seeks to exercise a right (such as the right of or repurchase” or option™”’), instead of performing an obligation. Tender of payment is sufficient for such exercise of right. . The consignation of the obligation had been made because the creditor to whom tender-of payment was made refused to accept it without just cause, or because of any of the grounds in Art. 1256 which dispenses ‘with the need for tender of payment; (Arts. 1256, 1258) - If the creditor justly refused to accept the payment because it was not in legal tender, consignation is Previous notice of the consignation had been given to the person interested in the performance of the obligation; (Art. 1257) Suge Cental v. Pure Cane Phi, 418; Rosales v. Reyes, et al, urias Sugar Conta . Pure Cane payment thereby avoiding consignation and the subsequent litigation.*® 4. The amount due was placed at the disposal of the court; (Act. 1258) and e. After the consignation had been made, the person interested was norified thereof. (Art. 1258) = Two notices are required: prior to and after the consignation. The reason for the second notice is to enable the creditor to withdraw the goods or i. Strict compliance. The foregoing requis mandatory and must be strictly complied wi F (b) if the consignation is not made strictly in consonance with the provisions which regulate payment. (Art. 1257) iii. Applicability. The foregoing requisites do not strictly apply to debts pursuant to a judgment. In such a case, if the judgment creditor refuses to accept the payment of the amount due on the Judgment, the court may direct the money to beAT ANICHAD TRIVEDEITY HARE RE paid in court and when this is done, order satisfaction of the judgment to be entered.” 4. Effect of Consignation. ion or Discharge of the Obligation. Once the ion has been duly m: the judge to order the cancellation of the (Art 1260) b. Expenses. ‘The expenses of consignation, when properly made, shall be charged against the creditor. (Art 1259) ©. Withdrawal, i. Before the creditor has accepted the consignation, or before a judicial declaration that the consignation has been properly made — the debtor may withdraw the thing or the sum deposited, allowing the obligation to remain in force. (Art. 1260) + _Atthis point, the debtor is still the owner ofthe hus withdraw = It has been held, however, that when all the requisites for consignation are complied with (and there is no reason to disapprove the consignation), the property deposited becomes for the account of the creditor, who must bear the risk of loss, 2 Savant v. Cruz, 88 Pi. 296 (1851; Francisco v, Batsla, GR, No, 44167, Deoamber 18, IV Tole 331, 98 even before the actual approval of the court or acceptance by the creditor.** ii, After the creditor has already accepted the the court has already is proper — the debtor ~ If the creditor should consent or authorize the withdrawal — (@) The creditor shall lose every preference which he may have over the thing. (Art 1261) (b) The co-debtors, guarantors and sureties shall be released. (Art, 1261) IIL. LOSS OF THE THING DUE A. IN GENERAL ~ IN OBLIGATIONS TO GIVE A DETERMINATE THING L in delay. (Art. 1262) a, Broadly speaking, loss (as a cause for extinguishment of the obligation) refers to the impossibility of performance of the prestation. ~The impossibility which extinguishes obligation refers to that which occurred after the creation of 4 Sav. CA, 62 PW 355 (1952),AYIAAARTION HMIILOUTTY Teer ». ce the obligation. If the impossibility existed at the time of the creation of the obligation, it is void ab (Art, 1348) A thing is considered lost when it: (i) perishes; (ji) ‘g0¢s out of commerce; oF (ii) disappears in such a way istence is unknown or it cannot be recovered Partial Loss — If the loss is partial, the courts shall determine whether, under the circumstances, the partial loss is so important 2s to extinguish the obligation, (Art. 1264) ‘The extinguishment of an obligation which has become impossible to perform follows from the principle that no person shall be liable for fortuitous events, or those which could not be fore: foreseen, were inevitable. (Art. 1174, supra) 2. Exceptions. The obligation is not extinguished, and the debtor is thus liable for damages, in any of the following cases: », ©. When, by stipulation, the fortuitous events. (Arts. 1262, When the nature of the ob assumption of risk. (Asts. 1262, ‘When, by Jaw, the obligor is liable even for fortuitous events. (Arts. 1262, 1174) (Art. 1942), depositary (Art. 1979) and manager (Art. 2147) are, by law, fortuitous events under certain 100 i, When the obligor il negligence.” (Arts. 1262, of contributory fault or 0) = Presumption — Whenever the thing is lost in the possession of the debt the loss was due to his fault: be presumed that (1) unless there is proof to the contrary, and without prejudice to the provisions of article 1165 (Art. 1265). @) except in case of earthquake, flood, storm, or other natural calamity. (Art. 1265) occurred after the obligor has incurred in delay, (Arts. 1262, 1165) £ When the obligor has promised to deliver the same thing to two or more persons who do not have the same interest. (Art, 1165) ‘When the obligation to give the thing due arose from @ criminal offense, (Ast. 1268) - When debt of a thing certain and determinate proceeds from a criminal offense, the debtor shall not be exempted from the payment whatever may be the cause for the loss. ( ~ Unless the thing having been offered by him to the person who should receive it, the latter refused without justification to accept it. (Art. 1268) . Creditor’s Remedy. The obligation having been extinguished by the loss of the thing, the creditor shall have ‘We pula ¥.CA,GR. No, L 29640, June 10,1871 101ATUNARNTIBN FRWEUUTE YU nee RET! all the rights of action which the debtor may have against third persons by reason of the loss. (Art. 1269) = Under this provision, the creditor may seek recourse to the insurance indemnity for the thing lost.2*7 4, Effect on Reciprocal Obligations. In reciprocal obligations, the release of the debtor due to loss or impossibility also releases the creditor from the counter prestation, because each obligation depends on the other.™* B. IN OBLIGATIONS TO GIVE A GENERIC THING = In General, Loss Does Not Cause Extinguishment. In an obligation to deliver a generic thing, the loss or destruction of anything of the same kind does not extinguish the obligation. (Art, 1263) ‘a, This rule is based on the principle that the genus of a thing can never perish. Genus nunguan peri? ‘generic; therefore, it is ss of any specific property An obligation to pay m not excused by fortuitous of the debtor.” C. INOnLicaTIoNs To DO 1. Impossibility. The debtor in obligations to do shall also be released when the prestation becomes legally or physically impossible without the fault of the obligor. (Art. 1266) Beco River Panton, nc, 2 Pi 8, cling Col & Capitan; Von Tub; Perez Gonzalez & Alquer: and ‘a. Physical impossibility arises when the prestation, by its nature, cannot be accomplished or performed. - Impossibility refers to the nature of the thing to be done, and not to the inability of the obligor to do it If others can perform the prestation, it is not ty arises when the prestation becomes illegal or prohibited by law. Extreme Difficulty Due to Unforeseen Events. When the service has become so difficult as to be manifestly beyond the contemplation of the parties, the obligor may also be released therefrom, in whole or in part. (Art. 1267) @. Ast. 1267 is said to be based on the principle of rebus ‘ic stantibus, under which the parties are considered to have stipulated in the light of certain prevailing conditions, and once these conditions cease t0 exis (he contract also ceases to exist. However, Art. 1267 is ication of the principle of rebus sic Stantibus, which would endanger the security of ccoatractual relations. The parties to the contract must exceptional changes of circumstances that equity demands assistance for the debtor. ~ An “abrupt change in the political climate of the country after the EDSA Revolution” and the debtor's “poor financial condition” do not warrant application of Art. 1267 . If performance has become impossible altogether, At 1266 should be applied. ). 2 Phi National Construction Cov. CA, GR. No, 116896, May 5, 1997donations with respect to acceptance, amount, and IV. CONDONATION OR REMISSION OF THE DEBT a. Condonation must be accepted by the debtor. (Art A. IN GENERAL 1270) 1. Definition, Condonation or remission is an act of liberality whereby the creditor, without receiving any equivalent, renounces the enforcement of the obligation, which is accordingly extinguished in its entirety or in that part remitted.” b. The condonation = Ifthe debtor refuses to accept the condonation, but subject to the rule on inofficious donations, ic, the amount condoned cannot be more 2. Gratuitous. Condonation or remission is essentially than what the creditor may give by will. (Art. 1270, in gratuitous, and requires the acceptance by the obligor. (Art. rel. to Art. 752) 1270) 4, Effect on Accessory Obligation. The renunciation of the - Itis an essential characteristic of remission that it be gratuitous, that there is no equivalent received for the ‘enefit given; once such equivalent exists, the nature of the act changes." i, It may become dation in payment when the creditor receives a thing different from that stipulated; or |. Tt may become a novation, when the object oF principal conditions of the obligation should be principal debt shall extinguish the accessory obligations. (Art. 1273) a. But the waiver of the accessory obligation shall leave the princi ion in force. (Art. 1273) Thus, the accessory obligation of pledge may be waived without affecting the principal debt previously secured by the pledge. . It is presumed that the accessory obligation of pledge been remitted when the thing pledged, after its ATIARANRTIG HRW Ure 1 cere ease changed; or delivery to the creditor, is found in the possession of the debtor, or of a third person who owns the thing. iii, It may become a compromise, when the matter (art. 1274) renounced is in litigation or dispute and in exchange of some concession which the creditor |B, MANNER OF CONDONATION: Condonation may be made receives, expressly or impliedly. (Art. 1270) 3. Governing Raies. Condonation is essentially a donation 1. Express condonation — shall comply with the forms of of the credit to the debtor, and is thus subject to the rule on donation. (Art, 1271) 2 Dizon. CTA, GR No, £40044, Ani 3, 2008 — 2 zon v. GTA, GR No, 140044, Ap 30, 2008 #5 1V Tolentino 354 104 105V. CONFUSION OR MERGER OF RIGHTS = Ifthe condonation is made mortis causa, the forms of a will must be followed. A. Concer 2, ‘Implied condonation. instances where condonatior Code provides two 1. The obligation is extinguished from the time the characters ied: of creditor and debtor are merged in the same person. (Art. 1275) a. The delivery of a private document evidencing a credit, ‘made voluntarily by the creditor to the debtor, implies 2. Confusion or merger usually takes place when the debtor i acquires the credit. Exa his father, who subsequently dis heir. X thus succeed to his fath i. Whenever the private document in which the against X. Thus, as far as the P10,000 cre: appears is found in the possession of the debt the characters of creditor and debtor have shall be presumed that the creditor in the person of X. against the latter. (Art. 1271) 3. Confusion or merger may also take place when the creditor acquires an encumbered property. Example: when the AUER OAT eRe ere et eerer ee ii, ‘The waiver may be nullified if i debtor and his heirs may uphold prove that the delivery of the document was made in virtue of payment of the debt. (Art. 1271) to the creditor, is found in the possession of the debtor, ‘or of third person who owns the thing, (Art. 1274) = However, being a mere presumption, it may be overcome by proof that no condonation was intended. 