Oblicon

Obligations and Contracts: Essential Notes

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

Notes: Definition NOT comprehensive -does not say WHO should DO WHAT -does not say WHO should DO the giving/ receiving -no names/parties of obligation -obligation above is only CIVIL OBLIGATION -does NOT include NATURAL OBLIGATION

1423 – Natural Obligation Not being based on positive law but on equity and natural law, do NOT grant a right of action to enforce their performance, but voluntary fulfillment by the obligor, they authorize the retention of what has been delivered or rendered by reason thereof.

Important on Natural Obligation Duty not to recover what has VOLUNTARILY been paid although payment was NO longer required. Note: Debtor must KNOW that he no longer may be compelled to pay (prescribed). Otherwise rule will not apply.

Definition - Juridical relation, created by virtue of certain facts, between two or more persons, whereby one of them, known as the creditor or obligee, may demand of the other, known as the debtor or obligor a definite prestation.

Elements -Active subject -Passive subject -Object/prestation -Efficient cause/juridical tie

Requisites of Prestation -Physically/legally possible -Determinate/determinable -Has a possible equivalent in money

1157 Sources of Obligation -Law -Contracts -Quasi contracts -Acts or omissions punishable by law, and -Quasi delict

Sources are Exclusive SC in Sagrado Orden de Predicadores vs. Nacoco (91 Phil 503) declared— “The occupant’s obligation to pay rentals, like any other obligation, must arise from law, contract, quasicontract, crime or negligence. If occupant took possession of the property with the permission of the Alien Property Custodian, without any express or implied agreement between them that rentals would be paid for the use and occupation of the enemy property, NONE may be recovered by pre-war owner.”

1158 Obligations arising from LAW never presumed -Hence, in cases of doubt, presumption is AGAINST the existence of an obligation arising from a particular law

- No agreement is necessary obligation ex lege can arise.

before

Example: One who gambles and wins can be compelled by loser to return the winnings (Art. 2014)

- Action is called “INDEBITATUS ASSUMPSIT” (Leung Ben vs. O’Brien, 38 Phil. 182)

So-Called Innominate Contracts (CONTRATOS INNOMINADOS)

i.Du ut des – I give that you may give ii.Du ut facias – I give that you may do iii.Facio ut des – I do that you may give iv.Facio ut facias – I do that you may do

Pelayo vs. Lauren “xxx This liability (to support) originates from the xxx mutual obligation which the law has expressly established between the married couple. Within the meaning of the law, the father and mother-in-law are strangers with respect to the obligation that devolves upon the husband to provide support xxx of medical assistance to his wife xxx it does not appear that a contract existed between the defendants and plaintiff physician xxx.”

1159 Obligation’s arising from CONTRACTS have the force of law between the contracting parties and should be complied with in good faith.

Except: Those contrary to law, morals, good customs, public order, public policy.

In Cui vs. Arellano University, the Supreme Court declared that the stipulation that a student’s scholarship is good only if he continues in the same school and that he waives his right to transfer without refunding the equivalent of his scholarship grant in cash is contrary to public policy, xxx is NULL and VOID. N.B. Does not apply if employee given scholarship to study. Employer may require to stay

Scholarship are awarded in recognition of merit and “to help students in whom society has an established interest or first lien” and not to keep outstanding students in school to bolster prestige and increase its business potential.

NOTE: Obligations arising from CONTRACT need NOT always be EXPRESS (like those from LAW). They may be IMPLIED.

Aldaba vs. CA, et al. (27 SCRA 263) Issue: Was there a contract whether express or implied? Ruling: No express agreement to pay for the services rendered. No implied contract also because xxx petitioner did not expect to be paid for the services. xxx When a person does not expect to be paid for his services there cannot be a contract implied in fact to make compensation for said services.

To give rise to an implied contract to pay services, they must have been rendered by one party in EXPECTATION that the other party would pay for them xxx and ACCEPTED by the other party with KNOWLEDGE of the expectation.

Quasi-Contracts Those juridical relations arising from lawful, voluntary and unilateral acts, by virtue of which the parties become bound to each other, based on the principle that no one shall be unjustly enriched or benefited at the expense of another. (Art. 2142)

Kinds of Quasi-Contracts 1)Negotiorum Gestio – voluntary management of the property or affairs of another without the knowledge or consent of the latter. (Art. 21442153)

2)Solutio Indebiti – juridical relation which is created when something is received when there is no right to demand it and it was unduly delivered by mistake. (Art. 2154-2163) 3)Other cases (Art. 2164-2175)

Negotiorum Gestio: Requisites 1)Gestor must voluntary assume agency or management; 2)Business or property must be neglected or abandoned; 3)Agency/management must not be authorized by owner either expressly or impliedly; 4)Assumption of agency/management must be made in good faith.

Illustration: X abandoned his fishpond in Marawi. He fled to Manila. Y seeing fish in the pond for harvest, took possession, harvested fish and sold the harvest to Z. Then Y borrowed money from W to buy supplies of fish fry and prepare fishpond for next crop.

Issues: i.Juridical relation between X and Y? • • •

QC-NG Y-gestor; X-owner/beneficiary Officious manager (Art. 2144)

ii.Obligation of Y to X as regards contract of Z? •

Y must account of his operations and deliver to X price of harvested fish (Art. 2145)

iii. Obligation of X as regards Y’s contract with W? •

X must pay loan to W. X must answer for obligations incurred with 3rd persons in his interest. (Art. 2150)

iv. Legal effect of X expressly ratifies Y’s management? •

Shall create express agency and X is liable to pay commissions habitually received by gestor. (Art. 2149)

Solutio Indebiti: Requisites (Art. 2154) 1)There must be payment; 2)Person who made payment was under NO obligation to do so; 3)Payment was by mistake

Classification of Obligations Based on Prestation I.Real Obligations – to give (a) Real obligation to give specific object (b) Real obligation to give generic object

II.Personal Obligations – to do, not to do, not to give (a) Positive personal obligation – to do or to give (b) Negative personal obligation – not to do or not to give

REAL OBLIGATIONS Specific Determinate Principal – Art. 1244 ‘The debtor of a thing cannot compel the creditor to receive a different one, although the latter may be the same value as, or more valuable than that which is due.”

Generic Indeterminate Art. 1246 ‘xxx the creditor cannot demand a thing of superior quality. Neither can the debtor deliver a thing of inferior quality.’

Supplemental – Art. 1163 ‘xxx also obliged to take care of it with Not applicable the proper diligence of a good father of a family. Except :(a) law requires another (b) agreement states another

Specific Determinate

Generic Indeterminate

Art. 1166 ‘Deliver all accessions and Ibid. accessories of the thing although not mentioned.’ Not applicable

Art. 1165, par. 1; Art. 1170 ‘Liable for damages in case of breach by the debtor due to delay, fraud, negligence and COTOTTO.’

Art. 1165, par. 2 ‘Creditor may ask that the obligation be complied with at the expense of the debtor.’ Art. 1170 ‘Liable for damages in case of breach due to delay, fraud, no negligence and COTOTTO.’

PERSONAL OBLIGATIONS POSITIVE

NEGATIVE

Art. 1244, par. 2 Art. 1244, par. 2 The “xxx act xxx cannot be The “xxx forbearance cannot be substituted by another act xxx substituted by another xxx against obligee’s will.” forbearance against the obligee’s will.” Art. 1167 - Have the obligation performed or executed at the expense of obligor - Ask what has been poorly done be undone - Recover damages Except: when the personal qualification of the obligor is the principal motive of the obligation

Art. 1168 - If the obligor does what he has been forbidden, obligee can have it undone at obligor’s expense - Recover damages Except: (1) Effects of the act which is forbidden are definite in character; (2) It is physically or legally impossible to undo what has been done

 No specific performance  No involuntary servitude

Kinds of Breach of Obligations

1)Involuntary – debtor is unable to comply with his obligation because of fortuitous event Note: Debtor is NOT liable for damages.

2) Voluntary – debtor, in the performance of the obligation, is guilty of: (a) Default (mora) (b) Fraud (dolo) (c) Negligence (culpa) (d) Breach through contravention of tenor of the obligation Note: Debtor is liable for damages.

A. Default (Mora): Delay in the fulfillment of the obligation with respect to time. -Must be either malicious or negligent -If due to inadvertence without any malice of negligence, the obligor cannot be liable under Art. 1170 (RCBC vs. CA, G.R. No. 133107, March 25, 1999)

Requisites in order to consider the obligor in default 1)Obligation is demandable and already liquidated 2)The obligor/debtor delays performance 3)The creditor requires performance judicially or extra-judicially (demand) (SSS vs. Moonwalk Devt. and Housing Corp., G.R. No. 73345, April 7, 1993)

Kinds of Default 1)Mora solvendi – delay of the debtor to perform his obligation a) Ex re – obligation is to give b) Ex persona – obligation is to do

There is no mora solvendi in: -Negative obligation -Natural obligation -Alternative obligation

2) Mora accipiendi – delay of the creditor in accepting delivery of the thing which is the object of the obligation Requisites: a) Offer of performance by the creditor who has the required capacity; b) Offer is to comply with the prestation as it should be performed; and c) Creditor refuses the performance without just cause.

Remedy: d) Consign it in court e) Keep it to himself (not liable for damages)

3) Compensatio morae – delay of the parties or obligors in reciprocal obligation

Rules on Default 1)Unilateral Obligation Demand is necessary. No demand-no delay. Mere expiration of the period fixed by the parties will not cause delay. Except: a)Express stipulation that demand is not necessary b)The law EXPRESSLY so declares (i.e., taxes) c)Time is of the essence of the contract • Barzaga vs. CA

d)Demand would be useless (i.e., debtor voluntarily destroy the thing) •Jimmy Co v. CA; Broadway Motors (23 June 1998)

Pantaleon vs. American Express (May 8, 2009) Unreasonable delay in approving/ disapproving credit card purchase is MORA SOLVENDI, subject to damages. N.B. Delay was committed in the obligation to process loan (for approval or disapproval) NOT in an obligation to release LOAN

Barzaga vs. CA (Feb, 12, 1997) Materials necessary to be delivered in a particular date so as to complete construction of Niche before Christmas and to bury the dead before Dec. 25 as requested by the deceased – FAILURE is delay that justifies damages – no demand necessary – time was MOTIVE

Lorenzo Shipping Corp. vs. BJ Mathel International (Nov. 19, 2004) -No delay is incurred in the delivery if NO demand was made by creditor -By accepting the cylinders that were delivered after default, creditor waived his right to sue for damages based on Art. 1169

2) Reciprocal Obligation Fulfillment by both parties should be simultaneous; one party incurs delay from the moment the other party fulfills his obligation, while he himself does not comply or is not ready to comply in a proper manner with what is incumbent upon him. (Art. 1169) Except: When different dates for the performance of obligation is fixed by the parties. Demand is necessary in such case.

In Solar Harvest vs. Davao Corrugated Carton Corp. (July 26, 2010), SC said “in reciprocal obligations xxx the general rule is that the fulfillment of the parties’ x x x obligation should be simultaneous. Hence, NO DEMAND x x x necessary because once a party fulfills his obligation and the other party does not x x x the latter automatically incurs in delay. But when different dates for performance xxx are fixed, the default xxx must be determined by the rules given by the first paragraph (Art. 1169) xxx incur delay ONLY from the moment the other party demands fulfillment xxx.”

B. Fraud (Dolo): Conscious and intentional proposition to evade the normal fulfillment of an obligation -Implies some kind of malice or dishonesty and cannot cover cases of mistake and errors in judgment made in good faith. In such case, obligor can be held liable for damages. -There is deliberate and intentional evasion of normal fulfillment of obligation

Civil Frauds Distinguished Fraud/Dolo in the Performance Art. 1170 Present only performance of obligation

Causal Fraud (Dolo Causante or Dolo Incidente) Arts. 1338 and 1344

during the Present only during the time of a pre-existing birth or perfection of the obligation

Purpose is to evade the normal Purpose is to secure the consent of fulfillment of the obligation the other to enter into a contract Results in the non-fulfillment or Results in the vitiation of consent breach of the obligation Gives rise to a right of the obligee Gives rise to a right of an innocent to recover damages from the party to annual the contract debtor and not a cause of annulment of contract Valid obligation

Voidable obligation

Cathay Pacific Airways vs. Vazquez (Mar. 14, 2003) Upgrading of passengers from Business Class to First Class in this case was NOT FRAUD. The airline informed passengers of the change. There were no insidious words or deceitful machinations or wilful concealment of material facts.

C. Negligence (Culpa): Any voluntary act or omission, there being no malice, which prevents the normal fulfillment of an obligation Kinds: 1)Civil Negligence a) Culpa contractual b) Culpa aquiliana/quasi-delict 2)Culpa Criminal

Meralco vs. Ramoy (March 4, 2008) Meralco cutting the electric power of customers on the basis solely of NPC request to cut power of houses in NPC property already ordered evicted by final judgment and finding in fact that the house of Ramoy was not in NPC property was NEGLIGENCE.

Carnapping Not Necessarily Fortuitous Event Jimmy Co vs. CA, Broadway Motor Corp. June 22, 1998

Ruling: It is not a defense for a repair shop xxx to escape liability xxx because the damage or loss xxx was due to carnapping. Carnapping per se cannot be considered as fortuitous event. The fact that a thing was unlawfully and forcefully taken from another’s rightful possession xxx does not automatically give rise to fortuitous event.

To be considered xxx it must be proved and established that the event was an Act of God or was done solely by third party and that the claimants or person alleged to be negligent has any participation.

NOTE: Defendant was also held already in legal delay. For the car was lost three (3) days after the obligation to deliver. No demand was required, apparently because it was “useless.” Car was not working.

NOTE: Art. 2001 The act of a thief or robber who has entered the hotel is NOT deemed force majeure, unless it is done with the use of arms or through irresistible force.

Sicam vs. Jorge, 529 SCRA 443 Robbery per se, just like carnapping, is not a fortuitous event. It does not foreclose the possibility of negligence on the part of the obligor. The unforeseen event, the robbery, must take place without any concurrent fault on the debtor’s part in order to be appreciated as a fortuitous event under Article 1174 of the NCC.

The robbery took place in the pawnshop under the control of petitioners. Petitioners had the means to screen the persons who were allowed entrance and to protect itself from unlawful intrusion but it failed to exercise precautionary measures. Hence, the robbery was not considered fortuitous event because of concurring negligence on the part of the petitioners.

BUT…

Reminders: In Hernandez vs. Chairman, COA, disbursing officer of PTA encashed check for salaries of employees when he was robbed inside a passenger jeepney in broad daylight on a busy highway and in the presence of other passengers. The Court held the robbery here was a fortuitous event because it could not be the result of the victim’s imprudence and negligence. Here, there was no concurring negligence on the part of the disbursing officer.

Tire Blow Out The explosion of the new tire may not be considered a fortuitous event. There are human factors involved in the situation. The fact that the tire was new did not imply that it was entirely free from manufacturing defects or that it was properly mounted on the vehicle. Neither may the tire bought is of a brand name noted for quality, that it could not explode within five days’ use. It is settled that an accident caused either by defects or through the negligence of its driver is not a caso fortuito that would exempt the carrier from liability for damages. (Yobido vs. CA, Oct. 17, 1997; Juntilla vs. Fontanar, May 31, 1985)

Mechanical Defect In a vehicular accident, a mechanical defect will not release from liability if shown that the accident could have been prevented had he properly maintained and taken good care of the vehicle. (Perla Compania De Seguros Inc. vs. Sarangaya, 474 SCRA 191)

1997 Asian Financial Crisis The 1997 financial crisis that ensued in Asia did not constitute a valid justification to renege on obligations—the Asian financial crisis in 1997 is not among the fortuitous events contemplated under Art. 1174 of the Civil Code. (Fil-Estate Properties vs. Go, 530 SCRA 621)

D. Breach through contravention of tenor of contract -Includes not only any illicit act which impairs the strict and faithful fulfillment of the obligation, but also every kind of defective performance The following do not excuse fulfillment: 1)Increase in cost of performance 2) Poverty 3)War between the subjects of a neutral country

Cathay Pacific Airways vs. Vasquez “The Vasquezes had the right to waive the PRIORITY (FIRST CLASS) and by Cathay’s imposing the UPGRADE, it breached its contract of carriage with the Vasquezes. However, since there is no bad faith or fraud on the part of Cathay, the Sps. Vasquez are only entitled to nominal and NOT moral damages.”

