law on obligations_edited 09 version

7/27/2019 Law on Obligations_edited 09 Version

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ATENEO DE DAVAO UNIVERSITYSchool of Business and Governance

CPA Review Center

BUSINESS LAW(May 23, 2009)

REVIEW ON LAW ON OBLIGATIONS(Articles 1156-1304 of the Civil Code)

I. Obligations General Provisions

1. Meaning of Law on Obligations and Contracts?

The law on obligations and contracts is the body of rules which deals with the natureand resources of obligations and rights and duties arising from agreements andcontracts.

2. Source of the Law on Obligations and Contracts is the Civil Code of the Philippines

(Republic Act No. 388)which took effect August 30, 1950. The Civil Code is derived from the Civil Code of

Spain of 1889.

3. Meaning of obligation:Code basis Article 1158 obligation is juridical necessity to give to do or not

to do.

4. Criticism as to the definition of the Civil Code by Justice J.B.L. Reyes.

It views obligation from the debit side. There is no debt with credit and the credit is anasset in the patrimony of the creditor just as the debt is the liability of the obligor.

Better definition: the one given by Arias Ramos, one of the commentators of the CivilCode:

An obligation is a juridical relation whereby a person (called creditor)may demand from another (called debtor) the observance of a determinativeconduct (the giving, doing or not doing) and in case of breach, may demandsatisfaction from assets of the latter.

5. Kinds of obligations based on its definition:

Real obligation obligation to give

Personal obligation obligation to do or not to do

Two kinds of personal obligationa) Positive personal obligation to dob) Negative personal obligation not to do

6. Essential Requisites of obligation

1. Active Subject the obligee or creditor one who has the right and power todemandthe performance of the obligation.

2. Passive Subject the obligor or debtor one who is obliged to perform theobligation.

3. Object or Prestation subject matter of the obligation that consists of theprestation to give, to or not to do. The objects of contract are things, right orservices.

4. Juridical or Legal Tie It is also known as efficient cause, which binds theparties to the obligation. Another name is VINCULUM JURIS.

7. Meaning ofJuridical Necessity:

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Obligation is a juridical necessity because in case of non-compliance, the courts ofjustice may be called upon to enforce its fulfillment or in default thereof, the economicvalue that it represents. In a proper case, the debtor may be made liable for damagesfor the injury or harm suffered by the creditor for the violation of the latters right.

8. Other Significant terms:

a) Obligation the act or performance that the law will enforce.b) Right The power which a person has under the law to demand from anotherany prestation.c) Wrong (cause of action) an act or omission of one party in violation of the legalright

(a right recognized by law) of another. It is also known as INJURY

OperativeIllustrations of an obligation:

I. By virtue of a contract, D obliged himself to ship the goods of C from Manila to Cebufor P10, 000. D is the passive subject while C is the active subject. The shipping ofgoods to Cebu is the prestation; the contract between D and C is the efficient cause

or vinculum juris.

II. (Obligation to give)Isaac Rimando and Moises Reyes signed a contract whereby Isaac Rimando obliged

himself to deliver to Moises Reyes a Toyota Corolla 2008 model on November 12,2008.

III. (Obligation to do)Robert Gonzales and Angel Filamor entered into a contract whereby, Robert

Gonzales obliged himself to paint the car of Angel Filamor.

IV. (Obligation not to do)

Nicanor Castro insured himself with the Manila surety and Insurance Co. The partiesagreed that Nicanor would not commit suicide during the existence of the insurance.

9. Kinds of Obligations:

1. Viewpoint of sanctions:

a. Civil obligations give a right of action to compel their performance.b. Natural obligations not based on positive law but on equity and natural law.

It does not grant a right of action to enforce theirperformance but after voluntary fulfillment by the obligor they authorize theretention of what has been delivered or rendered by reason thereof.

c. Moral obligations those that cannot be enforced by action but which isbinding on The party who makes it in conscience and natural law. Under ourlaw, moral obligations are not merged with natural obligations.

2. Viewpoint of performancea. Positive to give or to dob. Negative not to do

3. Viewpoint of subject mattera. Real obligation to giveb. Personal obligation to do or not to do

10 . Sources of obligations: ( Article 1157 of the Civil Code)A - 1. Law

2. Contracts3. Quasi-contracts4. Act or omission punishable by law5. Quasi-delicts

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B. Law as source of obligationsObligations derived from law are presumed. Only those expressly determinedin this code or by special laws are demandable and shall be regulated by theprecepts of the law which established them; and as to that has not been foreseen,by the provisions of this book. (Art.1158)

a) Obligation ex-lege (arising from law) not presumed.

b) Obligations arising from law are not presumed. To be demandable andenforceable, the obligation must be stayed by the law, which created theobligation. Such being the case the agreement of the parties under this obligationis no longer necessary because it is the law, which governs their obligation.

c) Law governing obligations derived from law. Obligations derived from law shall begoverned by the law, which establishes them. In case of insufficiency, theprovisions of the Civil Code shall supplement the same.

Examples:a. The obligation of husband and wife to support each other. (Art.195, Civil Code)

b. The obligation of a taxpayer to file his income tax return. (Title VI. Section 44, NLRC)c. The obligation of the legitimate ascendants and descendants to support each other.

(Art 195, Civil Code)

ILLUSTRATIVE CASE.SG, while employed as a guard of a movie house by O, shot and killed a

gatecrasher, X who attacked SG with a knife after having been refused entrancewithout first providing himself with a ticket. SG was criminally charged withhomicide but the trial court dismissed the case. For the expense incurred in hisdefense, SG demanded reimbursement from the owner. When the owner refused,he filed his action for the recovery of the amount paid to his lawyer plus moraldamages.

Held: The owner O is not liable because the giving legal assistance to theemployee is not a legal obligation.

While is may be true it may be considered as a moral obligation. It does not atpresent, count with the legal sanction of any man-made law. If the owner with is notlegally obliged to give legal assistance to the employee, then the latter cannotrecover the amount paid cannot be presumed, it must be stated before it becomeobligatory.

C. Contract as a source of obligation:

Obligations arising from contracts have full force of law between the contractingparties and should be complied with in good faith. (Art.1159)

a) Validity of Contract.In contract as to their general formation this is what we call freedom to contract orautonomy of will, the contract entered into between the parties shall have theforce of law between the parties. Any violation by either party shall produce acause of action against the violator. However, in order for a contract to be valid andenforceable it must not be contrary to law, morals, good customs, public order orpublic policy, otherwise the contract is void. (Art.1306, 1409, Civil Code)

b) Effect if part of the contact is void.

If part of the contract is void but the contract is susceptible of division, the part,which is not affected, may be enforced disregarding the part, which is void. Suchthat if the contract is falsified by the unauthorized insertion of additional stipulation,this falsified insertion shall be considered inexistent and part unaffected shall beenforced.

D. Quasi-Contracts as source of contract.

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It is judicial relation, which arises from certain lawful, voluntary, and unilateral acts,to the end that no one may be unjustly enriched or benefited at the expense ofanother. (Art. 2142 of the Civil Code)

Two principal kinds of Quasi-contracts.

1. Negotiorum Gestio (unauthorized management) voluntary administration of the

property, business or affairs of a third person without the consent or authority of itsowner.

2. Solutio Indebiti (undue payment) payment by mistake of an obligation that wasnot due when paid.

Distinction between contract and quasi-contract:The distinction of a quasi-contract from contract is that in contract, there is

consent of the parties while in quasi-contract, the obligation arises without a contract.

What law governs Quasi-Contracts?Chapter 1, Title XVII of the Civil Code ( Arts. 2142-2175) as provided under Article

1160, CC.

Some examples of Quasi-Contract.

1) Art 2144, whoever voluntarily takes charge of the agency or management of thebusiness or property of another, without any power from the latter is obliged tocontinue the same until the termination of the affair and its incidents or to require theperson concerned to substitute him. If the owner is in a position to do so.

Examples of Quasi-Contracts:1. A merchant-farmer and owner of a ten-hectare agricultural land left for USA on apleasure trip. While enroute to USA typhoon dading devastated the entirePhilippines including the land owned by D. Before the typhoon reached our area ofresponsibility C, a neighbor of D employed six (6) farmers to harvest the palay plantedon the obligation of D upon arrival is to reimburse C P600 because he must not beenriched at the expense of another.

2) Art.2154. If something is received when there is no right to demand it and it wasunduly delivered through mistake he obligation to return it arises.

3) Art. 2164. When, without the knowledge of the person obliged to give support, it is

given by a stranger, the latter shall have a right to claim the same from the former,unless it appears that he gave it out of piety and without intention of being repaid.4) Art. 2167. When, through an accident or other cause, a person is injured or becomeseriously ill, and he is treated or helped while he is not in a condition to give consent toa contract he shall be liable to pay for the services of the physician or other personaiding him, unless the service has been rendered out of pure generosity.