106 228 Yok Tong Ln Fie & Matine Insurance v.Yusingco, 64 Pi mortgagee acquires the mortgaged property, the mortgage obligation is extinguished™ (but not necessarily the principal obligation secured by the mortgage). B. EFFECT AND EXTENT 1, Confusion or merger which takes place in the person of the principal debtor or creditor benefits the guarantors. (Art. 1276) a, But merger which takes place in the person of any of the guarantors does not extinguish the obligation. (Art. 1276) b. Example: byl. J's obligation as guarant is also extinguished. But indebied to Y, which debt is guaranteed is merely accessory) J acquires Y's credit 937), 107ATIANANTIN URITEREITY THRE thereby extinguishing J's obligation as guarantor, this does not affect X's obligation, J can stil collect from a 2. Confusion does not extinguish a joint obligation except as regards the share corresponding to the creditor or debtor in whom the two characters concur. (Amt. 1277) = If the obligation is solidary, it may be extinguished by the confusion or merger between any of the creditors with any of the debtors. (see Ast. 1215) V. COMPENSATION ‘A. INGENERAL 1. Definition, Compensation (or offsetting) is a mode of ‘extinguishing (to the concurrent amount) the obligations of in their own right and as principals, are ly debtors and creditors of each other.” (Art, 2, Kinds of Compensation. a. According to Extent i. Total ~ when the two debts are of the same amount, in which case both debts are totally extinguished. (Art. 1281) fi, Partial ~ when the two debts are not of the same amount, in which case the debts are extinguished only to the concurrent amount. (Art, 1281) August 15, 2001; see also Franca v. IAC, GR. No, L- 108 Madecorv. Uy, GR, Ne. 129588, August b. According to Cause ration of law when all infra) ii, Conventional ~ takes place when the parties agree to compensate their mutual obligations even in the absence of some requisites.” (Art. 1282) (infra) = Incertain cases, compensation may be claimed compensation. Example: if X°s debt to ¥ is pure, while Y's debt to X is with a term for Y's benefit and has not yet become due, Y may object to the compensation, but Y may also choose to waive the tenn and claim compensation. i. Judicial — compensation decreed by @ court in a case where the defendant has counterclaims against the plaintiff - Ione of the parties to a suit over an obligation eee for damage the other, the xr may set it off by proving his right to a damages and the amount thereof. (Art. 1283) B. LEGAL COMPENSATION 1. In General. Legal compensation takes place by operation of law (inso jure) when all the requisites are present” It WIAC, GR. No. 67648, 1. IAC, GR. No, L-67649,ATTN 2. Requisites. In order that (legal) compensation may be proper, the following five requisites are necessary (Ast. 1279): ‘a, That each one of the obligors be bound principally, and that he be at the same time a principal creditor of the other; ~The parties must be mutually debtors and creditors reir own right and as principals. Thus, X corporation's debt to Y cannot be offset with Y's debt to a stockholder of X, because the corporation is distinct from its stockholder.” (2) Also, the debt of partnership ABC to X cannot be offset with X’s debt to B (@ partner in ABC)! @) A share of stock is not a credit against the ‘corporation, and stockholders, as such, are not creditors of the corporation, Thus, a corporation’s credit against its stockholder cannot be offset with the latter’s share of tock Eco. Hee of Ess 28 Ph rata om Gh Seg 83 P90 no (4) Taxes cannot be compensated with the toxpayer’s claim against the Government, because taxes are not “debts” and the Government and the taxpayer cannot be considered creditor and debtor to each other.”” ‘very nature, fungible things may be substituted for each other.?* ‘That the two debts be due; |. ‘That they be liguidated and demandable; t the existence and amount termined, a3 opposed 10 such as damages) which ore sill disputed ‘and. whose amount is ot yet determined. Compensation cannot extend to unliquidated, disputed claim existing from breach of contract?” “Demandable” means that the debt is legally it is a civil (and natural, obligation), it hax not yet prescribed, it is not subject to a suspensive period or condition which has not yet happened, and itis not unenforceable. mtATIRDANIT HAHWERCE YW VAI AY Assignment of Credit.” In case the creditor + Note, however, that when one or both debts are rescissible or voidable, they may be compensated against each other before they are judicially rescinded or avoided. (Art. 1284) They are considered valid until annulled or rescinded. ‘ii, Legal compensation is possible even though the shall be an indemnity for expenses of exchange or transportation to the place of payment. (Art. 1286) ©. That over neither of them there be any retention or controversy, commenced by third persons and communicated in due time to the debtor. (1196) + Example: When a credit is gamished by court (execution or attachment), 2. Who May Invoke. Generally, compensation may be invoked or claimed by the princi the same time a principal creditor). debtor (who is also at ~ However, the guarantor may also set up compensation as regards what the creditor may owe the principal debtor, (Art. 1280) That is, the guarantor may invoke any available compensation between the principals, and thus benefit from the extinguishment of the principal obligation which results from such compensation, credit to a third party, who then attempts to enf debtor has the following rights: ‘HEIY Tolentino 374376, ting Manresa, m2 a. If compensation has already taken place before the assignment — the obligation is deemed extinguished by operation of law, and the debtor is thus discharged of liability by invoking the compensation. - Exception: if the debtor consented to the assignment, this is considered a waiver of the compensation, . If compensation has not yet taken place before the assignment (because, e.g., the debts are not yet mature ot liquidated) — i. Ifthe debtor consented — he cannot set up against the assignee the compensation which would pertain, to him against the assignor. (Art. 1285) - Unless the assignor was notified by the debtor at the time he gave his consent, that he reserved his right to the compensation. (Art. 1285) fi, If the debtor was informed of the assignment, but of debts before the assignment, but not of subsequent ones. (Art. 1285) If the debtor was not informed of the assignment — he may set up the compensation of all credits prior to the assignment and also later ones until he hhad knowledge of the assignment. (Art. 1285) Note: The reason for the foregoing rules is to protect a party from being fraudulently deprived of the benefits of compensation.” ‘HIV Reyes & Puno 15, cting Manress. usMERA Qerer CMe eD eee e 4, Plurality of Debts. If a person should have against him several debts which are susceptible rules on the application of payment order of the compensation. (Art. 1289) ~ Thus, the debt which is most onerous to the debtor, among those due, shall be deemed to have been offset. e of the same nature and burden, the be applied to all of them (Ast. 1289 in rel. to Ast, 1253) 5. Effect of Compensation. When all the requisites mentioned in Article 1279 are present, compensation takes, effect by operation of law, and extinguishes both debts to the concurrent amount, even though the creditors and debtors are not aware of the compensation. (Art. 1290) C. CONVENTIONAL COMPENSATION 1. In General. Conventional (or voluntary) compensation is ‘compensation by agreement - place when the parties agree to compensate their mutual obligations even in the absence of some requisites ~ Thus, the-parties may agree upon the compensation of debts which are not yet due, (Art. 1282) 2, Requisities. Conventional compensation is possible only When the parties are mutual creditors and debtors of each other Aside from this, the requirements of conventional compensation are: 2% PNB Madecor. Uy, GR, No, 129698, August 1 Francia v IAC, GR. No. 87649, June 28,1988. Ot Insta and Development Cov. CA, GR No. 11880, May 7,157,272 SORA 14 2. Debts arising from a contract of commodatum; 18 Sps. Ne v. Equitable PCI Bark, GR. No, a. That each of the parties can dispose of the credit he seeks to compensate, and 'b. That they agree to the mutual extinguishment of their credits. D. LIMITATIONS: The following debts cannot be compensated — 1. Debts arising from a contract of depositum:; (Art. 1287) . 1287) a, Both depositum and commodatum are based on the ‘rust and confidence of the depositor or bailor that the thing deposited or fent will be returned. b. The prohibition is against the depositary and the borrower, in favor of the depositor and bailor. The depositor and bailor may choose to waive the benefit and set up compensation (facultative). ©. Note that bank deposits (whether fixed, savings or current deposits) are considered: simple loans (Art. 1980), and are therefore to compensation or setoff against the depositor’s obligations to the bank 25 3. Claims for support due by gratuitous ttle; (Art. 1287) a. Allowing compensation may defeat the purpose of support, which is to maintain the person to be supported and answer his needs. Tt may also defeat the exemption of support from attachment and execution. (EC, Art. 205)b. Support in arrears may be subject to compensation, because the need for the same has already passed. (Art. 301, par. 2, in rel. to Art. 1287) ty arising from a penal is against the offender, in favor of the . The offended party may choose to waive the benefit and set up compen: (facultative), 5. Obligation to pay faxes to the government, Taxes are not “debts”, and are not subject to compensation as a matter of public poticy * ‘VIL. NOVATION A. INGENERAL yn. Novation is a mode of extinguishing an ion by changing its object or principal conditions, by substituting a new debtor in place of the ol subrogating @ third person to the rights of the cre (Art 1 In onder that an obligation may be extinguished by another which substitutes the same, it is imperati that it be so declared in unequivocal terms, or (i the old and the new obligations be on every point incompatible with each other. (Art. 1292) DERANANTEGE TURRET YP REE ee - b. Novation, properly speaking, is extinctive, ie., an old obligation is terminated by the creation of a new one ie. Mambulao Lumber Co, 4 that takes the place of the former. A novation that is 4, Extinctive novation does not necessarily imply that the new agreement should be complete by itself; certain terms and conditions may be carried, expressly or by implication, over to the new obligation.*° 2. Classification. a. According to Manner i, Express ~ when the parties declare in unequivocal terms that the new obtigation novates or extinguishes the old one. (Art. 1292) ii, Implied — the novation is inferred from the fact that the old and the new obligations are on every point incompatible with each other. (Art. 1292) ~The test of incompati obligations can stand t are irreconcilable, the si 469 Phil. 688,702 (2003). Sp, 852 Pi. 82 2003.DEDORNTE WMWUPHSET Pie ees b. According to Cause i. Objective ~ novation caused by ch object or principal conditions (Art. 129 |. Subjective - novation caused by change in the person of the debtor or the creditor (Art. 1291 [2] &BD 3. Requisites. For novation to take place, the following requisites must concur." a, There must be a previous valid obligation. i, If the original obligation was void, the novation is also void. (Art. 1298) - Exception: when annulment may be claimed only by the debtor or when ratification validates acts which are voidable. (Art. 1298) ii, If the original obligation was voidable, the novation is valid, because the debt deemed a ratification of the original obligation or an implied waiver of its defect. (see Art. 1298) Exception: in expromision, wherein the debtor does not consent. ii, inal obligation has prescribed, the id, A prescribed debt is a natural obligation and suffices as a consideration for the new obligation” Besides, the prescription may 32 Garcia v, Lamas, GR. No. 154127, December 8, 2008; Sueno v. Land Bank, GR. No ptember 17, 2008, 3 Vilatoe v. Estas, 71 Phi. 140 (1940). us be claimed only by the debtor, and he impliedly ‘waives it by agreeing to the new obligation.” b. The parties concerned must agree to a new contract. i, There must be an intention to novate or animus novandi. ii, This requirement presupposes that the parties have the capacity to agree to the new contract, c. The old contract must be extinguished, = If the original obligation was subject to a suspensive or resolutory condition, the new obligation shall be under the same condition, unless itis otherwise stipulated. (Art. 1299) d. There must be a valid new contract. i, Ifthe new obligation is void, the original one shall subsist, unless the parties intended that the former relation should be extinguished in any event. (Art 1297) fi, Tf the new contract has not yet been executed, the previous obligation is not novated and remains subsisting.