OBLIGATIONS AND CONTRACTS

CHAPTER 1: OBLIGATIONS

OBLIGATION - An obligation is a juridical necessity to give, to do, or not to do. (Art. 1156)

REQUISITES: 1. JURIDICAL OR LEGAL TIE2. ACTIVE SUBJECT - obligee or creditor3. PASSIVE SUBJECT obligor or debtor4. PRESTATION object of the obligationRequisites:1. It must be licit2. It must be possible, physically or juridically3. It must be determinate or determinable4. It must have an equivalent in money

SOURCES OF OBLIGATION (ART. 1157)

1. Law2. Contracts3. Quasi-contracts4. Delicts5. Quasi-delicts

LAW (OBLIGATION EX LEGE) cannot be presumed; must be expressly and impliedly set forthCONTRACT (OBLIGATION EX CONTRACTU) it is the law between the contracting parties -parties may enter into any stipulation provided it is not contrary to law, morals, public order or public policy

QUASI-CONTRACT -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 benefitted at the expense of another.KINDS OF QUASI-CONTRACTS:1. NEGOTIORIUM GESTIO arises whenever a person voluntarily takes charge of the agency or management of the business or property of another without any power of authority from the latter.2. SOLUTIO INDEBITI arises whenever a person unduly delivers a thing through mistake to another who has no right to demand it.

QUASI-DELICTS an act or omission by a person which causes damage to another giving rise to an obligation to pay for the damage done, there being no fault or negligence and there being no pre-existing contractual relations between the parties (Art. 2176, NCC)

REQUISITES:1. There must be an act or omission2. There must be fault or negligence3. There must be damage caused to the plaintiff4. There must be a direct relation of cause and effect between the act or omission and the damage5. There is no pre-existing contractual relation between the parties

CHAPTER 2: NATURE AND EFFECT OF OBLIGATIONS

NATURE OF OBLIGATIONS

1. Personal Obligations - obligations to do, or not to do, subject matter of the obligation is an act to be done or to be not donea. Positive - obligation to dob. Negative - obligation not to do2. Real Obligations - obligations to give, the subject matter is a thing which the obligor must deliver to the obligeea. Determinate or specific - the object is particularly designated or physically segregated from all other things of the same classb. Generic - object is designated by its genus or classc. Limited Generic - when the generic objects are confined to a particular class

Ex. An obligation to deliver one of my horses (Tolentino, Volume IV, p. 91)

EFFECT OF OBLIGATIONS

DUTIES OF A DEBTOR IN AN OBLIGATION TO DELIVER A DETERMINATE THING (Arts. 1163, 1164, 1166)

1. To preserve and take care of the thing due with the diligence of a good father of a family.

DILIGENCE OF A GOOD FATHER OF A FAMILY - ordinary care or that diligence which an average or reasonably prudent person would exercise over his own property

Rule on Standard of Care:1) That which is required by law;2) That stipulated by the parties;3) In the absence of the two, diligence of a good father of a family

2. To deliver the fruits of the thing from the time the obligation to deliver it arisesWHEN THE OBLIGATION TO DELIVER ARISESGENERAL RULE: From the time of the perfection of the contract (meeting of the minds between the parties)EXCEPTION:

1) When the parties stipulate regarding the right of the creditor to the fruits of the thing2) When the obligation is subject to a suspensive condition; the obligation to deliver arises upon the fulfillment of the condition or the arrival of the period.

PERSONAL RIGHT (JUS AD REM)REAL RIGHT (JUS IN REM)

A right enforceable only against a particular person or a definite group of personsA right enforceable against the whole world

The right of a person (creditor) to demand from another (creditor), as definite passive subject, the fulfillment of the latters obligation to give, to do, or not to do. The right of a person over a specific thing (like ownership, possession, mortgage), without a definite passive subject against whom the right may be personally enforced.

3. To deliver its accessions and accessories

ACCESSIONS - are the fruits of a thing or additions to or improvements upon a thing.Ex. House or trees on land, air-conditioner in a carACCESSORIES - are things joined to or included with the principal thing for the latter's embellishment, better use, or completion.Ex. Key of a house4. To deliver the thing itself 5. To pay damages in case of breach of the obligation by reason of delay, fraud, negligence, contravention of the tenor of the obligation.DUTIES OF DEBTOR IN AN OBLIGATION TO GIVE A GENERIC THING

1. To deliver the thing which should be neither of superior nor of inferior quality.2. To pay damages in case of breach of the obligation by reason of delay, fraud, negligence, contravention of the tenor of the obligation.REMEDIES OF CREDITOR IN CASE OF NON-PERFORMANCE

1. Specific Performance Performance by the obligor of the prestation itself2. Substitute Performance Performance of the obligation by another person at the expense of the obligor3. Equivalent Performance DamagesREMEDIESREAL OBLIGATIONSPERSONAL OBLIGATIONS

DeterminateGenericTo DoNot To Do

Specific PerformanceXXXUndo the things already done

Equivalent PerformanceXXCan only be demanded if obligation is not based on personal qualifications of the obligorX

Substitute PerformanceXXUndo the things already done the obligors expense

Rescission/CancellationXXX

BREACH OF OBLIGATIONS

1. Voluntary the debtor in the performance of the obligation is guilty of: a. Fraudb. Negligencec. Delayd. Contravention of the tenor*Debtor is liable for damages2. Involuntary debtor is unable to comply with his obligation because of fortuitous event*Debtor is not liable for damages

DELAY, DEFAULT OR MORA

Non-fulfillment of the obligation with respect to time

KINDS OF DELAY1. Mora Solvendi - default on the part of the debtor a. Mora Solvendi Ex re - default in real obligationsb. Mora Solvendi Ex persona - default in personal obligationsREQUISITES:1) The obligation must be due, demandable, and liquidated or determinate in amount;2) There must be non-performance; 3) There must be a demand, unless demand is not required.EFFECTS: 1) The debtor is guilty of breach of the obligation2) He is liable to the creditor for interest (obligations to pay money) or damages (other obligations). In the absence of extra-judicial demand, the interest shall commence from the filing of the complaint;3) Debtor is liable for fortuitous event if the obligation is to deliver a determinate thing. (Arts. 1165, 1170). *If he can prove that the loss would have resulted just the same even if he had not incurred in delay, the court may equitably mitigate or reduce the damages. (Art. 2215 [4])GENERAL RULE: NO DEMAND, NO DELAY

EXCEPTIONS (no demand necessary):1) When the obligation or the law expressly so declares; or2) When TIME IS OF THE ESSENCE (When from the nature and the nature of the obligation it appears that the designation of time when the things ids to be delivered or the service is to be rendered was a controlling motive for the establishment of the contract)3) When demand would be useless, as when the obligor has rendered it beyond his power to perform.