5) Art. 2168. When, during a fire, flood, storm, or other calamity, property is savedfrom destruction by another person without knowledge of the owner, the latter isbound to pay the former just compensation.

6) Art. 2174. When, in a small community a majority of the inhabitants of age decided

upon a measure for protection against lawlessness, fire, flood, storm or other calamity,anyone who objects to the plan and refuses to contribute to the expenses shall beliable to pay his share of said expenses.

Difference between Quasi-contract and Natural Obligation:Quasi-contracts are certain lawful, voluntary and unilateral acts which give rise to

the juridical relations of the party to the end that no person shall be unjustly enrichedor benefited at the expense of another while natural obligations are those not basedon positive law but on equity and natural law. They are not demandable in the courts

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of justice however when they are voluntarily performed or fulfilled, they can already beretained and the debtor cannot recover what has been paid or performed.

Example: If the debtor pays by mistake or not knowing that the condition or periodhas not yet arrived, he can recover based on undue payment (quasi-contract). Adebtor paid his creditor knowing that his obligation to pay has already expired cannotanymore recover what he paid by reason of natural obligation.

E. Delict as a source of obligationThis is an act or omission punishable by law. The principle is that if a person

committed an act or omitted to do an act and the act or omission is punishable bylaw he is civilly-liable. (Art. 1161)

a) Felony or crime: It is an act or omission punishable by law. A violation of theRevised Penal Code is called a felony while violation of any penal statutes includingthe Revised Penal Code is called a crime.

b) Rules governing Delicts:

1) Philippine revised Penal code and other penal laws subject to the provisions ofArticle 2177 of the Civil Code.

2) Chapter II, Preliminary Title, on Human Relations of the Civil Code.3) Civil Code on damages, Title 18 of Book IV

c) Civil Liability Arising from Delicts or Acts or Omissions Punishable by Law:

a. Restitution The thing itself shall be restored.b. Reparation of the damage caused- The court determines the amount of

damage taking into consideration the value of the thing, improvements andfruits and reparation shall be made accordingly.

c. Indemnification for Consequential Damages- It shall include not only those

suffered by the injured party but also those suffered by his family and thirdperson by reason of the crime.

d) Commission of a crime as a source of an obligation.

Every person who is criminally liable is also civilly liable under Art. 100 of theRevised Penal Code. If a person therefore is guilty of the crime charged he must notonly be imprisoned but he shall also answer for damages as a civil obligation. Suchcivil obligation is a necessary consequence of a criminal responsibility and it to bedeclared and enforced in the same criminal proceeding except when the injuredparty reserved his right to file the civil action independently from the criminalaction. (Sec. I, Rule III, Revised Rules of Court)

e) Enforcement of Civil liability arising from crimes or delicts:

Ordinarily, when the offended party files the criminal action, he is deemed to havefiled simultaneously the civil action for the civil liability of the offender unless hereserves his right to institute a separate civil action of the civil liability of theoffender. Meaning the civil liability shall be heard separately from the criminalaction.

F. Quasi-delict or culpa aquiliana or tort as a source of obligationOne which causes damage to another, there being fault or negligence, but there is no

pre-existing contractual relation between the parties. (Art. 1162)

A) Meaning of Culpa Negligence (Culpa Aqulliana, torts) omission of thatdiligence required by the circumstances of person, place and time. Negligence is aquestion of FACT.

The failure of a person to exercise or observe for the protection of the interests ofanother person the degree of care, precaution & vigilance which circumstances

justify demand whereby such person suffers injury.

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b. However, if the law or contract provides for a different standard ofcare, said law or

stipulation must prevail (Art. 1163)

Other names for Diligence of a Good Father of the Family -a) Ordinary Diligenceb) Diligence of a Prudent Man

c) Diligence that depends on the nature of the obligation and corresponds withthe circumstances of person, of time and of the place.

When EXTRAORDINARY DILIGENCE IS REQUIRED? If it is stipulated or required bylaw

Example of a case where the law requires extraordinary care (not merely that of aprudent man):

A common carrier is bound to carry the passengers safely as far as human careand foresight can provide, using the utmost diligence of a very cautious persons,with due regard for all the circumstances. Art. 1755 of the Civil Code.

B) Duty of a person obliged to give generic thing:a) To deliver a thing which is of the quality intended by the parties taking into

consideration thepurpose of the obligation and other circumstances (Art. 1246) Rule on

Medium Quality

Liability:

To be liable for damages in case of fraud, negligence or delay, in theperformance of his obligation or contravention of the tenor thereof (Art. 1170)

2. Duty to deliver the thing and the fruits of the said thing to be delivered .(Article 1164)

a. When creditor is entitled to the fruits?The rule is the creditor has a right to the fruits from the time the obligation todeliver arises. Meaning the creditor is entitled to the fruits of the thing to bedelivered from the time the obligation to make delivery arises. The intention ofthe law is to protect the interest of the creditor should the debtor commitsdelay purposely or otherwise, in the fulfillment of the obligation.

In Article 1537 specifically in a contract of law, the right to the fruits begins

from the day on which the contract was perfected. It clearly defined themeaning of obligation to deliver arises as far as the contract of sale is involved.

The vendor is bound to deliver the thing sold and its accessions andaccessories in the condition in which they were upon the perfectionof the contract.All the fruits shall pertain to the vendee from the day on which the

contract was perfected.

b. When does the obligation to deliver arises?- if there is no term or condition, from the perfection of the contract.- If there is a term or condition, from the moment the term arrives or the

condition happens.

c. Personal right (jus in personam) power demandable by one [person toanother to give, to do or not to do.

d. Real right (jus in re) power over a specific thing.

Kinds of fruits:a. Natural fruits spontaneous product of nature without human intervention.

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b. Civil fruits (like rents) a result of civilization arising from juridicaltransactions.

c. Industrial fruit products of nature bolstered with human intervention.

3. Duty to deliver the accessories and accessions (Art. 1166) The obligationto give a determine thing includes:

a) Accessories- Those joined to or included with the principal for the lattersbetter use, perfection, or enjoyment.

b) Accessions additions to or improvements upon a thing.

As a rule, accessories and accessions are included in the delivery of the thing evenif they are not mentioned.

Effect of stipulation: If there is a stipulation and accessories are not included, suchstipulations are valid and binding upon the parties.

4. Deliver of the thing itself (Article 1165):

Kinds of Delivery:

Delivery may be either actual or constructive.

I. Actual delivery (tradition) where physically the property changes hands.Example: If A sells to B a fountain pen, the giving of the fountain pen by A to B isactual tradition.

II. Constructive Delivery That where the physical transfer is implied. This may bedone by:

a. Traditio symbolica (symbolic tradition) as when the keys of a bodega aregiven.

b. Traditio longa manu (delivery by mere consent or the pointing of the object.

c. Traditio brevi manu (delivery by short hand; that kind of delivery wherebya possessor of a thing not as an owner becomes the possessor as an owner.Example: when a tenant already in possession of the house buys the housefrom the owner.

d. Traditio Constitutom Possessorium the opposite of brevi manu; thus thedelivery whereby a possessor of a thing as an owner retains possession nolonger as an owner, but in some other capacity (like a house owner whosells a house but remains in possession as tenant of the same house)

e. Tradition by the execution of legal forms and solemnities.

5. Answer for damages in case of non-fulfillment of the obligation :

Under the Civil Code, what are the different acts or omissions of the obligor ordebtor that will result in the breach of the obligation for he can be held liable fordamages?

a. Default (Mora) delay on the part of the debtor ( See discussions ofmora below)

b. Fraud (Dolo) in the performance of the obligation.

Kind of Dolo:

a) Incidental Fraud (dolo incidente) referred to under Article

1170.b) Causal Fraud ( dolo causante) fraud employed in the

execution of the contract under Article 1338 which vitiateconsent.

Note: The law refers to incidental fraud only as reiterated inArticle 1344, 2nd paragraph, incidental fraud obliges the personemploying it to pay damages.

c. Negligence (Culpa)

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d. Contravention of the tenor of the obligation (Art. 1170)

KINDS OF DAMAGES

M Moral damages referring to mental and physical anguish;E - Exemplary corrective or to set example

N - Nominal -to vindicate a right -when no other kind of damages may berecovered.T Temperate when the exact amount of damage cannot be determinedA Actual losses as well as unrealized profitL Liquidated (predetermined beforehand by agreement)

Measure of liability for damages.

Article 2201 of the Civil Code states:

In contracts and quasi-contracts, the damages fir which the obligor who acted in

good faith is liable shall be those that are the natural and probable consequences of thebreach of obligation and which the parties have foreseen or could have reasonablyforeseen at the time obligation was constituted.

In case of fraud, bad faith, malice or wanton attitude, the obligor shall beresponsible for all damages which may be reasonably attributed to the non-performanceof the obligation.