** If the new contract is voidable, it is valid until 2 Esvadav. Viera (CA) 40 0. th Supp.) 201 ed in V Toetino 398, * Sueno v. Land Bank, GR. No. 174711, September 17,2008, ngDIVARANTIG HNMIUPHNETY rte es > iv. If the new contract is unenforceabl not in writing, per the Statute of Frauds), novation cannot be proven. 4, Not Presumed, Novation is never presumed, and the novandi (intent to novate), whether totally or 5. Effect on Accessory Obligation. When the principal obligation is extinguished in consequence of a novation, accessory obligations are also extinguished. (Art. 1296) This is because the accessory obligations (e.g., mortgage and pledge) were given to secure a particular obligation and the solvency of a particular debtor; thus, a change in the obligation or debtor destroys the basis of the consent to give the accessory obligations.” - “Exception”: accessory obligations may subsist only insofar as they may benefit third persons who did not cir consent. (Art. 1296) However, these for the benefit of third persons are in reality ligations. B, OBJECTIVE NOVATION 1. Essential Change vs. Accidental Change. Objective novation is caused by change in the object or in the conditions of the obligation. (Art. 1291) Changes ical relation™ (from commodatum to lease of things, or from negotiorum gestio to agency, or from a ‘mortgage to antichresis, or from a sale to a loan) may also be subsumed under this category. 120 In other words, there must be essential change." Changes that breed incompatibi nature and not merely accidental there is no express novation, such essontial change implied novation by creating an incompatibility between the old and the new obligations. On the other hand, accidental changes — or changes which are merely incidental to the main obligation, or refer merely to secondary agreements — do not cause extinetive novation.*” The novation is merely modificatory, in which case the new agreement will not have the effect of, extinguishing the first but would merely supplement it or supplant some but not all of its provisions.°** . Determination of the Nature of Change. It is thus important to determine if the change refers to the object or the principal conditions (essential change), or merely to incidental conditions (accidental change). The and relative economic importance of the modification, and other similar factors" Examples of essential changes. a. Change in the price . Reduction of the period or duration of an easement oftten) to a contract of lease (even if merely verbal Change from a sale of real estate to @ conditional sale of real estate.” = Ina contract of sale, the ttle to the property passes to the vendee upon the delivery of the thing sold; in a contract to sell, ownership is, by agreement, reserved in the vendor and is not to pass to the ‘vendee until full payment of the purchase price. . Change from trust receipt agreement to a simple loan” f. Change from a mortgage to antichresis.*"” - Change from a sale to a loan. 4, Examples of incidental changes. a. Execution of a mortgage to secure the payment of a loan" — the contract of loan is not novated by the ‘mortgage, which is merely an accessory contract. , Changes in the terms of payment of an obligation to pay,” such as: Lgtn v. CA, GR. No, 38677, Febnary gaan ¥.CA, GR No. S807, Ferry 2. Ase Banking Cn. v. Larson Company, 8 SRA 967, a5 rected in Voanqur ve. Cout of m2 i, Extension of the period — the period affects only the performance of the obligation and does not create @ new one ii, Restructuring of the payment scheme repayment in one year to repayment quarterly installments", or providing for a new schedule of payments and additional security’) ili, Change or reduction in the interest rate. = Tt has been held that an obt money is not novated by an expressly recognizes or ratifies the old, changes only the terms of payment, and adds other obligations not incompatible with the old ‘ones, or where the new contract merely supplements the okt one. In a construction contract, changes for the redesign of the structure and corresponding reduction in the contract price (particularly where the contract states that changes may be made in the works without invalidating the contract).*” C. SUBJECTIVE NOVATION: Subjective novation is novation by changing the person of the debtor or the person of the creditor.Neeverceswrr teu e ees se ReURE EET 1, Change in the Debtor a. Necessity of Consent i. The consent of the ereditor to the change in the debtor is always required. (Art. 1293) (1) The consent may be express or may be given at any time (2) For novation to take place, the creditor must consent (expressly or impliedly) to the release of the old debtor. = The mere fact that the creditor receives a guaranty or accepts payments from a third person does not constitute a novation and ish the obligation of the person who has assumed the obligation of the debtor merely becomes a co-debtor or a surety. fi, ‘The consent of the new debtor is also always required. 52 Ajax Marketing Corp. v. CA, GR. No GR. No, 168704, December 2, 2008, iii, The consent of the old debtor is not always required. (Art. 1293) Thus, substitution of the debtor may bs lin con whether the old debtor has given consent: (1) Expromision — the initiative for the change does not come from (and mi without the knowledge assumption of requires the consent of Q) Delegacion - the debtor offers, and the creditor to the sul thus, the consent of these three persons are necessary.” b. Effect of Insolvency of New Debtor obligation shall not be ii, In delegacion itution is proposed by the original debtor and accepted by the creditor) — the ‘new debtor's insolvency shall not revive the action of the latter against the original obligor, but (unlike in expromision) it is subjection to the following exceptions —QUAN THMUPRNITY Tee RE (1) when said insolvency was already existing and of public knowledge, when the debtor delegated his debt, or (2) when said is and known his debt. (Art. 1295) ©. Right of New Debtor Payment by the new debtor gives him the rights mentioned in Articles 1236 and 1237. (Art, 1293) Thus: i. In expromision (without the knowledge or against the will of the old debtor) (1) The new debtor may recover from the old debtor only insofar as the payment has been beneficial to the old debtor. (Art. 1236) (2) The new debtor, upon payment, cannot be subrogated to the rights of the creditor. (Act. 1237) ii, In delegacion (with the knowledge and consent of the old debtor) — (1) The new debtor may demand from the old debtor what he has paid. (Art. 1236) (2) The new debtor, upon payment, is subrogated to the rights of the credit 1302{2)) 126 2. Change in the Creditor or Subrogation. in a conventional subrogation. (Art. 1303) Subrogation of a third person in the creditor is either legal or conventior Conventional Subrogation — is subrogation which takes place by agreement”; it requires the consent of the original parties and of the third person. (Art. 1301) i, Conventional subrogation must be clearly established in order that it may take effect. (Art 1300) ignment of Credit. is not identical to i, Distinguished from Conventional subrogat assignment of credit, thus’ (1) Conventional subrogation: (@) the debtor's consent is necessary; (b) extinguishes an obligation and gives rise to anew one; 22 Asko Electonics Corp. vs. Export and Foreign Loan Guarante Corp, GR. No. pine Natonal Bank vs. Cout of Agpedl, GR, N 27TERE NEE TUE TE Pete FE (©) the mullity of an old obligation may be cured by subrogation, such that the new obligation will be perfectly valid; (2) Assignment of credit: (@) the debtor’s consent is not required; + Nonetheless, the debtor must have knowledge (either by formal notice or some other means) of the assignment so that he may pay the debt to the 00)" The sed from the obligation. (Art. 1626) (b) assignment refers to the same right which ‘passes from one person to another; f an obligation is not remedied ent of the creditor's right to ©. Legal Subrogation — is subrogation which takes place by operation of law because of certain acts.* The parties’ consent or agreement is not necessary, and it may take place even without the debtor’s knowledge.” , No, 149040, July 4, 2007, cng Sizonv. Yap Tico, 37 inte v. Spouses Thong, GR. No, 186704, 20 December Exgart and Foreign Loan Guaratoe Cor, GR. No. Import & Export Corp, vs. Court of Appeals, GR Nos. 7,278, Export and Foreign Loan Guarantee Cop, GR. No. 128 Legal subrogation is not presumed, except in cases expressly mentioned inthe Civil Code. (Art. 1300) ‘There is legal subrogation in the following cases: (Art. 1302) (1) When a creditor pays another creditor who is preferred, even without the debtor's knowledge; (Art. 1302) - Example: if an unsecured security pays off a creditor with senior security. ) When a third person, not interested in the obligation, pays with the express or tacit approval of the debtor, (Art. 1302) (3) When, even without the knowledge of the debtor, a person interested in the fulfillment of the obligation pays, without prejudice to the effects of confusion as to the latter's share. (Art. 1302) (@) Examples of interested persons: co- debtors, surcties, guaranties, mortgagors and pledgors. (b) By express provision of Art. 2067, the ‘guarantor who pays is subrogated by virtue thereof to all the rights which the creditor had against the debtor. (©) The insurer who pays a claim for indemnity is legally subrogated to the rights of the person indemnified. The 129AT RINT MTN PRR Eas insurer may then seek to recover aoa the person who is liable forthe los @. Effect of Partial Payment. — A creditor, to whom partial payment has been made, may exercise his right for the remainder, and he shall be preferred to the person who has been subrogate of the partial payment of the same credit. (Art. 1304) Express Cop v. American Home Assurance Co, G.R. No. 150084, August 18,2004, ‘American General Insurance Co,, Inc. ¥. Sweet Lines, Inc, 212 SCRA 194, 130 Chapter 6 Introduction to Contracts I. INGENERAL Definition. The Civil Code defines a contract as “a meeting of minds between two persons whereby one binds respect to the other, to give something or service.” (Art. 1305) “Meeting of minds” — once the minds of the contracting parties meet, a valid contract exists, whether it is reduced to writing or not™ (except in certain contracts, infra). i, The area of agreement must extend to all poi the parties deem material, Otherwise, there that no ii, While a contract need not be in writing, the lack of signature on the draft written contract is indicator that reach agreement on all points b. “Two persons” — there must be at least 140 contract. However, a contract may also be mult involving more than two parties. = Autocontraets are contracts made by a single person representing two parties (one is a party he represents, while the other is either another party he represents or hhe himself, in his personal capacity). Generally,RUBMIAVE HMIUPRAT YP EKER 2. Stages of Contra b, toward the probate court. An administra permitted to deal with himself as an individual in any transaction conceming trust property. *? “One binds himself, with respect to the other" — the contract may also be reciprocal, wherein both parties are obliged to perform a prestation. Negotiation covers the period from the time the prospective contracting parties indicate interest in the contract to the time the contract is concluded (perfected). Perfection of the contract takes place upon the concurrence of the essen ‘of. Until the contract is perfected, it lependent source of obligation, serve as binding juridical relation. i In general, contracts are consensual, i.e., perfected by mere consent (Art. 1315), or upon a mere meeting of minds, i.e., the concurrence of offer and acceptance, on the object and on the cause thereof. Example: sale (Art 1458). Propet Phones nc. . 3. Classification of Contracts. The obligation. (Art. 1316) Examples: deposit, pledge and commodatum, iii, Ina solemm or formal contract, formalities prescribed by law Consummation begins when the parties perform their respective undertakings under the contract culminating in the extinguishment thereof. lowing are some of the common classifications of contracts — a According to dependence: i principal —may ji, accessory — existence depen (cg. pledge, mortgage, or suretyship) lease, sale or loan) another contract . According to perfection: i, consensual — perfected upon consent fi, real — perfected upon delivery, in add (cg., commodatum or pledge); fii. formal — perfected upon execution of required formalities (¢.g., donation or mortgage of real Property) According to cause: IV Tolentino 410-411, 133RUBLE HERAT! CR i. onerous — parties exchange equivalent values (¢.g, sale); and i. gratuitous — one party does not receive an equivalent value (e.g, commodatum) According to the parties obliged: required to perform only one party is required to perform a ion (¢.g., commodatum or gratuitous deposit) se With particular names, like sale, lease, 10se without particular names) (1) Imnominate contracts are traditionally divided into four types: (a) Do ut des (I give and you give); (b) Do ut facias (I give and you (6) Facio ut des (Ido and you gi (@) Facio ut facias (I do and you do). (2) Innominate contracts are regulated by the following: (Art. 1307) (2) Stipulation of the parties; (©) Rules governing the most anatogous nominate contract; Cores v.CA, GR. No, 40424, 134 - Eg, a renunciation of interest in real property as payment of loan by the renouneer is analogous to sale.” (@ Customs of the place. 