2. Mora Accipiendi - default on the part of the creditor when he unjustifiably refuses to accept the performance of the obligation

REQUISITES:1) Offer of performance by the debtor2) Offer must be to comply with the prestation as it should be performed3) Creditor refuses the performance without just causeEFFECTS:1) Responsibility of the debtor is limited to fraud and gross negligence2) Debtor is exempted from risk of loss of thing, creditor bears the risk of loss3) Expenses incurred by the debtor for the preservation of the thing after delay is chargeable to the creditor4) If the obligation bears interest, debtor does not have to pay from the time of delay5) Creditor is liable for damages6) Debtor may relieve himself of the obligation by consigning the thing in court

3. Compensatio Morae - both parties are in default (in reciprocal obligations); the delay of the obligor cancels the delay of the obligee and vice versa. Legally speaking, there is no default or delay on the part of both parties.

RULE ON RECIPROCAL OBLIGATIONS: In reciprocal obligations, neither party incurs in delay if the other does not comply or is not ready to comply in a proper manner with what is incumbent upon him. From the moment one of the parties fulfills his obligation, delay by the other begins.Performance must be simultaneous unless different dates for the performance of the obligation were fixed by the parties.

CESSATION OF THE EFFECTS OF MORA:1. Renunciation (express or implied)2. Prescription

NOTE: There is NO DELAY in negative obligations and natural obligations.

FRAUD (DOLO)

The deliberate and intentional evasion of the normal fulfillment of an obligation. (8 Manresa 72)

TYPES OF FRAUD:1) Causal Fraud (Dolo Causante) - fraud employed in the execution of the contract under Art. 13382) Incidental Fraud (Dolo Incidente) - committed in the performance of an obligation already existing because of a contract. (Art. 1170)

Incidental Fraud/ Dolo Incidente (Art. 1170)Causal Fraud/ Dolo causante (Art. 1338)

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

Purpose is to evade the normal fulfilment of the obligationPurpose is to secure the consent of the other to enter into a contract

Results in the breach or non-fulfilment of the obligationResults in the vitiation of consent

Gives rise to a right of the creditor to recover damages from the debtorGives rise to a right of an innocent party to annul the contract

NOTE: Future fraud cannot be waived for it would result to illusory obligation.

REMEDIES OF DEFRAUDED PARTY: 1. Specific performance (Art. 1233)2. Resolve contract (Art. 1191)3. Claim for damages, in either case

NEGLIGENCE

Consists in the omission of that diligence which is required by the nature of the obligation and corresponds with the circumstances of the persons, of the time and of the place.KINDS OF DILIGENCE REQUIRED (ART. 1173):1. That agreed upon by the parties, orally or in writing 2. In the absence of stipulation, that required by law in the particular case 3. If both the law and the contract are silent, then the diligence expected of a good father of a family

NOTE: Negligence can be waived unless the nature of the obligation or public policy requires extraordinary diligence as in a common carrier.

KINDS OF NEGLIGENCE1. Quasi-delict (Culpa aquiliana/culpa ex-contractual) source of obligation2. Contractual negligence (Culpa contractual) negligence in the performance of a contract

CULPA AQUILIANACULPA CONTRACTUAL

Negligence is substantive and independentNegligence is merely an incident of the performance of the obligation

There may or may not be a pre-existing contractual obligationThere is a pre-existing contractual relation

Source of the obligation is the negligence itselfSource of the obligation is the breach of the contractual obligation

Negligence must be provedProof of existence of the contract and its breach is prima facie sufficient to warrant recovery

Diligence in the selection and supervision of employees is a defenseDiligence in the selection and supervision of employees is not available as defense

FRAUD vs. NEGLIGENCEFRAUDNEGLIGENCE

There is deliberate intention to cause damageThere is no such deliberate intent

Liability cannot be mitigatedLiability may be mitigated

Waiver for future fraud is voidWaiver for future negligence may be allowed in certain cases

TEST OF NEGLIGENCEThe test of negligence can be determined by this standard: If the defendant, in committing or causing the negligent act, has used reasonable care and vigilance which a man of ordinary prudence would have employed under the same situation, he is not guilty of negligence. Otherwise, he is guilty.

FORTUITOUS EVENT - An event which cannot be foreseen, or which though foreseen, is inevitable.

REQUISITES:1. The event must be independent of the will of the debtor2. The event could not be foreseen, or if foreseen, is inevitable3. The event must be of such a character as to render it impossible for the debtor to comply with his obligations in a normal manner;4. The debtor must be free from any participation in, or the aggravation of, the injury to the creditor.

GENERAL RULE: No liability in case of fortuitous eventEXCEPTION: 1. When expressly specified by law (bad faith, object of the obligation is generic, debtor is in delay)2. When expressly declared by stipulation or by contract3. When the nature of the obligation requires the assumption of risk4. When the obligor is in default or has promised to deliver the same thing to two or more persons who do not have the same interest

EFFECT OF FORTUITOUS EVENT:1. In determinate obligations, the obligation is extinguished2. In generic obligations, the obligation is not extinguished based on the principle that generic thing does not perish (genus nunquam peruit)

ART. 1176. The receipt of the principal by the creditor, without reservation with respect to the interest, shall give rise to the presumption that said interest has been paid. The receipt of a later instalment of a debt without reservation as to prior instalments shall likewise raise the presumption that such instalments have been paid.