REMEDIES OF THE CREDITOR AGAINST DEBTOR:

In obligations to give what are the different rights, which are available to thecreditor?

If the obligation is an obligation that is determinate, the creditor may:1. Compel specific performance (Art. 1165)2. To recover damages in case of breach of the obligation (Art

1170)

If the obligation is indeterminate or generic, the creditor may:

a. Ask for the performance of the obligation (Art. 1246)b. To ask that the obligation be complied with at the expense of the debtor (Art.

1165, par. 2 CC)c. To recover damages in case of breach of obligations. (Art. 1170)

If obligation is to do and debtor fails to perform it, the creditor maya. Ask another person to perform the obligation at the expense of the debtor ( Art.

1167) unless act is personal in character and/orb. He may also demand damages from the debtor. Damages only when obligation

is personal in character.

If debtor performs it but in contravention of the tenor of the obligation or done in apoor manner, creditor may:

a. Have the same be undone at the debtors expense (Art. 1167) and

b. Demand damages from the debtor (Art. 1170)

If debtor does what has been forbidden, creditor maya. Demand what has been done be undone.b. Demand damages from the debtor

What is the requirement before a debtor is liable of delay?

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Under Article 1169 of the Civil Code, demand (judicial or extra-judicial) is requiredbefore a debtor is considered in legal delay or mora.

Judicial demand is when a complaint is filed in court.Extrajudicial demand when oral or written demand was conveyed or sent to the

debtor.

What is the meaning of Mora?

Default or mora signifies the idea of delay in the fulfillment of an obligation. Inother words, it is the non-fulfillment of an obligation with respect to time.

The different kinds of default or mora:

A. Mora solvendi or delay of the obligator or debtor to perform his obligation. Thisdelay is called mora solvendi ex re when the obligation is an obligation to give ormora solvendi ex persons when the obligation is an obligation to do.

B. Mora Accipiendi or delay of the obligee or creditor to accept the delivery of thething, which is the object of the obligation.

C. Compensatio Morae, or delay of the parties or obligors or debtor incur in delay.

In obligations to give or to do, when does the obligor or debtor incur indelay?

The debtor incurs in delay from the time the creditor judicially or extra judiciallydemands from him the fulfillment of the obligation. And in spite of demand, he isunable to observe the obligation. (Art. 1189 par. 1, CC)

When is demand by the creditor not necessary in order that delay mayexist?

a. When the obligation or the law expressly so declares;b. When from the nature and the circumstances of the obligation it appears that

the designation of the time when the thing to be delivered or the service is tobe rendered was a controlling motive for the establishment of the contract.

c. When demand was be useless, as when the obligor has rendered it beyond hispower to perform (Art 1169 par. 2)

In reciprocalobligations when does one of the parties incur in delay?

In reciprocal obligations, neither party incurs in delay if the other does notcomply or is not ready to comply in a proper manner with what is incumbent uponhim. From the time one of the parties fulfills his obligation, delay by the other

begins. (Art 1169, par 3)

Effect of waiver of fraud or negligence in an obligation:

a) If fraud is present in the obligation, the same is immediately demandable.WAIVER OF FUTURE FRAUD IS VOID. Waiver of past fraud is allowed.(Art. 1171) Reason: Fraud is absolutely not encouraged by the law becauseof its evil effects. Past fraud because the act was already done. Suchwaiver is an act of liberality on the part of the creditor.

b) If negligence is present in the obligation, it is likewise demandable. Waiverof future negligence may be allowed except where the nature of the

obligation requires exercise of extraordinary diligence as in the case ofcommon carriers and also where negligence shows bad faith. (Art. 1172)

What is fortuitous event?

A fortuitous event is an event, which cannot be foreseen, or which thoughforeseen, is inevitable (Art 1174 CC). Ordinarily, the terms fortuitous event andforce majeure are used interchangeably.

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There is however a technical difference. Force majeure is a term that isapplicable only to those fortuitous events which are dependent upon humanintervention, such as wars, strikes, riots, etc., while fortuitous event is the generalterm that is applicable regardless of whether the event is independent of ordependent upon human intervention.

GENERAL RULE: No liability for FORTUITOUS EVENT (CASO FORTUITO, ACTOF GOD, FORCE MAJEURE & UNAVIODABLE ACCIDENT) if obligation refers to give adeterminate thing and debtor acted without fault.

Exceptions:- When expressly declared by stipulation or contract;- When the nature of the obligation requires the assumption of risk (the

doctrine of Created Risk)- When the law expressly provides:a. When the object of the obligation is lost and the loss occurs after the

debtor has incurred in delay. (Art. 1165)b. When the debtor promises to deliver the same thing to two or more

persons at the same time who do not have common interest; (Art. 1165)c. When debtor is guilty of fraud, negligence, delay and contravention of

the tenor of the obligation ( Article 1170)d. When the obligation to deliver arises from a criminal offense ( Article

1268); ande. When the obligation is generic (Art. 1263)

Essential Characteristics of a Fortuitous Event:a) The cause must be independent of the will of the debtor;

b) Impossibility of foreseeing or impossibility of avoiding it,even if foreseen;

c) The occurrence must be such as to render it impossible for

the debtor to fulfillhis obligation in a normal manner.

Usury Law governed by special law.

The law governing usurious transactions is Act No. 2655 otherwise known asthe Usury Law as amended by Act Nos. 3291, 3998, 4070, Commonwealth Act No.339. However, the Monetary Board of the Central Bank is empowered to changethe rates of interest from time to time whenever economic and social conditionswarrant or may eliminate, exempt or suspend the same. The ceiling of interestmay not be uniform.

Central Bank circular 905-A dated December 10, 1982, suspendedapplication of the Usury law when it provided that rate of interest and other chargesin loan or forbearance of money, goods or credits, regardless of maturity and whethersecured or unsecured, that may be charged or collected shall not be subject to anyceiling prescribed under the Usury law.

Note: Usury law has not been repealed but merely suspended. Only Congress canrepeal laws.

Rules on interest payments:

The rule is no interest shall be due unless it has been expressly stipulated inwriting.

There being a stipulation as to interest but the rate is not fixed, then the creditormay only recover the legal rate.

Meaning of legal Rate: Legal rate of interest is that rate which will prevail in theabsence of any special agreement as to the rate of interest between the parties toa contract.

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Central Bank Circular on Interest Rates.

The Monetary Board of the Central Bank issued December 3, 1982, Circular No.905, fixing the rates of interest on loans or forbearance of money goods or credit.Section 1 of the circular provides as follows:

The rate of interest, including commissions, premiums, fees and other charges on

a loan or forbearance of any money, goods or credits, regardless of maturity and whethersecured or unsecured that may be charged or collected by any person, whether naturalor juridical shall not be subject to any ceiling prescribed under or pursuant to the UsuryLaw as amended.

Applicable Presumptions:

Meaning of Presumption By presumption is meant the inference as to theexistence of certain facts which if not contradicted is considered true.

Two kinds of Presumption

a) Conclusive one which cannot be contradictedb) Disputable (Rebuttable) one which may be contradicted by presenting

satisfactory proof tothe contrary.

Presumptions:A. Receipt of the Principal without Reservation would give rise to a

presumption that interest has been paid. (Art. 1176)B. Receipt of the later installment without reservation as to prior

installment shall likewise raise the presumption that the priorinstallments have been paid. (1176)

Remedies which are available to the creditors in order to protect his rightsagainst the debtor act defrauding the former: (Art. 1177)

a) Exact payment (specific performance) with right of damagesb) Exhaust or pursue debtors properties generally by attachment (except propertiesexempted by law)c) after having pursued the property in possession, exercise all rights and besubrogated by all the rights and actions of the debtor save those that are inherent hisperson (accion subrogatoria)d) To ask the court to rescind or impugn all acts which the debtor may have done todefraud the creditor (accion pauliana)

Principle of Transmissibility of Rights (Article 1178)

General Rule:

Subject to the laws, all rights acquired in virtue of an obligation are transmissible ifthere has been no stipulation to the contrary.

Principle of Transmissibility of Rights to be read together with Article 1311 onthe Principle of Relativity of Contracts. (Contracts bind only the contracting parties,their heirs and assigns)

INTANCES WHERE PRINCIPLE OF TRANSMISSIBILITY WILL NOT APPLY (Exceptions):

a) If the law provides otherwiseIn contract of partnership, agency & commodatum, there is no transmissibility

of rights.b) If the contract provides otherwisec) If the obligation is purely personal

III. DIFFERENT KINDS OF OBLIGATIONS (Arts. 1179-1230)

1. A. Primary Classes of Obligations:

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a) Pureb) Conditionc) With a term or a periodd) Alternativee) Facultativef) Jointg) Solidary

h) Divisiblei) Indivisible

j) With a Penal Clause

PURE OBLIGATION

Pure Obligation is defined as one whose performance does not depend on a futureor

uncertain event, or upon a past event unknown to the parties, hence demandableat once. (Art.1179) In other words, this is one, which contains neither period nor acondition; hence the obligation is effective immediately.