3) Contracts which do not strictly conform to the standard contracts are allowed and may be considered innominate contracts.“ 1. AUTONOMY OF CONTRACT The contracting parties may establish such stipulations, clauses, terms and conditions as they may deem convenien are not contrary to law, morals, good customs, public order, or public policy. (Art. 1306) ‘A person’s freedom to contract about his own affairs is part of the liberty of the individval under the Constitution. However, this freedom is not absolute and must yield to the common ‘Thus, stipulations which are contrary to law, morals, good customs, public order or public policy are void. A. “Law” 1, Applicable laws form part of and are read into the contract without need for any express reference. 2, Examples of contracts or stipulations prohibited by aw: a, Pactum commissorium — The creditor cannot appropriate the things given by way of pledge orRUREI WET CNSR RE mortgage, or dispose of them. Any contrary is null and void. (Art. 2088) . Stipulation in contract of employment discriminating against women (Labor Code, Art them from getting married.” (Labor Cote, Art c. An agreement to deprive conferred on it by law is void. Jurisdiction over an action is conferred by law, and may not be changed by ‘mere agreement of the parties.” yurt of jurisdiction B. MORALS AND Goop Customs L 2. Morals and good customs refer to general principles of morality which have received a good measure of social acceptance.’ According to the Code Commission, morals and good customs are distinct concepts, but some 351 commentators disagree: Examples: annum," or 108-120% per annum: that there is no fixed rule on what is unconscionable; in cone case, interest rate of 7% per month (or 84% per annum) was upheld.*** b. Contracts for domestic services without payment of ‘wages are void” C. PUBLIC POLICY OR PUBLIC ORDER 1 Public policy or public order refers to the public good or the interest of the society, No person can lawfully do that which has a tendency to be injurious to the public or against the public good. . Examples 8. Void: stipalation that a credit card holder who reported the loss/theft of his credit card continues to be liable for unauthorized charges until the credit company notifies its member establishments. Such clause leaves, the holder at the mercy of the credit card company.*” jon which repudiates the existence of smployee relationship to circumvent the ‘compulsory coverage of the employee under the Social Security law.™® The employment status of a person is defined and prescribed by law and not by what the parties say it should be.*” c. Void: agreement to stifle prosecution of a crime." It ‘would be detrimental to the administration of justice. romber 23, 2007, cing Chaver v. 3 Lope v. Netropoltan WaterworksAUR OHNEET aT PY 4. Void: a stipulation by a common carrier itself from liability or limiting its liability for 1used by its own negligence. (see Art. i. However, a stipulation fixing the sum that may be recovered from a common carrier is valid if it is reasonable and just under the circumstances, and hhas been fairly agreed upon. (Art, 1750) fi, In a contract of private carriage, the partios may validly stipulate that the shipowmer is not liable for loss of or damage to the cargo caused even by the negligence of the ship captain. As the contract is not of common carriage, public interest is not strictly involved? . Void: stipulation for the commission of an agent in the prosecution or following-up of applications for import allocations or foreign exchange allocations from the provision in a construction contract providing -year petiod during which the contract is liable for defects. Contractor cannot be expected to make a perpetual guarantee on all materials and workmanship." 8. Valid: fixed-period employment contracts, unless the period was purposely intended to circumvent the employee's right to his security of temure, 30 of the buyer to pay three successive monthly installments or any one yearend lump sum payment.** i. Valid ~ provision in deed of restrictions that a buyer of 4 parcel of land automatically becomes member of the homeowners’ association and must pay association dues. J. Valid: stipulation in the sale of socialized housing that the buyer must be in actual possession of the house at all times and cannot dispose of the same within 5 years." k. Valid: stipulation that the creditor may apply any of the debtor's moneys in the creditor's hands for the payment of the debtor's obligation. . “Non-involvement clauses” are those which prevent an employee from working for another employer. In general, they are valid if there are reasonable limitations as to time, trade and place, and if they are not greater than is necessary to afford a fair and reasonable protection to the employer.” Examples: a. Clause probibiting the employee from working for any company or business in the Philippines for 5 years — void, as there is no limitation as to trade.”RUROINI TNT Enna ~ Exceptions: In formal contracts ( B. Clause prohibiting the employee from working for any company engaged in the same businesses of his former employer for 1 year — void, as the trade is not reasonable; the employee only worked in the abaca business of the employer, and not in any of its numerous other business ‘c. Clause prohibiting employee from opening, owning or having any connection with any other drugstore within a radius of four miles from the employer's place of business during the time the employer was operating his drugstore — vata." 4. Clause prohibiting an independent agent for 1 year from engaging directly or indirectly in activities of other companies that compete with the business of her principal — vatid.?"* . Clause prohibiting employee from engaging in any pre- ness akin to het employer’s within 2 years — Il. CHARACTERISTICS A. AUTONOMY: (see discussion above) B. CONSENSUALITY: Contracts are generally deemed perfected bby mere consent. (Art. 1315) No special form is necessary. (Art. 1356) , donation; mortgage of real property), compliance with special formalities is 7 Cons Tuy, Platnum also required. In real contracts (eg, commodatumn; pledge), delivery ofthe object is also required. ns arising from contracts have the contracting parties and should be complied with in good faith. (Art. 1159) 1 From the perfection of contract, the parties are bound not only to the fulfillment of what has been express according to their nature, may be in keeping with good faith, usage and law. (Art. 1315) ‘The mere fact that one has made a poor bargain may not be a ground for setting aside the agreement.” The law does not relieve a party from the effects of an unwise, foolish or disastrous contract, entered into with full awareness of ‘what he was doing and entered into and carried out in good faith. Courts have no jurisdiction to look into the wisdom of the contract entered into by the parties or to render a decision different therefrom.” + The contract must bind both contracting parties; ty or compliance cannot be left to the will of one of . 1308) ‘The determination of the performance may be left to a third person, whose decision shall not be binding until it has ‘been made known to both contracting parties. (Art. 1309) ~The determination shall not be obligatory if it is evidently inequitable. In such case, the courts shall decide what is equitable under the circumstances. (Art. 1310)2. Under the principle of mutuality, no party can renounce a contract unilaterally ot without the To abandon a contract, mutual ass = Unless the parties stipulated that either one of them. ‘may unilaterally terminate the contract." 3. Escalation clauses which grant the creditor an absolute right to adjust the interest independently and upwardly, without the consent of the debtor, is void. E, RELATIVITY: Contracts take effect only between the parties, their assigns and heirs. (Art. 1311) . Not Binding on Third Parties. Contracts can only bind the parties who entered into it, and it generally cannot favor or prejudice a third person, even if he is aware of such contract and has acted with knowledge thereof. Since a contract may be violated only by the parties thereto as ach other, a party who has not taken part in it efor performance, unless he shows that he has a real interest affected thereby.°® a. A party who is not privy to the contract cannot sue upon breach thereof.** Similarly, a person who is not privy to a contract cannot be sued or held liable for breach thereof.” Enginearing Sovies, GR. No. 153057, August 7, 2006. V.CA, GR No. 38,200, 'b. A subsidiary of the creditor corporation cannot collect from the debtor." |, contracts are generally heirs of the original contracting parties, except in the following cases**” — a. Where the rights and obligations are not transmi by their nature. + This refers to rights and ob! strictly personal (intuitu perso (1) Those relating to family relations (such as parental authority, action for nullity or annulment of marriage or for legal separation, cohabitation); @) Those arising fiom public law (such as sufirage or public office); circumstances of a particular individual as a contract for a concert by a famous singer, or a portrait commissioned from a distinguished painter); (4) Criminal responsi Code) (Art. 89, Revised Penal - However, civil liability arising from crime continues 10 be an obligation of the deceased offender's estate."¥b. Where the rights and obligations are not transmissible ‘by stipulation, ¢. Where the rights and obligations are not transmissible ty provision of lav. - Examples: usufruct (Art, 603); agency (Art. 1919) commodatum (Art. 1939) Note: The heir is not lisble beyond the value of the property he received from the decedent. (Art. 13: Money debis left by the decedent are not transmis in the sense that they are paid from the estate of the decedent, and only the net estate or remainder goes to the heirs. If the decedent’ pay his debts, bis heirs cannot be hel debts in their personal capacity.” ‘These are further discussed below, |. Stipulation Pour Autrui. If a contract should contain some stipulation in favor of a third person (stipulation pour autrui), he may demand its fulfillment provided he communicated his acceptance to the obligor before its revocation. (Art. 1311) a. To constitute a valid stipulation pour auirui, a mere incidental benefit or interest of @ person is not 21,1988. J. Vitug senting b. sufficient. The contracting parties must have clearly and deliberately conferred a favor upon a third person. (art, Requisites of a valid stipulation pour autrui”™! i, There must be a stipulation in favor of a third person; ii, The stipulation in favor of a third person should be part, not the whole, of the contract; iii, The contracting parties must have clearly and deliberately conferred a favor upon a third person, not a mere incidental benefit or interest; (1) There must be an intent to benefit a third party, and to recognize him as the primary party-in- interest and privy in the promise, Put otherwise, the contracting parties must have intended to create a cause of action in favor of the beneficiary.” @) An agent who stands to receive a commission under a contract to sell a property is not @ beneficiary of a stipulation pour aufrui and thus cannot enforce the contract. His interest is merely incidental.” iv. The third person must have communicated bis acceptance to the obligor before its revocation; and (1) Acceptance may be in any form. Even if the benefit amounts to a donation, the acceptance 2; Sps. Ramos v. CA, GR. No. 192196,RURTSUTE UGE EMOTE T Leiner need not follow the formalities required for the acceptance of a donation.** @ Acceptance may be implied from the third party’s enjoyment of benefits under the stipulation,” or from his performance of his ‘objigations under the stipulation.”