Areola vs. CA & Prudential Guarantee & Insurance Held: Prudential act of cancelling the insurance policy entitles Areola to damages. Even if no harm/damage was done there was a BREACH because there’s supposed to be continuity in Insurance.

Defense Fortuitous event (Art. 1174) -Acts of God -Acts of Man

Requisites: 1)Event must be independent of the will of the obligor; 2)It must be either unforeseeable or inevitable; 3)Must be of such a character as to render it impossible for the obligor to fulfill his obligation in a normal manner; and 4)Obligor must be free from any participation in the aggravation of the injury resulting to the obligee.

Liability in case of fortuitous event: NO LIABILITY Except: 1)When expressly declared by law (e.g. Arts. 552 (2), 1165 (3), 1268, 1942, 2147, 2148 and 2159 NCC)

2)When expressly declared by stipulation or contract 3)When the NATURE of the obligation requires the assumption of risk 4)When the object of the prestation is generic

Tanguiling vs. CA (Jan. 2, 1997) JMT contracted to build windmill. Downpayment and partial payment made but complete payment was denied because the windmill collapsed due to strong wing. Held: Not fortuitous event because foreseeable event that strong winds are present in windmills places. Windmill should not have collapsed if there was no defect.

Nakpil & Sons. vs. CA (Oct. 3, 1986) Earthquake that destroyed building IS NOT FORTUITOUS EVENT that exempts designers/contractors from liability if there were alterations of the plans and specifications that have been stipulated with building owner.

Republic vs. Luzon Stevedoring (21 SCRA 279) Presumption of negligence; case at bar. – Considering that the Nagtahan bridge was an immovable object and xxx provided with adequate openings for the passage of water craft xxx the unusual event that the barge xxx rammed the bridge support raises a presumption of negligence xxx.”

The precautions taken by it on the day in question: that it assigned two of its most powerful tugboats to tow down river its barge; that it assigned to the task the more competent and experienced among its patrons, had the towlines, engines and equipment doublechecked and inspected; it instructed its patrons to take extra precautions; and concludes that it had done all it was called to do, and that the accident, therefore, should be held due to force majeure or fortuitous event.

These very precautions, however, completely destroy the appellant's defense. For caso fortuito or force majeure (which in law are identical in so far as they exempt an obligor from liability) xxx. It is xxx not enough that the event should not have been foreseen or anticipated, as is commonly believed, but it must be one impossible to foresee or to avoid. The mere difficulty to foresee the happening is not impossibility to foresee the same: xxx

Otherwise stated, the appellant, xxx knowing xxx the perils xxx voluntarily entered into a situation involving obvious danger; it therefore assured the risk, and can not shed responsibility merely because the precautions it adopted turned out to be insufficient. xxx

Far East Bank & Trust Co. vs. CA Facts: Luis and Clarita Luna filed an action for damages against Far East Bank and Trust Company when it cancelled his FAREAST CARD after Clarita Luna lost her supplemental credit card. Luis Luna was forced to pay in cash when he tendered a despedida lunch for a close friend at the Bahla Rooftop Restaurant of the Hotel Intercontinental Manila and his card was not honored. Issue: Whether or not Far East Bank is liable for damages.

Held: Far East Bank is liable for nominal damages. Far East Bank’s neglect to inform Luis Luna of the cancellation of his card constitutes only simple negligence. If Far East Bank’s omission was gross negligence and is therefore, tainted with bad faith, it would have been liable for moral damages.

Salugada vs. FEU (Apr. 30, 2008) “We find that respondents failed to discharge the burden of proving that they exercised due diligence in providing a safe learning environment for their students. They failed to prove that they ensured that guards met the requirements. xxx”

“A school should not be allowed to completely relinquish or abdicate security matters in its premises to security agency. To do so would result to contracting away its inherent obligation to ensure a safe learning environment for students.”

Extinguishment of Interest and Prior Installments (Art. 1176) Receipt of the principal (or later installment) without reservation as to the interest (or prior installment) shall give rise to a disputable presumption that the interest (or prior installment) has been paid.

However, presumptions do not apply: 1)When there is a reservation made orally or in writing 2)If the receipt does not recite that it was issued for a particular installment due as when the receipt is only dated 3)To payment of taxes 4)Where non-payment of the prior obligations has been proven

Compare with Art. 1235 “When the obligee accepts the performance, knowing its incompleteness or irregularity, and without expressing any protest or objection, the obligation is deemed fully complied with.”

(Above is CONCLUSIVE PRESUMPTION)

Remedies of Creditor to Protect Credit (Art. 1177) 1)Cession (1250) – to exhaust the property in possession of the debtor generally by attachment, subject to exemptions provided by law. 2)Accion pauliana – to impugn all the acts which the debtor may have done to defraud them by means of rescissory action at the instance of the creditor who is prejudiced. 3)Accion subrogatoria – to be subrogated to all the rights and actions of the debtor save those which are inherent in his person.

Transmissibility of Rights Acquired by Virtue of an Obligation (Art. 1178) General Rule: Rights acquired by virtue of an obligation are transmissible in character Except: 1)When prohibited by LAW which are purely personal in character 2)When prohibited by PERSONAL QUALIFICATION or circumstances of the transferor which is material ingredient attendant in the obligation 3)When prohibited by STIPULATION of the parties

PURE OBLIGATION The effectivity or extinguishment does not depend on the fulfillment or non-fulfillment of a condition or on the expiration of a term or period, and is immediately demandable. (1179, par. 1) Seone vs. Franco, 24 Phil 309 – debtor promise to pay debt “little by little” is an obligation with period subject to Art. 1197.

CONDITIONAL OBLIGATION •Suspensive Condition The effectivity is subordinated to the fulfillment or non-fulfillment of a future AND uncertain fact or event. (1181)

•Resolutory Condition Extinguishment of obligation is dependent upon fulfillment of condition.

In Central Philippines University vs. CA (July 17, 1995), when a person donates land on condition that donee would build a school on land, condition is NOT suspensive BUT resolutory.

Effects of Failure to Comply with Condition 1)PERFECTION of a contract – results in the failure of the contract 2)PERFORMANCE of the obligation – gives the other party an option to refuse to proceed with the compliance of the obligation or to waive the condition. (i.e., Contract to Sell)

Article 1545 “Where the obligation of either party to a contract of sale is subject to any condition which is not performed, such party may refuse to proceed with the contract or he may waive performance of the condition. xxx"

OBLIGATION WITH A PERIOD Those whose demandability or extinguishment is subject to the expiration of a term or period. Term/Period Interval of time, which, exerting an influence on an obligation as a consequence of a juridical act, either suspends its demandability or produces its extinguishment Requisites: 1)Future; 2)Certain; and 3)Possible, legally and physically

Note: When obligation is demandable at once— 1)Pure obligations (Art. 1179, par. 1) 2)Obligations with a resolutory condition

(Art. 1179,

par. 2)

3)Obligations with a resolutory term (Art. 1193, par. 2) 4)Obligations with a condition not to do an impossible thing (Art. 1183, par. 2)

Kinds of Condition 1)Potestative – fulfillment of the condition depends on the will of a party to the obligation 2)Casual – fulfillment of the condition depends on chance and/or the will of a third person 3)Mixed – fulfillment of the condition depends on the will of a party to the obligation and party on chance and/or will of a third person

Potestative Condition •When it depends exclusively upon the will of creditor – condition and obligation is valid in as much as creditor is interested in the fulfillment •When it depends exclusively upon the will of debtor in case of a suspensive condition – condition and obligation are void; to allow such condition would be to sanction illusory obligation, in direct contravention of the principle announced in Art. 1308

SEBTC vs. CA & Ferrer (Oct. 11, 1995) Provision in the contract for building construction that adjustment of (increase) in contract price (due to increase in prices of supplies) subject to mutual agreement is POTESTATIVE CONDITION. Hence, VOID. Because the “mutual agreement” requirement is in effect a condition dependent on petitioner bank’s SOLE WILL, since the (creditor) would naturally and logically give consent to such an agreement which would allow him recovery of the interest cost

Catungal, et al. vs. Rodriguez (Mar. 23, 2011) In a Conditional Deed of Sale the vendee shall pay the balance of the price when he has successfully negotiated and secured a road right of way is NOT a condition on the perfection of the contract nor on the validity of the entire contract—such condition is NOT purely potestative—such condition is likewise depended on chance as there is no guarantee that the vendee and the 3rd party landowners would come to an agreement regarding the road right of way, a type mixed condition expressly allowed under Article 1183.

• When it depends exclusively upon the will of debtor in case of a resolutory condition – condition and obligation is valid; the position of the debtor is exactly the same as the creditor in a suspensive condition and does not render the obligation illusory

Taylor vs. Uy Tieng Piao and Tan Liuan 43 Phil 83

Employment contract, employee engaged for 2 years, if machinery fail to arrive within 6 months, employer may cancel at his option, employment contract—potestative, but resolutory, hence valid.

Parks vs. Prov. of Tarlac 49 Phil 142

Donation of property with a condition that portion be used for a school and park; the condition is RESOLUTORY because the event cannot be fulfilled without giving effect to the donation.

Naga Telephone Co. vs. CA (Feb. 24, 1994) Contract provision— “That the term or period of this Contract shall be as long as the party of the first party has need for the electric light posts of the party of the second party.”

SC: Contract VOID – the condition is PURE potestative as it depends upon the sole will of debtor.

Catungal, et al. vs. Rodriguez (Mar. 23, 2011) But— “It being understood that this contract shall terminate when for any reason whatsoever the 2nd party is forced to stop, abandon its operation as a public service and it becomes necessary to remove the electric light post.”

SC: Contract is VALID – fulfillment of obligation does NOT depend upon sole will of debtor.

Effects of Impossible Conditions (Art. 1183) 1)Conditional obligation is void – both obligation and condition are void 2)Conditional obligation is valid – if condition is negative, it is disregarded and obligation is rendered pure and valid 3)Only the affected obligation is void – if the obligation is divisible, the part not affected by the impossible condition shall be valid 4)Only the condition is void – if obligation is preexisting, not depending on fulfillment of the condition which is impossible for its existence, only the condition is void

5) Condition considered not imposed – if impossible/unlawful condition is attached for a simple or remuneratory donation as well as to a testamentary disposition, condition is considered not imposed while the obligation is valid. NOTE: The impossibility of the condition must exist at the time of the creation of the obligation; a supervening impossibility does not affect the existence of the obligation.

Cruz vs. Gasilian Considering that the tract of land was originally stony and partly forested, the condition that it be totally cultivated is an impossible one which the law does not countenance.

Effects of Positive and Negative Condition (Art. 1184-1185) •In positive condition, obligation is extinguished as soon as the time expires or if it becomes indubitable that the event will not take place. •In negative condition, the obligation is effective from the moment the time indicated has lapsed, or if it has become evident that the event cannot occur, although the time indicated has not yet lapsed.

Positive/negative condition is different from positive/negative obligation

Doctrine of Constructive Fulfillment of Suspensive Condition (Art. 1186) Condition is deemed fulfilled when the obligor actually prevented the obligee from complying with the condition; prevention must have been voluntary or wilful in character. Reason: One must not profit by his own fault.

Requisites: 1)Condition is suspensive 2)Debtor actually prevents the fulfillment of the condition 3)He acts voluntarily

Constructive Fulfillment Int’l Hotel Corp. vs. Joaquin (Apr. 10, 2013) Mere intention of the debtor to prevent the happening of the condition or to place ineffective obstacles to its compliance, without actually preventing fulfillment is insufficient.

Principle of Retroactivity in Suspensive Condition (Art. 1187) The principle of retroactivity under Art. 1187 is limited to the effects of the obligation. The cause of action for the enforcement of the obligation accrues and the prescription of the action must still be computed from the moment of the happening of the suspensive condition. (Priority of Rights)

Rule on Retroactivity has no application to: a)Real contracts; they are perfected only by delivery of the object of the obligation; principle only applies to consensual contracts; b)Contracts in which the obligation arising therefrom can only be realized within successive periods or intervals (e.g. lease, hire of service, life annuity)

Retroactive effect as to the fruits and interests in obligations to give a)Reciprocal obligations – no retroactivity, mutually compensated (fruits may be natural, industrial or civil) b)Unilateral obligations – no retroactivity, debtor appropriates the fruits and interests received because it is usually gratuitous unless intention was otherwise as inferred from nature and circumstances. •

In accord with Art. 1164 – Fruits only to be right of creditor at the time of delivery arise, hence, subject to suspensive condition.

Article 1188 Creditor, may, before the fulfillment of condition, bring appropriate action for the preservation of his right. NB: No preference of credit is granted to the creditor.

Right of Debtor Before Fulfillment of Condition -may recover what he paid by mistake before the happening of the SC -payment was determinate thing, may file an accion reinvindicatoria -payment for generic, solutio indebiti -payment made with knowledge of condition, debtor impliedly waives condition and cannot recover

- payment with knowledge but condition did NOT happen, debtor can recover lest creditor will be unjustly enriched - payment not by mistake debtor impliedly waived condition, he cannot recover what he has prematurely paid once SC is fulfilled

Effects of Loss, Deterioration and Improvement in Real Obligations (Art. 1189) 1)Loss – when it perishes; or goes out of commerce; or disappears in such a way that its existence is unknown or it cannot be recovered a) Without debtor’s extinguished

fault

–

obligation

is

b) With debtor’s fault – obligation is converted into one of indemnity for damages

2) Deterioration – any reduction or impairment in the substance or value of a thing which does not amount to a loss a) Without debtor’s fault – impairment to be borne by the creditor b) With debtor’s fault – creditor may choose between bringing an action for rescission of the obligation OR bringing an action for specific performance with damages in either case

3) Improvement – anything added to, incorporated in, or attached to the thing that is due a) By the thing’s nature or by time – shall inure to the benefit of the creditor b) At the debtor’s expense – debtor shall have no other right than that granted to a usufructuary (Arts. 579 and 580) Consequently, the debtor cannot ask reimbursement for the expenses incurred for useful improvements of for improvements for mere pleasure (Art. 579), he can only ask reimbursement for necessary expenses. (Art. 546)

Above rule applies to the following: 1)Determinate things only because the genus of a thing never perishes (genus nun quam peruit) 2)Obligation with a period 3)Those who have a duty to return in case of loss, deterioration or improvement of the thing in an obligation with a resolutory condition (Art. 1190, par. 2)

N.B. The happening of a resolutory condition does NOT ipso jure revert ownership in the original debtor, he merely becomes entitled to the delivery which would give him ownership anew.

HENCE…. Original debtor merely has a personal right which is enforceable only against his creditor who has become a debtor obliged to make restitution.