Examples:Ill pay you P20,000 on demand.Ill pay you P20,000.

CONDITIONAL OBLIGATION

Conditional obligation is one where there is a condition imposed.

Meaning ofcondition It is an uncertain event, which wields an influence on alegal relationship.

Characteristics of condition:A. It refers to future and uncertain event.B. It may also refer to past event but unknown to the parties.

A condition is either:

a)) Suspensive the happening of the condition give rise to an obligation.Example : Ill buy you a land for P 1M if you pass the CPA Board Exam in

October 2009.(This is suspensive for the result has to be awaited) See Article 1181

b) Resolutory the happening of the condition extinguishes the

obligation.Example : Ill give you my land now, but should you fall in the CPA

Board this coming October2009, your ownership will cease and it shall revert back to

me. (Article 1181)

Therefore, there are three (3) instances when an obligation and demandable atonce thus:

a) When it is a pure obligation andb) When the obligation has a resolutory condition.c) When the obligation is subject to a resolutory period.

CLASSIFICATION OF CONDITIONS

As to effect:

1. Suspensive the happening of the condition give rise to the obligation.

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2. Resolutory the happening of the condition extinguishes the obligation.

As to cause or origin:

1. Potestative depends upon the will of the one of the contractingparties.

a) If it is suspensive and dependent on the will of the debtor

(Example: Ill sell you my car if I like), both the condition and obligationare VOID. (Article

1182)b) Where the condition depends upon will of creditor, obligation is valid.

Example: I will pay you upon your demand.c) Where resolutory condition depends upon the will of the debtor, the

obligation is valid.Example is pacto de retro sale. The position of the debtor when

the condition isresolutory is exactly the same as of the creditor when the

condition is suspensive.2. Casual depends on chance or hazard or the will of third person VALID

Example; Ill give you P 10,000 if I win 1st prize in the lotto.3. Mixed depends party on the will of one of the parties and party on

chance or willof the 3rd person (If I pass the bar) VALID

Example: I will give you P 10,000 if you marry Miss Black or if I winthe lotto.As to divisibility:

1. Divisible capable of partial performance2. Indivisible not capable of partial performance because of the nature of the

thing orbecause of the intention of parties.

As to mode:

1. Positive an act is to be performed.The condition that some event happen at a determinate time shall extinguish

the obligation as soonas the time expires or it has become indubitable that he event will not take

place. (Art. 1184)2. Negative something will be omitted.

If condition is negative which means the event will not happen at a determinatetime. The obligation shall become effective and binding from the moment thetime indicated has lapsed without the event taking place; or from the moment it

has become evident that the event cannot occur, although the time indicated hasnot yet elapsed. (art. 1185)

As to form:

1. Express the condition is stated.2. Implied - the condition is merely inferred.

As to possibility:

1. Possible capable of fulfillment in nature and in law2. Impossible not capable of fulfillment due to nature or due to the operation of

thelaw or morals or public policy; or due to a contradiction in its terms.

Note is condition is impossible, legally or physically obligation is also void.If condition is negative, that is not to do an impossible thing, the condition is

disregarded and theobligation is rendered pure and valid.

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As to numbers:

1. Conjunctive if all the conditions must be performed2. Alternative if only a few of the conditions have to be performed.

Constructive Fulfillment of a Condition

If the debtor prevents voluntarily the fulfillment of the condition the said actwould result to

CONSTRUCTIVE FULFILLMENT SAID CONDITION UNDER Art. 1186.

Note: It is not even required that debtor is in bad faith. It is sufficient that heprevented the

happening of the condition.

Effect if suspensive condition takes place:

Rule is retroactive effects of fulfillment of suspensive condition. In an obligation togive subject to a suspensive condition becomes demandable only upon the fulfillmentof the condition. However, once the condition is fulfilled, its effects shall retroact tothe day when the obligation is constituted. Reason: condition is mere accidentalelement of the contract.

If obligation is reciprocal, there is no retroactivity because the fruits and interestsreceived during the pendency of the condition are deemed to have been mutuallycompensated.

In unilateral obligation, there is usually no retroactive effect because they aregratuitous. The debtor receives nothing from the creditor unless from the nature andother circumstances it can be inferred that the intention is to apply retroactivity.

In obligation to do or not to do, the courts shall determine, in each case, theretroactive effect of the condition that has been complied with. (Article 1187)

Rights of creditor /debtor pending fulfillment of suspensive condition:

Creditor may bring appropriate actions of preservation of his right.

Debtor may recover what has been paid by mistake in case of a suspensive

condition. (Article 1188)If subject to a period and there is payment by mistake Article 1195 provides thataside from recovery of what was paid by mistake, debtor can also recover fruitsand interests, if any.

LOSS DETERIORATION AND IMPROVEMENT DURING THE PENDENCY OFCONDITION.

(The same rule applies for both obligations with suspensive and resolutory condition andobligation with a period) Article 1189

a. For conditional obligation, if suspensive, it is required that condition is

fulfilled and the object is specific. For resolutory condition, thehappening of the condition extinguishes the obligation, hence mutualrestitution follows.

b. The above rules also apply to suspensive and resolutory period exceptthat in a period, it will necessarily come.

a) The object may be lost:1. without the fault of the debtor - extinguishes obligation

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2. with the fault of the debtor require debtor payment ofdamages.

b) The object deteriorates without the fault of the debtor, the impairment is borneby the

creditor. If it deteriorates thru the fault of the debtor, creditor may chooseeither

rescission of the contract or of the fulfillment, with claim for damages

either of theselected remedy.

c) If the object improves by nature, the improvement inures to the benefit of thecreditor and

if the debtor at his expense improve it, the debtors right is merely of ausufructuary.

RECIPROCAL OBLIGATIONS:

The power to rescind obligations implied in reciprocal ones, in case one of theobligors should

not comply what is incumbent upon him. (Art. 1181, par. 1)

Remedies of the injured party in reciprocal obligations:f. Action for specific performance of the obligation with damages; org. Action for rescission of the obligation also with damages.

The above remedies are alternative. He may however choose rescission if afterhe has chosen fulfillment, the latter become impossible.

RESCISSION contemplated by the law is JUDICIAL RESCISSION.

Further, the court in some instance may instead grant the party a term for

performance instead of ordering rescission such as in case when the breach isslight or when right of third person is affected. Hence court may deny rescission.

When it is the court rescinds the obligation, this is known as JUDICIALRESCISSION, which is initiated upon the filing of complaint in court by the injuredparty.

Rule when both parties are guilty of breach

Art. 1192. In case both parties have committed a breach of the obligation, the liabilityof the first infractor shall be equitably tempered by the courts. If it cannot bedetermined which of the parties first violated the contract, the same shall be deemed

extinguished, and each shall bear his own damages. Application of the pari delictorule

Obligation with a Term or Period

A space of time which has an influence on obligations as a consequence of ajuridical act and either suspends their demandability or produces theirextinguishment.

It is one that arises upon the arrival of the term or period agreed upon, hence

demandable only on that instance.

Term or Period is that time or event which necessarily must come, whether theparties know when it would happen/come or not

Day certain means one, which must necessarily come although it may not beknown when.

Examples:

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1) Ill pay you P20,000 on the 25th of December next year.2) Ill pay you P20,000 if Imelda Marcos dies. Death is certain even if we

cannotreally ascertain when it will come.

But this one is conditional:

Ill pay you P20,000 if Imelda Marcos dies of malaria Reason: She mightdie of bangungot.

NOTE: When the debtor binds himself to pay when his meanspermit him to do so, the obligation is deemed to be one with a Term orPeriod (Article 1180).

Example : Ill pay you P10,000 when my means permit me to do so.Ill pay you P10,000 little by littleIll pay you P10,000 as soon as possible.Ill pay you as soon as I have the money.

Kinds of Period-1) Legal period fixed by law2) Voluntary Fixed by the parties3)Judicial period imposed or fixed by the court

Other classifications1) Ex die (suspensive) a period which must lapse before the obligation

can bedemanded

2) In diem (resolutory)- a period when it arrives extinguishes the obligation.

Distinction between Period and Condition:

Period ConditionAs to fulfillment

It is sure to happen or the event wouldnecessarily happen

It is uncertain event

As to influence on the obligation:

Fixes the time of efficaciousness of anobligation.

Causes the obligation to arise or tocease.

As to time:

Refers to the future. Refers future or a past event unknowntot he parties.

Period is generally for the benefit of both parties, unless otherwise stipulated (Art.1196)Meaning: The debtor cannot pay prematurely and the creditor cannot demand

prematurely.