* () Before acceptance by the third party, the original contracting parties may revoke the stipulation pour auarui, v. Neither of the contracting parties bears the legal representation or authorization of the third party. ©. Examples: (i) a stipulation in a sublease contract that should directly pay rent to the principal a stipulation in a deed of donation requiring the donee to transfer title over a portion of ety to the present occupants ofthe said the sul the Church to defray certain religious expe stipulation in a contract between BAN credit card company, and its affiliated establishment that the latter will honor the BANKARD credit card offered by a cardholder. °° Contracts Creating Real Rights. In contracts creating real rights, third persons who come into possession of the object of the contract are bound thereby, subject to the 5, 30 September 1977, 79 SCRA 183. ne 20,1996 provisions of the Mortgage Law and the Land Registration Laws. (Art. 1312) = Areal right directly affects the property subject to it; thus; whoever comes into possession of such property aust respect that = Bxample mortgage over a property is binding even on a third person who subsequently acquires it, even if he was not party to the Contracts to Defraud Creditors. Creditors are protected in cases of contracts intended to defraud them. (Art. 1313) pay off his previous debts. (Art. 1387) b. The defrauded creditor may sue for the rescission (accion pauliana) of the contract intended to defraud him, (Art. 1381, par. 3; Art. 1177) Unlawful Interference with Contraets. Any third person who induces another to violate his contract shall be liable for damages to the other contracting party. (Art. 1314) a, Elements of unlawful or tortious interference™: i. Existence of a valid contract; fi, Knowledge on the part of the third person of the existence of contract; and iii, Interference of the third person is without legal Justification or excuse.8 b. Examples: (a) X induced the owner to lease a building to him, knowing that said building had already been leased to another person, ¥“"'; (b) J induced the owner of a cinema film to break his contract of lease with a theater owner, K, and lease the film to J, for the purpose of exhibiting it in another theater in the same city. c. Remedies: i. The wronged party is entitled to damages, but the liability for damages of the meddler cannot be worse than the liability of the contracting party who breached the contract.“ ii, Jnnction is also a proper remedy to restrain such unlawful interference.” Aecion directa. Those who put their labor upon or furnish materials for a piece of work undertaken by the contractor have an action against the owner up to the amount owing, from the latter to the contractor at the time the claim is made. (Art. 1729) IV. UNAUTHORIZED CONTRACTS ‘No one may contract in the name of another without being authorized by the unless he has by law a right to represent him. (Art, A contract entered into in the name of another by one who hhas no authority or legal representation, or who has acted beyond his powers, shall be unenforceable. (Art. 1317) +87 Yu, Couttof Appeals, GR. No. 8689, January 21, 198, 148 or impliedly, by the as been executed, before it tracting party. (Art. 1317) ~ Ratification is generally retroactive. It is as though authority to do the act had been previously given, except Where the rights of third parties have intervened between the act and the ratification.“°* 49RRGRQUEE UMTVENOIT Litt’ Chapter 7 Essential Requisites of Contract 1. GENERAL PROVISIONS ‘There is no contract unless the following requisites concur: 1. Consent of the contracting parties; 2. Object certain which is the subject matter of the contract; 3. Cause of the obligation which is established. (Art. 1318) Note that for formal contracts, compliance with special formalities ly required. For real contracts, delivery of the additionally required. I. CONSENT A. IN GENERAL 1. Concept. Consent is the conformity of the parties to the terms of the contract; the acceptance by one of the offer made by the other; the concurrence of the minds of the posties on the object and the cause which shall constitute the contract.“ 2. Manifestation. Consent ig manifested by the meeting of the offer and the acceptance upon the thing and the cause which are to constitute the contract, (Art. 1319) Greer Metropol | Waste Management Commitee v. JANCOM Emionmental (Con, GR. No, 162883, a. The offer must be certain. (Art b. The acceptance must be absolute, (Art, 1319) - A qualified acceptance constitutes « counter-offer (An. 1319) ‘c, Tn addition to the subject matter and the consideration, the area of agreement must extend to all points that the B. OFFER 1. Definition. “Offer” means a unilateral proposition which one party makes to the other for the celebration of the 2, Certain, The offer must be certain. (Art. 1319) = There is an offer in the context of Article 1319 only if the contract can come into existence by the mere acceptance of the offeree, without any further act on the part of the offerer. Hence, the offer must be definite, complete and intentional.“ = An invitation to negotiate,“ or an offer to r deliberate on whether to purchase a 3. Effectivity. An offer is effective until either party becomes incapacitated, or until the offer is withdrawn by the offerer.é z z i Rune U a. Incapacity. An offer becomes ineffective upon the death, civil interdiction, insanity, or insolvency of either party before acceptance is conveyed. (Art, 1323) - “Cenveyed” means the time when the offerer learns of the acceptance by the offeree. b. Withdrawal. As a general rule, the offerer_may withdraw the offer at any time before he learns of the acceptance by the offerce. ‘The withdrawal is effective immediately after its manifestation, such as by its mailing, and not necessarily when the offeree leams of its withdrawal." Thus, if A makes an offer to B, and B The offer is deemed withdrawn upon B's mailing of withdrawal (before the contract could be perfected by B's receipt ofthe acceptance). When Period is Given. When the offerer has allowed the offeree a certain period to accept — i. Asa general rule, the offer may still be withdrawn at any time before acceptance by communicating such withdrawal. (Art. 1324) Thus, a unilateral ‘promise to sell under Art. 1479 may be withdrawn at any time. (1) However, this right should not be exercised whimsically or arbitrarily, as it could give rise damages under Art. 19 on abuse (2) Also, a unilateral promise distinguished from a bilateral pror and sell which, as tong as the determinate and the price certain, is reciptocally demandable."* (Art. 1479, first par.) = Note also that a unil when accepted, promise to buy and sel ‘As an exception, the offer may not be withdrawn in the principal contract, In such a situation, a contract of “option’” is created. (1) An “option contract” grants a person the choice, for a distinct and separate consideration, to purchase a determinate thing ata predetermined fixed price." (2) Withdrawal of the offer or option would be a breach of the option contract, which would render the offerer liable for damages." ~ In case of breach, the remedy of the offeree/optionee is damages for breach of the option contract, and not damages or specific performance of the contract which is the object of the option. The option contract is distinct from the main contractPp UUTTENGITT CRE (4, sale) which is the object of the option. (@) Ifthe consideration given is really intended as part of the consideration for the main contract, the main contract could be deemed perfected: Thus, an “earnest money” in a contract of sale is evidence of its perfection. (Art. (4) A “right of first refusal” (where X gives ¥ the ‘on whether X will decide to sell the property and on terms that are not yet determinate," i not an option contract, a right of first refusal does not need separate forms part of the considera principal contract. ~ In case the right of first refusal is violated — ice, the owner sells the property to a third person without first allowing the right-holder to purchase it — the right- seek specific performance of the owner's obligation to grant him the right of first refusal” (by allowing the right-holder to buy the property at the same terms and conditions at which it was sold to the third patty). 4, Advertisements, Unless it appears otherwise, business advertisements of things for sale are not definite offers, but mere invitations to make an offer. (Art, 1325) . Advertisements for bidders are simply invitations to make proposals, and the advertiser is not bound to appears. (Art. 1326) Public advertisements offering rewards or priz tute u promise, When a member of the public perform: act pursuant to the offer (e.g., participates in the contest), such action constitutes an acceptance which. converts the promise into a contract binding on the 3S (patadary the conser fr te future sale) would have 824, 135CURREeER Ee ETE WEEE mere ee mermee C. ACCEPTANCE 1, Definition. Acceptance is the conformity by the offerce to the proposition of the offerer. 2, Absolute, a, The acceptance must be absolwe, (Art. 1319) = To produce a contract, the acceptance must not qualify, modify or vary the terms of the offer. acceptance, or when a simple obligation is converted by the acceptance into an ltemative one; in other words, when something is desired which is not exactly what is proposed in the b. A qualified acceptance constitutes a counter-ofter (Art. 1319) = Any modification or variation from the terms of the offer ennuls the latter and frees the offerer.*”° ‘The original offerer is ftee to accept or refuse the counter-offer. 3. Knowledge of the Acceptance. The acceptance of an offer must be made known to the offerer.*! perfected only from the time the acceptance ofthe offer is made known to the offerer.® Unless and until the offerer knows of the acceptance, there is no meeting of the minds of the parties, no real concurrence of offer and acceptance. a. The offerer may withdraw his offer before he leans of the acceptance thereof by the offeree."™ The contract is not perfected if the offerer withdraws his offer, and the withdrawal is made before he leams of the b. Acceptance made by letter or telegram does not bind the offerer except from the time it came to his knowledge. (Art. 1319) - The contract, in such a case (acceptance by letter or telegram), is presumed to have been entered into in the place where the offer was made. (Art. 1319) c. An offer made through an agent is accepted from the time acceptance is communicated to him (ie., the agent). (Art. 1322) - A messenger or intermediary or letter-cartier who brings the offer is not necessarily an agent. ‘The contract is not perfected by communicating the acceptance to a messenger. Express or Implied. An acceptance may be express or implied. (Art, 1320) ‘a. Acceptance may be implied from the contemporaneous and subsequent acts of the contracting parties. Thus, performance of the conditions in a “conditional 30,2008, tng Enrique v. Sun Life Assurance, 41 faarosaV-CA, GR. No, 125761, Apr 30,2003, 1s7SRMERTEYE EME ret ees 2 eer: an acceptance.” As an_ exception, however, acceptance may be implied from silence if clearly ‘warranted by the circumstances. (see ©. If the offeree requires express acceptance, done expressly. (Art. 1321) 5, Time, Place and Manner. The person making the offer may fix the time, place, and manner of acceptance, all of which must be complied with. (Art. 1321) a. An acceptance which is not made in the manner, place or period prescribed by the offerer is not effective but constitutes a counter-offer, which the offerer may accept or reject. ’b. In general, when the offerer has not fixed a period for the offeree to accept the offer, and the offer is made to person present, the acceptance must be made immediately. 