Rescission of Reciprocal Obligations in General (Art. 1191) Reciprocal Obligation – Those which are created or established at the same time, out of the same cause and which result in mutual relationships of creditor and debtor between the parties. General Rule: If one of the parties fails to comply with what is incumbent upon him, there is a right on the part of the other to rescind (or resolve) the obligation (tacit resolutory condition)

• Permitted only for such breaches as are substantial and fundamental as to defeat the object of the parties in making the agreement (Universal Food Corp. vs. CA, G.R. No. L-29155, May 13, 1970)

• Can be demanded only if the plaintiff is ready, willing, and able to comply with his own obligation and the other is not (Seva vs. Berwin, G.R. No. L-24321, Jan. 11, 1926) and the party who has not performed his part of the agreement is not entitled to sue/rescind; the right belongs to the injured party

Sy vs. Andok’s Litson Corp. (Nov. 21, 2012)

A lease contract is a reciprocal contract. By signing the lease agreement, the lessor grants possession over his/her property to the lessee for a period of time in exchange for rental payment. Indeed, rescission is statutorily recognized in a contract of lease in Art. 1659.

Substantial breach—delay on the billboard construction by another lessee, thereby preventing Andok to construct and the lessor’s failure to explain unpaid electric bills.

Substantial Breach Villamar vs. Mangaoil (Apr. 11, 2012) Although Article 1458, 1495 and 1498 of the NCC and case law do not generally require the seller to deliver to the buyer the physical possession of the property subject of a contract of sale and the certificate of title covering the same, the agreement entered into by the petitioner and respondent provides otherwise. xxx

In the case of Chua vs. CA xxx which was cited by petitioner, it was ruled that when the deed of absolute sale is signed by the parties and notarized, then delivery of the real property is deemed made by the seller to the buyer. The transfer of the certificate of title in the name of the buyer is not necessary to confer ownership upon him. In the case at bar, the ruling in Chua cannot apply because the contract EXPRESSLY provides that petitioner shall deliver to the buyer the physical possession of the property and the certificate of title.

• Must be invoked judicially UNLESS contract contains a facultative resolutory provision, in which case, judicial permission to cancel or rescind the contract is no longer necessary – act of rescission must be communicated to other party (Jison vs. CA, G.R. No. L-45349, Aug. 15, 1988)

But in Nolasco, et al. vs. Cuerpo (Dec. 9, 2015) where the Contract of Sale stipulates that seller will cause completion of the transfer of registration of title to names of buyer and that “xxx failure xxx shall automatically authorize (buyers) to undertake the same xxx and charge seller the cost xxx.”

SC: No, resolution (rescission) allowed. The failure to comply with provision CANNOT be said to defeat the object of the parties, considering that the same provision provides for a recourse on the part of buyers. No substantial breach to justify rescission. Only slight breach.

Fil-Estate Properties vs. Ronquillo (Jan. 13, 2014)

“xxx non-performance of petitioners’ obligation entitles respondents to rescission under Article 1191 xxx. More in point is Section 23 of PD 957, the rule governing the sale of condominium which provides— “No installment payment made by a buyer xxx in a xxx condominium project for xxx unit he contracted to buy shall be forfeited xxx when the buyer after notice to the owner, desists from further payment due to the failure of xxx developer to develop xxx condominium xxx.

Such buyer may, at his option, be reimbursed the total amount paid including amortization interests but excluding delinquency interests, with interest thereon at the legal rate.

Effects: If there is a stipulation granting the right of rescission on the part of the aggrieved party and he validly rescinds the contract pursuant to such express grant, any court decision adjudging the propriety of the rescission extra-judicially made is NOT the REVOCATORY act of rescission but merely DECLARATORY or an affirmation of the revocation (De Luna vs. Abrigo, G.R. No. 57455, Jan. 18, 1990)

ALSO: 1191 applies only if there has already been performance by any of the parties.

Maglasang vs. Northwestern University (Mar. 20, 2013)

Construction of a new Integrated bridge system. The xxx contracts require no less than substantial breach before they can be rescinded (based on 1191). Since the contracts do not provide for a definition, we apply definition found in jurisprudence.

xxx Cannu vs. Galang, that substantial, unlike slight or casual breaches of contract, are fundamental breaches that defeat the object of the parties in entering into an agreement, since the law is not concerned with trifles. - New IBS was expected to be CHED compliant. Contractor failed to supply the same. It was substantial breach.

Art. 1191 does NOT apply to the following: 1)Contracts of partnership where a partner fails to pay the whole amount which he has bound to contribute to the common fund (Arts. 1786 and 1788) 2)Sales of real or personal property by installments. The first being governed by Recto Law while the latter is governed by Maceda Law. 3)Action for rescission is not required upon breach of compromise agreement; Art. 2041 confers upon the party concerned the authority to regard it as rescinded and to insist upon the original demand.

NOTE: Prescriptive period for action of Resolution is 10 years from the time right of action accrues according to Art. 1144 – NOT 4 YEARS (applicable to rescission)

Question: Is petition for rescission a prejudicial action to warrant suspension of criminal action for BP 22?

In Reyes vs. Rossi (18 Feb. 2013, Bersamin), SC— •Issue in BP 22 – WON accused issued dishonored checks knowing that they had insufficient funds. •Issue in 1191 – WON the breach in fulfilment warranted the rescission of conditional sale.

Hence, if in 1191 case, there is ground to rescind, it will not mean that accused in BP 22 will be absolved of crime because accused already committed the crime where the sale was still fully binding (before rescission).

Vicelet & Vicelen Lalicon vs. NHA (Jul. 13, 2011) Violation of annotated restriction that property sold by NHA with mortgage cannot be sold within five years from release of mortgage is subject to resolution in Art. 1191 – NOT Rescission in Art. 1389

Sps. Felipe & Leticia Conner vs. Sps. Gil & Fernandina Galang (May 25, 2005) Non payment of the balance of P45,000 for a total purchase price of P120,000 after several demands is a SUBSTANTIAL BREACH that justify RESOLUTION of the contract.

In ASB Realty Corp. v. Ortigas & Co., Ltd. (9 Dec. 2015, Bersamin), a deed of sale between Ortigas and Amethyst Peal Corp. over a property with condition that latter will build in 4 years. This was annotated in title. APCorp. assigned property to ASB who knew of the condition. APC failed to build. Issue: Can Ortigas (seller) rescind (resolve) by filing petition against ASB?

SC: No. ASB was not party to the contract. It was APC. Despite annotation in the title (ASB was aware of), ASB had no legal duty to fulfil construction of building. It was APC, that defaulted under the Deed of Sale. Hence, enforcement of the sale should be against APC. Rescission cannot take place anymore for the property legally came into the juridical possession of ASB, who was a 3rd party to the Deed of Sale. N.B. There was no novation.

Ayala Life Insurance vs. Ray Burton Dev’t. Jan. 23, 2006 •A contract of sale, title passes to buyer upon delivery of the thing sold. •In contract to sell, ownership is reserved in the seller and is NOT to pass until full payment of price.  Full payment is positive, suspensive condition.  No action for specific performance without fulfillment of condition. (Lim vs. CA, 182 SCRA 564)

•In contract of sale, non-payment is Negative Resolutory Condition.

Effect of Fortuitous Event in Obligation with a Period It only relieves the contracting parties from the fulfillment of their respective obligations DURING the term/period. (Victoria’s Planters vs. Victorias Milling Co., G.R. No. L-6648, July 25, 1955)

Fortuitous event does NOT interrupt the running of the period.

Period for Whose Benefit (Art. 1196) General Rule: For the benefit of both parties. Except: If it can be shown that the period has been established in favor of the creditor or debtor.

Ponce de Leon vs. Sujuco (Oct. 31, 1951) Loan with interest for a period, the debtor CANNOT compel payment before the period even if he pays interest because interest is merely one of the benefits of period. There are other benefits.

Judicial Term/Period When fixed by a competent court in accordance with the causes expressly recognized by law. Once fixed, the period can no longer be judicially changed.

When Court May Fix Period (Art. 1197) General Rule: Courts are WITHOUT power to fix period Except: 1)If the obligation does not fix a period, but from its nature and circumstances it can be inferred that a period was intended; 2)If the duration of the period depends upon the will of the debtor; and 3)If the debtor binds himself when his means permit him to do so (Art. 1180)

People’s Bank & Trust Co. vs. Odom 64 Phil. 126 When obligation or note is payable on demand, it is one without a term and becomes due ONLY upon demand. Hence, court is NOT authorized to fix period.

NOTE: Fulfillment of obligation cannot be demanded until after court has fixed period. But an action for fixing period and enforcement (combined) may be allowed if it can be shown that separate action for performance would be a mere formality because NO additional proofs other than the admitted facts will be presented and will serve no other purpose other than to delay. (Tiglao vs. Manila Railroad Co., 98 Phil. 183)

Action to ask court to fix period must be brought within 10 years from execution or perfection of notes/contracts. (Gonzales vs. Jose)

When Debtor Loses Right to Make Use of Period (Art. 1198) 1)He becomes insolvent, unless he gives a guaranty or security for the debt (the insolvency need not be judicially declared) 2)He does not furnish to the creditor the guaranties or securities which he has promised 3)If, after their establishment, the guaranty or security is impaired through the fault of the debtor, he shall lose his right to the benefit of the period; however, if it is impaired without his fault, he shall retain his right

4) If the guaranty or security disappears through any cause, even without the fault of the debtor 5) He violates any undertaking, in consideration of which the creditor agreed to the period (i.e., if an employee commits a substantial breach of his employment contract, the employer may terminate the employment) 6) He attempts to abscond • It is not essential that there be actual absconding

ALTERNATIVE OBLIGATION It is one where out of two or more prestations which may be given, only one is due.

Right of Choice in Alternative Obligation (Art. 1200) General Rule: Right of choice belongs to the debtor Except: 1)Expressly granted to creditor 2)Expressly granted to third person

Limitations Upon the Right of Choice The debtor cannot choose undertakings which are:

prestations/

1)Impossible 2)Unlawful 3)Could not have been the object of the obligation • • •

Undertakings that are not included among others from those which the obligor may select; or Those which are not yet due and demandable at the time the selection is made; or Those by reason of accident or some other cause, have acquired a new character distinct or different from that contemplated by the parties when the obligation was constituted.

4) Those that are due and demandable but whose enforcement is dependent on creditor as when period fixed is solely for his benefit. 5) The creditor cannot be compelled to receive part of one and part of the other undertaking. NB: Communication of the choice renders the obligation simple and demandable. Hence, no delay unless alternative is transformed into simple by communicating the choice.

Effects of Loss of Objects of Alternative Obligation (Arts. 1204-1205) A.When choice belongs to debtor 1)Due to fortuitous event a) All are lost – debtor is released from the obligation b) Some but not all are lost – deliver that which he shall choose from among the remainder c) Only one remains – deliver that which remains

2) Due to debtor’s fault a) All are lost – creditor shall have a right to indemnity for damages based on the value of the last thing which disappeared or service which become impossible b) Some but not all are lost – deliver that which he shall choose from among the remainder without damages c) Only one remains – deliver that which remains

3) Due to creditor’s fault (Art. 1203) - If through the creditor’s act the debtor cannot make a choice according to the terms of the obligation, the latter may RESCIND with damages

B. When choice belongs to creditor 1) Due to fortuitous event a) All are lost – debtor is released from the obligation b) Some but not all are lost – deliver that which he shall choose from among the remainder c) Only one remains – deliver that which remains

2) Due to debtor’s fault a) All are lost – creditor may claim the price/value of any of them with indemnity for damages b) Some but not all are lost – creditor may claim any of those subsisting without a right to damages OR price/value of the thing lost with right to damages

FACULTATIVE OBLIGATION An obligation wherein only one object or prestation has been agreed upon by the parties to the obligation, but which may be complied with by the delivery of another or the performance of another prestation in substitution. •Art. 1201 can be applied by analogy with respect to the time/moment when the substitution will take effect. •Communication is necessary to make substitution effective. •Only debtor has choice.

JOINT OBLIGATION (Obligacion Mancomunada)

The whole obligation is to be paid or fulfilled proportionately by different debtors or demanded proportionately by different creditors.

SOLIDARY OBLIGATION (Obligacion Solidaria)

Each one of the debtors is bound to render and/or each one of the creditors has a right to demand entire compliance with the prestation.

Nature of a Collective Obligation (Art. 1207) General Rule: Obligation is presumed joint if there is concurrence of several creditors OR of several debtors OR of several creditors and debtors in one and the same obligation.

Exceptions:

1)The obligation expressly states that there is solidarity: • • •

Jointly and severally Individually and collectively “I promise to pay” followed by the signatures of two or more persons

Law Provisions on Solidarity Art. 17 (g) NIL – 2 parties sign a note “I promise to pay” Art. 927 – 2 or more heirs liable for estate they take possession of even if only one is negligent Arts. 1824; 1911; 1915; 1945; 2146; 2157; 2194

2) The law requires solidarity. •

tort, quasi-contracts, liability of principals, accomplices and accessories of a felony, obligations of devisees and legatees, bailees in commodatum

3) Nature of the obligation requires solidarity.

4) When a charge or condition is imposed upon heirs of legatees, and the testament expressly makes the charge or condition in solidum. 5) When a solidary responsibility is imputed by a final judgment upon several defendants.

Heirs of George Poe vs. Malayan Insurance (April 7, 2009) “Where the insurance contract provides for indemnity against liability to third persons, the liability of the insurer is DIRECT and such third person can directly sue the insurer. The direct liability xxx does NOT mean however xxx the insurer can be held SOLIDARILY LIABLE with the INSURED. The liability of the insured xxx is based on TORT xxx liability of INSURER arises from CONTRACT xxx.”

Note: Even if the parties stipulated in their contract that the obligation of the debtor is solidary, but such contract was superseded by a JUDICIAL DECISION declaring the obligation to be merely joint, the said decision must be enforced in a joint manner (Oriental Phils. Co. vs. Abeto, G.R. No. L-4239, Oct. 10, 1934)

JOINT INDIVISIBLE OBLIGATION (Art. 1209) Midway between joint and solidary obligations, preserving the two characteristics of the joint obligation, in that no creditor can do an act prejudicial to others, and no debtor can be made to answer for others.

Breach of Joint Indivisible Obligation (Art. 1224) Obligations can be enforced only proceeding against all the creditors.

by

•If anyone of the debtors should fail or refuse to comply with the obligation, it is converted into one of indemnity for damages •Debtors who may have been ready to comply with what is incumbent upon them shall not contribute to the indemnity beyond the corresponding portion of the price of the thing or the value of the service in which the obligation consists. (Ex. Delivery of horse)

Interruption of Period of Prescription in Joint Indivisible Obligations 1)The act of one joint creditor beneficial to others, as for instance the interruption of period of prescription, is sufficient since Art. 1209 merely provides that the right of creditors may be prejudiced only by their collective acts. (Manresa) 2)The act of a joint creditor which would ordinarily interrupt the period of prescription would not be valid because the indivisible character of the obligation requires collective action of the creditors. (De Buen)

Effects of Assignment of Rights in Solidary Obligations (Art. 1213) General Rule: A solidary creditor CANNOT assign his right as it is predicated upon mutual confidence, i.e., personal qualification of each creditor had been taken into consideration Except: 1)Assignment to a co-creditor 2)Assignment is with consent of c-creditor

To Whom Payment Made in Solidary Obligation (Art. 1214-1216) General Rule: Payment may be made to any of the solidary creditors Except: If demand, judicial or extra-judicial, has been made by one of them, payment should be made to him.