If term is for the benefit of the debtor alone. He may only be required to pay onlyat the end of the term, but he may pay even before the period.If term is for the benefit of the creditor. Creditor can demand anytime even beforethe expiration of the period and he cannot be compelled by the debtor to acceptpayment before the term.

Instances wherein the debtor losses his right to make use of the period .Art 1198

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Meaning the term is extinguished and obligation is demandable at once.

a) Insolvency, unless a guaranty or security is givenb) Failure to furnish the promised guaranty or securityc) Impairment of the guaranty or security by debtors act or its loss due to

fortuitousevent, unless a satisfactory guaranty or security is given.

d) Violation of any undertaking in consideration of which the creditor agreedto the

periode) Attempt to abscond.

ALTERNATIVE & FACULTATIVE OBLIGATIONS

ALTERNATIVE OBLIGATION OBLIGATION WHEREIN VARIOUS THINGS ARE DUE,BUT

THE PAYMENT OF ONE OF THEM IS SUFFICIENT,DETERMINED BY THE CHOICE, WHICH AS A GENERAL

RULE BELONGS TO THE DEBTOR (Art.1199).

Right ofChoice:

Generally belongs to the DEBTOR. (Art. 1200) UNLESS expressly agreementgranted to the creditor (Art.1200)

Debtor cannot choose those prestations which are impossible, unlawful or whichcannot be an object of obligation.

When choice of the debtor becomes effective:

- It becomes effective from the time selection was communicated to the creditorthe said

time is the reckoning date of determining when legal effects are produced.- If debtor has no choice as there is only one choice left, the obligation isconverted to simple

obligation. (Art. 1202)- If the debtor cannot choose through the acts of the creditor, he may rescind the

contractwith damages. (Art.1203)

If the choice is given to the debtor, the loss of the thing is governed as follows:a) Loss of all obligation is extinguished provided debtor is without faultb) Loss of some the debtor may deliver any of the remainder or that which

remains ifonly one subsists, without obligation to pay damages. (If

debtor iswithout fault)

If loss was due to debtors fault:

Loss of all debtor shall pay the value of the last thing lost, plus damages.

However if all of them were lost at the same time, the debtormay choose

the value of any of them, plus damages.

Loss of some debtor may, without incurring any liability to paydamages, deliver

any of the remainder, or that which remains if only onesubjects.

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Loss of some due to debtors fault and the last thing due to fortuitousevent.

From and after the lost except one of the various things, whether due to

fortuitousevent or the debtors fault, the debtor shall loss the right of choice.

(Art.1202) and

the obligation is converted to a simple obligation. Hence, the loss of thelast

subsisting prestation due to fortuitous event extinguishes the obligation.

If Right of Choice is given to the CREDITOR:

Loss of things

Due to fortuitous event

a) Loss of all obligation is extinguished IF DEBTOR IS NOT AT FAULT.b) Loss of some the debtor shall deliver that which the creditor should

choose anyof those subsisting IF DEBTOR IS NOT AT FAULT.

Otherwise, he shall any of thosesubsisting or the price of any of those that have been lost

through the fault of the debtor plus payment of damages.

FACULTATIVE OBLIGATION obligation where only one prestation has beenagreed upon but the debtor may ender another substitution.

Example : D obliged himself to give C a specific Rolex watch with theunderstanding that D

could give a diamond ring as a substitute

Loss of the principal things:a) Due to fortuitous event the obligation is extinguished and the debtor is

notobliged to give the substitute.

b) Due to debtors fault the debtor shall answer for the loss of the thingdue to his

fault.

Loss of the substitute:a) Before substitution

The loss of the substitute before the substitution is made does not

affect theobligation as the principal can still delivered

b) After substitutionDue to fortuitous event obligation is extinguishedDue to debtors fault debtor is liable for damages

JOINT AND SOLIDARY OBLIGATIONS

Kinds of Obligation according to number of parties:1. Individual obligation one where there is only one obligor

an one oblige; and2. Collective obligation one where there are two or moredebtors and/or two or more creditors.

Joint obligationSolidary obligation

Joint obligation each of the debtors is liable only for a proportionate part of thedebt and

each creditor is entitled to a proportionate part of the credit.

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NOTE:

In the absence of stipulation, when there are multiplicity of parties or collectiveobligation, said obligation is presumed JOINT. Meaning, the share in the obligation isspecified, the correlative rights and obligation of the parties are known.Implications:

a) There are as many debts as there are debtors;b) There are as many credits as there are creditors;c) The debts/credits are considered distinct and separate from one another.d) Each creditor is entitled only for a proportionate part of the credit.e) Each debtor is liable only for his proportionate part of the debt.

Presumption established under Article 1208 is only disputable.Other terms for joint obligation:

a) mancomunadab) mancomunada simplec) proportionatelyd) pro-rata

Examples:

Joint obligation

A, B and C jointly executed a promissory note worded asfollows:

We promise to pay to the order of X P9,000.00

Sgd. A, B and C

Solidary obligation each debtor is liable for the entire obligation and eachcreditor is

entitled to demand the whole obligation.

When solidarity exists:

As a general rule, the mere concurrence of two or more creditors or two ormore debtors in one and the same obligation does not imply solidarity. Bypresumption of the law, the obligation is joint, unless:

a) Solidarity is expressly agreed upon (Conventional Solidarity)b) Solidarity is declared by law (Legal Solidarity)c) Solidarity is required by the nature of the obligation (Real

Solidarity)

Kinds of Solidarity

a) Active - solidarity among creditorsb) Passive solidarity among debtorsc) Mixed solidarity on the part of the creditors and debtors

Example:

1.

A, B, & C jointly executed a promissory note worded asfollows:

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I promise to pay to the order of X P9,000.000

Sgd. A, B & C

X can collect the entire P 9,000 from any of A, B or C.

2. A, B and C joint debtors are obliged to give x, Y and Z, solidary creditors of P18,000. How much can X collect and from whom? X being a solidary creditor canentirely collect P 18,000. But since A, B and c are joint debtors, X may collect only P6,000 from each of them. After collecting the sum of P 18,000, X must give Y and Zsshare of P 6,000.3. A, B and C solidary debtor are obliged to give X,Y and Z joint creditors of P 18,000.How much may A be made liable? A being a solidary debtor may be held liable for P18,000. But since the creditors are merely joint ones, each one of them can collectfrom A up to P 6,000.

Other terms for solidary obligation:a) In solidumb) Jointly and severallyc) Juntos o separadamented) Solidariase) Mancomumanda o in solidumf) Mancomunada soldariasg) Individually and collectively

Effects if obligation is JOINT and INDIVISIBLE. Art 1209 and Art.1224

A JOINT INDIVISIBLE OBLIGATION IS AN OBLIGATION WHERE THERE ARE SEVERALDEBTORS OR CREDITORS WHO ARE JOINTLY BOUND BUT THE PRESTATION ISINDIVISIBLE.

The debt can be enforced by the collective acts of the debtors or creditors inview of the indivisibility of the object. Like in the case of the joint debtors thecreditor has to proceed against all of them, otherwise, failure of the other debtorsto comply the obligation would call for the conversion of the obligation to itsmonetary value or indemnity for damages plus payment of damages as todefaulting debtors. The same rule applies to joint creditors they have to proceedto the debtor jointly to ensure the fulfillment of the obligation.

Rules Governing Solidary Obligations:

Solidarity does not imply indivisibility. An obligation may be divisible even if it issolidary.

Indivisibility does not imply solidarity. It is the intention of the parties thatprovides for the

nature of obligation (Art. 1210)

Solidarity may exist although the creditor and debtor may not be bound in the samemanner

same period and conditions. ( Art. 1211)

Each one of the solidary creditors may do whatever may be useful to others but notanything that is prejudicial to the others ( Art. 1212). A solidary creditor cannotassign his rights without the consent of the others (Art. 1213) Essential feature isMutual Agency.

The debtor may pay any one of the solidary creditors; but if any demand, judicial orextrajudicial, has been made by one of them, payment should be made to him. (Article1214)

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Novation, compensation, confusion or remission of the debt, made by any of the solidarycreditors or with any of the solidary debtors, shall extinguish the obligation, withoutprejudice to the provisions of Article 1219. The creditor who may have executed any ofthese acts, as well as he who collects the debt, shall be liable to the others for the sharein the obligation corresponding to them. ( Article 1215)

Solidary creditors can collect from some or all of the debtors at one given time. If thecreditor fails to collect from one debtor, he can go against the other or others, until thewhole obligation is paid. It was held that the creditor may sue any of the solidary debtorsor all of them simultaneously. An action instituted against one shall not a bar to those,which may be subsequently brought against others, as long as the debt has not beenentirely satisfied (Article 1216)

Payment made by one of the solidary debtors extinguishes the obligation. If two or moresolidary debtors offer to pay, the creditor may choose which offer to accept.

