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This document is a reviewer of obligations and contracts, focusing on the definitions, elements, and sources of obligations, as well as the different kinds of legal remedies and damages. It discusses the importance of proper diligence and legal principles in fulfilling obligations.
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5 Defining and Understanding Obligations Definition, Elements, and Sources of Obligations Definition of an Obligation (Art. 1156) A juridical necessity to give, to do, or not to do Elements of an Obligation Active Subject ○ Creditor (obligationstogi...
5 Defining and Understanding Obligations Definition, Elements, and Sources of Obligations Definition of an Obligation (Art. 1156) A juridical necessity to give, to do, or not to do Elements of an Obligation Active Subject ○ Creditor (obligationstogive)or Obligee (obligationsto do) ○ The person who has the right to demand an obligation Passive Subject ○ Debtor (obligationsto give) or obligor (obligationsto do) ○ The person who must fulfill or perform the obligation Object/Prestation ○ To give, to do, or not to do ○ Lawful, possible, determinate/determinable, useful, and capable of pecuniary estimation [can be recovered monetarily] (Arts. 1347-1349) Juridical Tie ○ Vinculum juris(Bond of law) ○ The reason causing an obligation to arise, creating a legal relationship between the parties granting all the rights and remedies to the parties with respect to the obligation Understanding Juridical Necessity T he creditor or obligee can resort to legal remedies to enforce their rights, compelling the debtor or obligor to perform the obligation The “invisible” threat of being sued “Natural obligations” are a class of non-enforceable obligations performed due to morality and ethical principles Sources of Obligations (Art. 1157) Law (Art. 1158) ○ Laws expressly determined to be demandable by the Civil Code or by special laws ○ Obligations may be owed to the State or the benefit of private persons ○ Ex. 13th Month Pay, Overtime Pay, National Internal Revenue Code, the Family Code Contracts (Art. 1159) ○ Binding agreements, a “meeting of minds” wherein one binds oneself with respect to the other to give something or render service (Art. 1305) ○ Has the force of law between the parties and must be complied in good faith ○ Ex. Contract of Sale Quasi-Contracts (Art. 1160) ○ Lawful, voluntary, unilateral acts giving rise to a juridical relation ○ No formal contract, but an obligation still exists ○ Negotiorum Gestio Whenever someone voluntarily, but with no authority, takes charge (officious manager) of the abandoned business/property of another, the owner is responsible for the obligations incurred Must reimburse the officious manager for expenses proportional to the owner’s benefit ○ Solutio Indebiti(When you receive any payment bymistake, you have the obligation to return it) ○ Other examples: Support given by strangers (Art. 2164) Third person bearing funeral expenses (Art. 2165) Properties saved during calamities (Art. 2168) “Acts or Omissions punished by law” (Art. 1161) ○ Criminal offenses 6 ○ I f you commit a crime, you are not just criminally punished but civilly liable to the victim for damages (Art. 100 Revised Penal Code) ○ Types of Liabilities Restitution (Return/restore) Reparation (Monetary compensation [Price + Sentimental Value]) Indemnification (Collateral damages for injury to other persons or property) ○ Types of Damages Actual or Compensatory Damages (Compensation for a proven loss or injury) Moral Damages (Cases involving psychological suffering, mental anguish, or besmirched reputation) Nominal Damages (A right has been violated, but no substantial injury or loss has been inflicted) Temperate Damages (Given for a loss that has been suffered but cannot be proven with certainty) Liquidated Damages (Damages stipulated in a contract and can be claimed in case of breach) Exemplary Damages (Also known as punitive damages, these are awarded as a form of punishment and to deter future wrongdoings. ○ Damages may still be required even if innocence is declared ○ Criminal Cases (Proof beyond Reasonable Doubt) vs. Civil Cases (Preponderance of Evidence) Quasi-Delicts/Culpa Aquiliana (Art. 1162) ○ Fault or negligence causing damage, but not a crime ○ No pre-existing contractual obligation ○ Negligence (failure of a person to observe for the protection of the interests of another that degree of care, precaution, and vigilance which the circumstances justly demand, and which causes injury to the other person) [Child Learning Center, Inc. vs. Tagorio] ○ Culpa contractual(Negligence in Contract Obligation) Nature and Effect of Obligations Obligations to Give (Arts. 1163-1166) To take care of it (Art. 1163) ○ Creditor has the right to the delivery of the object in the state or condition agreed upon ○ Standard of Care (Proper Diligence of a Good Father) unless stipulated otherwise [Transport (Art. 1755, Spouses Cruz vs. Sun Holidays) | Banks (Solidbank Corporation/Metropolitan Bank and Trust Company vs. Spouses Tan)] ○ The debtor, caretaker of the thing or object, must be preserved from the perfection of the contract until it has been delivered to the debtee (Seven Brothers Shipping Corporation vs. Court of Appeals) or how a prudent person would care for their property (Sicam vs. Jorge) To give the fruits (Art. 1164) ○ Kinds of Fruits [Art. 442] Natural (spontaneous products of the soil or animals) Industrial (produced by lands of any kind through cultivator or labor) Civil (rents of buildings, the price of leases of land other property, annuities) ○ Creditor has the right to the fruits from time obligation to deliver arises ○ Credit acquires REAL right (Currently an expectation) only upon delivery s.t. Before delivery, creditor can only go enforce against debtor to deliver Governeed by the legal maxim,nonnudis pactis, sed tradition dominia rerum transferentur(tradition or delivery is needed to pass ownership) [Heirs of Pedro Escanlar, et al. vs. the Hon. Court of Appeals, et al.] Forms of Non-Delivery ○ The instrument (public document) itself expresses/implies delivery was not intended [Equatorial Realty Development vs. Mayfair Theater] ○ Failure of the vendee to take actual possession of the land sold [Cebu Winland Development Corporation vs. Ong] ○ Such delivery was not effected, because a third person was actually in possession of the thing [Equatorial Realty Development vs. Mayfair Theater] 7 A fter delivery, creditor can enforce against the third party, preventing others from using the thing [Development Bank of the Philippines vs. National Labor Relations Commission] To give the thing (Art. 1165) ○ Determinate/Specific “Concrete, particularized object, indicated by its own individuality” [Cordova vs. Reyes Daway Lim Bernardo Lindo Rosales Law Offices, et al.] Non-substitutable, even if the alternative has identical qualities and specifications [Art. 1244] Delivering the fruits [Art. 1164], including accessions and accessories [Art. 1166] Accessories (things which are meant for the embellishment, use, or preservation of a thing which is more important) Legal Remedies Specific Performance (fulfilled by the debtor) Liability for damages ○ Indeterminate/Generic Indicated solely by its class, indistinguishable from the rest of its kind Any object can be delivered, as long as it satisfies the description of the object (substitutable) Only the purpose of the obligation and other circumstances can be taken into consideration for legal remedies [Art. 1246] If not performed, creditor may ask a 3rd party to give it at the debtor’s expense Presumptions (Art. 1176) ○ If principal amount is received without reserving right to interest, presumption is interest has been paid ○ If a later installment is received without reserving prior installments, presumption is earlier installments have been paid ○ Not applicable to taxes Determinate Generic Specific Performance Remedy available, plus damages Remedy available, plus damages Recission Remedy available, plus damages Remedy available, plus damages Substitute Performance Not available Remedy available, plus damages Damages Remedy available Remedy available Obligations to (Not) Do (Arts. 1167-1168) Obligations to Do (Art. 1167) ○ Can be a “personal” obligation (only the obligor can do) or a “non-personal” obligation (anyone else can do) Personal obligations can only be remedied by filing damages against the artist, specific performance cannot be rendered (provisions against involuntary servitude) [1987 Philippine Constitution, Art. III, Sec. 18 (2)] ○ If obligor fails to do the service, a 3rd party may be asked to do it at the obligor’s expense ○ If done