PNB vs. Independent Planters Ass. In case of the death of one solidary debtor, creditor may still proceed against surviving SD without necessarily filing a claim in the estate of the deceased debtors. This, notwithstanding Rule 86, Sec. 6 (Rules) which states that if obligation of decedent is solidary, claim shall be filed against decedent as IF HE WERE THE ONLY DEBTOR. (Art. 1216)

Effect of Novation, Compensation, Confusion and Remission in Solidary Obligations (Art. 1215, Arts. 1219-1220) Note: Do only what is useful/beneficial prejudicial. (Art. 1212)

NOT

A. NOVATION 1) If prejudicial, the solidary creditor who effected the novation shall reimburse the others for damages incurred by them; 2) If beneficial and the creditor who effected the novation is able to secure performance shall be liable to the others for the share;

3) If effected by substituting another person in place of the debtor, the solidary creditor who effected the novation is liable for the acts of the new debtor; 4) Subrogating a third person in the rights of the solidary creditor responsible for the novation, the obligation is not extinguished; the relation between the other creditors not substituted and the debtor/s is maintained;

5) If the novation is effected by subrogating a third person in the rights of all the solidary creditors, the creditor responsible is liable to the other creditors for the share.

B. COMPENSATION and CONFUSION 1) PARTIAL – rules on application of payment shall apply, other creditors who have not caused the confusion or compensation to be reimbursed to the extent that their rights are diminished or affected;

2) TOTAL – obligation extinguished, what is left is the ensuing liability for reimbursement within each group – the creditor causing the confusion or compensation is obliged to reimburse the other creditors; the debtors benefited by the extinguishment of the obligation are obliged to reimburse the debtor who made the confusion or compensation possible.

C. REMISSION 1) Entire obligation – obligation is totally extinguished but the solidary debtor who obtained it does not entitle him to reimbursement 2) For the benefit of one of the debtors covering his entire share – he is completely released 3) For the benefit of one of the debtors and it covers only part of his share – his character as a solidary debtor is not affected

4) Total or partial remission – creditor/s responsible for the remission are liable to reimburse others for the share in the obligation corresponding to them If the creditor/s proceed against any one of the solidary debtors for the payment of the entire obligation, such debtor can always avail himself of the defense of partial remission. (Art. 1222) Note: The above rules cannot be applied in case the debt has been totally paid by anyone of the solidary debtors before the remission was effected. (Art. 1219)

Effect of Payment by a Debtor (Art. 1217 and Art. 1218) Payment made by one of the solidary debtors either totally or partially extinguishes the obligation depending upon whether the entire amount of debt is paid or only a part thereof. •If two or more solidary debtors offer to pay, the creditor may choose which offer to accept.

•

Solidary debtor who made the payment entitles him to claim the share which correspondents to others with interest from the time of payment; does not create a real case of subrogation; if payment was made before the debt is due, no interest for the intervening period may be demanded.

Reason: The right of the playing co-debtor to be reimbursed is not based on the original obligation but upon the payment made by him.

•

•

No reimbursement if payment is made after the obligation has prescribed or has become illegal. Share of the insolvent solidary debtor shall be borne by ALL his co-debtors, in proportion to the debt of each.

Effect of Death of Principal Debtor Stronghold Ins. vs. Republic-Asahi Glass (Jun. 22, 2006)

The creditor may sue, separately or together, the principal debtor and the surety, in view of the solidary nature of their liability. The death of the principal debtor will not work to convert, right of solidary creditor. Evidently, despite the death, the creditor may still sue the surety.

DIVISIBLE OBLIGATION Those which have as their object a prestation which is susceptible of partial performance without the essence of obligation changed.

INDIVISIBLE OBLIGATION Those which have as their object a prestation which is not susceptible of partial performance, otherwise, the essence of the obligation will be changed. Presumption: Indivisible (Art. 1248)

Test of Divisibility Whether the prestation is susceptible of partial compliance or not. (Art. 1225, par. 1) The susceptibility of partial compliance should be understood in the sense of the possibility of realizing the end or purpose which the obligation seeks to attain. •In obligations to give, even though the object may be physically divisible, the obligation is still indivisible if it is provided by law or it is so intended by the parties (Art. 1225 par. 3)

General Rule: Creditor cannot be compelled partially to receive the prestation; neither may the debtor be required to make partial payments. Except: 1)When the obligation expressly stipulates the contrary 2)When the different prestations constituting the objects of the obligation are subject to different terms and conditions 3)When the obligation is in part liquidated and in part unliquidated

OBLIGATION WITH A PENAL CLAUSE An obligation to which an accessory undertaking (penal clause/penalty) is attached to insure its performance by virtue of which the obligor is bound to pay a stipulated indemnity or perform a stipulated prestation in case of breach.

A penal clause is attached to an obligation in order to insure performance and has a double function: 1)to provide for liquidated damages, and 2)to strengthen the coercive force of the obligation by the threat of greater responsibility in the event of breach (Filinvest Land, Inc. vs. CA, G.R. No. 138980, Sept. 20, 2005)

General Insurance & Surety Corp. vs. Republic (Jan. 31, 1963) The bond is penal in nature and substitute indemnity for damages and payment of interest. Even if bond is worth more than actual damages. •Bond is to guarantee DepEd that school will follow rules/pay salaries. School did not pay salary amounting to only P2,000, bond was for P10,000. •If bond less than actual damages, no action for payment of deficiencies except when there is fault.

Effect of Penalty (Art. 1226, par. 1) General Rule: The penalty shall substitute the indemnity for damages and payment of interest in case of non-compliance. Except: 1)When there is a stipulation to the contrary 2)When the obligor refuses to pay the penalty – entitled to interest in the amount of penalty (Art. 2209)

3)When the obligor is guilty of fraud (Art. 1170) – creditor to prove fraud and amount of damages. He is not entitled only to the penalty plus the difference between the proven damage and penalty

Limitation Upon the Right of the Debtor in Obligations with a Penal Clause (Art. 1227) General Rule: Debtor cannot exempt himself from the performance by paying the stipulated penalty Except: Unless this right has been clearly and expressly granted to him

Limitation on the Right of the Creditor in Obligations with a Penal Clause (Art. 1227)

General Rule: Creditor cannot demand the fulfilment and demand the satisfaction of the penalty at the same time.

Except: Unless this right has been clearly granted to him •If creditor has chosen fulfillment of the principal obligation and performance thereof became impossible without his fault. •If there was fault on the part of debtor.

No need for proof of actual damages in order that penalty may be demanded. Penalty is liken to liquidated damages.

Compagnie Franco-Indochinoise vs. Deutsched (29 Phil 474) Property of plaintiff transported on steamship of defendant, was unlawfully detained by the captain of said steamship, resulting in loss to its owner. Sued for damage for an amount equal to the value of cargo, the defendant claimed amount recoverable cannot exceed the amount of freight under the penal clause which stated – “penalty for non-performance xxx, proved damages, not exceeding the estimated amount of freight”. Is contention tenable?

Held: NO. Assuming limitation expressed in the penal clause is valid, xxx it was intended to apply to cases of NON-PERFORMANCE, that is to cases where defendant is liable for damages for failure to perform obligations in contract. The ACT of captain which is basis of claim is NOT non-performance but amounts to a conversion of the cargo, AN ACT OF POSITIVE MISFEASANCE, and not a mere NON-FEASANCE such as is contemplated in the penal clause. Recoverable damages are not limited to the amount of the freight as stated by the Penal Clause.

Article 1229 – Judge may reduce penalty 1)Principal obligation irregularly complied;

has

been

partly/

2)Even if no performance, the penalty may also be reduced if iniquitous/ unconscionable

Land Bank of Phil. Vs. David -Foreclosed property sold at public auction for price that included penalty and interest. -Courts has discretion to determine whether penalty/interest rates are unconscionable. -Having found penalty/interest exorbitant, the sale at public auction was VOID.

Filinvest Land Inc. vs. CA & PepCorp Sept. 20, 2005

-Penalty of P15K a day of delay agreed. 94% of work completed. As a general rule, courts are not at liberty to ignore agreement to a penalty. But courts may equitably reduced stipulated penalty in 2 instances: (1) if principal obligation has been partly or irregularly complied; (2) if no compliance but penalty is iniquitous or unconscionable.

WON penalty is reasonable or iniquitous is addressed to sound discretion of court and on several factors, including type, extent and purpose of penalty, nature of obligation, mode of breach or consequences supervening realities, the standing and relationship of parties, extent of prejudice to plaintiff. (Lo vs. CA, 411 SCRA 523)

SC held inequitable— Forfeiture of paid installment of P101,550 as liquidated damages, particularly after buyer had tendered balance of P76,050 in full payment of balance. Not iniquitous – forfeited amount was only 8% of stipulated price. (Manila Racing Club vs. Manila Jockey Club, 69 Phil 55)

NOTE: If the interest rate agreed upon is VOID for being iniquitous, the rate of interest should be 12% PA computed from judicial or extrajudicial demand. (Dino vs. Jardines, 481 SCRA 226

Modes of Extinguishing Obligations 1)Payment/performance 2)Loss of the thing due 3)Condonation or remission of debt 4)Confusion or merger 5)Compensation 6)Novation 7)Annulment 8)Rescission 9)Fulfillment of a resolutory condition 10)Prescription

Payment or Performance (Art. 1232) •Means delivery of money and the performance, in any other manner, of an obligation. •Also means non-performance Characteristics of payment: 1)Identity – only the prestation agreed upon and no other must be complied with 2)Completeness – the thing or service must be completely delivered or rendered 3)Indivisibility – payment or performance must be indivisible

Burden of Proof Party who pleads payment MUST PROVE such payment. But where the debtor introduces some evidence of payment, the burden shifts to creditor to prove non-payment. (Jimenez vs. NLRC, 326 SCRA 89)

Requisites of Payment: 1)Must be complete 2)Tendered by the proper party 3)Party must have capacity to pay 4)Paid to proper person 5)Capacity of recipient 6)Identity of prestation preserved 7)Made in proper place

Manila International Airport Authority vs. Ding Velayo Sports Center (May 30, 2011) Article 1235 of the Civil Code states that “[w]hen the obligee accepts the performance, knowing its incompleteness or irregularity, and without expressing any protest or objection, the obligation is deemed fully complied with.” The Contract of Lease was executed on May 14, 1976, and the one-year period expired on May 14, 1977. Yet, petitioner did not register any protest or objection to the alleged incompleteness of or irregularity in the performance by respondent of its obligation to build and develop improvements on the subject property.

Persons From Whom the Creditor Must Accept Payment (Art. 1236) 1)Debtor himself or his legal representative 2)Any person who has an interest in the obligation (like a guarantor) (Monte de Piedad vs. Rodrigo) 3)A 3rd person who has no interest in the obligation when there is stipulation that he can make payment

• Person who pays the obligation should have the necessary legal capacity to effect such payment (Art. 1239) NB: Person making payment must have capacity. Otherwise, payment NOT VALID.

Cecilleville Realty & Services Corp. vs. Sps. Acuna (July 13, 2009) Cecilleville paid the debt of the Acuna spouses to Prudential as an interested third party. Even if the Acuna spouses insist that Cecilleville’s payment to Prudential was without their knowledge or against their will, Art. 1302 (3) of the Civil Code states that Cecilleville still has a right to subrogation.

Cecilleville clearly has an interest in the obligation because it owns the properties mortgaged to secure the Acuna spouses’ loan. When an interested party pays the obligation, he is subrogated in the rights of the creditor. Because of its payment of the Acuna spouses’ loan, Cecilleville actually steps into the shoes of Prudential.

Effect of Payment by 3rd Person •Without knowledge or against the will – recovery is only up to the amount beneficial to the debtor; no subrogation •With knowledge – rights of reimbursement and subrogation

To Whom Payment Must Be Made (Art. 1240) 1)The person in whose favor the obligation has been constituted 2)His successor in interest 3)Any person authorized to receive it – by law or by the creditor at the time when payment is due and not when the obligation was constituted

Effect of Payment to Unauthorized Persons in Obligation to Give General Rule: It shall NOT be valid, even though made in good faith. Except: 1)Provided that it has redounded to the benefit of the creditor. 2)Payment to the possessor of the credit, made in good faith (Art. 1242) •Refers to the possession of credit not the document evidencing it.

3)Debtor pays creditor prior to acquiring knowledge of the assignment of credit made by the latter. (Art. 1626)

Benefit to the creditor is presumed in the following cases: (Art. 1241) 1)If after the payment, the third person acquires the creditor’s rights (subrogation); 2)If the creditor ratifies the payment to the third person (ratification) 3)If by the creditor’s conduct, the debtor has been led to believe that the third person had authority to receive the payment (estoppel)

Republic, PNP vs. Thi Thu Thuy De Guzman (June 15, 2011) Facts: The PNP replied that payment was made to "Montaguz Builders”, via LBP Check to Edgardo Cruz (Cruz) who signed for the check due to MGM. Respondent claimed that payment was made to Montaguz Builders, her other company, which was also doing business with the PNP, and not to MGM, with which the contract was made

Held: No, petitioner's obligation consists of payment of a sum of money. In order for petitioner's payment to be effective in extinguishing its obligation, it must be made to the proper person. Art. 1240 of the Civil Code states: Art. 1240.Payment shall be made to the person in whose favor the obligation has been constituted, or his successor in interest, or any person authorized to receive it.

In Cembrano v. City of Butuan, SC said: When payment is made to the wrong party, however, the obligation is not extinguished as to the creditor who is without fault or negligence even if the debtor acted in utmost good faith and by mistake as to the person of the creditor or through error induced by fraud of a third person.

The respondent was able to establish that the LBP check was not received by her or by her authorized personnel. The PNP's own records show that it was claimed and signed for by Cruz, who is openly known as being connected to Highland Enterprises, another contractor. Hence, absent any showing that the respondent agreed to the payment of the contract price to another person, or that she authorized Cruz to claim the check on her behalf, the payment, to be effective must be made to her.

Note: In obligations to give, payment to incapacitated person is valid when: 1)The incapacitated has kept the amount or thing paid or delivered 2)Payment has been beneficial to the incapacitated person (Art. 1241)

Rule in Monetary Obligation (Art. 1249) Must be made in the currency stipulated; if it is not possible to deliver such currency, then in the currency which is legal tender in the Philippines.

Legal Tender Such currency which may be used for the payment of all debts, whether private or public. Its significance is manifested by the fact that it is such which the debtor may compel a creditor to accept in payment of the debt. Legal tender in the Philippines would be all NOTES AND COINS issued by the Bangko Sentral (Circular No. 537) 1)1-Peso, 5-Pesos and 10-Peso coins: in amounts not exceeding P1,000.00 2)25 centavo coin or less: in amounts not exceeding P100.00

Take note that bills, regardless of denomination, are legal tender up to whatever amount. RA 8163 provides that all monetary obligations shall be settled in the Philippine currency which is legal tender in the Philippines. The parties may agree that the obligation or transaction be settled in other currency at the time of payment.

Rules on Payment in Checks 1)Not legal tender – NOT valid tender of payment whether manager’s, cashier’s, or personal check. 2)Creditor has option to accept. 3)Shall produce payment ONLY when: a) Encashed b) Impaired through fault of creditor instruments executed by 3rd debtor)

(only in persons; not those by

N.B. When case involves NOT payment but exercise of RIGHT, e.g. right of redemption—rule on payment NOT applicable. Hence, mere tender of check is sufficient to COMPEL redemption. (Biana vs. Gimenez, 469 SCRA 486)

Place of Payment (Art. 1251) 1)Place stipulated by the parties 2)If there is no stipulation, obligation is a determinate thing, payment shall be made at the place where the thing might be at the time the obligation was constituted. 3)In any other case, the payment shall be made at the domicile of the debtor.