He who made the payment may claim from his co-debtors only the share whichcorresponds to each, with the interest for the payment already made. If the payment is

made before the debt is due, no interest for the intervening period may be demanded.When one of the solidary debtors cannot, because of his insolvency, reimburse his share

to the debtor paying the obligation, such share shall be borne by all his co-debtors, inproportion to the debt of each. ( Article 1217)

Note:In action filed by the creditors, a solidary debtor may avail of the following

defenses:

Defenses derived from the nature of the obligation which constitutetotal defenses, such as- absolute simulated contract

- illegal cause or consideration- illegal object or subject matter- non-fulfillment of the suspensive conditions- other defenses which will nullify the contract which is the basis of

creditors action.

Defenses personal in nature which may constitute a total orpartial defense- factor which vitiate consent such as minority, insanity, fraud, violence,

intimidation, etc.

Defenses personal to the other co-debtors which will constitute a

partial defense for the solidary debtor being sued, thus exempting him frompaying the proportionate share of the co-debtor whose personal defense heis invoking. He is exempted to pay the proportionate share of the invokingco-debtor but is still liable of his share and of those co-debtors whose sharesare not in question.

DIVISIBLE AND INDIVISIBLE OBLIGATION:

Divisible obligation one which capable of partial performanceIndivisible obligation one which is not capable of partial performance

Test for the distinction:

In determining whether an obligation is divisible or indivisible, the controllingcircumstance is not the possibility or impossibility of partial prestation but thepurpose of the obligation or the intention of the parties.

What determined divisibility or indivisibility:a) Intentionb) Law

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c) Character of the prestation

When obligation is presumed indivisible.a) Obligation to give definite things, such as an obligation to give a specific carb) Those which are not susceptible of partial performance.

When obligation is presumed divisiblea) Execution of a certain number of days of work, such as an obligation to work for

30days

b) Accomplishment of work by metrical unit, such as when five debtors are obligedto

deliver five tons of sand and gravel. The debtors are obliged to deliver one toneach.

c) Analogous thing which by their nature are susceptible of division.

Obligation with Penal Clause

Penal clause An accessory undertaking to assume greater liability in case of breach.

Purpose:a. To ensure performance of the obligation by creating an effective deterrent against

breach, making the consequences of such breach as onerous as it may bepossible.

b. To substitute a penalty for indemnity for damages and the payment of interests incase of non-compliance (art. 1226); or to punish the debtor for non-fulfillment orviolation of his obligation. In the first case, the purpose is reparation; in the

second, punishment.

Rules:

a. Penalty is not a substitute for performance except only when this right has beenexpressly reserved for him.

b. Penalty clause is presumed subsidiary. Penal clause is joint or the debtor has theright to pay penalty in lieu of performance only when this right has been expresslyreserved for him.

Kinds of penal clause:

According to source:a) Legal- penalty imposed by lawb) Conventional penalty agreed upon by parties

According to extent of liabilitya) Subsidiary when only the penalty can be recovered in case of non-performanceof the

obligationb) Joint when in case of non-performance of the obligation both the principalobligation and

the penalty can be recovered.

Proof of actual damages suffered by the creditor is not necessary in order that thepenalty may be demanded (Art. 1228)

Right to recover damages and interest in addition to the penalty

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The penalty shall substitute the indemnity for damages, and interest in case theobligation is not fulfilled. Hence as a general rule, the creditor cannot demanddamages and interests in addition to the penalty except:

a) When the parties so agreed;b) When the debtor refuses to pay the penalty;c) When the debtor is guilty of fraud in the fulfillment of the obligation.

- Nullity of the principal carries with it the nullity of the accessory.

- Penalty may be reduced by the court when there is partial or irregularperformance of the obligation or Even when there has been no performancewhen the penalty agreed upon is iniquitous or unconscionable. (Article1229)

MODES OF EXTINGUISHMENT OF OBLIGATIONS

1. Obligations are extinguished by: (Enumeration under Article 1231 of the Civil Code)a) Payment or performanceb) Loss of the thing duec) Condonation or remissiond) Confusion or merger of rights of the creditor and debtore) Compensationf) Novation

Other causes of extinguishment of obligations are (h) annulment, (I) rescission, (j)fulfillment of a resolutory condition and (k) prescription. The following are found inother chapters of the Civil Code.

Other forms of Extinguishment of the obligationa) Death of a party in case the obligation is personalb) Mutual desistance or withdrawal from contract or agreementc) Compromise

PAYMENT OR PERFORMANCE

Payment (ART.1232-1261) means not only the delivery of money but also theperformance, in any other manner, of an obligation. (Art.1232)

General Rule: Completeness of Payment. Payment should be complete. (Art. 1233)

Exceptions:a. Recovery allowed in case of substantial performance in good faith. (Art. 1234)b. Recovery allowed when incomplete or irregular performance is waived.

(Art.1235)c. Instances when partial performances are allowed. (art. 1248)

- when there is an express stipulation to that effect.- When the debt is part liquidated (definitely and determined or

computed) and in part liquidated.- When the prestations in which the obligation consists are subject to

different terms or conditions which affect some of them.

3. Third person cannot compel the creditor to accept payment or performance of an

obligation except:a) When it is made by a third person who has interest in the fulfillment of the

obligation;b) When there is a stipulation to the contrary (Art.1236, CC). In this case, the

creditorwaives his right to refuse to deal with strangers to the obligations

4. If a third person pays an obligation with the knowledge and consent of the debtor hecan recover from the debtor the entire amount, which he has paid (reimbursement)

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and he is subrogated of all the rights of the creditor. Subrogation of the rights, suchas those arising from a mortgage, guaranty or penalty (Art. 1237). If payment wasmade without the consent of the debtor, he can recover only insofar as the paymenthas been beneficial to the debtor.

5. Payment made by a third person who does not intend to be reimbursed by the debtoris deemed to be a donation, which requires the debtor's consent. But the payment is inany case valid as to the creditor who has accepted it. (Art. 1238)

6. Art. 1239. In obligations to give, payment made by one who does not have the freedisposal of the thing due and capacity to alienate it shall not be valid, without prejudiceto the provisions of Article 1427 under the Title on "Natural Obligations."

a. Free disposal of the thing due means that the thing to be delivered must not besubject to any claim or lien or encumbrance of a third person.

b. Capacity to alienate means that the person is not incapacitated to enter into acontract and for that reason, to make a disposition of the thing due.

7. Art. 1240. Payment shall be made to the person in whose favor the obligation hasbeen constituted, or his successor in interest, or any person authorized to receive it.

a. Creditorb. His successor in interestc. Person authorized to receive it. It refers to both authorized by the creditor or

authorized by the court such as the guardian, executor or administrator ofthe estate)

5. Payment to an incapacitated person is valid only if the latter kept the thing deliveredor insofar as the payment has been beneficial to him. Payment made to third personshall be valid insofar as it redounded to the benefit of the creditor. It is presumed inthe following:

a) If after the payment, the third person acquires the creditors rights(Subrogation of the payer in the creditors right).

b) If the creditor ratifies the payment to the third person (Ratification by thecreditor).

c) If by the creditors conduct, the debtor has been led to believe that thethird person had authority to receive payment. (Estoppel on the part ofthe creditor) (Art.1241 par.2)

6. Art. 1242. Payment made in good faith to any person in possession of the creditshall release the debtor.

7. Art. 1243. Payment made to the creditor by the debtor after the latter has beenjudicially ordered to retain the debt shall not be valid.

8. Art. 1244. The debtor of a thing cannot compel the creditor to receive a differentone, although the latter may be of the same value as, or more valuable than thatwhich is due. In obligations to do or not to do, an act or forbearance cannot besubstituted by another act or forbearance against the obligee's will.

9. Payment of debts in money shall be made only in the Philippine currency which thelegal tender pursuant to Art. 1249 of the Civil Code in relation to Republic Act No.8183. Obligation shall now be payable in the legal tender in the Philippines. Legaltender means the currency which the debtor may compel his creditor to accept

payment of his debt. However, the parties may stipulate that the payment may bemade in currency under than the legal tender of Philippines at the time of payment.( R.A. No. 8183)

Note that under the New Central Bank Act:a. Centavo (0.25) and above is legal tender up to P 50.00b. Centavo (0.10) and below is legal tender up to P 20.00c. All coins P 1.00 and above including bills are legal tender up to any amount

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* Strictly speaking, it is not a form of payment but more of a mode of payment.