6. Revocation of Acceptance. Acceptance may be revoked, but the revocation must be made known to the offerer before he leams of the acceptance. For as soon as the offerer leams of the acceptance, the contract is deemed perfected. D. CAPACITY T0 GIVE CONSENT general rule, any person of legal age can. give a contract unless there is a ground for his incapacity provided by law. = Capacity is presumed; the party who alleges the incapacity of a certain person has the burden to prove such incapacity.” Incapacity. The following cannot give consent to a contract: a. Unemancipated minors (Art. 1327) i, The reference to “unemancipated” minors is meant to distinguish them from minors who had been emancipated by marriage (under the Civil Code, persons below 18 years old could marry). With the Family Code setting the age of consent for marriage to 18 yé the age of majority, there is no longer a possibility of an ‘emancipated minor. A minor (near the adult age) who misrepresented he was of legal age may be deemed estopped k of capacity." This doctrine, been criticized on the ground that a minor cannot be bound by his representations in the same way that he cannot be bound by his contracts.CRSTERESIEE WIN ERLE meee eo eerEEREEE b. Insane or demented persons; (Art. 1327) i. Contcts entered into during a lucid interval ate valid. (Art. 1328) i, Contracts agreed to in a state of drunkenness or during a hypnotic spell are voidable. (Art. 1328) Notes: (1) The person who questions the sanity of a party to a contract must prove that such party was of ‘unsound mind at the time of the making of the contract. is not sufficient t show that the acting party was judicially declared incompetent several days after she execution of the contract.“ (b) A person suffering from schizophrenia necessarily lose his competence only very slow deterioration of The party who challenges the capacity of the schizophrenic must still show that at the time of the contract, the ‘schizophrenic was not of sound mind.* - Note that in this case, the burden of proof hhas shifted to the party alleging sanity or lucidity ©. Deaf-mutes who do not know how to write. (Art. 3. Othe 1327) er Grounds for Incapacity/Disqualification. The incapacity declared in Article 1327 is subject to the modifications determined by law, and is understood to be without prejudice to special disqualifications established in the laws, (Art. 1329) “8 Rul 92, Section 2, ‘The Rules of Court provide that an “incompetent” person may be placed on guardianship. The word “incompetent” includes:“* i, Persons suffering the penalty of civil interdiction; i Hospitalized lepers; iii, Prodigals; iv. Persons who are deaf and dumb who are unable to read and write; vy, Persons who are of unsound mind, even though they have lucid intervals, and vi, Persons not of unsound mind, but by reason of age, disease, weak mind, and other similar causes, cannot, without outside aid, take care of themselves and manage their property, becoming thereby an easy prey for deceit and exploitation. 1stPPLE UTE RTUE EE Rea eeryEE b. The law also provides for specific disqualifications, such as the disqualification of foreigners to acquire land or the disqualification of spouses to sell to each other. 4, Effect of Incapacity. a. If one of the parties to a contract is incapacitated, the contract is voidable (not void). (Art. 1390) b. If both parties to a contract are incapacitated, the contract is unenforceable (not void). (Arts. 1403[3] and 1407) ~ If a party is disqualified by law, the contract is void. E. VICES OF CoNsENT Consent is essential to the existence of a contract. If consent is absent, the contract is non-existent.” If consent is present, but it was given through mistake, violence, intimidation, undue influence, or fraud, the contract is voidable. (Art. 1330) Consent has the following requisites: (1) it should be intelligent or with an exact notion of the matter to which it refers; (2) it should be free; and (3) it should be spontaneous.® These requisite characteristics are vitiated by the aforementioned vices or defects of consent — intelligence in consent is vitiated ted by violence, intimidation or undue influence; spontaneity is vitiated by fraud.” Defect or lack of valid consent, to make a contract voidable, must be established by full, clear and convincing evidence, and not merely by a preponderance thereof" The presumption is that a person takes ordinary care of his concerns and that private transactions have been fair and regular.*** 1. Mistake. a. In order that mistake may invalidate consent, it should refer to: i. The substance of the thing which is the object of the contract (Art. 1331), or ii, ‘Those conditions which have principally moved cone or both parties to enter into the contract, (Art 1331) (1) Mistake as to the identity or qualifications of one of the parties will: vitiate consent only when such identity or qualifications have been the principal cause of the contract. (Art, 1331) + Identity or qualifications can usually become material in obligations to do (e.g., to perform in a concert or paint a portrait) (2) A simple mistake of account shall give rise to its correction. (Art. 1331) ‘81 Hers of Zambales v. CA, GR. No. 54070, February 2, 1983 163PUPUET We TEE ree fees - This refers to error in mathematical computation, The amount intended wil govern Notes: (1) The concept of enor in Art. 1331 includes ledge with respect to a thing, and (b) mistake properly speaking, which is a wrong existence of some circumstance, fact, or event, which in reality does not exist. In both cases, there is a lack of full and correct knowledge out to be only 18 hectares (2) The error must be the causal, not merely incidental, factor that induced the complaining party to enter into the contract. = Error as to quality (a DVD movie which tumed out to be boring) or as to value (a Jewelry which tumed out to be overpriced) is generally merely incidental. b. ‘be considered valid even if there is a mistake in the designation of its tot number or TCT umber." The remedy here is reformation of instrument. There is no mistake if the party alleging it knew the doubt, contingency or risk affecting the object of the contract. (Art. 1333) i, To invalidate consent, the error must be real and not one that could have been avoided by the party alleging it. An error so patent and obvious that nobody could have made it, or one which could have been avoided by ordinary prudence, cannot be invoked by the one Who made it in order to annul fi, Alleged mistake as to the area of the land or encroachments thereon may be considered inexcusable as it could be avoided through a geodetic survey.** . Mutual error as to the legal effect of an agreement when the real purpose of the parties is frustrated, may vitiate consent, (Art. 1334) i, Asa rule, mistake of law,” or misappreciation of the legal import of the contract, will not vitiate consent.PTS UE SLES ESTEE! agreement; (c) the real purpose of the parties is frustrated. iii, Ar. 1334 may encompass mistake as tothe nature of the contract" Thus, if A promises to lend B a particular thing, and B agrees inthe belief that itis donated to him, there is no contract.“ 4. When one of the parties is unable 10 read, or if the contract is in a language not understood by him, ed mistake or fraud is alleged, the person enforcing the contract must show that the terms thereof have been fully explained to the former, (Art, 1332) (@ Note that Art, 1332 creates a presumption of ‘mistake and fraud, upon a showing that: (1) one of, the parties is unable to read, or (2) the contract is in language not understood by him. If these circumstances are shown, the burden shifts to the ‘other party (Who seeks to enforce the contract) 10 rebut the presumption of mistake and fraud“ (by showing that the contract was fully explained to the disadvantaged party and was freely consented ii, Ifthe illiterate party is the one seeking to enforce the contract, he need not prove that the contracts was fully explained to hit, ‘on the principle that when one a disadvantage on account of his ce, ignorance, indigence, mental 1 488, p04T8, CA, GR No. L40145, July 28, 1982; Leonaro v. CA, GR. No, 125486, 13 , GR, No 40145 uly 29,1962 16 ‘weakness, tender age or other handicap, the courts, ‘ust be vigilant for his protection. (Art. 24) e. Ifa party signed a contract without knowing what it ‘was, there is no consent, and the contract is void.** 2. Violence, a, There is violence when in ordet to wrest consent, serious Requisites of violence as a vice of consent: i. The force must be the determining cause of the contract, or must have caused the consent to be given; fi, The force must be serious or irresistible. b. Violence shall annul the obligation, although it may have been employed by a third person who did not take part in the contract, (Art. 1336) 3. Intimidation. a. There is intimidation when one of the contracting parties is compelled to give his consent by a reasonable and well-grounded fear of an imminent and grave evil upon his person or property, ot upon the person or property of his spouse, descendants or ascendants (Art. 1335) Requisites of intimidation as vice of consent“;ii, ‘The threatened act be unjust or unlawful; - A threat to enforce one’s claim through competent authority, if the claim is just or legal, does not vitiate consent. (Art. 1335) (@) There is nothing unlawful in a threat to sue as a means to enforce a claim, even if a claim proves to be unfounded, as long as the claimant believes it was his right to do criminal charges against a bank teller unless she retuns the proceeds of a spurious check,*? or to fored mortgage unless the debtor promissory notes to restructure the loan, (©) Thus, « threat to file a case for immorality against a bar candidate if he does not marry a gitl he had sex with, does not vitiate consent. iii, The threat must be real and serious, there being an evident disproportion between the evil and the resistance which all men can offer, leading to the choice of the contract as the lesser evil; and iv, The threat produces a reasonable and well- ‘grounded fear from the fact that the person from ‘whom it comes has the necessary means or ability to inflict the threatened injury. To determine the degree of intimidation, the age, sex and condition of the person shall be borne in mind, (Art. 1335) Judgment, and absolutely to act, overcome by force extent that he becomes @ mere automaton and acts mechanically only.‘ ii, A high level of education usually person is less susceptible to intimid Intimidation shall annul the obligation, although it may have been employed by a third person who did not take part in the contract. (Art. 1336) 4, Undue Influence. a ‘There is undue influence when a person takes improper advantage of his power over the will of another, depriving the latter of a reasonable freedom of choice. (Art. 1337) - Undue influence is any means employed upon a party which, under the circumstances, he could not,well resist and which controlled his volition and which otherwise he would not have entered into. It must destroy the-free agency of a party and interfere with the exercise of that independent discretion which is necessary for determining the advantages or disadvantages of a proposed contract." The following circumstances shall be considered (Art. 1337): i. The confidential, family, spiritual and other relations between the parties, or fi, The fact that the person alleged to have been unduly influenced was suffering from mental ‘weakness, or was ignorant or in financial distress. - However, financial distress per se cannot be equated with undue influence.‘ wherein almo: party. The p ; affixing his signature or his ‘adhesion’ to the contract." i. Any ambiguity, obscurity or doubt in a contract of adhesion is construed or, resolved strictly against 170 i. In some exc ignorance, indigence, mental weakness, tender age, and other similar handicap.“ (Art. 24) ional cases, the court may even set aside prejudicial stipulations in an adhes contract (such as a clause on an inconvenient A typical example is transportation tickets, which are usually accepted by passengers or the riding public without paying much attention, particularly when the available common carriers serving a given area are few." Note, however, that contracts of adhesion are not lid per se and not strictly against the law; they as ordinary contracts.*! This is so in contracts entered into by educated persons or by seasoned businessmen, since they are presumed to have acted with due care and to have signed the contracts with full ‘Knowledge of its import.’ The court may also consider the nature of the transaction and the amount of money involved; major transactions involving huge sums of money are naturally deemed to have been entered only with care, deliberation and diligent study. 0, ‘ i ‘ f , ’ } i a ‘Undue influence shall annul the may have been employed by not take part in the contract. (by analogy with Art. 1336) 5. Fraud. In General, There is fed when, through insidious words or machinations of one of the contrecting parties, the other is induced to enter into @ contract which, without them, he would not have agreed to. (Art. 1338) i, “Insidious words or machinations” include false promises, the exaggeration of hopes or benefits, the abuse of confidence, the use of pretended names, qualities, or powers, and the thousand other forms of deceit, by which one may be misled.