Go Sinco vs. CA, et al. (Oct. 9, 2009) Issue: If there is unjustified refusal to accept payment, does such act constitute extinguishment of the obligation” Rule: NO. The law requires the twin acts of tender of payment and consignation. If there is tender of payment but no consignation, it does not have the effect of payment. The effect of the tender is xxx debtor is freed from the obligation to pay interest on the outstanding amount from the time of the unjust refusal took place.”

Special Forms of Payment A.Application of Payment Designation of the debt to which the payment must be applied when the debtor has several obligations of the same kind in favor of the same creditor.

Requisites: 1)There must be only one debtor and only one creditor; 2)There must be two or more debts of the same kind; 3)All the debts must be due except if there is stipulation to the contrary OR application of payment is made by the party for whose benefit the term has been constituted (Art. 1196); and 4)Amount paid by the debtor is insufficient to cover the total amount of all the debts.

Rules on Application of Payment •The right to designate the debt to which the payment shall be applied belongs primarily to the debtor. •If the debtor does not apply, the creditor may designate which debt is paid by specifying in the receipt •If the creditor did not apply or if application is void, debt which is the most onerous, is the one satisfied. It is evident in the circumstances laid by Art. 1254, that it is the law which makes the application

Limitation: •Interest first •Cannot disregard indivisibility •Those that may be due already, anytime for debtor but not creditor cause latter has exclusive benefit of period

Sps. Tan etc. vs. China Banking Corp. 17 August 2016 SC said— “The right to make application of payment is a right of debtor which is merely directory xxx and must promptly be exercised, lest such right passes to the creditor.”

In the case, the Bank foreclosed the mortgages over properties used to secure payment. Debtor failed to manifest preference of application, Bank used it to first pay for the interest, then to the principal.

No hard and fast rule, however, can be put up. As last resort when it cannot definitely be determined whether one debt is more burdensome than the other. •Debts due of the same nature, payment shall be applied proportionately

B. Dation in Payment (Dacion en pago) Delivery and transmission of ownership of a thing by the debtor to the creditor as an accepted equivalent of the performance of the obligation. (Art 1245)

C. Payment by Cession (Art. 1255) Special form of payment whereby the debtor assigns/abandons ALL of his property for the benefit of his creditors in order that from the proceeds thereof, the latter may obtain payment of their credits. Requisites: 1) Plurality of debts; 2) Partial or relative insolvency of the debtor; and 3) Acceptance of the cession by the creditors

D. Tender of Payment and Consignation (Art. 1256) Tender of Payment – Manifestation of the debtor to the creditor to comply immediately with obligation; preparatory act and extrajudicial in character Consignation – Deposit of the object in a competent court after refusal or inability of the creditor to accept the tender of payment; principal act and judicial in character

Special Requisites of Consignation 1) Existence of a valid debt which is due; 2) Tender of payment by the debtor; creditor’s refusal without just cause to accept it or any of the cases provided in Art. 1256, par. 2 exists a) Tender must be precede consignation; b) It must have been unconditional; c) Refusal must be without just cause

3) Previous notice of consignation to creditor and others interested in order to give the creditor the opportunity to reconsider and to accept payment •

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Lack of previous notice does not invalidate the consignation, but simply makes the debtor liable for the expenses occasioned thereby With respect to the creditor, this notice can be made simultaneously with the tender of payment. Separate notices must be given to other interested parties such as guarantors.

4) Consignation – amount or thing due placed at the disposal of the court 5) Subsequent notice of consignation to enable the creditor to withdraw the goods or money deposited • It would be unjust to make the creditor suffer the risk of deterioration, depreciation or loss of such goods or money by reason of lack of knowledge of the consignation

Instances Where Consignation Shall Produce the Effects of Payment Without Prior Tender of Payment (Art. 1259, par. 2) 1)Creditor is absent or unknown, or does not appear at the place of payment •

Absence need not be judicially declared. He must, however, have no legal representative to accept the payment

2)Creditor is incapacitated to receive the payment at the time it is due

3) When without just cause, the creditor refuses to give a receipt •

Refusal to issue a receipt preceded the tender of payment

4) When two or more persons claim the right to collect (as in the case of interpleader) 5) When the title of the obligation has been lost 6) Creditor declares he will not accept Note: The list is not exclusive.

E. Loss of the Thing Due Effects of Loss in Determinate Obligation to Give (Art. 1262) – Obligation is extinguished if the thing is lost or destroyed without the fault of the debtor and before he has incurred in delay.

General Rule: Loss of a determinate thing due to a fortuitous event shall extinguish the obligation. Except: 1)When the law so provides; 2)When the stipulation so provides; 3)When the nature of the obligation requires an assumption of risk; 4)Loss of the thing is partly due to the fault of the debtor; 5)Loss of the thing occurs after the debtor incurred in delay;

6) When the debtor promised to deliver the same thing to two persons who do not have the same interest; 7) When the obligation to deliver arises from a criminal offense; and 8) When the obligation is generic Except: if the class/genus goes OUT of commerce of man.

Effect of Partial Loss (Art. 1264) General Rule: Partial loss does not extinguish the obligation. Except: When the partial loss or destruction of the thing is of such importance that would be tantamount to a complete loss or destruction.

Effect of Impossibility of Performance in Obligation to Do (Art. 1266) When the obligation becomes legally or physically impossible without the fault of the debtor, obligor is released from the obligation. The legal and physical impossibility must have occurred after the constitution of the obligation.

Release in obligation TO DO when prestation becomes legally or physically impossible. Not if obligation is TO GIVE.

PNCC vs. CA (May 5, 1997) PNCC leased land for rock crushing plant. Term for 5 years, beginning on date of issuance of an industrial clearance by Ministry of Human Settlement. PNCC given Temporary Permit for 2 years in Jan. 7, 1986, hence Lessor demand payment for rent 1 year. PNCC declined because it decided to cancel the contract as it decided to cancel rock crushing plant due to financial and technical difficulties. PNCC cites Art. 1266.

Held: NO. Contract of lease was perfected. PNCC cannot use Art. 1266 because it is applicable to obligation to ‘DO’. The contract created obligation to ‘GIVE’. Lease property delivered and to pay rent are TO GIVE.

Temporary Impossibility Merely delays performance of the obligation NOT extinguishes the same. Except: 1)In case of agreement 2)Must be performed within a definite time

BUT if the obstacle is unforeseen or unknown as to DURATION, obligation may be considered juridically impossible to perform, hence, extinguished. Subsequent REMOVAL of the obstacle does NOT revive the obligation.

Effect of Relative Impossibility (Difficulty of Performance) Doctrine of Unforeseen Events (Art. 1267) – When the service has become so difficult as to be manifestly beyond the contemplation of the parties, the court should be authorized to release the obligor in whole or in part. (This is also referred to as the Doctrine of Frustration of Enterprise) Also known as— •Theory of IMPREVISIBILITY •Theory of Lack of Basis

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The intention of the parties should govern and if it appears that the service turns out to be so difficult as to have been beyond their contemplation, it would be doing violence to the intention to hold the obligor still responsible. The impossibility is RELATIVE because the difficulty of performance triggers a manifest disequilibrium in the prestations, such that one party would be placed at a disadvantage by the unforeseen event.

Difficulty NOT only physical or ‘actual’ difficulty BUT also if performance would place one party at a disadvantageous position by the unforeseen event.

Rebus Sic Stantibus Parties stipulate in the light of certain prevailing conditions, and once these conditions cease to exist the contract also ceases to exist. Unforeseen event is NOT an absolute application of RSS, which would endanger the security of contractual relations. Parties to the contract must be presumed to have assumed the RISK of unfavorable developments. It is ONLY in absolutely exceptional.

Requisites: 1)The event or change of circumstances could not have been foreseen at the time of the execution of contract 2)Makes performance extremely difficult NOT impossible 3)The event must NOT be due to the act of any of the parties 4)Contract is for a long period of time or for successive performances.

Natelco vs. CA & Casureco (Feb. 24, 1994) -Natelco contract with Casureco to use electric post for telephone lines -Natelco promised 10 telephone lines for Casureco -After 10 years, Casureco filed reformation because contract was one-sided. More lines attached, heavier load for post and post not in City also used.

SC: 1267 applicable. Obligation is extinguished. BUT for the removal will affect public. SC required NEW contract in order not to disrupt the basic and essential services of parties.

Effect of Loss on Reciprocal Obligations •First View: If an obligation is extinguished by the loss of the thing or impossibility of performance through fortuitous events, the counter-prestation is also extinguished. The debtor is released from liability but he cannot demand the prestation which has been stipulated for his benefit. He who gives nothing has no reason to demand. (Tolentino, Commentaries and Jurisprudence on the Civil Code of the Phils., Vol. 4, p. 337-338 [1991])

(Res Perit Domino)

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Second View: The loss or impossibility of performance must be due to the fault of the debtor. In this case, the injured party may ask for rescission under Art. 1191 plus damages. If the loss or impossibility was due to a fortuitous event, the other party is still obliged to give the prestation due to the other. (J.B.L. Reyes) (Res Perit Creditori)

Better View: Res Perit Creditori general rule Except: 1) Law requires Res Perit Domino • • •

Art. 1504 – Sale of Personal Property Art. 1655 – In Lease Contracts Art. 1717 – Contract for a Piece of Work

Also, SC in Reyes vs. Caltex and Villaruel vs. Manila Motors favored view that RISK of LOSS is for the account of creditor.

Rule If Obligation Arises From Criminal Offense (Art. 1268) General Rule: Debtor shall not be exempted from the payment of the price whatever may be the cause for the loss. Except: When the thing having been offered by the debtor to the person who should receive it, the latter refused without justification.

F. Condonation or Remission of the Debt • An act of liberality the obligee without receiving any price or equivalent, renounces the enforcement of the obligation, is extinguished in its entirety or part. • It is the gratuitous abandonment by the creditor of his right; a form of donation.

Requisites of remission: 1) It must be gratuitous; 2) It must be accepted by the obligor; 3) The obligation must be demandable; 4) Parties must have the capacity; 5) Not inofficious; and 6) Must comply with the forms of donation SHOULD IT BE EXPRESS (Arts. 748 and 749)

Court may NOT condone interest due the creditor for to condone is an act of liberality. It is to forgive, or revert a debt. (Baez vs. Young, Oct. 27, 1952)

Implied Remission (Art. 1271) -Delivery of private document evidencing a credit made voluntarily by creditor to debtor

To refute implication – it should be claimed to be inefficious In order for presumption of remission to apply, it is necessary that: 1)Document is private (not public) 2)It is an evidence of credit

Lopez Lizo vs. Tambunting Creditor proved that he sent his receipt to debtor for purposes of collecting without intending the document to remain in possession of debtor – is sufficient proof to rebut the presumption that creditor voluntarily delivered document.

G. Confusion It is the merger of the characters of the creditor and the debtor in one and the same person by virtue of which the obligation is extinguished.

Requisites of merger: 1) Merger of the characters of the creditor and debtor must be in the same person; 2) Must take place in the person of either the principal creditor or the principal debtor; and 3) Whether the merger refers to the entire obligation or only part thereof, there must be complete and definite meeting of all qualities of creditor and debtor in the obligation or in the part thereof affected by the merger.

Effects of Confusion/Merger (Art. 1276-1277) If confusion takes place: 1) In the person of either the principal creditor or principal debtor – extinguishment of entire obligation 2) In the person of a subsidiary creditor or subsidiary debtor (e.g. guarantor) – no extinguishment of principal obligation; only substitution of creditor or debtor

3) In one of the joint debtor – principal obligation is extinguished up to the share which corresponds to him; 4) In one of the solidary debtors – entire obligation is extinguished. However, the debtor in whom confusion took place may claim reimbursement from co-debtors for the shares which corresponds to them.

H. Compensation Mode of extinguishing in the concurrent amount of the obligation of those persons who are reciprocally debtors and creditors of each other. •

Most fundamental effect: It extinguishes both debts to the extent that the amount covered by the amount of the other.

Requisites of compensation (Art. 1279): 1) There must be two parties, who, in their own right, are principal creditors and principal debtors of each other except in case of a guarantor (Art. 1280); 2) Both debts must consist in sum of money, or if the things due are fungibles (consumables), they must be of the same kind and quality. General Rule: Compensation is not possible in obligations to do because of the difference in the respective capacities of the obligors.

3) Both debts must be due; Except: Voluntary compensation (Art. 1282)

4) Both debts must be liquidated and demandable; 5) There must be no retention or controversy commenced by third persons over either of the debts and communicated in due time to the debtor; 6) The compensation must not be prohibited by law.

Debts which cannot be compensated: -Depositum -Commodatum -Support -Criminal offense -In favor of government

Lao vs. Special Plans (June 29, 2010) Issue: When are claims LIQUIDATED for proper COMPENSATION? Rule: Claim is liquidated when the amount and time of payment is FIXED. If acknowledged by debtor, although NOT in writing, the claim must be treated as liquidated. When the defendant, who has an unliquidated claim, sets up by way of counterclaim, and judgment is rendered liquidating such claim, it can be compensated against the plaintiff’s claim from the moment it is liquidated by judgment. (Here contract of lease where Lessee to undertake necessary repairs, Lessor STRUCTURAL repairs.)

Problem: Is it proper to compensate defendant-appellant’s indebtedness of P9k claimed in the complaint, with the sum of P10k representing the value of his shares of stock with the plaintiff entity?

Answer: Considering that a share of stock is not an indebtedness to the owner, it is, therefore, not a credit. Stockholders as such are not creditors of the corporation. xxx Therefore, since the defendant-appellant stockholder is not a creditor of the corporation although the corporation is a creditor of the former, there can be no compensation. (Garcia vs. Lim Chua Sing, 59 Phil 562)

Problem:

Has a bank the right to apply a deposit to the debt of a depositor to the bank?

Answer: YES, because an ordinary bank deposit creates the relationship of creditor and debtor. (Gullas vs. Philippine National Bank, 62 Phil 519)

Problem: X sued Y to collect P20k plus interest and attorney’s fees. Y, in his answer, included a counterclaim for P150 allegedly loaned by him to X and which was already overdue. X moved to dismiss the counterclaim which motion was granted by the lower court. Was the motion correctly resolved?

Answer: NO. Pursuant to Arts. 1278, 1279, 1286 and 1290 of the Civil Code, the defendant would have been entitled to deduct from plaintiff’s claim of P20k if the latter were established—the sum of P150 involved in the counterclaim if the allegations thereof were true, even if no such counterclaim is filed. (Icasiano vs. Icasiano, L16592, Oct. 27, 1961)

I. Novation It is the substitution or change of: 1. an obligation by another, resulting in its extinguishment or modification, either by: a. changing its object; b. principal conditions; or

2. by substituting another in place of the debtor; or 3. by subrogating a third person in the rights of the creditor.

Requisites of novation: 1) Previous valid and existing obligation; Except: a) When annulment may be claimed only by the debtor and he consented to the novation as in a new contract, recognizing and assuming a prescribed debt, would be valid and enforceable. The prescription, being available to the debtor, can be waived by him. The novation of a prescribed debt is thus valid. b) When ratification validates acts which are voidable.

2) Capacity of the contracting parties (to the new contract) 3) Animus novandi or intent to novate (especially for implied novation and substitution of debtors); 4) Substantial difference between the old obligation and the new obligation (especially for implied novation), consequently, extinguishment of the obligation; and

5) Validity of the new obligation Except: If parties clearly intended that the old obligation be extinguished

Inchausti vs. Yulo Mere extension of the term of payment DOES NOT constitute EXTINCTIVE novation. But..

Soncuya vs. Azarraga Extension of time coupled with payment of interest on the amount due is extinctive novation because a new consideration has been stipulated by the parties.

Kabankalan Sugar vs. Pacheco -Reduction of period is extinctive novation because the obligation has been materially altered by making obligation more burdersome.