What is meant by legal application of payment?Legal application of payment refers to the following the rules, both of which areenunciated in Art. 1254 of the Civil Code;

a) When neither the debtor nor the creditor makes any application of payment or if

it cannotbe inferred from other circumstances, the debt which is most onerous to the

debtor amongthose which are due shall be deemed to have been satisfied. The following

may be given

Examples.- Where there are various debts, which are due and they were incurred at

different dates the oldest are more onerous.- Where there are various debts, which are due and they were incurred at

different dates the oldest are more onerous.- Where one bears interest and the other does not, the former is more

onerous- Where one s secured the other is not, the former is more onerous- Where the debtor is bound as principal in one and as guarantor or surety

in another, the former is more onerous- Where the debtor is bound as solidary debtor in one and as a sole debtor

in another, the former is more onerous.b) If the debts due are of the same nature and burden, the payment shall beapplied to all of them proportionately

14. Payment by Cession or Assignment it is a special form of payment wherebythe debtor

abandons all of his property for the benefit of

hiscreditor in order that from the proceeds

thereof the latter may obtain payment oftheir

credits. Also known as voluntary cession orinsolvency.

There is no transfer of ownership but merely grants the creditors of a debtor to sellproperties of said insolvent debtor and apply the proceeds to their respective credit.Debtor is released only up to the net proceeds of the sale. He remains liable to thecreditor as to the remaining balance unless otherwise agreed to release him to hisentire obligation.

Compare Cession from Insolvency under Act No. 1956. Cession has no courtintervention while Insolvency either Voluntary or Involuntary requires courtproceeding. Petition is filed in court and insolvent can be permanently dischargedfrom liability.

DISTINCTIONS:

Dation in Payment Payment by Cession

1. There is usually only one creditor 1. There are several creditors

2. It does not presuppose the insolvencyof the debtor

2. Debtor is insolvent at the time ofassignment

3. It does not involve all the propertiesof the debtor

3. Involves all the properties of thedebtor

4. The creditor becomes owner of thething given by the debtor

4. The creditors only acquire the right tosell the thing and apply to their creditsproportionately

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5. Dation is really an act of novation 5. Cession is not novation

15. Meaning ofTender of payment consists in the manifestation made by the debtorto the creditor of his decision to comply immediately with the obligation.

Meaning ofConsignation: refers to the deposit of the object of the obligation in a

competent court in accordance with the rules prescribed by law after refusal orinability of the creditor to accept tender of payment.

As a rule, there must be tender of payment first before consignation can be effected.

Distinguish Tender of Payment from Consignation:

Tender of payment is antecedent of consignation; in order words, while the first ispreparatory act, the second is the principal act, which will produce the effects ofpayment.

Tender of payment is by its very nature extra judicial in character, wile consignation is

judicial.

Requisites for Consignation:a) That there is a debt that is due:b) That the consignation has been made either because the creditor to whom tenderof payment was made refused to accept the payment without just cause or becauseany of the stated by law for effective consignation without previous tender ofpayment exists. (Art.1256)c) That previous notice of the consignation has been given to the persons interestedin the fulfillment of the obligation. (Art.1256)d) That the thing or amount due had been placed at the disposal or judicial authority(Art.1258 par. 1)

e) That after the consignation has been made the person interested in the fulfillmentof the obligation had been notified thereof. (Art. 1258 par. 2)

f) Judicial declaration that the consignation is proper with prayer on the part of thedebtor to be discharged from the obligation.

h) Payment by the creditor of the expenses for consignation if properly made by thedebtor.

Even without Tender of Payment, Consignation may be validly pursued in thefollowing:a) When the creditor is absent or unknown or does not appear at the place ofpayment;b) When he is incapacitated to receive the payment at the time it is due;c) When without just cause he refuses to give a receipt;d) When two or more persons claim the right to collect and;e) When the title of the obligation has been lost. (Art.1256)

Debtor can withdraw the thing deposited as a matter of right before the creditoraccepts or before a judicial declaration is made by the court. In effect, obligationremains (Art. 1260). If the consignation has been made properly, creditor shouldauthorize the debtor to withdraw the same and he shall lose every preference whichhe may have over the thing. The co-debtor, guarantors and sureties shall bereleased. ( Art. 1261)

16. LOSS OF THE THING DUE (Arts. 1262-1269) means that the thing whichconstitutes the object of the obligation perishes, or goes out of the commerce of manor disappears in such a way that its existence is unknown or it cannot be recovered.(Art. 1189. NO. 2) In its broad sense, it means impossibility of compliance orperformance with the obligation through any cause.

Kinds of Loss

a. Physical loss when a thing perishes as when the house is burned and reduced toashes.

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b. Legal loss when the thing goes out of commerce.c. Civil loss when the thing disappears in such a way that its existence is unknown

or even if known, it cannot be recovered, whether as a matter of fact or of law.d. Physical or legal impossibility

Art. 1266. The debtor in obligations to do shall also be released when theprestation becomes legally or physically impossible without the fault of the obligor.

e. Difficulty of performance

Art. 1267. When the service has become so difficult as to be manifestly beyond thecontemplation of the parties, the obligor may also be released therefrom, in wholeor in part

In order that an obligation shall be extinguished by the loss or destruction of thething if is essential that the following requisites must concur:a) The thing, which is lost, is specific or determinateb) The thing is loss without any fault of the debtor if that thing is lost through the faultof the debtor the

obligation is transformed into an obligation to indemnify the obligee or creditorfor damages.

c) The debtor is not guilty of delay

Exceptions to the above rule are as follows:

a) When by law the obligor is liable for fortuitous events (Arts. 1174 and 1262 par 2)b) When by stipulation the obligor is liable even for fortuitous events. (Arts 1174 and1262

par 2)c) When the nature of the obligation requires the assumption of risk. (Arts. 1174 and1262

par 2)d) When the loss of the thing is due party to the fault of the debtor (Art 1262 par 1CC)

e) When the loss of the thing occurs after the debtor has incurred in delay. (Art 1262par.1

and Art 1135 par. 3)f) When debtor promised to deliver the same thing to two or more persons who do not

have the same interest (Art. 1165 par 3)g) When the obligation is generic (Art.1263)h) When the debt of a certain and determinate thing proceeds from a criminal offense(Art

1268)Art. 1265 provides that whenever the thing is lost in the possession of the debtor, it

shall be presumed that the loss was due to his fault, unless there is proof to thecontrary, and without prejudice to the provisions of article 1165. This presumption

does not apply in case of earthquake, flood, storm, or other natural calamity.Art. 1269 provides that the obligation having been extinguished by the loss of the thing,

the creditor shall have all the rights of action which the debtor may have against thirdpersons by reason of the loss.

this right is transferred by operation of law.

17. CONDONATION AND REMISSION (Arts. 1270 1274) Is an act of liberality byvirtue of which the obligee, without receiving any price or equivalent, renounces theenforcement of the obligation as a result of which it is extinguished in its entirely or inthat part or aspect of the same to which the remission refers. It is gratuitousabandonment by the creditor of his right.

Requisites:a) It must be gratuitousb) It must be accepted by the obligorc) The parties must have capacity.

d) It must not be Inofficious; ande) If made expressly, it must comply with the forms of donations. Otherwise,

remission or condonationis not valid.

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Example:

a) Express Condonation involving real property must be in publicinstrument together with the acceptance of donee.

b) Express Condonation of personal property amounting to P 5,000above must be in writing together with the acceptance of donee

Important principles on Remission:

1. While a person may make donations, no one can give more thanwhich he can give by will; otherwise, the excess shall beInofficious and shall be reduced by the Court as it may impairthe legitime of the compulsory heirs of the donor.

2. The delivery of a private document evidencing credit madevoluntarily by the creditor gives a disputable presumption thatthere is a renunciation of the action which the creditor hasagainst the debtor. (Art. 1271) Example of implied remission

3. Whenever the private document is found in possession of thedebtor, it is presumed that the creditor delivered the document

voluntarily. (Art. 1272).4. If the thing pledged is found in the possession of the debtor,

there is a disputable presumption that the contract of pledge hasbeen renounced. This however does not extend to the principalcontract. Example of Implied remission

18. CONFUSION OR MERGER (Arts. 1275-1277) - Merger of the characters of creditorand debtor in the same person by virtue of which the obligation is extinguished.Meeting in the same person of the qualities of the creditor and the debtor withrespect to one and the same obligation.

Requisites:

a) That the merger of the characters of the creditor and debtor must be in the sameperson. (Art.1275)

b) That it must take place in the person of either the principal creditor or principaldebtor

(Art.1276)c) That it must be complete and definite.

Notes:

Merger in the person of the guarantor does not extinguish the obligation. Only thecontract of guaranty is extinguished. There is in fact a novation where the guarantornow becomes the new creditor of the debtor.

Merger in the person of one of the solidary debtor shall extinguish the entireobligation because it is also merger in the other solidary debtors. Merger in jointobligation pertains only to the share of the debtor to which merger takes place. Onlythe share corresponding to the creditor or debtor in whom the characters concur. Thecreditor or debtor whose share was subject to confusion actually becomes the newcreditor of the other joint debtors pertaining to their share in the original obligation.