in contravention of tenor of agreement (breach of contract), a 3rd party may be asked to redo it at obligor’s expense ○ If poorly performed, can be treated as undone and a 3rd party may be asked to do it at obligor’s expense Obligations not to Do (Art. 1168) ○ If obligor does what is forbidden, a 3rd party may be asked to undo it at obligor’s expense Legal Delay (Art. 1169) D elay with legal consequences (liability for fortuitous events, damages, and interest) Distinct from ordinary delay, which is both non-demandable and starts when performance is not given or done on the due date General Rules on Legal Delay ○ There must be a judicial (courts) or extrajudicial (oral/written) demand 8 ○ Forms of Legal Delay (mora) Mora solvendi(Delay of the debtor in fulfilling his obligation) Mora accipiendi(Delay on the part of the creditor in accepting the performance of the debtor) Compensatio morae(Delay of both the creditor and debtor in reciprocal obligations) ○ Elements of Legal Delay Obligation is demandable and liquidated The debtor delays performance Creditor (extra)judicially requires the debtor’s performance [Pantaleon vs. American Express International] ○ Exceptions (Demand is not necessary to be considered a legal delay) Obligation expressly and strictly declares (stated in the contract) Law expressly declares (tax payments) The deadline is the controlling motive for the establishment of the contract (wedding dress) Demand is useless (obligor’s fault) ○ Additional Rules on Reciprocal Obligations (both parties required to give or do something in relation to the other) [Cortes, vs. Hon. Court of Appeals] No one’s in delay if both not ready to perform When one party fulfills their obligation, delay by the other may begin if they are unable to fulfill their obligations [Spouses Yao vs. Matela] Damages (Arts. 1170-1173) Forms of Liability for Damages ○ Fraud (Art. 1171) Bad faith (deliberate and intentional evasion of the normal fulfillment of obligation) [The International Corporate Bank (now Union Bank Of The Philippines) vs. Spouses Gueco] Demandable in all obligations (to do/give) Waiver of future fraud is void (not allowed), but past fraud may be forgivable ○ Negligence (Art. 1172) Omission of that diligence required by the nature of the obligation (Failure to exercise required care and caution) [Layugan vs. Intermediate Appellate Court, et al.] Gross Negligence (An absence of or failure to exercise even slight care or diligence, or the entire absence of care) [Philippine Airlines vs. Court of Appeals, et al.] Liability may be tempered by the courts If with bad faith, Arts. 1171 & 2201(2) will apply ○ Delay (Art. 1169) ○ Contravene Tenor of Obligation When there is a breach (performance is contrary to the terms and conditions) The obligor will be responsible for all damages which may be reasonably attributed to the non-performance of the obligation [Art. 2201 & Legaspi Oil Co., Inc. vs. the Court of Appeals] Fortuitous Events (Art. 1174) N o person shall be responsible for events which could not be foreseen or, even if foreseen, were inevitable or could not be avoided (difficulty of foreseeing is not an impossibility) [Sicam vs. Jorge] Fortuitous events can exempt one from liability if one has not committed negligence/misconduct causing the event Exceptions: ○ Law expressly specifies liability (delay) [Art. 1165 & Art. 1268] If an obligor legally delays Obligor promises to deliver the same thing to 2 persons who do not have the same interest, they shall be liable for the fortuitous event until delivery Obligation to deliver arises from a crime [Art. 1268] ○ Stipulation (or agreement) by the parties expressly specifies liability ○ Nature of obligation requires assumption of risk ○ Delivery of generic thing (genus never perishes [genus nunquam perit]; can easily be replaced; does not extinguish liability) [Co v. Court of Appeals] Elements/Requisites: ○ Independent of human will 9 I mpossible to avoid ○ ○ Impossible for obligor/debtor to fulfill obligations normally ○ Obligor/debtor is free from any participation [CAP v. Belfranlt Development] On Credit-Based Obligations (Art. 1175-1177) On Usurious Transaction [Art. 1175] ○ Taking/Receiving more interest for the use of money, goods, or chattels or credits that the law allows [Manio vs. Gonzales] ○ Lenders and borrowers can agree on any interest rate [Spouses