Note: A change in the rate of interest is merely collateral agreement between the creditor and principal debtor that did not affect the surety. It did not in any way affect the original contract. Thus, despite the compounding of the interest, the liability of the surety remains only up to the original uncompounded interest. (Garcia, Jr. vs. CA, G.R. No. L-80201, Nov. 20, 1990)

Foundation Specialist Inc. vs. Betonval Ready Concrete Inc. (24 Aug. 2009) Obligation to pay a sum of money is not novated by an instrument that changes only the terms of payment, adds other obligations not incompatible with old; as the new merely supplements the old.

Salazar vs. J.Y. Brothers Marketing Corp. (20 October 2010 The acceptance by the creditor of a new check in replacement of the dishonored check does not result in extinctive novation in absence of an express agreement that debtor is already discharged from his liability caused by the dishonored check. Neither is there incompatibility because both checks were given precisely to terminate the same obligation.

National Exchange Co. vs. Ramos, (51 Phil 310) A corporation with ACS of P250k increased the CS to P500k. There was novation by changing the principal condition of the obligation and a subscriber to shares of the original CS, without knowledge of such novation is relieved of the obligation to pay which became extinguished as a consequence of said novation.

Problem: B secured a money judgment against P. Subsequently B and P entered into a contract whereby said judgment was to be extinguished by monthly payment and that in case of failure to pay the monthly payment B shall be at liberty to enter suit against P. Was there a novation of the judgment?

Answer: NO. Because the contract did not expressly extinguish the obligation existing in said judgment. On the contrary, it expressly recognized and modified the obligations existing in said judgment and expressly provided a method giving P more time to extinguish the same, that is by monthly payment. (Zupanta vs. De Rotaeche, 21 Phil 154)

Reyes vs. CA (Nov. 4, 1996) Co-owners of property entered into Deed of Partition. Then into a MOA that they shall share alike and reserve equal shares in proceeds of sale of property subject of partition. There was no NOVATION of DOP with that of MOA, as they can stand together.

Dungo vs. Lopena (6 SCRA 1007) There is NO NOVATION even if in the second and new contract a surety bond is filed, or a third person assumes payment of the obligation and creditor even accepts partial payment from third party because NO agreement that the first debtor be released from debt. Surety bond is not a new and separate contract but merely an accessory. Third party merely becomes co-obligor or surety.

Also in Dungo A owes B P6K. A executed promissory note and C surety company for P6K without interest. A failed to pay. B goes after surety C. C pay P6K without interest. B sues A for accumulated interest. A defense was NOVATION. Held: No Novation. There was no express or implied release of A from debt. Surety not a new contract.

Problem: In the course of construction of a building according to plans and specifications, the defendant requested a number of changes and alterations which the contractor made on the understanding that he would be paid therefore. Was there a novation of a contract?

Answer: Although numerous changes were made and there was a minor increase in the cost of the building there was no material change in its size or dimensions. The original contract was used as a basis for the construction and any changes or alterations were founded upon the original contract with the understanding that the contractor would be paid the reasonable value of such changes. Hence, there was no novation. (Tiu Suico vs. Habana, 45 Phil 707)

Ruby & Francisco Reyes vs. BPI Family Saving Bank (Mar. 31, 2006) SC: With respect to obligations to pay sum of money, there is no novation by an instrument that expressly recognizes the old, changes only the terms of the payment, adds other obligations NOT incompatible with the old ones, or the new contract merely supplements the old one.

Problem: The contract of lease contained a stipulation that the lease shall be obligatory upon and redound to the benefit not only of the persons who are the lessees but also their assigns. The lessee firm having assigned the lease to a third person, was there a novation by substitution of the debtor?

Answer: NO. Because the contract does not stipulate that the original lessees shall be discharged by such assignment. The new obligation assumed by the assignee was not incompatible with the continued liability of the original lessee. (Rios and Reyes vs. Jacinto Palma, 49 Phil 7)

Sps. Reyes vs. BPI Family Bank (Mar. 31, 2006) Issue: Is there NOVATION if there is a 45-day credit extension in the payment of an obligation? Rule: NO. Extinctive novation is never presumed. There must be an express intention to novate; in cases where it is implied, the act of the parties must clearly demonstrate their intent to dissolve the old obligation as the moving consideration for the emergence of the new one. No incompatibility between the old obligation and the extension of the credit.

Kinds of Novation As to its essence: 1) Objective/Real 2) Subjective/Personal – substitution of debtor or by subrogation 3) Mixed – change in the object or principal obligation and change in the persons of either creditor and debtor of an existing obligation

Kinds of Novation by Substitution of Debtors 1)Expromission – effected with the consent of the creditor at the instance of the new debtor even without the consent or even against the will of the old debtor (beneficial reimbursement) Requisites: a)Initiative for substitution must emanate from the new debtor; b)Consent of the creditor to the substitution; and c)Old debtor must be released from obligation.

•Creditor’s consent cannot be presumed. It must be given expressly.

Kinds of Substitution by Expromission a)Substitution with the knowledge and consent of the old debtor; and b)Substitution without the knowledge or against the will of the old debtor.

Villanueva vs. Girged (110 Phil 478) A owes B money. C wrote B that he will take care of A loan as soon as A makes shipment of logs to Japan. A did not ship. C did not pay. Is C liable to B. SC: No. (1) Expromission did not take place for NO consent of B was given. (2) C liability was dependent on suspensive condition.

2) Delegacion – effected with the consent of the creditor at the instance of the old debtor (delegante), with the concurrence of the new debtor (delegado) (reimbursement and subrogation) Requisites: a) Initiative for substitution must emanate from the old debtor; b) Consent of the new debtor; c) Acceptance by the creditor; and d) Old debtor must be released from obligation.

Hodges vs. Rey (111 Phil 219) A owes B P3K. A authorizes PNB to pay B by proceeds of loan granted by PNB. PNB agreed. PNB paid B only P2K. B sued PNB & A for balance. Is PNB liable also? SC: No. even if B agreed NO delegacion. PNB never assumed payment. There was merely authorization, accepted by PNB. Loan was only P2K. Hence, PNB only liable for P2K.

Note: The mere fact that the creditor receives a guaranty or accepts payment from a third person who agrees to assume the obligation, when there is no agreement that the first debtor shall be released from responsibility, does not constitute novation, and the creditor can still enforce the obligation against the original debtor. The third person becomes merely a co-debtor; surety or cosurety. (Mercantile Insurance Co. vs CA, G.R. No. 85647, April 22, 1991)

Problem: In novation by substitution of the debtor, must the creditor’s consent be express?

Answer: YES. It implies on the part of the creditor a waiver of the right that he had before the novation, which waiver must be express under the principle that renuntiatio non praesumitur, a waiver of right may not be performed, unless the will to waive is indisputably shown by him who holds the right. (Testate Estate of Mota, et al. vs. Serra, 47 Phil 464)

However, in Asia Banking Corp. vs. Elser, 34 Phil 994, the court held that Art. 1205, now Art. 1293 does not say that the creditor’s consent must be express or given at the time of the substitution. According to Spanish jurisprudence it is sufficient the consent be given at any time and in any form whatever, while the agreement of the debtor subsists. The existence of the consent may be inferred from the acts of the creditor since volition may as well be expressed by deeds as by words. The holding in Testate Estate of Mota vs. Serra is not meant to convey the impression that the word “express” was to be given an unqualified meaning contrary to the Spanish and American cases cited in said decision.

But... If creditor is a corporation, its consent must always be expressed (Pirovano vs. Dela Rama Steamship) Except: In case of veil of corporate fiction is pierced. (Asia Banking vs. Elser)

Problem: X sued Y for estafa. While the case was pending, Y entered into a contract with X where Y promised to pay X in installment the amount misappropriated by Y. Despite this stipulation, the court convicted Y for estafa. Y questioned the legality of the conviction on the ground of novation.

Answer: The conviction must be upheld. Y’s novation theory may perhaps apply prior to the filing of the criminal action in court because up to that time, the original trust relation may be converted by the parties into an ordinary creditor-debtor relationship. But after the justice authorities have taken cognizance of the crime and instituted action in court, the offended party may no longer divest the prosecution of its power to exact the criminal liability as distinguished from the civil. (People vs. Nery, L-19567, Feb. 5, 1964; People vs. Benitez, L15923, June 30, 1960)

BUT…

Degaños vs. People (14 Oct. 2013) •There was consignment of jewelry for sale or return if unsold. •Accused claimed his partial payments novated contract from agency to a LOAN, thereby converting his liability from criminal to civil. •He insisted that his failure to complete his payment PRIOR to filing of criminal complaint notwithstanding, complainants requiring accused to make formal proposal before barangay authorities on payment of balance confirmed NOVATION.

SC: NO NOVATION. Partial payment made and purported agreement to pay remaining obligations DID NOT equate to NOVATION of the original contractual relationships of agency to one of SALE. Acceptance of partial payments without change in the original relations between complainant and accused CANNOT be NOVATION. There MUST be intent to extinguish the old relationship. INTENT cannot be inferred from mere acceptance of partial payment.

Effects of Insolvency or Non-Fulfillment by New Debtor (Arts. 1294-1295) 1)Expromission • Tolentino: it shall not revive the original debtor’s liability to the creditor whether the substitution is effected with or without the knowledge or against the will of the original debtor. • Jurado: If the substitution was effected with the knowledge and consent of the original debtor, it shall revive the original debtor’s liability to the creditor.

2) Delegacion The right of the creditor can no longer be revived EXCEPT in the following cases. a) Insolvency already existing and of public knowledge at the time when the original debtor delegated his debt b) Insolvency was already existing and known to the original debtor when he delegated his debt It is submitted that ACTUAL knowledge of the creditor that new debtor was insolvent at the time of delegation, will bar him from recovering from the old debtor. He must bear the consequences of his acts knowingly done.

Effects of Novation Upon Accessory Obligations (Art. 1296) When the principal obligation is extinguished in consequence of a novation, accessory obligation may subsist only insofar as they may benefit third persons who did not give consent.

Effects of Condition in Novation 1) If the original obligation was subject to suspensive/resolutory condition, the new obligation shall be under the same condition, unless otherwise stipulated. (Art. 1299) 2) If the new obligation and the old obligation are subject to different conditions: a) If the conditions can stand together— •

If both are fulfilled – the new obligation becomes demandable

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If only the condition affecting the old obligation is fulfilled – old obligation is revived while the new obligation loses its force

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If only the condition affecting the new obligation is fulfilled – there is no novation since the requisite of a previous valid and effective obligation would be lacking.

Novation by Subrogation (Art. 1300) A personal novation effected by subrogating a third person in the rights of the creditor.

Legal Subrogation (Art. 1302) General Rule: Legal subrogation is not presumed. Except: 1)When a creditor pays another creditor who is preferred, without debtor’s knowledge; 2)When a third person, not interested in the obligation, pays with the express or tacit approval of the debtor; or 3)When, even without 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.

Effects of Subrogation (Arts. 1303-1304) 1) Total subrogation – Transfers to the person subrogated the credit will all the rights the original creditor had against the debtor or third persons. 2) Partial subrogation – A creditor, to whom partial payment has been made, may exercise his right for the remainder and he shall be preferred to the person who has been subrogated in his place.

CONTRACTS

CONTRACTS A Contract is a meeting of minds between two persons whereby one binds himself, with respect to the other, to give something or to render some service. Stages in life of contract: 1)Preparation (conception) 2)Perfection/Executory 3)Consummation/Executed

Estate of Orlando Llenado, et al. vs. Llenado (March 4, 2009) Lease with option to Lessee to renew must be exercised. SC – “While the option to renew is an enforceable right, it must be first exercised to be given effect. xxx the option of the lessee gives the latter an enforceable right to renew xxx such time as provided for. xxx In the absence of a stipulation in the lease requiring notice of the exercise of an option xxx to be given within a certain time before the expiration of the lease, xxx general rule is that the lessee must exercise an option xxx to renew xxx and NOTIFY the lessor thereof BEFORE or at least at the time of the expiration of the original term xxx (Executory). The silence of lessee after termination of original period CANNOT mean to be that they opted to renew xxx (Executed).

Effects of Contracts 1) Essential – those without which there can be no contract (Art. 1318) a) Common elements – present in all contracts Consent Object or subject matter Cause or consideration b) Special elements – only in certain contracts c) Extraordinary elements – peculiar to specific contract

2) Natural – those which are derived from the nature of the contract and ordinarily accompany the same; they are presumed by law 3) Accidental – those which exist only when the parties expressly provide for them for the purpose of limiting or modifying the normal effects of the contract

Characteristics of Contracts 1)Obligatory force of contracts 2)Mutuality 3)Autonomy 4)Relativity 5)Consensuality

Obligatory Force of Contracts •This principle is explicitly recognized in Arts. 1159, 1308, 1315 and 1356. •It is a rule that once the contract is perfected, it shall be of obligatory force upon both of the contracting parties.

Mutuality (Art. 1308) The contract must bind both parties. Note: The validity or fulfillment of a contract cannot be left to the will of one of the contracting parties. Validity or fulfillment may be left to (1) the will of a third person, whose decision shall not be binding until made known to both the contracting parties (Art. 1309) or (2) chance.

Philippine Savings Bank vs. Sps. Castillo, et al. (May 30, 2011) Held: The unilateral determination and imposition of the increased rates (of interest in loan) is violative of the principle of mutuality of contracts under Art. 1308 xxx. A perusal of the Promissory Note will readily show that the increase or decrease of interest rates hinges solely on the discretion of petitioner. It does not require the conformity of the maker xxx. Any contract which appears to be heavily weighed in favor of one of the parties so as to lead to an unconscionable result, thus partaking of the nature of a contract of adhesion, is void. Any stipulation regarding the validity or compliance of the contract left solely to the will of one of the parties is likewise invalid.

BUT…

MIAA vs. Ding Velayo Sports Center (May 30, 2011) An express agreement which gives the lessee the sole option to renew the lease is frequent and subject to statutory restrictions, valid and binding on the parties. This option, which is provided in the same lease agreement, is fundamentally part of the consideration in the contract xxx. It is a purely executory contract and at most confers a right to obtain a renewal if there is compliance with the conditions on which the right is made to depend. The right of renewal constitutes a part of the lessee's interest in the land and forms a substantial and integral part of the agreement.

The fact that such option is binding only on the lessor and can be exercised only by the lessee does not render it void for lack of mutuality. After all, the lessor is free to give or not to give the option to the lessee. xxx Mutuality obtains in such a contract and equality exists between the lessor and the lessee since they remain with the same faculties in respect to fulfillment.

Autonomy (Art. 1306) The contracting parties may establish such stipulations, clauses, terms and conditions as they deem convenient. Limitation to the principle of autonomy: •Stipulations should not be contrary to law, morals, good customs, public order, or public policy. •Exercise of Parens Patriae – weakening the consensual nature of contracts giving undue advantage to one of the contracting parties

Relativity (Art. 1311) General Rule: Contracts take effect only between parties, their assigns and heirs. Limitations: HOWEVER with respect to assignees or heirs, the general rule under Art. 1311 is not applicable if the rights and obligations arising from the contract are not transmissible or purely personal.

Exceptions: 1)Beneficial stipulation/stipulation pour autrui – A stipulation in favour of a third person. 2)When the third person comes into possession of the object of a contract creating real rights; (Art. 1312) 3)Where the contract is entered into in order to defraud a creditor; (Art. 1313) •Here, the creditor may ask for its rescission.

1)Where the third person induces a contracting party to violate his contract (Art. 1314). Such third person can be held liable for damages.

