Obligations & Penalties

• The module covers obligations with a penal clause and the extinguishment of obligations

Obligations With A Penal Clause

• In obligations with a penal clause, the penalty substitutes the indemnity for damages and the payment of interests in case of noncompliance
• Damages are paid if the obligor refuses to pay the penalty or is guilty of fraud in fulfilling the obligation
• The penalty can only be enforced when demandable according to the provisions of the Code
• The purpose of a penal clause is to ensure performance by creating a deterrent against breach
• It makes the consequences of a breach as onerous as possible
• It can also substitute a penalty for the indemnity for damages and the payment of interests in the event of non-compliance
• It can punish the debtor for non-fulfillment or violation of the obligation

Kinds of Penal Clause

• Legal penal clauses are provided for by law

• Conventional penal clauses are provided for by stipulation of the parties

• Compensatory penal clauses take the place of damages

• Punitive penal clauses are imposed as punishment for breach

• Subsidiary or alternative penal clauses enforce only the penalty

• Joint or cumulative penal clauses enforce both the principal obligation and the penal clause

• The debtor cannot exempt themselves from performing the obligation by paying the penalty, unless this right has been expressly reserved for them

• The creditor cannot demand fulfillment of the obligation and satisfaction of the penalty at the same time, unless this right has been clearly granted to them

• If the creditor decides to require fulfillment of the obligation, the performance thereof should become impossible without their fault, the penalty may be enforced

• The nullity of the penal clause does not nullify the principal obligation

• The nullity of the principal obligation carries with it that of the penal clause

Extinguishment of Obligations

• Obligations can be extinguished through:
  • Payment or Performance
  • Loss of the thing due
  • Condonation or Remission of Debt
  • Confusion or Merger of the rights of the Creditor and Debtor
  • Compensation
  • Novation
  • Annulment
  • Rescission
  • Fulfillment of Resolutory Condition
  • Prescription

Elements Of Payment

• The term payment does not only mean the delivery of money but also the performance in any other manner of an obligation
• Elements of payment include:
  • Persons who may pay and to whom payment is made
  • Thing or object in which payment must consist
  • Cause
  • Mode or form
  • Place and time
  • Imputation of expenses
  • Special parts that may modify the same and its effects (quis, quinam, quid, causa, quo modo, ubi, quando, expensae, and pacta adjunta in Latin)
• A debt is not considered paid unless the thing or service in which the obligation consists has been completely delivered or rendered

Requisites Of Payment

• Requisites of Payment include:

  • Integrity, where the prestation is fulfilled completely
  • Identity, where the very prestation due must be delivered or performed

• The debtor has the burden of showing with legal certainty that the obligation has been discharged by payment

• The creditor is bound to accept payment or performance from:

  • the debtor
  • any person who has an interest in the obligation (like a guarantor)
  • a third person who has no interest in the obligation when there is a stipulation that he can make the payment

• Acceptance of incomplete or irregular performance:

  • The obligee knows that the performance is incomplete or irregular
  • He accepts the performance without expressing any protest or objection

Effect Of Payment By A Third Person

• If a third person makes payment without the knowledge or against the will of the debtor, the payer can recover from the debtor only to the extent that the payment has benefited the debtor
• The third person is not subrogated to the rights of the creditor
• If a third person makes payment with the knowledge of the debtor, the payer has the rights of reimbursement and subrogation
• They can recover whatever they have paid and acquire all the rights of the creditor
• Effect of payment made to a third person
  • The general rule is invalid and does not extinguish the obligation
  • The exception is if it has redounded to the benefit of the creditor
  • It is immaterial that the debtor acted in good faith and by mistake to the person of the creditor through fraud of a third person if the creditor is without fault or negligence

Application Of Payments

• If the debtor decides how payment should be applied, payment is made accordingly
• If the debtor does not make the application, the creditor can make the application
• If neither the debtor nor the creditor makes the application, payment is applied to the most onerous debt
• If the debts are equally onerous, payment is applied proportionately to all the debts

Requisites of Application of Payments

• One debtor and one creditor
• There must be two or more debts
• The debts must be of the same kind
• The debts to which payment is applied must be due
• The payment must not be sufficient to cover all the debts

Tender Of Payment

• Tender of payment must comply with the rules on payment
• It must be unconditional and for the whole amount
• It must be actually made
• Requirements for effective consignation include:
  • A debt that is due
  • Consignation was made because the creditor refused to accept payment, was absent or incapacitated, several persons claimed to be entitled to receive the amount, or the title to the obligation was lost
  • Previous notice of consignation was given to the interested party
  • The amount due was placed at the disposal of the court
  • After consignation, the interested person was notified

Loss Of The Thing Due

• An obligation to deliver a determinate thing is extinguished if it is lost or destroyed without the fault of the debtor and before delay
• This does not apply if the obligor is liable for fortuitous events by law or stipulation, or if the nature of the obligation requires the assumption of risk
• Requisites include:
  • The obligation is to deliver a specific or determinate thing
  • The loss occurs without the fault of the debtor
  • The debtor is not guilty of delay

Condonation Or Remission of Debt

• Requisites:
  • It must be gratuitous
  • It must be accepted by the obligor
  • The parties must have capacity
  • It must not be inofficious
  • If made expressly, it must comply with the forms of donation
• Presumption in case document of indebtedness voluntarily delivered by the creditor
  • delivery of a private document evidencing a credit, made voluntarily by the creditor to the debtor, implies the renunciation of the action which the former had against the latter
  • Whenever the private document in which the debt appears is found in the possession of the debtor, it shall be presumed that the creditor delivered it voluntarily, unless the contrary is proved

Confusion Or Merger Of Rights

• Confusion or merger is the meeting in one person of the qualities of the creditor and debtor with respect to the same obligation
• Merger in the person of the principal debtor or creditor extinguishes the obligation
• Requisites of Confusion:
• must take place between the principal debtor and creditor
  • It must be complete and definite

Compensation

• Compensation takes place when two persons, in their own right, are creditors and debtors of each other

• For compensation to be proper:

  • Each obligor must be bound principally and be a principal creditor of the other
  • Both debts must consist in a sum of money, or if the things due are consumable, they must be of the same kind and quality
  • The two debts must be due
  • The debts must be liquidated and demandable
  • There must be no retention or controversy commenced by third persons and communicated to the debtor

• Legal compensation occurs by operation of law even without the knowledge of the parties, and cannot be pleaded or invoked as long as the requisites are present.

• Voluntary or conventional compensation includes any compensation which takes place by agreement of the parties even if all the requisites for legal compensation are not present.

Novation

• Novation is the total or partial extinction of an obligation through the creation of a new one that substitutes it
• Obligations may be modified by:
  • Changing their object or principal conditions
  • Substituting the person of the debtor
  • Subrogating a third person in the rights of the creditor
• Elements of novation include:
  • A previous valid obligation
  • An agreement of all parties concerned to a new contract
  • The extinguishment of the old obligation
  • The birth of a valid new obligation
• Subrogation is the substitution of one person in the place of another with reference to a lawful claim or right Subrogation is either legal or conventional
• Legal subrogation is presumed:
  • When a creditor to pays another creditor who is preferred, without the debtor's knowledge
  • When a third person, without interest in the obligation pays with the debtor's approval
  • When even without the knowledge of the debtor, a person interested in the obligation pays
• A creditor, to whom partial payment has been made, may exercise his right for the remainder and shall be preferred to the person who has been subrogated in his place in virtue of the partial payment of the same credit