“ fi, ‘The fraud under Art. 1338 which is deemed a vice of consent refers to that which is employed prior or siraltaneous to the creation of the contract. This should be distinguished from fraud under Art which is fraud in the fulfilment of a contract igation already existing. Fraud under Art. bad faith in the performance of an obligation or a conscious and intentional design to evade the normal fulfillment of existing obligations. fii, Good faith is presumed, and allegations of fraud must be proved by clear and convincing evidence.*” Myers Bung Co, GR. NO. L- b. Classification, The fraud or dolo which is present at the time of birth or perfection o bbe dolo causante ot dolo incidente. i tract may either Dolo causante or causal fraud — insidious words or machinations of one of the contracting parties, through which the other is induced to enter into a contract which, without them, he would not have agreed to. (Art. 1338) (Q) Dolo causante determines ot is the essential the type of fraud which vitiates consent: (2) To vitiate consent, the following requisites must concur: (@ It must have been employed by one contracting party upon the other (Art. 1342 and 134); (b) It must have induced the other party to center into the contract (Art. 1338); (6) Tt mst have been serious (Art. (@ It most have resulted in damage and injury to the party seeking annulment. i. Dolo incidente or incidental fraud — fraud which is not serious in character and without which the other party would still have entered into theUST SUE TELE ETE SE ‘@ Geradezv.CA, GR. No ‘© Song Vv. Gulez Repie, 44 Pi. 47; 213 US. 418 + Dolo incideme refers only to some particulars or accident of the obligations. It merely obliges the person employing it to pay damages, “* (art 1344) ©. Determination of Fraud. i. Failwe to disclose facts, when there is a duty to revesl them, es when the parties are bound by confidential relations, constitutes fraud. (Art. 1339) , the managing director and stockholder of company ABC agent, additional ABC stockholder, Y. X se to Y, that the value of the shares would be greatly enhanced because of a transaction being negotiated. It was held that the purchase was fraudulent. As director, X had the duty to disclose (2) A mortgaged his land to Bank to seoure loan, A then sold the land to Z who assumed the mortgage. Z entered into an agreement with the Bank for the restructuring of A’s loan and for the discharge of the mortgage. Bank later cancelled its agreement with Z when it discovered that the real consideration for A’s sale of the land to Z was much higher than what Bank thought. It was beld that there was no fraud in Z’s to disclose the real consideration for the sale, as Z had no duty to make such disclosure; the bank security 253, February 23,1904 14 remained unimpaired regardless of the consideration of the sale." ii, The usual exaggerations in trade, when the other party had an opportunity to knaw the facts, are not in themselves fraudulent, (Art. 1340) (1) The law allows considerable statements or dealer’s tal seller to exaggerate the value, q) characteristics of his products. The buyer is 1o make the proper inquiries and not products false appearances which are designed to mistead. (0 of the Consumer Act (RA 7394) , deceptive or misleading advertisement” to induce the purchase of ‘consumer products or services. 6of an opinion does not signify Unless (1) made by an expert and (2) the other party has relied on the former's special knowledge. (Art. 1341) resentation by a third person does not vitiate (Art. 1342) Unless substanti (Art. 1342) such mistepresentation has created stake and (2) the same is mutual ~The deceived person has a cause of action the third person who deceived v. Misrepresentation made in good faith is not fraudulent but may constitute error. (Art. 1343) |. Effects of Fraud. i. Dolo causante makes the contract voidable, provided th serious, and (b) has not been employed by i + Dolo causante also renders the person employing it liable for damages. ®* ~The fraud is serious when it is sufficient to ead an ordinarily prudent ii. Dolo incidente onty obliges the person employing itto pay damages. (Art, 1344) F. SIMULATED ConTRACT Definition. Simulation occurs when an apparent contract is a declaration of a fictitious will, deliberately made by agreement of the parties, in order to produce, for the purpose of deception, the appearance of a juridical act which does not exist or really executed.° . Requisites of simulation”: a, An outward declaration of will different from the will of the parties; b. The false appearance must ‘have been intended by ‘mutual agreement; and c. The purpose is to deceive third persons. ion of a contract may be i. Example: When X and Y enters into a sale of land, but did not really intend it; no consideration was given and the land was not delivered. ii, An absolutely simulated or fictitious contract is void (Art, 1346), because consent is totally absentiii, An absolutely simulated contract must be distinguished from a fraudulent contract or (2) In fraudulent alienation, a contract exists and was intended to take effect (for a fraudulent purpose). If intended to defraud a creditor, it may be rescinded by creditors prior to the contract, upon showing that the debtor is insolvent, and within a prescription period of four years. b. Relative Simulation — when the parties conceal their ‘rue agreement, (Art, 1345) i. Example: When X and Y enters into a purported sale of land, but their real intent is for it to be donation, ot equitable mortgage. fi, The real or true agreement is binding on the parties, provided that: (1) Itdoes not prejudice a third person, and @ is not intended for any purpose contrary to law, morals, good customs, public order or public policy. (Art. 1346) *2 Rodrigue v Rdhiguz, 20 SCRA 908 (1867 V Tolentne 817. 18 1. ORJECT OF CONTRACTS. “Object” is the thing, right or service which is the subject matter of the contract (See Arts, 1378 and 1347) ‘The following are the requisites for a thing, right or service to be an object of contracts: ‘A. WITHIN THE COMMERCE OF MAN things which are not outside the commerce of man, ing future things, may be the object of contracts. 347) a Things “outside the commerce of man” are those which are not susceptible of appropriation or private ownership. b. Examples: (j) public office’ and political rights; (ii) purely personal rights, such as those arising from family relations; and properties of public laza,*" airport lands and ads and highways," atershed,*” submerged lands." cc. Even future things may be the object of contracts. (Art 1347) Future things are those which are not yet existing, or not yet owned by the obligor at the time of the contract. (Chavez v. Public Estates Autor, GR No. 119= Thus, a person may sell “future goods”, i, those which are not yet existing at the time of perfection of sale, but are to be manufictured oF acquired thereafter. (Art. 1462) 4. No contract may be entered into upon future inheritance except in cases exptessly authorized by Taw. (Art, 1347) i, Future inheritance is any property or right that a 32 person may in the future acquire by succession. @) A renuncis someone WI @) A partition by the heirs of the property they expect to inherit from someone who is still alive is void," ii, To be considered a “contract upon a future inheritance,” the following requisites must, concur." (1) That the succession has not yet been opened; = Upon the death of decedent, the succession opens, and the heirs may thus enter into conteacts over their shares in the inheritance, even before the settlement of partition ofthe estate."° 5 Blas v, Santos, 114 Phi 1); JLT. Ago, ie. v.Balansag, GR No, 141882, Mach 1 Rosario, GR. No 4963, danury 29,1953. (2) That the object of the contract forms part of the inheritance; and the promissor has, with respect to the ‘an expectancy of a right which is purely iii. The exception referred to in Art. 1347 is a partition xr vivos under Art. 1080. A person may, during , make @ partition of his properties, but ‘such partition takes effect only upon his is revocable at any time during hist 2. All rights which are not intransmissible may also be the object of contracts. (Art. 1347) 3. All services which are not contrary to law, morals, good customs, public order or public policy may likewise be the object of a contract, (Art, 1347) B. PossiBLe Impos (an. things or services cannot be the object of contracts. ) = _ It is impossible foro lessor to undertake the maintenance of the public drainage system; he can only maintain the private pipes or drainage of the leased premises." C. CERTAIN 1. As to Kind, determinate as, 1€ object of every contract must be ts kind, (Art. 1349) ‘Ago In. v. Balansag, GR. No. March 11, 2006 {GueventIndustal Devt Corp. v. Pi. Lenus Amusement Corp, GR. No. 158279, uy 11, an. 181= The object may be generic (a car, a dog). (see Art. ) 2. As to Quantity. The fact that the quantity is not determinate shall not be an obstacle to the existence of the contract, provided it is possible to determine the same, without the need of a new contract between the partes. (Art. 1349) = The quantity must at least be determinable, based on circumstances stipulated in the contract. IV. CAUSE OF CONTRACTS A. INGENERAL L Definition. Cause is the essential reason which moves the contracting parties to enter into it. In other words, the cause is the immediate, direct and proximate reason which justifies the creation of an obligation through the will of the ‘contracting parties.“ = Although the term consideration is often used interchangeably with cause or “causa”, the two are not exactly similar. “Causa” is broader than consideration (an Anglo-American legal concept), as “causa” encompasses even a natural obligation and pure liberality as sufficient cause for a contract. 2. Cause of Contracts. a, In onerous contracts, the cause i each contracting party, the thing or service by the other. indetstood to be, for or promise of a 0) i. In a sale, the cause consists of the seller’s undertaking to deliver the property and the buyer’s ‘undertaking to pay the purchase price. The cause should not be confused with the object, which is the thing sold. ii, In mortgage, surety, guaranty or “accommodation”, the cause is the same as that of the principal obligation secured by the mortgage, surety, guaranty or accommodation, #! - This is true even if the mortgagor, surety, guarantor or accommodating party is a third party or stranger to the principal obligation. b. In remuneratory contracts, the cause is the service or benefit which is rermaneratod. (Art: 1350) = Bonuses granted to employees to excite their zeal and efficiency, with consequent benefit for the employer, do not constitute donation having liberality for a consideration."i. This covers contracts designed solely and exclusively sure the welfare of the benefici any intent of producing any satisfac jonor or without serving the self-interest of the donor. ** ii, Examples: commodatum; donation. B. DISTINGUISHED FROM MOTIVE: The particular motives of the contract, motive is the particular reas into a contract and which does not affect the other party." 1 s undertaking to deliver a computer to him, motive may be different, e.g, to be able to surf the internet, or edit his photos, or start an online business. 2. Ordinarily, a party's motives for entering into the contract do not affect the contract. A party's motive does not even hhave to be known to the other party. 3. However, as an exception, the motive may be regarded as the cause “when the motive predetermines the cause”, ie., when the contract is conditioned upon the attainment of the ‘motives of one of the contracting partes.°”” Distance Co. vs. Jeturan, GR. 7756, July 30, 195, cod n Liguezv. CA, C. EXISTENCE OF CAUSE: Contracts must have a cause, a essential requisit a, Example 1: In a case where the National Housing ‘Authority bought lands to be used for housing, there is a failure of cause when it turned out that the lands are not suitable for housing.