5) Contracts creating “status” (marriage contract) 6) In suspension of payments and compositions under the Insolvency Law 7) CBA 8) Negotiorum gestio (Art. 2150-2151) 9) Violence & intimidation employed by 3P (Art. 1336)

Essential Requisites of Contracts CONSENT: conformity of the parties to the terms of the contract; the acceptance by the offeree of the offer made by the other Requisites: 1)Must be manifested by the concurrence of the other and acceptance; (Arts. 1319-1326) 2)Parties must possess the necessary legal capacity; (Arts. 1327-1329) and 3)Must be intelligent, free, spontaneous, and real. (Arts. 1330-1346)

• The fact that the signatures of the witnesses and the notary public were forged does not negate the existence of the contract for as long as the parties consented to it. The signatures of the witnesses and the notary public are necessary simply to make the contract binding on the third person (Soriano v. Soriano, G.R. No. 130348, Sept. 3, 2007)

OFFER: Unilateral proposition which one party makes to the other for the celebration of a contract Requisites: 1)It must be defined. 2)It must be intentional. 3)It must be complete. 4)It must be directed to person or persons with whom the other offeror intends to enter into a contract except definite offers which are not directed to a particular person but to the public in general (i.e. public auction)

Withdrawal of Offer Offer/proposal may be withdrawn so long as the offeror has no knowledge of acceptance by offeree Except: Option Contract (Art. 1324) Counter-offer Qualified acceptance; involves a new proposal; a rejection of the original offer

Complex Offers When a single offer involves two or more contracts, the perfection, where there is only partial acceptance, will depend upon the relation of the contracts between themselves, whether due to their nature or due to the intent of the offeror.

Rule on Complex Offers 1)Offers are interrelated – contract is perfected if all the offers are accepted 2)Offers are not interrelated – single acceptance of each offer results in a perfected contract unless the offeror has made it clear that one is dependent upon the other and acceptance of both is necessary

ACCEPTANCE: Must be certain or definite and absolute in character. A qualified acceptance constitutes a counter-offer. (Art. 1319) It may be express or implied (e.g. failure on the part of the heir to reject the inheritance within 30 days from notice of the order of the court distributing the estate). (Art. 1320)

Requisites of acceptance: 1)Absolute (no vitiation) 2)Directed to the offeror 3)Made with the intention to be bound 4)Made within the prior time 5)Communicated to the offeror and learned by him unless the offeror knows of the acceptance.

Amplified Acceptance Under certain circumstances, a mere amplification on the offer must be understood as an acceptance of the original offer, plus a new offer which is contained in the amplification.

Withdrawal Acceptance •First View (Manresa) – Although the offeror is not bound until he learns of the acceptance, the same thing cannot be said of the offeree who from the moment he accepts, loses the power to retract such acceptance xxx •Second View (Tolentino) – Acceptance may be revoked before it comes to the knowledge of the offeror because in such case there is still no meeting of minds

Theories that determine the exact moment of perfection when acceptance is made by letter or telegram: 1)Manifestation Theory – perfected from the moment the acceptance is declared or made. •Adhered to by the Code of Commerce

1)Expedition Theory – perfected from the moment the offeree transmits the notification of acceptance to the offeror.

3) Reception Theory – perfected from the moment that the notification is in the hands of the offeror in such a manner that he can, under ordinary conditions, procure the knowledge of its contents, even if he is not able to actually acquire such knowledge. 4) Cognition Theory – perfected from the moment the acceptance comes to the knowledge of the offeror. Note: The stipulation of the parties governs the manner and moment of acceptance as when they stipulate that it be expressly accepted.

Note: Silence can be construed as consent. Requisites: 1) There is a duty or possibility to express oneself; 2) The manifestation of the will cannot be interpreted in any other way; 3) There is a clear identity in the effect of the silence and the undisclosed will (Arts. 1670, 1870-1873)

OPTION CONTRACT A preparatory contract in which one party grants to the other for a fixed period under specified conditions, to decide whether or not to enter into a principal contract. Requisites: 1)It is supported by an independent consideration; and 2)It is exclusive. If the option is not supported by a consideration which is distinct from the purchase price, the offer may still be withdrawn even if the offeree has already accepted it (Jurado, Desiderio, Comments and Jurisprudence on Obligations and Contracts, p. 413 [2010])

Persons Incapacitated to Give Consent (Art. 1327) A.Minors Exceptions: a)When minor misrepresents his age (It must be an active not merely constructive representation); physical attributes; b)Contracts involving the sale and delivery of necessaries to minors (Art. 1489) c)Contracts by guardians or legal representatives.

B. Insane or Demented Persons - Unless the contract was entered into during a lucid interval (Art. 1328). C. Deaf-mutes who do not know how to read and write N.B. Rule 93, Sec. 2— Incompetents 1) 2) 3) 4)

Persons under civil interdiction Hospitalized lepers, prodigals, deaf & dumb Unsound mind Person who cannot take care of themselves because of age, disease or weak mind.

Are they Incapacitated? Answer: Incompetents also incapacitated OBVIOUSLY cannot give consent BUT incompetents NOT incapacitated – can give consent BUT if guardian already appointed, then cannot give consent anymore.

Incapacity to give consent (Art. 1327) vs. Disqualification to contract (Art. 1329) Article 1327

Article 1329

Restrains the existence Restrains the very right of the right to contract itself Based upon subjective Based upon public circumstances of certain policy and morality persons Voidable Void

Vices of Consent (Art. 1330) 1)Vices of the will (vicios de la formacion de la voluntad) 2)Violence 3)Intimidation 4)Mistake 5)Fraud 6)Undue Influence

Vices of Declaration (vicios de la declaracion) -Simulation of contracts

A. Mistake It must refer to the substance of the thing which is the object of the contract, or to those conditions which have principally moved one or both parties to enter into the contract. (Art. 1331) Not only wrong conception of the thing but also the lack of knowledge with respect to it.

Two (2) General Kinds of Mistake Mistake of Fact

Mistake of Law

One or both contracting parties believe that a fact exists when in reality it does not or vice versa.

One or both parties arrive at an erroneous conclusion regarding the interpretation of a question of law or legal effects of a certain act or transaction.

Vitiates consent

Does not vitiate consent except when it involves mutual error as to the effect of an agreement when the real purpose is frustrated.

Requisites of Art. 1334 which will vitiate consent: 1)It must be of a past or present fact; 2)It must not be imputable to the party mistaken, i.e. mistake is not inadvertent and excusable; 3)Mistake must be with respect to the legal effect of an agreement; 4)It must be mutual; and 5)Parties’ real purpose must have been frustrated. •There is NO MISTAKE in the party alleging it knew the doubt, contingency or RISK affecting the object of the contract (Art. 1333)

B. Violence When in order to wrest consent serious or irresistible force is employed (Art. 1335) Requisites: 1) Must be serious or irresistible 2) Must be the determining cause for the party upon whom it is employed in entering in the contract 3) It is not justified 4) It is sufficient

C. Intimidation (Art. 1335) Requisites: 1) One party is compelled to give his consent by a reasonable and well-grounded fear of an evil; 2) The evil must be imminent and grave; 3) The evil must be upon his person or property, spouse, descendants or ascendants; and 4) It is the reason why he enters the contract. 5) The evil must be unjust.

Violence vs. Intimidation Violence Refers to compulsion

Intimidation physical Refers to moral compulsion

External or prevents the will to Internal or induces manifest itself performance of an act

the

D. Undue Influence (Art. 1337) When a person takes improper advantage of his power over the will of another, depriving the latter of a reasonable freedom of choice. Test of undue influence: Whether or not the influence exerted has so overpowered or subjugated mind of a contracting party as to destroy his free agency, making him express the will of another rather than his own. (Coso v. Fernandez Deza, G.R. No. 16763, December 22, 1921)

Circumstances considered to determine whether the influence exerted is unreasonable: 1)Confidential relations 2)Family relations 3)Spiritual relations 4)Other relations between the parties •By analogy, undue influence employed by a third person may annul the contract.

N.B. Reverential fear is fear of displeasing a person to whom respect and obedience is due. Here, there is NO unreasonable restraint in the choice of the party and HENCE NOT VITIATE CONSENT.

E. Fraud (Art. 1338) When, through insidious words or machinations of one party, the other is induced to enter into a contract which without them, he would not have agreed to. Kinds of fraud: 1) Fraud in the PERFECTION of the contracts a) Causal Fraud (Dolo Causante) b) Incidental Fraud (Dolo Incidente) 2) Fraud in the PERFORMANCE of an obligation (Art. 1170)

Requisites of Fraud under Art. 1338: 1)One party must have employed fraud or insidious words or machinations 2)It must have been serious; 3)It induced the other party to enter into a contract; 4)It must have been employed by one contracting party upon the other and not employed by both contracting parties or by third persons; 5)Damage or injury resulted to the other party; 6)It must be made in bad faith, i.e. with knowledge of its falsify

Dolo Causante vs. Dolo Incidente Dolo Causante (Art. 1338)

Dolo Incidente (Art. 1344)

Refers to those deceptions or misrepresentations of a serious character employed by one party and without which the other party would not have entered into the contract

Refers to those deceptions or misrepresentations which are not serious in character and without which the other party would have still entered the contract.

Fraud which is serious in character Not serious in character It is the cause which induces the Not the cause party to enter into a contract Renders the contract voidable

Liability for damages

Bad faith and fraud are allegations of fact that demand clear and convincing proof. They are serious accusations that can be so convenient and casually invoked, and that is why they are never presumed. (Cathay Pacific Airways, Ltd vs. Sps. Vazquez, G.R. No. 150843, March 14, 2003)

Note: Failure to disclose facts, when there is a duty to reveal them, constitutes fraud. (Art. 1339)

• The usual exaggerations in trade, when the other party had an opportunity to know the facts, are not in themselves fraudulent (Art. 1340) • A mere expression of an opinion does not signify fraud unless made by an expert and the other party relied on the former’s special knowledge (Art. 1341).

Fraud by third person does not vitiate consent UNLESS: a)It has created a substantial mistake and the same is mutual. b)Third person makes the misrepresentation with the complicity, or at least with the knowledge but without the objection, of the favoured contracting party.

• Misrepresentation made in good faith is not fraudulent but may constitute error (Art. 1343) • When two persons constitute one party of the contract with respect to another, the deceit exercised by one of them upon his co-party is not a cause for annulment of the contract.

Simulation of Contracts (Arts. 1345-1346) A deliberate declaration contrary to the will of the parties. 1)Agreement of the parties to the apparently valid act. 2)The purpose is to deceive or to hide from third persons although it is not necessary that the purpose be illicit or for purposes of fraud.

Kinds of simulation of contract: 1)Absolute (simulados) – parties do not intend to be bound by the contract at all. •Status: VOID 2)Relative (disimulados) – parties conceal their true agreement. It binds the parties to their real agreement, when it does not prejudice a third person and is not intended for any purpose contrary to law, morals, good customs, public order or public policy. (i.e. a deed of sale of a piece of land is executed by the parties to conceal their two agreement which is a donation)

Two juridical acts in relatively simulated contracts: 1)Ostensible Act (apparent or fictitious) – pretended contract 2)Hidden Act (real) – true agreement

Should the hidden act or the concealed contract be lawful and does not prejudice a third person, it is absolutely enforceable. Its validity and effects will be governed by the rules applicable to it, and not by those applicable to the apparent contract.

With respect to a third person acting in good faith, the apparent contract must be considered as the true contract. The declaration that the contract is simulated does not prejudice him. •Relative simulation is presumed by law in case of Art. 1602

OBJECT: The thing, right or service which is the subject matter of the obligation arising from the contract. Requisites: 1)Must be within the commerce of man; 2)Should be real or possible; 3)Should be licit; and 4)Should be determine, or at least possible of determination as to its kind.

Things Which Cannot Be the Object of Contracts (Art. 1347-1349) General Rule: All things or services may be the object of contracts. Exceptions: 1)Things outside the commerce of men; 2)Intransmissible rights; 3)Future inheritance except in cases authorized by law:

expressly

a)The object of the contract forms part of the inheritance; and b)The promissor has an expectancy of a right which is purely hereditary in nature.

4) Services contrary to law, morals, good customs, public order or public policy; 5) Impossible things or services; 6) Objects not possible of determination as to their kind.

Note: In order that a thing, right or service may be the object of a contract, it should be in existence at the moment of the celebration of the contract, or at least, it can exist subsequently or in the future: •Future thing may be the object of a contract. Such contract may be interpreted in two possible ways: 1)Conditional contract – if its efficacy should depend upon the future existence of the thing 2)Aleatory contract – if one of the contracting parties should bear the risk that the thing will never come into existence

CAUSE: It is the immediate, direct or most proximate reason which explains and justifies the creation of an obligation through the will of the contracting parties. Essential requisites of cause: 1)Existing at the time of the celebration of the contract; 2)Licit or lawful; and 3)True

Cause and Object Distinguished Cause

Object

The service or benefit which The thing which is given in is remunerated remuneration The liberality of the donor or The thing which is given or benefactor donated Prestation or promise of a The thing or service itself thing or service by the other Different with respect of each May be the same for both party parties

Cause and Motive Distinguished Cause

Motive

Direct and most proximate Indirect or remote reason reason of a contract Objective or juridical reason Psychological or of a contract personal reason

purely

Always the same for each Differs for each contracting contracting party party Its legality affects the existence Its legality does not affect the or validity of the contract existence or validity of contract.

Effect of Lack of Cause, Unlawful Cause, False Cause and Lesion (Arts. 1352-1355) Cause

Effect

Lack of Cause

There is a total lack The contract confers or absence of cause no right and produces no legal effect

Illegality of cause

The cause is stated The contract is void if it should not be but is not true proved that they were founded upon another cause which is true and lawful

Cause Lesion or inadequacy of price

Effect Shall not invalidate the contract, UNLESS: is fraud, •There mistake or undue influence; or •When the parties intended a donation or some other contract.

FORMS OF CONTRACTS General Rule: 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). Exceptions: 1.When the law requires that the contract be in a certain form to be valid (Art. 1356) 2.When law requires that the contract be in a certain form to be enforceable (Statute of Frauds) 3.When required to make the contract effective as against third parties (Art. 1357-1358)

Where the validity of a contract is made to depend upon a particular formality, an action under Art. 1357 cannot be brought to compel the other party to execute such formality. Article 1357 presupposes the existence of a valid contract and cannot possibly refer to the form to make it valid.

Contracts which must appear in writing: 1.Donation of personal property whose value exceeds five hundred pesos (Art. 748) 2.Sale of a piece of land or any interest therein through an agent (Art. 1874) 3.Agreements regarding payment of interest in contracts of loan (Art. 1956); 4.Antichresis (Art. 2134); and 5.Stipulation limiting common carrier’s duty of extraordinary diligence to ordinary diligence (Art. 1744)

Contracts which must appear in public instrument: 1.Donation of immovable properties (Art. 749); 2.Partnership where immovable property or real rights are contributed (Arts. 1171 and 1773); 3.Acts/contracts which have for their object the creation, transmission, modification or extinguishment of real rights over immovable property (Arts. 1358 (1), 1403 (2), 1405); 4.The cession, repudiation or renunciation of hereditary rights or of those of the conjugal partnership of gains (Art. 1358 (2); 5.The power to administer property or those which should prejudice a third person (Art. 1358 (3); 6.The cession of actions or rights proceeding from an act appearing in a public document (Art. 1358 (4)

Note: With respect to those enumerated under Art. 1358 (items 3 to 6 in the preceding list), they are valid as between the contracting parties. The requirement that they be executed in a particular form is for the purpose of making them effective against third persons. However, with respect to items 1 and 2, formalities are required for the validity of the contract.