PRINCIPLE: Before the presumption that a prior instalment had been paid may arise, the receipt must specify the instalment for which payment is made. Art. 1177. The creditors, after having pursued the property in possession of the debtor to satisfy their claims, may exercise all the rights and bring all the actions of the latter for the same purpose, save those which are inherent in his person; they may also impugn the acts which the debtor may have done to defraud them.

REMEDIES AVAILABLE TO CREDITORS FOR THE SATISFACTION OF THEIR CLAIMS:

1. Exact fulfillment of the obligation by specific or substitute performance with a right to damages in either case;2. In case of reciprocal obligations, petition the court to resolve the contract;3. Pursue the leviable (not exempt from attachment under the law) property of the debtor;4. Accion Subrogatoria - to be subrogated to all the rights and actions of the debtor save those which are inherent in his person.

Requisites:a. The debtor to whom the right of action properly pertains must be indebted to the creditor;b. The creditor must be prejudiced by the inaction or failure of the debtor to proceed against the third person;c. The creditor must have pursued first or exhausted all the properties of the debtor which are not exempt from execution;d. The debtor's assets are insufficient to satisfy his claims; ande. The right of account is not purely personal

5. Accion Pauliana asking the court to rescind or to impugn all the acts which the debtor may have done to defraud the creditors (Arts. 1380-1389)

Requisites:a. There is a credit in favor of the plaintiffb. The debtor has performed an act subsequent to the contract, giving advantage to other personsc. The creditor is prejudiced by the debtors act which are in favour of 3rd parties and rescission will benefit the creditord. The creditor has no other legal remedye. The debtors acts are fraudulent

Article 1178. Subject to the laws, all rights acquired in virtue of an obligation are transmissible, if there has been no stipulation to the contrary.

GENERAL RULE: Rights acquired by virtue of an obligation are transmissible in character.EXCEPTIONS: 1. When they are not transmissible by their very nature e.g. purely personal right 2. When there is a stipulation of the parties that they are not transmissible 3. Not transmissible by operation of law

CHAPTER 3DIFFERENT KINDS OF OBLIGATIONS (ARTS. 1179-1230)CLASSIFICATION OF OBLIGATIONS

As to demandability:1. Pure2. Conditional3. With a period

As to plurality of object: 1. Simple2. Alternative3. Facultative

As to plurality of subject:1. Simple2. Joint3. Solidary

As to performance:1. Divisible2. Indivisible

As to sanctions for breach:1. With a penal clause2. Without a penal clause

PURE and CONDITIONAL OBLIGATIONS

PURE OBLIGATIONS - one whose effectivity or extinguishment does not depend upon the fulfillment or non-fulfillment of a condition or upon the expiration of a term or period and is demandable at once.

CONDITIONAL OBLIGATIONS one whose effectivity is subordinated to the fulfilment or non-fulfillment of a future AND uncertain event or upon a past event unknown to the parties.

CONDITION a future AND uncertain event or a past event unknown to the parties

KINDS OF CONDITION:

1. Suspensive the happening or fulfillment of the condition gives rise to the obligation

EFFECTS:1) Before fulfilment of the condition, the demandability as well as the acquisition of the rights arising from the obligation is suspended.2) After the fulfilment of the condition, the obligation arises or becomes effective.3) The effects of a conditional obligation to give, once the condition has been fulfilled, shall retroact to the day of the constitution of the obligation4) When the obligation imposes reciprocal prestations upon the parties, the fruits and interests shall be deemed to have been mutually compensated.5) If the obligation is unilateral, the debtor shall appropriate the fruits and interests received, unless from the nature and circumstances it should be inferred that the intention of the persons constituting the same was different.6) In obligations to do or not to do, the court shall determine the retroactive effect or the conditions that have been complied with.

CONSTRUCTIVE FULFILLMENT OF SUSPENSIVE CONDITION: The condition shall be deemed fulfilled when the obligor actually prevented the obligee from complying with the condition and such prevention must have been voluntary and wilful in character

RULES ON LOSS, DETERIORATION, AND IMPROVEMENTS DURING THE PENDENY OF A SUSPENSIVE CONDITION (Art. 1189)

WITHOUT DEBTORS FAULTWITH DEBTORS FAULT

LOSS Obligation is extinguishedDebtor pays damages

DETERIORATIONImpairment to be borne by creditorCreditor may choose between rescission of the obligation or its fulfilment with indemnity for damages in either case

BY NATURE OR BY TIMEAT THE EXPENSE OF THE DEBTOR

IMPROVEMENTSImprovement shall inure to the benefit of the creditorDebtor shall have no other right than that granted to a usufructuary

REQUISITES BEFORE ART. 1189 CAN APPLY:1) The obligation must be a real obligation2) The object is a specific or determinate thing3) The obligation is subject to a suspensive condition4) The condition is fulfilled5) There is loss, deterioration or improvement of the thing during the pendency of the happening of the conditionA THING IS UNDERSTOOD TO BE LOST WHEN:1) It perishes;2) It goes out of commerce of men;3) Disappears in such a way that its existence is unknown or it cannot be recovered.

2. Resolutory fulfilment of the condition results in the extinguishment of rights arising out of the obligation.

EFFECTS:1) Before the fulfilment of the condition, the right which the creditor has already acquired by virtue of the obligation is subject to a threat of extinction2) If condition is not fulfilled, rights are consolidated; they become absolute3) Upon fulfilment of the condition, the parties shall return to each other what they received including the fruits

3. Potestative - fulfillment of the condition depends upon the will of a party to the obligation.

RULE ON POTESTATIVE CONDITION:1) If the fulfilment of the potestative condition depends upon the sole will of the debtor, the condition as well as the obligation itself is void. It renders the obligation illusory. (Applicable only to a suspensive condition and to an obligation which depends for its perfection upon the fulfilment of the potestative condition and not to a pre-existing obligation.)2) If the fulfilment depends exclusively upon the will of the creditor, both the condition and the obligation is valid.