Bacolor vs. Banco Filipino Savings and Mortgage Bank] (due to CB Circular 905 [Florendo vs Court of Appeals]), so long as the rate is not “inquitous or unconscionable” [Medel, et al. vs. Court of Appeals], leading to a void obligation should it occur (“contra bonos mores,” contrary to morals) ○ Lenders cannot unilaterally raise the interest rate without the consent of the debtor [Almeda vs. Court of Appeals] Creditors have the following remedies (insuccessiveorder) [Art. 1177] ○ Pursue the property in possession of the debtor to satisfy the claim (exhaust debtor properties through legal remedies of levy and execution) ○ Exercise all rights and bring all actions of the debtor (run after debtors of debtors) ○ Impugn acts done by debtor in fraud of creditor (debtor sold his property to a third party) Transmissible (Art. 1178) A ll rights by virtue of an obligation are transmissible (You can assign/pass an obligation to another creditor/debtor) Exceptions ○ If the parties to an obligation stipulate that it cannot be transmissible ○ The nature of the obligation prevents transmission (the contract requires the parties’ personal qualifications) ○ Law prohibits such (partnerships) Different Kinds of Obligations Pure & Conditional (Arts. 1179-1192) Pure Obligation (Art. 1179) ○ Not subject to a condition, performance is immediately demandable ○ No specific period or date mentioned for its fulfillment ○ “Instant demandability” cannot be subject to an absurdity Conditional Obligation ○ Effectivity/extinguishment is subject to the fulfillment of a condition ○ Condition (Future and uncertain event, or a past event unknown to the parties) Suspensive (The happening/fulfillment of the condition creates the obligation) May either be a positive (Art. 1184) [condition occurs] or a negative [condition does not occur] (Art. 1185) suspensive condition Effectivity retroacts to the day of the obligation’s creation For Obligations to Give, no retroactivity on fruits or interest and prescription ○ Reciprocal Obligations (No retroactivity due to mutual compensation) Those which arise from the same cause and in which each party is both a debtor and a creditor of the other In case one of the debtors do not comply, the aggrieved party may choose either specific performance/fulfillment or judicial rescission, both with damages [Art. 1191] Alternative, not cumulative remedies The aggrieved party may seek rescission if fulfillment becomes impossible Violations must be substantial to grant rescission 10 R escission contemplated is judicial rescission (except in cases where extra-judicial rescission is allowed, such as contractual terms) Good faith is the basis of the right to rescind Court may grant the guilty party to perform their obligation ○ Unilateral Obligations (No retroactivity due to gratuity) For Obligations to Do or Not to Do, retroactive effects shall be determined by courts Resolutory (The happening/fulfillment of the condition ends the obligation) No retroactive effect Obligation extinguished Restore to each other what was received, plus give interest/fruits Suspensive Condition Resolutory Condition ffect of the happening on the E I f the suspensive condition is I f the resolutory condition is condition on the existence of the fulfilled, the obligation arises fulfilled, the obligation is obligation extinguished hen the law begins to affect the W I f the suspensive condition does not I f the resolutory condition takes parties take place, the legal tie does not place, the legal tie is consolidated appear Existence of the Obligation ntil the suspensive condition takes T U he obligation begins immediately, place, the existence of the obligation but over this obligation hovers the is a mere hope possibility of its termination, if the resolutory condition takes place Potestative (Condition is dependent on the sole will of one party) [Art. 1182] Potestative Conditions: ○ Suspensive and depends upon sole will of debtor (VOID) ○ Dependent on Chance (VALID) ○ Sole will of creditor (VALID) ○ Sole will of a 3rd party (VALID) ○ Mixed Conditions (VALID) [International Hotel Corporation vs. Joaquin, Jr.] ○ Resolutory Condition (VALID) Impossible and/or Illegal (Void) Obligations dependent on these conditions are annulled Exceptions ○ Won’t affect pre-existing obligations ○ Divisible ○ Condition not to do an impossible thing [Art. 1183] ○ Constructive Fulfillment [Art. 1186] If a debtor voluntarily prevents the fulfillment of a condition, then the condition shall be deemed fulfilled (principle of good faith) The intent of the debtor to prevent the fulfillment of the condition The actual prevention of the fulfillment Unnecessary if the debtor acted with fraud or malice, the debtor should not be allowed to profit from their own voluntary act that will adversely affect the creditor [The International Corporate Bank, Inc. vs. The Honorable Court of Appeals] Rights of Parties ○ Creditors (may seek legal remedies to preserve their rights, such as from concealment or alienation of the property) Debtor (may recover what has been paid by mistake before the fulfillment of the condition) ○ Loss, Deterioration, or Improvement Elements for Article 1189 Obligation to give Object is specific/determinate Suspensive Condition 11 Loss, deterioration, or improvement occurs during the pendency of the condition Suspensive condition is fulfilled Rescission is available even if deterioration does not affect the usability of the object With a Period (Arts. 1193-1198) A n obligation dependent on a future and certain event (Period) Effects and consequences are subjected–in one way or another–to the arrival/expiration of a period/term Any period set by the parties to an obligation is for the benefit of both parties ○ Exceptions Period is set for the benefit of the debtor Period is set for the benefit of the creditor Parties who decide whether to subject their contract to a period ○ If the obligation neither states a period nor is it intended, the court is not authorized to fix a period ○ If the period agreed upon has already lapsed, the court cannot fix it; the guilty party will be liable for damages due to delay ○ Exceptions If there is no period fixed but was intended based on the nature and circumstances When the period depends solely on the will of the debtor [Art. 1180] Obligations are not demandable before the lapse of the period ○ Exceptions (Period is disregarded, losing the debtor’s right to make use of it, making the obligation immediately demandable) [Art. 1198] Insolvency (unless the debtor gives a guaranty/security), even without judicial declaration Debtor fails to furnish guaranties of securities promised Guaranties/securities given have been either impaired or have disappeared unless new, equally satisfactory guaranties are given When debtor violates an undertaking in the loan agreement When the debtor attempts to abscond “Payable when able” is a Period ○ Parties should agree on a specific period ○ Court will fix period if parties do not agree Kinds of Period Conditions ○ Resolutory (in diem) Demandable at once but terminates upon arrival of theday certain Day certain (that which must necessarily come, although it may not be known when) ○ Suspensive (ex die) [Obligation becomes demandable on the day stipulated] In the event of loss, deterioration, or improvement before the period’s arrival, rules in Article 1189 shall apply Payment made by the debtor before the period, assuming the debtor is both unaware of it and obligation has become due and demandable, may be recovered by the debtor with fruits and interests [Art. 1195] Alternative & Facultative (Arts. 1199-1205) Facultative ○ There is only one prestation agreed upon but debtor may give another in substitution ○ If the principal obligation itself is void, there is no necessity to give the substitute (~P therefore ~S) ○ If it is impossible to give the principal, the substitute does not have to be given (the principal must still be given if the substitute is impossible to give) ○ Right of choice is given only to the debtor Alternative ○ There are several prestations but only one–generally decided by the debtor–is due and sufficient ○ If one prestation is illegal, others may be valid but the obligation remains ○ If impossible to give all except one, last one must still be given ○ Right to choose with either debtor or creditor Alternative Facultative Number of Prestations everal prestations are S due, O nly 1 prestation is due with right complying with 1 is sufficient to substitute 12 Right of Choice enerally the debtor, except when Debtor only G agreed by the parties to give such right to the creditor or 3rd person Loss through Fortuitous Event oss of 1ormoreofthealternatives L L oss of the thing due