19. COMPENSATION Compensation may be defined as a mode of extinguishing intheir concurrent amount those obligations persons who in their own right are creditorsand debtors of each other.

Requisites for legal compensation under Article 1279:a) There must be two parties, who in their own right, are principal creditors andprincipal

debtors of each other. (Arts. 1278, 1279. No. 1)b) Both debts must consist in money, or if the things due are fungibles (consumables),they

must be of the same kind and quality (Art. 1279. NO.2)c) Both debts must be due (Art. 1279. NO. 3)d) Both debts must be liquidated and demandable ( Art 1279 NO. 4)

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e) There must be no retention or controversy commenced by third persons over eitherof

the debts and communicated in due time to the debtor (Art.1279 NO. 5 CC)f) The compensation must not be prohibited by law (Arts 1278, 1288)

Under Article 1290 When all the requisites mentioned in Article 1279 are present,compensation takes effect by operation of law, and extinguishes both debts to the

concurrent amount, even though the creditors and debtors are not aware of thecompensation.

Instances when legal compensation is not allowed by law:a. When one of the debts arises from depositum or from the obligation of a

depositary or of a bailee in commodatum.b. Where one of the debts arises from a claim for support due by gratuitous title.c. Where on of the debts consists in civil liability from a penal offense.

Different classification of Compensation:a) Legal when it takes place by operation of law from the moment all of therequisites

prescribed by law are present (Arts 1278 & 1279)b) Voluntary when the parties who are mutuality creditors and debtors agree to

compensate their respective obligations even if the requisites ofcompensation

may not be present.c) Judicial when it takes effect by judicial decree.d) Facultative when it can only be set up by one of the parties.

In contract of deposit, the depositary cannot set up compensation against thedepositor if he fails to return the object of deposit as against any amount which thedepositor owes the depositary.

In contract of commodatum, the bailee cannot set up compensation but the bailorcan.Reason: This is because it would violate the fiduciary character of the contract ofdeposit or commodatum. But the depositor or bailor can set up by way ofcompensation against the depositarys or bailees credit. Here, only one party can setup compensation. (Art. 1287)

Person obliged to give support cannot also set up compensation unless support hasdeveloped into arrears. In such case, compensation is possible.(Art. 1287)

Neither shall there be compensation if one of the debts consists in civil liability arisingof a crime. The one whose obligation arose from said liability cannot set up

compensation against the other but the latter can. (Art. 1288)

Art. 1286. Compensation takes place by operation of law, even though the debts may bepayable at different places, but there shall be an indemnity for expenses of exchangeor transportation to the place of payment.

AS TO EFFECT:

Total when the debts to be compensated are equal in amount:Partial when the debts to be compensated are not equal in amount.

Note: The rule on application of payment is also applicable in compensation.

In case there are several debts, when the debtor cannot set up compensationagainst the assignee if he knows that assignment was made by the creditor/assignor andhe did not notify the assignor that he reserves his right to set up compensation. He canhowever collect from the creditor what he could have set off against the creditor hadthere been no assignment made by the latter. If the debtor knows about the assignmentbut did not consent, he can set up compensation against the assignee to obligationsprevious to the assignment. But he has no knowledge of the assignment, he can set upcompensation of all credits prior, subsequent to the assignment until he obtainsknowledge of the assignment. (Art. 1285)

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Art. 1289. If a person should have against him several debts which are susceptible ofcompensation, the rules on the application of payments shall apply to the order of thecompensation.

20. NOVATION (Arts. 1291 1304)

Novation is the substitution or change of an obligation by another, resulting in itsextinguishment or modification, either by changing its object or principal conditions or bysubstituting another in place of the debtor, or by subrogating a third person in the rightsof the creditor

Classification of Novation:a) Objective or real refers to the change either in the cause object or principalconditions

of the obligationb) Subjective or personal refers to the substitution of another person of the debtor

(passive) or subrogating a third person of the rights of the creditor (active). (Arts.1291, Nos. 2 and 3)

c) Mixed refers to the combination of objective and subjective novation.

Requisites of Novation:a) A previous valid obligation;b) Agreement of the parties to the new obligation;c) Extinguishment of the old obligation andd) Validity of a new obligation

Test of incompatibility in order an obligation may be impliedly extinguished by another,which substitutes the same, it is imperative that the old and new obligation must beincompatible with each other on every point. It is then imperative to determine whetheror not both can stand together, each having its own independent existence. If they can

stand together, there is no incompatibility consequently there could be no novation.

NOVATIONis not presumed. If must be clearly and unmistakably establishedeither by the express agreement of the parties or acts of equivalent import.

Kinds of Novation:

According to origin:

1. Legal that which takes place by operation of law.2. Conventional that which takes place by agreement of the parties.

According to how it is constituted:

1. Express- when it is so declared in unequivocal terms.2. Implied - when the old and the new obligations are essentially incompatible

with eachother.

According to extent or effect:

1. Total or extinctive - when the old obligation is completely extinguished.2. Partial or modificatory-when the old obligation is merely modified.

According to the subject:

1. Real or objective- when the object (or cause) or the principal conditions of theobligation are changed.

2. Personal or subjective- when the person of the debtor is substituted and/orwhen a third person is subrogated in the rights of the creditor.

3. Mixed when the object and/or principal conditions of the obligation and thedebtor or the creditor, or both the parties, are changed. It is a combination ofreal and personal novations.

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Kinds of substitution:

A. Expromission or that which takes place when a third person of hisown initiative and without the knowledge or against the will of theoriginal debtor assumes the latters obligation with the consent of thecreditor.

Effect the new debtors insolvency or non-fulfillment of theobligation will not revive the action of the creditor against the olddebtor whose obligation is extinguished by the assumption of the debtby the new debtor. If the new debtor pays the creditor, he is notsubrogated with the rights of the creditor; he is only entitled to bebeneficial reimbursement.

B. Delegation one which takes place when the creditor accepts a thirdperson to

take place of the debtor at the instance of the latter. The creditor maywithhold approval. (art. 1295) In delegacion, all the parties the old debtor,the new debtor and the creditor must agree. If the payment was made

with the consent of the original debtor or on his own initiative(delegacion), the new debtor is entitled to reimbursement and subrogationunder Art.1237

Effect of new debtors insolvency or non-fulfillment of the obligation indelegacion:

General Rule: Original debtor is not liable to the creditor in case ofinsolvency of the new debtor. The exceptions are:a) The said insolvency was already existing and of public knowledge (although it

was notknown to the old debtor) at the time of the delegacion; or

b) The insolvency was already existing and known to the debtor (although it wasnot of

public knowledge) at the time of the delegacion.

The exceptions are intended to prevent fraud on the part of the old debtor.

Other pertinent provisions:

Art. 1296. When the principal obligation is extinguished in consequence of a novation,accessory obligations may subsist only insofar as they may benefit third persons whodid not give their consent. Referring to Stipulation Pour Autrui.

Art. 1297. If the new obligation is void, the original one shall subsist, unless theparties intended that the former relation should be extinguished in any event.

Art. 1298. The novation is void if the original obligation was void, except whenannulment may be claimed only by the debtor or when ratification validates actswhich are voidable.

Art. 1299. If the original obligation was subject to a suspensive or resolutorycondition, the new obligation

shall be under the same condition, unless it is otherwise stipulated. (n)

KINDS OF SUBROGATION (Art. 1300)

Conventional Subrogation when it takes place by express agreement ofthe original parties. (The debtor, the original creditor and the third person)Consent of all parties required.

Conventional Subrogation requires consent of all of the parties, to wit, thedebtor, the old creditor and the new creditor.

Distinction between conventional subrogation and assignment of credit.

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Assignment of Credit Conventional SubrogationThere is mere transfer of the same rightor credit. The transfer did notextinguish credit.

Extinguishes the obligation and creates anew one

It does not require the debtors consent.Mere notification to him is sufficient.

Requires debtors consent

The defect in the credit or right is notcured simply by assigning the same.Here, the debtor generally has still theright to present against new creditorany defense available as against olddebtor.

The defect of the old obligation may becured in such a way that the new obligationbecomes entirely valid. Thus here, there isno right to present against new creditorany defense which he, the debtor or couldhave set up against the old creditor.

Here creditor is the one ceding ortransferring his rights.

Here, somebody makes payment in behalfof the debtor with the latters consent.

Legal Subrogation when it takes place without agreement but by operation bylaw

Cases of Legal Subrogation:a) When a creditor pays another creditor who is preferred (see arts. 2236, 2251)b) When a third person without interest in the obligation pays with the approval

of thedebtor;

c) When a third person with interest in the obligation pays with the approval ofthe debtor.

What comprises subrogation?

Art. 1303. Subrogation transfers to the persons subrogated the credit with all therights thereto appertaining, either against the debtor or against third person, be theyguarantors or possessors of mortgages, subject to stipul

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