4. Causal - fulfilment of the condition depends upon chance and/or the will of a third person5. Mixed fulfilment of the condition depends partly upon chance and/or the will of a third person6. Possible condition is capable of realization according to nature, law, public policy and good customs7. Impossible condition is not capable of realization according to nature, law, public policy and good customs8. Positive condition involves the performance of an act

9. Negative condition involves the omission of an act

10. Divisible condition is susceptible of partial realization

11. Indivisible condition is not susceptible of partial realization

IMPOSSIBLE AND ILLEGAL CONDITIONS

GENERAL RULE: They shall annul the obligation which depends upon them.EXCEPTIONS: a. Pre-existing obligationsb. If obligation is divisiblec. In simple or remuneratory donationsd. Testamentary dispositionse. Conditions not to do an impossible thing

RECIPROCAL OBLIGATIONS

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.

TACIT RECIPROCAL OBLIGATIONSIf 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 the obligation.

THE RIGHT TO RESCIND (ART. 1191)General rule: The right to rescind needs judicial approvalExceptions: 1) If there is an express stipulation of automatic rescission2) When the debtor voluntarily returned the thingNOTE: Article 1191 refers to judicial rescission. It does not apply if there is an express stipulation to rescind, in which case such stipulation must prevail. There is nothing in the law which prohibits the parties from entering into an agreement that violation of the terms of the contract would cause its cancellation without court intervention. Said stipulation is in the nature of facultative resolutory condition (Angeles vs. Calasanz, 135 SCRA 323). The injured party may choose between fulfillment and rescission of the obligations, with the payment of damages in either case. These remedies are alternative, not cumulative. However, should fulfillment become impossible, the injured party may also seek rescission. The right to rescind belongs exclusively to the injured party.

OBLIGATIONS WITH A PERIOD

- Those whose demandability or extinguishment is subject to the expiration of a term or period.

Requisites:1. Future2. Certain3. Legally and physically possible

CLASSIFICATION OF TERM OR PERIOD

1. A. Suspensive (ex die) obligation becomes demandable only upon arrival of a day certainB. Resolutory (in diem) arrival of day certain terminates the obligation

2. A. Legal granted by lawB. Conventional stipulated by the partiesC. Judicial fixed by the court

3. A. Definite date or time is known beforehandB. Indefinite date or time of day certain is unknown

TERMCONDITION

Interval of time which is future and certainFact or event which is future and uncertain

Time which must necessarily come although it may not be known whenFuture and uncertain fact or event which may or may not happen

Exerts an influence upon the time of demandability or extinguishment of an obligationExerts an influence upon the very existence of the obligation itself

Does not have any retroactive effect unless there is an agreement to the contraryHas retroactive effect

When it is left exclusively to the will of the debtor, the existence of the obligation is not affected When it is left exclusively to the will of the debtor, the very existence of the obligation is affected

WHEN COURTS MAY FIX PERIOD:

1. If the obligation does not fix a period, but from its nature and circumstances it can be inferred that a period was intended by the parties.2. If the duration of the period depends upon the will of the debtor3. In case of reciprocal obligations, when there us a just cause for fixing a period.4. If the debtor binds himself when his means permit him to do so.

GENERAL RULE: When a period is designated for the performance or fulfilment of an obligation, it is presumed to have been established for the benefit of the both the creditor and the debtor.

EXCEPTION: When it appears from the tenor of the obligation or other circumstances that the period has been established in favour of one or of the other.

REASON FOR FIXING THE PERIOD (ART 1197) There can be no possibility of any breach of contract or failure to perform the obligation unless the period is fixed by courts.

WHEN DEBTOR LOSES RIGHT TO MAKE USE OF THE PERIOD (IGIVA) 1. When after the obligation has been contracted, he becomes insolvent, unless he gives guaranties or securities for the debt (note: the insolvency need not be judicially declared) 2. When he does not furnish to the creditor the guaranties or securities he promised.3. When by his own act he has impaired said guaranties or securities after their establishment, and when through fortuitous event they disappear, unless he gives new ones equally satisfactory when debtor violates any undertaking, in consideration of which the creditor agreed to the period or 4. When debtor attempts to abscond.

ALTERNATIVE OBLIGATIONS

Facultative Obligations - only one prestation has been agreed upon but another may be given in substitution

EFFECT OF LOSS OR DETERIORA0TION THROUGH NEGLIGENCE, DELAY OR FRAUD OF OBLIGOR:1. Of thing intended as substitute - no liability2. Of the substitute after substitution is made with liability

Alternative Obligations bound by different prestations but only one is due

RIGHT OF CHOICE IN ALTERNATIVE OBLIGATIONSAs a general rule the right of choice belongs to debtor

FACULTATIVEALTERNATIVE

Comprehends only one object or prestation which is due, but it may be complied with by the delivery of another object or performance of another prestation in substitutionComprehends several objects or prestations which are due but may be complied with by the delivery or performance of only one of them

Fortuitous loss extinguishes the obligationFortuitous loss of all prestations will extinguish the obligation

Culpable loss obliges the debtor to deliver the substitute prestation without liability to debtorCulpable loss of any object due will give rise to liability to debtor

Choice pertains only to debtorChoice may pertain to creditor or even to third persons

EFFECT OF LOSS OF OBJECTS OF ALTERNATIVE OBLIGATIONS

A. If the right of choice belongs to the debtor1. If through a fortuitous event all were lost, debtor cannot be held liable for damages2. If 1 or more but not all of the things are lost or one or some but not all of the prestations cannot be performed due to fortuitous event or fault of the debtor, creditor cannot hold the debtor liable for damages because the debtor can still comply with his obligation

3. If all things, except one, were lost, the debtor must comply by performing that which remain4. If all were lost by fault of the debtor the latter is liable for the value of the last thing or service which became impossibleB. If right of choice belongs to the creditor1. If 1 of the things is lost through a fortuitous event, the debtor shall perform the obligation by delivering that which the creditor should choose from among the remainder or that which remains if only 1 subsists2. If the loss of 1 of the things occurs through the fault of the debtor, the creditor may claim any of those subsisting or the price of that which, through the fault of the former, has disappeared with a right to damages3. If all the things are lost through the fault of the debtor, the choice by the creditor shall fall upon the price of any one of them, also with indemnity for damages