extinguishes through fortuitous events does not the obligation extinguish the obligation Loss through Fault of Debtor oss of one alternative through L L oss of the thing due to debtor’s debtor’s fault does not render liability fault makes them liable here the choice belongs to the T W helossofthesubstitutebeforethe creditor, the loss of one alternative submission through debtor’s fault through the debtor’s fault gives rise does not render them liable to liability Joint & Solidary (Arts. 1207-1222) Situation ○ Contemplates of 2 or more debtors and/or 2 or more creditors ○ Either party may be in a joint and/or solidary obligation Joint (1207-1210) ○ Creditor can only demand the proportionate share from each debtor ○ Debtor only obliged to give proportionate share of the obligation Solidary/Joint and Several (1207; 1210-1222) ○ Creditor can demand the entire obligation from any debtor, remits it to the rest of the creditors ○ Debtor obliged to give entire the obligation upon demand, and can request reimbursement The default presumption is JOINT when two or more creditors or two or more debtors concur in one and the same obligation; neither party is individually liable/act in representation for the rest of the parties Exceptions ○ Solidarity is expressly stated ○ Law requires solidarity ○ Solidarity is imposed by court final judgment Effects of Joint Liability ○ Demand on one debtor produces delay only with respect to the debt of such debtor ○ Interruption in payment by one does not benefit or prejudice the other ○ Insolvency of one debtor does not affect other debtors Additional Info on Divisibility of Joint & Solidary Obligations ○ The indivisibility of an obligation does not necessarily give rise to solidarity ○ Solidarity of itself does not imply indivisibility (solidary divisible, solidary indivisible) Joint Divisible Obligations ○ Each creditor can demand for the payment of his proportionate share of the credit, while each debtor can be held liable only for the payment of his proportionate share of the debt ○ 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 Obligations ○ If there are 2 or more debtors, the fulfillment 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 the debtors ○ If there are two 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 ○ If either party cannot fulfill their side of the obligation, the individual party may be liable for damages, while the rest of the parties are not Solidary (Expressed by law, stipulation, or nature) ○ Solidarity may exist, although creditors and debtors may not be bound in the same manner, periods, and/or conditions ○ Each one of the solidary creditors may do whatever may be useful to the others, but not anything which may be prejudicial to the latter ○ A solidary creditor cannot assign his rights without the consent of the others 3 1 ○ The debtor may pay any one of the solidary creditors; if any demand has been made by one of them, payment should be made to them ○ Active (On the Part of Creditor or Obligee) Death of one solidary creditor transmits share to heirs (but collectively) Each creditor represents others in recovering payments Credit is divided equally between creditors Debtor may pay any solidary creditor; the debtor may request reimbursement ○ Passive (On the part of Debtors or Obligors) Each debtor may be requested to pay whole obligation with right to recover from co-debtors Prescription for one creditor affects all Interest from delay on one debtor is borne by all Delayed debtor must reimburse the co-debtors ○ Primary Extinguishing Solidary Obligations Condonation/Remission before Payment Remissions made by the creditor to one solidary debtor does not release said debtor from their responsibility towards the co-debtors, especially before the remission If remission is done before payment, the debtor who underwent remission has the right to refuse demand for reimbursement Condonation at the request of one debtor If remission occurs, the debtor cannot be reimbursed by co-debtors ○ Exceptions to Reimbursement Illegal obligation, even if payment has been made Failure of the creditor to demand performance “for an unreasonable length of time” Written Contracts: 10 years Quasi Contracts: 6 years Quasi Delicts: 4 years Irregular payments (if mistaken, creditor must return undersolutio indebiti) ○ Miscellaneous Info Obligations shall be