Contracts which must be registered: 1.Chattel mortgages (Art. 2140) 2.Sale/transfer of large cattle Registration Act)

(Cattle

Note: Arts. 1357-1358 do not require the execution of the contract either in a public/private document in order to validate/enforce it but only to insure efficacy, so that after its existence has been admitted, the party bound may be compelled to execute the necessary document.

• When one of the contracting parties invokes Art. 1357 and 1358 by means of proper action, the effect is to place the existence of the contract in issue, which must be resolved by the ordinary rules of evidence. • Actions to compel the execution of the necessary document and action upon the contract may be exercised simultaneously, unless it appears that the former action must precede the latter. • Although Art. 1357, in connection with Art. 1358, do not operate against the validity of the contract nor the validity of the acts voluntarily performed by the parties for the fulfillment thereof, it is evident that under them execution of the required document must precede the determination of the obligations derived from the contract.

R.A. 8792 (E-Commerce Act) It provides that the formal requirements to make contracts effective as against third persons and to establish the existence of a contract are deemed complied with provided that the electronic document is unaltered and can be authenticated as to be usable for future reference.

Reformation of Instruments Remedy by means of which a written instrument is made or construed so as to express or conform to the real intention of the parties when some error or mistake has been committed.

Requisites: 1)Meeting of the minds of the parties; 2)Their true intention is not expressed in the instrument; 3)Failure to express true intention is due to mistake, fraud, inequitable conduct or accident; and 4)Clear and convincing proof of mistake, accident, relative simulation, fraud, or inequitable conduct.

Reformation

Annulment

Presupposes that there is a valid contract but the document/instrument executed does not express their true intention

The contract was not validly entered into as when their minds did not meet or if the consent was vitiated

Gives life to the contract by Involves a complete making the instrument nullification of the contract conform to the true intention of the parties

When can one party ask for the reformation of the contract (Arts. 1361-1365) 1)In case of mutual mistake of the parties (Art. 1361) 2)When one party was mistaken and the other party acted fraudulently (Art. 1362); 3)When one party was mistaken, the other knew or believed that the instrument does not show their real intent but concealed that fact to the former (Art. 1363); 4)In case of ignorance, lack of skill, negligence or bad faith on the part of the person drafting the instrument (Art. 1364); 5)When parties agree upon the mortgage or pledge of a real or personal property, but the instrument states that the property is sold absolutely or with a right of repurchase (Art. 1365).

Instances when there can be no reformation: (Art. 1366) 1)Simple donations condition is imposed; 2)Wills;

inter

vivos

wherein

no

3)When the real agreement is void (Art. 1366) Note: •If mistake, fraud, inequitable conduct or accident has prevented a meeting of the minds of the parties, the proper remedy is not reformation of the instrument but annulment of the contract (Art. 1359) •Expediency and convenience are not grounds for the reformation of an instrument (Multi-Ventures Capital vs. Stalwart, G.R. No. 157439, July 4, 2007)

4) When one of the parties brought an action to enforce the instrument (Art. 1367) Note: • When one of the parties has brought an action to enforce the instrument, no subsequent reformation can be asked (principle of estoppel) •

In case of mutual mistakes, reformation may ordered at the instance of either parties or successors in interest, otherwise it may only brought by the petition of the injured party or heirs and assigns (Art. 1365).

be his be his

RESCISSIBLE Contracts Contracts which are valid but are defective because of injury or damage to either of the contracting parties or to third persons, as a consequence of which it may be rescinded by means of a proper action for rescission. •Distinguish from ‘RESOLUTION’ in Article 1191

Requisites of rescission: 1)Contract must be rescissible under Arts. 1381 and 1382. 2)Party asking for rescission must have no other legal means to obtain reparation for the damages suffered by him (Art. 1383) 3)Person demanding rescission must be able to return whatever he may be obliged to restore if rescission is granted (Art. 1385) 4)Things which are the object of the contract must not have passed legally to the possession of a third person acting in good faith (Art. 1385); and 5)Action must be brought within four years (Art. 1389)

Contracts that are rescissible (Arts. 1381-1382) A. Lesion 1)Those entered into by guardians where the ward suffers lesion of more than ¼ of the value of the things which are objects thereof. 2)Those agreed upon in representation of absentees, if the latter suffer lesion by more than ¼ of the value of the things which are subject thereof.

B. Fraud 1)Those undertaken in fraud of creditors when the latter cannot in any manner claim what are due them. (accion pauliana) 2)Those which refer to things under litigation if they have been entered into by the defendant without the knowledge and approval of the litigants and the court. 3)Payments made in a state of insolvency for obligations whose fulfillment the debtor could not be compelled at the time they were effected.

C. Other Causes Stated By Law 1)Art. 1098 – partition of inheritance where an heir suffers LESION of at least ¼ of the share to which he is entitled 2)Art. 1189 (4) – deterioration of the thing through the fault of the debtor 3)Art. 1526 (4) – right of unpaid seller to rescind 4)Art. 1538 – deterioration of the object of the sale 5)Art. 1539 – sale of real estate with a statement of its area at the rate of a certain price for a unit of measure or number and the vendor failed to deliver the area stated, which should be not less than 1/10 th of that stated

6) Art. 1542 – the vendee does not accede to the failure to deliver what has been stipulated 7) Art. 1556 – when through eviction, the vendee loses a part of the thing sold of such importance, in relation to the whole, that he would not have bought it without the said part 8) Art. 1560 – if immovable sold is encumbered with any non-apparent burden or servitude of such nature that it cannot be presumed that the vendee could not have acquired it had he been aware thereof 9) Art. 1567 – election of the vendee to withdraw from the contract in the cases under Arts. 1561-1566 10) Art. 1659 – rescission by the aggrieved party in a contract of lease when the other party does not comply with Arts. 1654 and 1657

Requisites before a contract entered into in behalf of wards of absentees may be rescinded on the ground of LESION: Lesion is the injury which one of the parties suffers by virtue of a contract which is disadvantageous for him. TO give rise to rescission, the lesion must be known or could have been known at the time of making of the contract.

1) Contract was entered into by a guardian in behalf of his ward or by a legal representative in behalf of an absentee; 2) It was entered into without judicial approval; 3) Ward or absentee suffered lesion of more than ¼ of the value of the property which is the object contract. 4) There is no other legal means of obtaining reparation for the lesion; 5) Person bringing the action must be able to return whatever he may obliged to restore; and 6) Object of the contract must not be legally in the possession of a third person who did not act in bad faith.

Note: A guardian is authorized only to MANAGE the estate of the ward; should he DISPOSE a portion thereof without authority from the court by way of a contract, the same is unenforceable under Art. 1403 (1), irrespective of whether there is lesion or not.

Requisites before a contract entered into in FRAUD OF CREDITORS may be rescinded: 1)There is a credit existing prior to the celebration contract; 2)There is fraud, or at least, the intent to commit fraud to the prejudice of the creditor seeking rescission; 3)Creditor cannot in any legal manner collect his credit; and 4)Object of the contract must not be legally in the possession of a third person who did not act in bad faith.

The action to rescind contracts in fraud of creditors is known as accion pauliana.

Requisites: 1)The plaintiff asking for rescission has a credit prior to the alienation; 2)The debtor has made a subsequent contract conveying a patrimonial benefit to a third person; 3)The creditor has no other legal remedy to satisfy his claim; 4)The act being impugned is fraudulent; and 5)The third person who received the property conveyed, if it is by onerous title, has been an accomplice in the fraud.

• Accion pauliana presupposes a judgment and unsatisfied execution which cannot exist when the debt is not yet demandable at the time the rescissory action is brought. • Even secured creditors are entitled to accion pauliana.

When alienation of property presumed in Fraud of Creditors: 1)Alienation by gratuitous title if the debtor has not reserved sufficient property to pay all of his debts contracted before alienation; 2)Alienation by onerous title if made by a debtor against whom some judgment has been rendered in any instance or some writ of attachment has been issued.

Requisites before payment made by insolvent can be rescinded: 1)It was made in a state of insolvency; and 2)Obligation must have been one which the debtor could not be compelled to pay at the time such payment was effected.

Asia Banking vs. Noble Jose and Lichauco & Co., (51 Phil 703) Where a debtor transfers property to a creditor supposedly in payment of a debt which has NOT YET matured at the time when debtor is INSOLVENT and for a CONSIDERATION which is grossly inadequate as compared to the actual value, SC considered the same as FRAUDULENT and may be set aside.

But... it is NOT fraudulent if the consideration of the sale was a pre-existing debt and the debt was due and owing and enforceable at the time of sale.

Parties who may institute action: 1)The creditor who is defrauded in rescissory actions on ground of fraud, and other person authorized to exercise the same in other rescissory actions. 2)Their representatives 3)Their heirs 4)Their creditors by virtue of the subrogatory action define in Art. 1177 of the NCC

Effect of Rescission (Art. 1385) 1)As to the parties – mutual restitution together with the fruits and interest. Note: This is applicable only to rescissory actions on the ground of lesion and not to rescissory actions on the ground of fraud.

2)As to third person •Bad faith or not legally in possession – obliged to return •Legally in possession and not in bad faith – no rescission; however, indemnity for damages may be demanded from the person causing the loss.

Prescriptive Period: Action for Rescission (Art. 1389) 1)Under Art. 1381 (1)– within 4 years from the time of the termination of the incapacity of the ward 2)Under Art. 1381 (2)– within 4 years from the time the domicile of the absentee is known 3)Under Art. 1381 (3) and (4) as well as Art. 1382 – within 4 years from the time of the discovery of fraud 4)In certain contracts of sale especially declared by law to be rescissible – 6 months or even 40 days counted from the day of delivery (Arts. 1547, 1571, 1577)

VOIDABLE Contracts Those which possess all the essential elements for validity but the consent is vitiated either by lack of legal capacity of one of the contracting parties or by mistake violence, intimidation, undue influence or fraud even though there may have been no damage to the contracting parties.

CAUSE The following contracts are voidable or annullable: 1)Those where ONE of the parties is incapable of giving consent to a contract; 2)Those where the consent is vitiated by mistake, violence, intimidation, undue influence of fraud (Art. 1390)

Prescriptive Period: Action for Annulment (Art. 1391): 1)Contracts entered into by incapacitated person – within 4 years from the time guardianship ceases; 2)Where consent is vitiated by violence, intimidation or undue influence – within 4 years from the time such violence, intimidation or undue influence ceases; 3)Where consent is vitiated by mistake or fraud – within 4 years from the time of the discovery of such mistake or fraud.

• Discovery of fraud must be reckoned from the time the document was registered in the Office of the Registry of Deeds. Registration constitutes constructive notice to the whole world. (Carantes vs. CA, 1977)

Who May Institute Action for Annulment (Art. 1397) General Rule: Action for annulment may be instituted by all who are thereby obliged principally or subsidiarily. A stranger to the contract cannot institute an action for annulment. Requisites: 1)Plaintiff must have interest in the contract; 2)The victim and not the party responsible for the vice or defect must assert the same.

Exception: If a third person is prejudiced in his rights with respect to one of the contracting parties, and can show detriment which would positively result to him from the contract in which he has no intervention (Teves v. People’s Homesite & Housing Corp., GR No. 21498, June 27, 1968)

Effects of Annulment 1)In contract has not yet been consummated parties shall be released from the obligations arising therefrom; 2)If contract has already been consummated rules provided in Arts. 1398-1402 shall govern. •Arts. 1398-1399 – Obligation of mutual restitution •Arts. 1400-1402 – Effect of failure to make restitution

UNEFORCEABLE Contracts Those which cannot be enforced by proper action unless they are ratified, because, either: 1)They are entered into without or in excess of authority (Art 1403 (1); Art. 1317); 2)They do not comply with the statute or frauds (Art. 1403 (2); 3)Both contracting parties do not possess the required legal capacity.

Note: The statute of frauds applies only to EXECUTORY CONTRACTS, not to those that are partially or completely fulfilled. Further, the statute does not apply to actions which are neither for specific performance of the contract nor for the violation thereof. Take note that the provision mentions “unenforceable by action.” The prohibition, thus, applies on actions which spring from the enforcement of the contract.

Mactan-Cebu Int’l. Airport Authority vs. Lozado, Sr. (Feb. 25, 2010)

Held: The Statute of Frauds operates only with respect to executory contracts, and does not apply to contracts which have been completely or partially performed,

Ratification of Contracts Infringing the Statute of Frauds (Art 1405) Such contracts may be ratified by: 1)Failure to object to the presentation of oral evidence to prove such contracts; or 2)Acceptance of benefits under these contracts Note: The unenforceability of a contract can only be assailed by parties thereto (Art. 1408). This defense is personal to the party to the agreement.

VOID OR INEXISTENT Contracts In general, they are those which lack absolutely either in fact or in law one or some of the elements essential for its validity. Note: The defense of illegality of contract is not available to third persons whose interests are not directly affected (Art. 1421) •A contract which is the direct result of a previous illegal contract, is also void and inexistent (Art. 1422)

Void and Inexistent Contracts Distinguished Void

Inexistent

Those where all of the requisites of a contract are present but the cause, object or purpose is contrary to law, morals, good customs, public order, or public policy or contract itself is prohibited or declared void by law.

Those where one or some or all of the requisites essential for the validity of a contract are absolutely lacking

Principle of applicable

pari

delicto

May produce legal effects

is Principle of pari delicto is not applicable Cannot produce legal effect

Covers Art. 1409 nos. 1, 3, 4, 5, 6 Covers Art. 1409 nos. 2 and 3 and 7

Contracts which are INEXISTENT and VOID AB INITIO (Art. 1409) 1)Those whose cause, object or purpose is contrary to law, morals, good customs, public order or public policy; 2)Those which are absolutely simulated or fictitious; 3)Those whose cause or object did not exist at the time of the transaction; 4)Those whose object is outside the commerce of men; 5)Those which contemplate an impossible service; 6)Those where the intention of the parties relative to the principal object of the contract cannot be ascertained; and 7)Those expressly prohibited or declared void by law.

Principle of In Pari Delicto (Arts. 14111417) General Rule: When the defect of a void contract consists in the illegality of the cause or object of the contract and both of the parties are at fault or in pari delicto, the law refuses them any remedy and leaves them where they are.

Exceptions: 1)Payment of usurious interest (Art. 1413); 2)Payment of money or delivery of property for an illegal purpose, where the party who paid or delivered repudiates the contract before the purpose has been accomplished, or before any damage has been caused to a third person (Art. 1414); 3)Payment of money or delivery of property made by an incapacitated person (Art. 1415); 4)Agreement or contract not illegal per se but merely prohibited by law, and the prohibition is designed for the plaintiff’s protection (Art. 1416);

5) Payment of any amount in excess of the maximum price of any article or commodity fixed by law (Art. 1417); 6) Contract whereby a labourer undertakes to work longer than the maximum number of hours fixed by law (Art. 1418); 7) Contract whereby a labourer accepts a wage lower than the minimum wage fixed by law (Art. 1419); 8) In case of divisible contracts, the legal terms may be enforced separately from the illegal terms (Art. 1420); and

9) One who lost in gambling because of fraudulent schemes practiced on him. He is allowed to recover his losses. [Art. 315, 3(b), RPC] even if gambling is prohibited.

Note: The principle of in pari delicto is applicable ONLY TO VOID CONTRACTS and not to inexistent contracts.

Rules when only one of the parties is at fault: 1)Executed Contracts – guilty party is barred from recovering what he has given to the other party by reason of the contract. Innocent party may demand for the return of what he has given. 2)Executory Contracts – Neither of the contracting parties can demand for the fulfillment of any obligation from the contract nor may be compelled to comply with such obligation.

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