JOINT AND SOLIDARY OBLIGATIONS (Arts. 1207-1222)

GENERAL RULE: Obligation is presumed joint if there is concurrence of two or more debtors and/or creditors

EXCEPTIONS TO THE PRESUMPTION: 1. When expressly stated that there is solidarity2. When the law requires solidarity3. When the nature of the obligation requires solidarity4. When a charge or condition is imposed upon heirs or legatees and the testament expressly makes the charge or condition in solidum (Manresa)

EFFECTS OF JOINT LIABILITY1. Demand on one produces delay only with respect to the debt2. Interruption in payment by one does not benefit or prejudice the other3. Vices of one debtor to creditor has no effect on the others4. Insolvency of one debtor does not affect other debtors

JOINT DIVISIBLE OBLIGATIONS1. Each creditor can demand for the payment of hi proportionate share of the credit, while each debtor can be held liable only for the payment of his proportionate share of the debt.2. A joint creditor cannot act in representation of the other creditors while a joint debtor cannot be compelled to answer for the acts or liability of the other debtors.

JOINT INDIVISIBLE OBLIGATIONS1. If there are 2 or more debtors, the fulfilment of or compliance with the obligation requires the concurrence of all the debtors, although each for his own share. The obligation can be enforced only by proceeding against all of the debtors.2. If there are 2 or more creditors, the concurrence or collective act of all the creditors, although each for his own share, is also necessary for the enforcement of the obligation.

EFFECT OF BREACHIf one of the joint debtors fails to comply with his undertaking, the obligation can no longer be fulfilled or performed. Consequently, it is converted into one of indemnity for damages. Innocent joint debtors shall not contribute to the indemnity beyond their corresponding share of the obligation.

EFFECT OF INSOLVENCY OF A DEBTORIf one of the joint debtors should be insolvent, the others shall not be liable for his share.

INDIVISIBILITYSOLIDARITY

Refers to the prestation which constitutes the object of the obligationRefers to the legal tie or vinculum juris and consequently to the subjects or parties of the obligation

Plurality of subjects is not requiredPlurality of subjects is indispensable

In case of breach, the obligation is converted into one of indemnity for damages because of breach, indivisibility of the obligation is terminatedWhen there is liability on the part of the debtors because of the breach, the solidarity among the debtors remains

KINDS OF SOLIDARITY:

1. ACTIVE Each creditor is empowered to exercise against the debtor not only the rights which correspond to him, but also all the rights which correspond to the other creditors, with the consequent obligation to render an accounting of his acts to such creditors creates a relationship of mutual agency among solidary creditors solidarity of creditors2. PASSIVE Solidarity of debtors Liability of each debtor for the payment of the entire obligation, with the consequent right to demand reimbursement from the others for their corresponding shares once payment has been made3. MIXED On the part of obligors and obliges; or debtors and creditors

Effect of PAYMENT by Solidary Debtor 1. Whole or partial extinguishment of debt 2. Right to recover against co-debtor 3. Right to recover interest from time the obligation becomes due

Effect of ASSIGNMENT by Solidary Creditor Without Consent of Others 1. If assignee is co-creditor no violation of Article 1213 because there can be no invasion of the personal or confidential relationship 2. If assignee is third person co-creditors and debtors are not bound by the assignment

Effect of COMPENSANTION and CONFUSION upon Solidary Obligation 1. If the confusion or compensation is partial, the rules regarding application of payment shall apply. This is without prejudice to the right of other creditors who have not caused the confusion or compensation to be reimbursed to the extent that their rights are diminished or affected. 2. If the confusion or compensation is total, the obligation is extinguished, what is left is the ensuing liability for reimbursement within each group:

a. The creditor causing the confusion or compensation is obliged to reimburse the other creditors.b. The debtors benefited by the extinguishment of the obligation are obliged to reimburse the debtor who made the confusion or compensation possible.

Effect of NOVATION upon Solidary Obligation 1. If the novation is prejudicial, the solidary creditor who effected the novation shall reimburse the others for damages incurred by them.2. If it is beneficial and the creditor who effected the novation is able to secure performance of the obligation, such creditor shall be liable to the others for the share which corresponds to them, not only in the obligation, but also in the benefits.3. If the novation is 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 in case the is deficiency in performance or in case damages are incurred by the other solidary creditors as a result of the substitution. 4. If the novation is effected by subrogating a third person in the rights of the solidary creditor responsible for the novation, the relation between the other creditors not substituted and the debtor or debtors is maintained.

Effect of Remission upon Solidary Obligation

1. If the remission covers the entire obligation, the obligation is totally extinguished and the entire juridical relation among the debtors is extinguished all together. 2. If the remission is for the benefit of one of the debtors and it covers his entire share in the obligation, he is completely released from the creditors but is still bound to his co-debtors. 3. If the remission is for the benefit of one of the debtors and it covers only a part of his share in the obligation, his character as a solidary debtor is not affected.

Effect of Loss or Impossibility of Performance

1. If it is not due to the fault of the solidary debtors, the obligation is extinguished. 2. If the loss or impossibility is due to the fault of one of the solidary debtors or due to a fortuitous event after one of the solidary debtors had already incurred in delay, the obligation is converted into an obligation of indemnity for damages but the solidary character of the obligation remains.

DIVISIBLE AND INDIVISIBLE OBLIGATIONS (ARTS. 1223-1225)

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

INDIVISIBLE OBLIGATIONS - Prestation is not susceptible of partial performance, otherwise, the essence of the obligation will be changed.

GENERAL RULE: The creditor cannot be compelled partially to receive the prestation in which the obligation consists; neither may the debtor be required to make partial payments.

EXCEPTIONS:

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; and 3. When the obligation is in part liquidated and in part unliquidated.

NOTES: Divisibility or indivisibility of the obligation refers to the performance of the prestation and not to the thing which is the object thereof. The intention of parties should be taken into account to determine whether obligation is divisible or not.