*”* b. Example 2: Where the owner of a company transferred his shares to a government crony with the motive of obtaining 2 goverment contract, the motive was deemed the (illegal) cause.” le 3: Where a man donated land to a woman 1€ motive of getting her to agree to have sexual ith him, the motive was deemed the (illegal) cause. isan effect Contracts without cause produce whatever (Art. 1352), ie, void 1. Presumption. Although the cause contract, i the debtor proves the contrary. (Ast. 1354) not stated in the lawful), unless . Distinguished from Failure to Pay the Consideration. consideration. The former prevents the contract, while the latter results in a right to demand the fulfillment or cancellation of the obligation under anWhere the deed of sale states that the purchase price has been paid but in fact has never been paid, the deed of sale is void ab initio for lack of consideration 3. Manner of Payment, In a contract of agreement on the manner of payme element. The agreement goes into the price, such the the manner of ‘payment is tantamount to a failure to agree on the price or consideration ™ D. LEGALITY OF Cause: The cause must be legal. Contracts with unlawful cause produce no effect whatever (Art. 1352), ie. void. 1. Presumption. The cause is presumed lawful, Although the cause is not stated in the contract, it is presumed that it (exists (an. 1354) lawful, unless the debtor proves the contrary. 2. Unlawful Cause. The cause is unlawful if itis contrary to law, morals, good customs, public order or public policy. (Art. 1352) Examples: a, The termination of marital celations is an unlawful consideration which renders the contract void ** b. Am agreement to stifle the prosecution of a person charged with a crime, for a pecuniary or other valuable consideration, is contrary to public policy and the due administration of justice. ©. Where the owner of a company transferred his shares to a government crony with the motive of obtaining ernment contract, the motive was deemed the d. Where a man donated land to a woman with the motive of getting her to agree to have sexual relations with him, the motive was deemed the (illegal) cause."* 3. False Cause, The statement of a false cause in contracts shall render them void, unless it should be proved that they ‘were founded upon another cause which is true and lawful (Art. 1353) E, ADEQUACY OF CAUSE L. General Rule. As a general rule, lesion (injury) or inadequacy of cause shall not invalidate a contract. (Art. 1355) = The law does not require that the price or consideration ve @ party from the unprofitable contract or bad 2. Exceptions — a, In cases specified by law. (Art. 1355)i, Under Art, 1381, contracts which are entered into in behalf of wards or absentees are rescissible if they suffer Jesion by more than one-fouith of the value of the things which are the object of the contracts. JF there fas been fraud, mistake or undue infiuence. (Ant 1355) i. Lesion or inadequacy of price may indicate that the consent (of the party suffering lesion’) was vitiated by fraud, mistake or undue influence, witich renders the contract voidable. 188 Chapter 8 Form of Contracts L_ INGENERAL A. GENERAL RULE: FORM Nor NECESSARY. 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) 1, Our contractual system upholds the that possesses the three validating elements of consent, subject matter, and causa.“ - For example, the following contracts are consensual, and are thus valid even if they are merely oral:3. However, the binding effect of oral contracts is generally limited to the contracting parties (inter partes). ‘The law ' registration for a contract to be binding on ;, and an oral contract cannot be registered reduced into a public document. B. EXCEPTIONS: WHEN FORM IS NECESSARY, Article 1356 of the Code establishes only two exceptions, to wit: 1. When Required By Law for Validity or Enfor: Form is necessary for contracts for which the I requires that they be in some particular form (writing) in order to make them valid and enforceable. = These are called solemn or formal contracts. The following are examples: (1) Donation of immovable property, which the law squires to be embodied in a public order “that the donation may be , existing or binding, (2) Donation of movables worth more than P5,000.00 ‘which must be in writing, “otherwise the donation shall be void” (Art, 748); (3) Contracts to pay interest on loans (nnutuum) which ipulated in writing” (Art lity of carrier to a diligence, which ‘must be in writing and signed by the shipper/owner of the goods (Art, 1744); ‘S00 Campo v, CA, GR. No, $8483, 29,188, 190 (5) Contract of partnership when an immovable is contributed — there must be an inventory of the (© Real estate mortgage (Art. 1874); and (D) Contract of antichresis, wherein the amount of principal and interest must be specified in writing. (Art. 2134) 2. When Required by Law to Prove the Contract. Form is necessary for contracts that the law requires to be proved by some writing (memorandum) of its terms, as in those covered by the old Statute of Frauds, now Article 1403(2) of the Civil Code. a. Their existence is not provable by mere oral testimony or parol evidence. b. The form required is for evidentiary purposes only. Thus, the Statute of Frauds would not apply if: i. The contract is wholly or partly executed, or ji, The parties permit a contract to be proved, without any objection.” Note: In the foregoing exception cases, the requirement of form is absolute and indispensable, (Art. If the formal requirement has not been complied with seek its enforcement or compel compliane requirement (Art, 1356), because the Yaw does not recognize any existing or enforceable contract to begin with, Domalagan v. Bolter, 33 Pi tober 20, 2004, 1915-1916), Swedish Match, AB v. CA, GR, No, 128120, 191Il, FORMAL REQUIREMENT AS A MATTER OF CONVENIENCE ‘A. IN GENERAL: If the law requires a document or other special form, such as in the acts and contracts enumerated in Article 1358 (infra), the contracting porties may compel each other to observe that form, once the contract has been perfected. (Art. 1357) 1. This right may be exercised simultaneously with the action ‘upon the contract, (Art, 1357) 2. This right presupposes the existence of a valid contract. It is not available or cannot be exercised for c ere form is necessary for validity/enforceabilit solemn contracts) or for proving the contracts contracts covered by the Statute of Frauds). (Art. supra) B. PUBLIC DOCUMENT REQUIREMENT 1. Under Art. 1358, the following must appear in a public document: 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 are govemed by Articles 1403, No. 2, and 1405, ie, they must appear in writing (even a private document) to be enforceable; b. The cession, repudiation or renunciation of hereditary rights or of those of the conjugal partnership of gains; Sov. Baoso, 53 . 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 thind person; d, The cession of actions or rights proceeding from an act appearing in a public document. 2. The foregoing requirement of a public document in Art 1388 is only for convenience, not for validity or enforceability." = Thus, failure to follow the proper form (eg, non- ‘appearance before the notary public) does not invalidate the contract. The parties can simply compel each other to observe that form, once the contract has been perfected.” PRIVATE DOCUMENT (AT LEAST): Contracts Art. 1358 provides that “all other contracts where the amount involved exceeds five hundred pesos must appear it private one. But sales of goods, chattel governed by Articles, 1403, No. 2 and = This does not mean that contracts involving more than PS00 are void or unenforceable if not in writing, It is not enough that be in writ farther pres should require that the contract Delos Angeles, GR. No. L-27010, Api 20,1858 193the contents of the written agreemer One of the Chapter 9 exceptions to the parol evidence rule is “the failure of the ‘written agreement to express the true intent and agreement Reformation of Instruments of the parties.” 3. In an action for reformation of instrument, the court does I. INGENERAL not attempt to make another contract for the parties, but ‘| simply confirais and perpetuates the real contract between } A. NATURE: Reformation is a remedy (originally in equity), the parties." is made or construed so as to i express or conform to the real intention of the parties, where ~ Reformation involves a determination of the true intent § some mistake, fraud, inequitable conduct or accident has of the parties. It involves a question of fact and not a 5 occurred or been committed. In granting reformation, the court mere question of law, and is different from mere } is not making a new contract for the parties, but establishing interpretation of the contract. ‘and perpetuating the real contract between the parties which, * under the technical rules of law, could not be enforced but for B. PURPOSE: Equity orders the reformation of an instrument in j such reformation 5 order that the true intention of the contracting parties may be ; expressed. The rationale of the doctrine of reformation is that it & Art, 1359 provides that when, there having been a meeting of ‘would be unjust and inequitable to allow the enforcement of a ; the minds of the partis to a contract, their true intention is not ‘written instrument which does not reflect or disclose the real i ed in the instrument purporting to embody the ‘meeting of the minds of the parties. by reason of mistake, fraud, inequitable conduct or accident, one of the parties may ask for the reformation of the C. Reguistres™ instrument to the end that such tme intention may be expressed, 1. There must have been a meeting of the minds of the parties i. 1. If mistake, fraud, ine le conduct, or accident has to the contract; d prevented a mecting of the minds of the patties, the proper remedy is not r of the instrument but annulment 2. The instrument does not express the true intention of the a of the contract. (Art, 1359) partes; and i 4 2. Reformation is an exception to the parol evidence rul ‘I that “when the terms of an agreement have been red ‘writing, itis considered as containing all the terms agreed ‘upon and there can be, between the parties and their successors in interest, no evidence of such terms other than {#8 Quiosv, jana, GR. No, 158601, March 8, 2004, 42 ‘Not. Corp.. Stavat Mg. Senioes Corp. GR. No, 157430, 194~The presumption is that an instrument sets out the true agreement of the parties thereto"; thus, proving otherwise is on the party who insists that the contract should be reformed.“ 3. The failure of the instrument to express the true intention of the parties is due to mistake, fraud, or accident. 7 IL. SPECIFIC INSTANCES OF REFORMATION ‘A. MUTUAL MISTAKE: When a mutual mistake catises the failure of the instrument to disc agreement, said instrument may be reformed, ( B. MISTAKE By ONE PARTY 1, Mistake By One Party; Fraud or Inequitable Conduct By the Other. If one party was mistaken and the other acted fraudulently or inequitably in such a way that the instrument does not show their true intention, the former ‘may ask for the reformation of the instrument. (Art. 1362) a. Example 1: When the parties agreed on a contract of lease, but one of the parties surreptitiously inserted certain stipulations which were not agreed upon." b, Example 2: When the parties agreed to a sale subject to condition of repurchase unbeknownst to the plaintiff \.Inlemedate Apple Cou, G.R. No. 7697, Jenuary 20,1888, /entues Capital & Mg. Corp. v. Stalwart Mgt. Serves Comp, GR. the language in which the ; Concealment By the Other. ‘When one party was mistaken and the other knew or believed that the instrument did not state their real agreement, but concealed that fact from the former, the instrument may be reformed. (Art. 1363) C. IGNORANCE, LACK OF SKILL, NEGLIGENCE OR BAD FAITH: When through the ignorance, lack of skill, negligence or bad intention of the parties, the courts may order that the instrument be reformed. D. SALE WHICH I REALLY A MORTGAGE OR PLEDGE: If two parties agree upon the mortgage or pledge of real or property, but the instrument states that the property is sold absolutely or with a right of repurchase, reformation of the instrament is proper. (Art, 1365; see also Arts, 1602-1605) Ill. WHEN REFORMATION IS NOT PROPER A. GRATUITOUS ACTS: There shall be no reformation in the following cases: (Art, 1366) 1. Simple donations inter vivos wherein no condition is imposed; and 2. Wills = Donations and wills are purely gratuitous dispositions of property, so the law will not normally interfere with *1 Ong Chua v Cart, 53 Phihhow the donor or testator wanted to dispose of his Property. ~ Art. 789 provides that “when there is an'imperfect description, or when no person or property exactly answers the description, mistakes and omissions must be corrected, if the error appears from the context ofthe will or from extrinsic evidence.” This refers merely to erpors or imperfections in the

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