OBLIGATIONS WITH A PENAL CLAUSE

Obligations with a penal clause - one to which an accessory undertaking is attached for the purpose of insuring its performance by virtue of which the obligor is bound to pay a stipulated indemnity or perform a stipulated prestation in case of breach.

CHARACTERISTICS OF PENAL CLAUSES:1. Subsidiary - As a general rule, only penalty can be demanded, principal cannot be demanded, except: Penalty is joint or cumulative2. Exclusive - takes place of damage, damage can only be demanded in the ff. cases:a. Stipulation granting rightb. Refusal to pay penaltyc. With dolo ( not of creditor )

PURPOSE OF PENALTY:1. To insure the performance of the obligation; 2. To liquidate the amount of damages to be awarded to the injured party in case of breach of the principal obligation (compensatory);3. In certain exceptional cases, to punish the obligor in case of breach of the principal obligation (punitive).

GENERAL RULE: The penalty fixed by the parties is a compensation or substitute for damages in case of breach.

EXCEPTION:

1. When there is a stipulation to the contrary; 2. When the debtor is sued for refusal to pay the agreed penalty; and 3. When debtor is guilty of fraud

WHEN PENALTY MAY BE REDUCED:

1. If the principal obligation has been partly complied with; 2. If the principal obligation has been irregularly complied with; and 3. If the penalty is iniquitous or unconscionable even if there has been no performance.

NOTE: Article 1228 does not apply to these exceptions; there must be proof of actual damages. The debtor cannot exempt himself from the performance of the principal obligation by paying the stipulated penalty unless when the right has been expressly reserved for him. The creditor cannot demand the fulfilment of the principal obligation and the satisfaction of the stipulated penalty at the same time unless the right has been clearly granted him.

CHAPTER 4EXTINGUISHMENT OF OBLIGATIONS

MODES OF EXTINGUISHMENT OF OBLIGATION

1. Payment of performance2. Loss of the thing due3. Condonation or remission of debt4. Confusion or merger of rights5. Compensation6. Novation7. Annulment8. Rescission9. Fulfillment of resolutory condition 10. Prescription

PAYMENT or PERFORMANCE

Payment or Performance - means not only the delivery of money but also the performance, in any other manner, of an obligation.

REQUISITES FOR A VALID PAYMENT OR PERFORMANCE

1. With respect to the prestation itselfa. Identity -requires that the very thing, service or forbearance, as the object of the prestation, must be performed or observedb. Integrity or completeness-GENERAL RULE: A debt shall not be understood to have been paid unless the thing or service in which the obligation consists has been completely delivered or rendered, as the case may be.EXCEPTIONS: a) When the obligation has been substantially performed in good faith; b) When the obligee accepts performance, knowing its incompleteness or irregularity & w/out expressing any protest or objection; c) When there is an express stipulation; and d) When the debt is in part liquidated and in part unliquidated. c. Indivisibility2. With respect to partiesa. PAYOR the one performing, he can be the debtor himself or his heirs or assigns or his agent, or anyone interested in the fulfilment of the obligation; can be anyone as long as it is with the creditors consent.

THIRD PERSONPAYMENT BY THIRD PERSON WITH BOTH DEBTOR AND CREDITORS CONSENTPAYMENT BY THIRD PERSON WITH CREDITORS CONSENT BUT WITHOUT DEBTORS CONSENT

The third person takes the debtors place. There is subrogation except if the 3rd person intended it to be a donation. The debtor shall reimburse the payment made but only to the extent that the payment has been beneficial to him.

b. PAYEE creditor or obligee or successor in interest, transferee, or agent.

THIRD PERSON, if any of the ff. concur: It must have redounded to the obligees benefit; and Only to the extent of such benefit

PERSON IN POSSESSION OF CREDIT applies only if the debt has not been previously garnished

Persons who may pay the obligation: 1. The debtor himself or his legal representative 2. Any third person

GENERAL RULE: Creditor is not bound to accept payment or performance by a third person.

EXCEPTIONS: 1. When made by a third person who has an interest in the fulfillment of the obligation;

2. When there is a stipulation to the contrary.

Rights of third person who paid the obligation: 1. If payment was made with knowledge and consent of the debtor: a. can recover entire amount paid b. can be subrogated to all the rights of the creditor. 2. If payment was made without knowledge or against the will of the debtor, he can recover only insofar as the payment has been beneficial to the debtor.

To whom payment must be made: 1. The person in whose favor the obligation has been constituted; 2. His successor in interest; or 3. Any person authorized to receive it.

GENERAL RULE: If payment is made to a person other than those enumerated, it shall not be valid. EXCEPTIONS: 1. Payment made to a 3rd person, provided that it has redounded to the benefit of the creditor. Such benefit to the creditor is presumed in the following cases: a. If after the payment, the third person acquires the creditors rights; b. If the creditor ratifies the payment to the third person; c. If by the creditors conduct, the debtor has been led to believe that the third person had authority to receive the payment. 2. Payment made to the possessor of the credit, provided that it was made in good faith.

PAYMENT MADE TO AN INCAPACITATED PERSON, VALID IF:1. Incapacitated person kept the thing delivered, or2. Insofar as the payment has been beneficial to him

Rules in Monetary Obligations: 1. Payment in cash - 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. 2. Payment in check or other negotiable instrument - not considered payment; not considered legal tender and may be refused by the creditor. It shall only produce the effect of payment: a. When it has been cashed or b. When it has been impaired through the fault of the creditor.

LEGAL TENDER Such currency which may be used for the payment of all debts, whether private or public. The kind of currency which a debtor can legally compel a creditor to accept in payment of a debt in money when tendered by the debtor in the right amount. Legal tender of the Philippines would be all notes and coins issued by the Central Bank. Section 52, R.A. No. 7653 1. 25c and above, legal tender up to P50 2. 10c and below, legal tender up to P20

WHERE PAYMENT MUST BE MADE:1. Place stipulated by the parties. 2. No stipulation and the obligation is to deliver 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.

SPECIAL FORMS OF PAYMENT: 1. Application of payment 2. Dation in Payment 3. Payment by Cession4. Tender of payment or consignation

1. APPLICATION OF PAYMENT -designation of debt to which the payment must be applied when the debtor has several obligations of the same kind in favour of the same creditor

Requisites:a. There must be only one debtor and only one creditorb. There must be two or more debts of the same kindsc. All of the debts must be due; except; if theres stipulation to the contrary; or application of payment is made by the party for whose benefit the term has been constituted; andd. Amount paid by the debtor must not be sufficient to cover the total amount of debts

GENERAL RULE: The right to designate the debt to which the payment shall be applied primarily belongs to the debtor.

EXCEPTION: if the debtor does not avail of such right and he accepts from the creditor a receipt in which the application is made.

Legal Application of Payment (Art. 1254)

i. If neither the debtor nor the creditor makes any application of payment, or if it cannot be inferred from other circumstances, the debt which is most onerous to the debtor, among those which are due, shall be deemed to have been satisfied. ii. If the debts due are of the same nature and burden, payment shall be applied to all of them proportionately.

2. DATION IN PAYMENT delivery and transmission of ownership of a thing by the debtor to the creditor as an accepted equivalent of the performance of the obligation.

REQUISITES:

1) Existence of a money obligation2) Alienation to the creditor of a property by the debtor with the consent of the former3) Satisfaction of the money obligation of the debtor

3. PAYMENT BY CESSION debtor 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 debts2) Partial or relative insolvency of the debtor3) Acceptance of the cession by the creditors

DATION IN PAYMENTPAYMENT BY CESSION

One creditorPlurality of creditors

Not necessarily in state of financial difficultyDebtor must be partially or relatively insolvent

The thing delivered is considered as equivalent of performanceUniversality of property of debtor is what is ceded

Payment extinguishes obligation to the extent of the value of the thing delivered as agreed upon, proved or implied from the conduct of the creditorMerely releases debtor for net proceeds of things ceded or assigned, unless there is contrary intention

4. TENDER OF PAYMENT OR CONSIGNATION

Tender of Payment Manifestation of the debtor to the creditor of his decision to comply immediately with his obligation. It is the preparatory act and extrajudicial in character.

Consignation Deposit of the object of the obligation in a competent court in accordance with the rules prescribed by law, after the tender of payment has been refused or because of circumstances which render direct payment to the creditor impossible or inadvisable. It is the principal act and judicial in character.

Special Requisites: 1) The debt sought to be paid must be due; 2) There must be a valid and unconditional tender of payment or any of the causes stated by law for effective consignation without previous tender of payment exists; 3) The consignation of the thing due must first be announced to the persons interested in the fulfillment of the obligation; 4) Consignation shall be made by depositing the things due at the disposal of judicial authority; and 5) The consignation having been made, the interested parties shall also be notified thereof.

Effects of Consignation: 1) If the creditor accepts the thing or amount deposited without contesting the validity or efficacy of the consignation, the obligation is extinguished. 2) If the creditor contests the validity or efficacy of the consignation or if the creditor is not interested or unknown or is absent, the result is litigation. If the debtor complied with all the requisites, the obligation is extinguished.

GENERAL RULE: Consignation shall produce effects of payment only if there is a valid tender of payment.

EXCEPTIONS (TRAIT): 1) Creditor is absent or unknown, or does not appear at the place of payment 2) Creditor is incapacitated to receive payment at the time it is due 3) When two or more persons claim the right to collect 4) When the title of the obligation has been lost 5) When without just cause creditor refuses to give a receipt

LOSS OF THE THING DUE

partial or total/includes impossibility of performance

When is there LOSS:1) When the object perishes2) When it goes out of commerce of men3) When it disappears in such way that its existence is unknown or it cannot be recovered

OBLIGATION TO DELIVER A DETERMINATE THING:

General rule: Obligation is extinguishedRequisites:1) That thing which is lost is determinate;2) The thing is lost without the fault of the debtor; and3) The thing is lost before the debtor has incurred in delay

Exceptions:

1) When by law, obligor is liable even for fortuitous event; 2) When by stipulation, obligor is liable even for fortuitous event; 3) When the nature of the obligation requires the assumption of risk; 4) When the loss of the thing is due partly to the fault of the debtor; 5) When the loss of the thing occurs after the debtor incurred in delay; 6) When the debtor promised to deliver the same thing to two or more persons who do not have the same interest; and 7) When the debt of a certain and determinate thing proceeds from a criminal offense

OBLIGATION TO DELIVER A GENERIC THING

General rule: Obligation is not extinguished because the genus of a thing does not perish

Exception: In case of generic obligations whose object is a particular class or group with specific or determinate qualities (Limited Generic Obligations)

Effect of Relative Impossibility or Doctrine of Unforeseen Events (ART 1267)

When the service has become difficult as to be manifestly beyond the contemplation of the parties, the obligor may also be released therefrom, in whole or in part.

Requisites: 1) The event or change in circumstances could not have been foreseen at the time of the execution of the contract; 2) It makes the performance of the contract extremely difficult but not impossible; 3) The event must not be due to the act of any of the parties; and 4) The contract is for a future prestation.

CONDONATION OR REMISSION OF THE DEBT

- An act of pure liberality by virtue of which the obligee, without receiving any price or equivalent, renounces the enforcement of the obligation, as a result of which it is extinguished in its entirety or in that part or aspect of the same to which the remission refers.

It is the gratuitous abandonment by the creditor of his right.

Express condonation or remission must comply with the formalities of donation.

Requisites: a. It must be gratuitous b. It must be accepted by the debtor c. The obligation must be demandable

CONFUSION OR MERGER OF RIGHTS

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: a. That the characters of creditor & debtor must be in the same person; b. That it must take place in the person of either the principal creditor or the principal debtor; and c. It must be complete and definite.

COMPENSATION

- Extinguishment in the concurrent amount of the obligation of those persons who are reciprocally debtors and creditors of each other.

Requisites: a. There must be 2 parties, who, in their own right, are principal creditors & principal debtors of each other (except in case of guarantor, Article 1280); b. Both debts must consist in money, or if the things due are fungibles, they must be of the same kind & quality; c. Both debts must be due; d. Both debts must be liquidated & demandable; e. There must be no retention or controversy commenced by 3rd persons over either of the debts & communicated in due time to the debtor; and f. Compensation must not be prohibited by law.

COMPENSATIONCONFUSION

Two persons who are mutual creditors and debtors of each otherOne person where qualities of debtor and creditor are merged

There must be at least two obligationsThere is only one obligation

COMPENSATIONPAYMENT

The requisites prescribed by law are different.The requisites prescribed by law are different from that of compensation.

Takes effect by operation of lawTakes effect by act of the parties

Capacity to give and to acquire is not necessaryCapacity to give and to acquire is essential

As a rule, it is partialAs a rule, it is complete and indivisible

Kinds of Compensation 1) Legal takes effect by operation of law2) Voluntary takes effect by judicial decree3) Judicial takes effect by judicial decree4) Facultative when it can be claimed by one of the parties who, however, has the right to object to it.

Debts NOT subject to Compensation: 1) Debts arising from contracts of deposit 2) Debts arising from contracts of commodatum 3) Claims for support due by gratuitous title 4) Obligations arising from criminal offenses5) Certain obligations in favor of government

Facultative Compensation

This is compensation which can be set up only at the option of a creditor, when legal compensation cannot take place because of want of some legal requisites for the benefit of the creditor. The latter can renounce his right to oppose the compensation and he himself can set it up. It differs from conventional compensation because it is unilateral while the latter depends upon the agreement of both parties. (Tolentino, Volume IV, p. 367)

NOVATION

- substitution or change of an obligation by another, resulting in its extinguishment or modification, either by changing its object or principal conditions, or by substituting another in place of the debtor, or by subrogating a third person in the rights of the creditor.

Requisites: 1) A previous valid obligation; 2) Agreement of the parties to the new obligation; 3) Extinguishment of the old obligation; and 4) Validity of the new obligation.

EFFECTS OF NOVATION:

1. Extinguishment of principal carries accessory, except:a. Stipulation to the contraryb. Stipulation pour autrui unless beneficiary consentsc. Modificatory novation only; obliged to w/c is less onerousd. Old obligation is void2. Old obligation subsists if new obligation is void or voidable but annulled already (except: intention of parties)3. If old obligation has conditiona. If Resolutory and it occurred old obligation already extinguished; no new obligation since there is nothing to novateb. If Suspensive and it never occurred as if no obligation; also nothing to novate4. If old obligation has condition, it must be compatible with the new obligation; if new obligation is w/o condition deemed attached to new5. If the new obligation has conditiona. If resolutory: validb. If suspensive and did not materialize: old obligation is enforced

KINDS OF NOVATION:

A. REAL/OBJECTIVE changein object, cause/consideration or principal conditionB. PERSONAL/SUBJECTIVEa. Substituting person of debtor (passive)b. Subrogating a third person to the rights of the creditor (active)i. Conventional - agreement and consent of all parties; clearly establishedii. Legal - takes place by operation of law; no need for consent; not presumed except as provided for in law: PRESUMED WHEN1. Creditor pays another preferred creditor even w/o debtors knowledge2. 3rd person not interested in obligation pays w/ approval of debtor3. Person interested in fulfillment of obligation pays debt even w/oknowledge of debtor

Test of CompatibilityWhether or not the old and new obligations can stand together, each having its own independent existence. If they can stand together, there is no incompatibility; consequently, there is no novation. If they cannot stand together, there is incompatibility; consequently, there is novation.

Forms of Substitution of Debtors: 1) Expromision - 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.

Requisites: a. Initiative for substitution must emanate from the new debtor b. Consent of the creditor to the substitution

2) Delegacion - effected with the consent of the creditor at the instance of the old debtor, with the concurrence of the new debtor.

Requisites: a. Initiative for substitution must emanate from the old debtor b. Consent of the new debtor c. Acceptance by the creditor

A. Delegante old debtorB. Delegatario creditorC. Delegado new debtor

Effect of insolvency of new debtor

1) Expromision the new debtors insolvency or nonfulfillment of the obligation shall not revive the original debtors liability to the creditor whether the substitution is effected with or without the knowledge or against the will of the original debtor.

2) Delegacion the creditor can sue the old debtor only when the insolvency was prior to the delegation and publicly known or when the old debtor knew of such insolvency at the time he delegated the obligation.

IMPORTANT: A change in the incidental elements of, or an addition of such elements to an obligation, unless otherwise expressed by the parties, will not result in its extinguishment.

Payment by a Third PersonChange of Debtor

Debtor is not necessarily released from debtDebtor is released

Can be done even w/o consent of creditorneeds consent of creditor express or implied

One obligationTwo obligations; one is extinguished and new onecreated

3rd person has no obligation to pay if insolventNew debtor is obliged to pay

CONVENTIONAL SUBROGATIONASSIGNMENT OF RIGHTS

Governed by Arts. 1300 to 1304Governed by arts. 1624 to 1627

Debtors consent is requiredDebtors consent is not required

Extinguishes the obligation and gives rise to a new oneTransmission of the right of the creditor to third person without modifying or extinguishing the obligation

Defects and vices in the old obligation are cureddefects and vices in the old obligation are not cured

Takes effect upon moment of novation or subrogationAs far as the debtor is concerned, takes effect upon notification

KINDS OF SUBROGATION1. Conventional takes place by agreement of the parties; this kind of subrogation requires the intervention and consent of 3 persons: the original creditor, the new creditor and the debtor. 2. Legal takes place without agreement but by operation of law because of certain acts (Article 1302).

GENERAL RULE: Legal subrogation cannot be presumed. EXCEPTIONS:1. Creditor pays another creditor who is preferred, without debtors knowledge; 2. A third person not interested in the obligation pays with the express or tacit approval of the debtor; or 3. Even without debtors knowledge, a person interested in the fulfillment of the obligation pays without prejudice to the effects of confusion as to the latters share.