extinguished due to fortuitous event If the debtor was delayed, then all debtors are liable for the item lost, plus damages, interest, and penalties If the prestation is lost due to fault or negligence, all debtors are liable, but innocent debtors may collect damages Mixed (on the part of both creditors and debtors) Conventional (by agreement of the parties) Legal (imposed by law) ○ Obligations arising from torts, quasi-contracts, or devisees and legatees (wills) ○ Liability of principals, accomplices, and accessories to a felony ○ Bailees in commodatum Divisible & Indivisible (Arts. 1223-1225) T est: Purpose of the obligation or the intention of the parties Even if an object or service may be physically divisible, an obligation may be indivisible if provided by law or intended by the parties (Art. 1225, para 3) Divisible (Capable of partial performance) ○ Execution of certain number of days work ○ Expressed by metrical units ○ Susceptible of partial fulfillment Indivisible (Not capable of partial performance) ○ To give definite things ○ Not susceptible of partial fulfillment ○ Provided by law ○ Intention of parties With a Penal Clause (Arts. 1226-1230) T wo obligations: the principal obligation and an accessory obligation (the penalty clause) Creditors need not prove the amount of damages suffered 14 Purposes ○ Ensuring the performance of the principal obligation ○ Substitute for damages Characteristics of Penal Clauses ○ Subsidiary (As a general rule, only penalty can be demanded, except if penalty is joint or cumulative) ○ Exclusive Takes place of damage Demandable Cases Stipulation (Granting right) Refusal to pay penalty With fault (not of creditor) Causes for Reduction of Penalty ○ Partial/Irregular Performance ○ Penalty provided is iniquitous/unconscionable Various Methods to Extinguish Obligations Seven Methods (Art. 1231) ○ Payment/Performance ○ Loss of the Thing Due ○ Condonation or Remission of Debt ○ Confusion or Merger of Creditor/Debtor Rights ○ Compensation ○ Novation ○ Other Methods: Annulment, Rescission, Fulfillment of a Resolutory Condition, Prescription Extinguishment of an Obligation → Terminated; Ceases to be Due and Demandable Payment or Performance Fulfillment of the obligation (to give, to do, or not to do) [Art. 1232] The Prestation (Object) Identity (Same thing/same service or quality) ○ Specific/Determinate Very thing or service must be delivered or performed Obligee has the right to refuse improper delivery, even if superior payment [Art. 1244] ○ Generic/Indeterminate Must belong to the same genus or species agreed upon, and of the same quality If not specified, the obligee cannot demand delivery of an item of superior quality, neither can the obligor deliver an item of inferior quality [Art. 1246] ○ Special Rules Currency Full amount due; “must be performed in one act, not in parts” [Barons Marketing Corp. vs. Court of Appeals] Creditor cannot be compelled to accept partial payments, unless previously agreed Debtor cannot also be required to make partial payments before the due date if full payment was the agreement [Art. 1248] Negotiable Paper ○ Exceptions Facultative Dacion En Pago Novation Integrity (Entirety) [Art. 1233] ○ Completely delivered or rendered [Operators Incorporated vs. American Biscuit Co., Inc.] ○ Obligor cannot insist on alternative performance if the obligee does not consent [Art. 1244, para. 2] ○ Exceptions Substantial Performance in Good Faith [Art. 1234] 5 1 An attempt in good faith to perform the obligation, without any willful or intentional deviation from the said obligation The deviation from the obligation must be slight The omission/defect must be technical and unimportant, and must not permeate the whole obligation, which would otherwise frustrate the parties’ intended objective Waiver/w/out Protest [Art. 1235] Obligee accepts the incomplete/irregular performance Express stipulation for the obligee to receive partial performance [Art. 1248] Equal Onerous Debts/Partially Liquidated Debt ○ Miscellaneous expenses (packaging, transportation) will be shouldered by the debtor; judicial expenses will be paid by the losing party [Art. 1247] Indivisibility (Single Act) ○ Neither creditor nor debtor can be compelled to receive/give partially ○ Exceptions Express Stipulation Entail Partial Performance Partly Liquidated/Unliquidated Joint Divisible Obligations Solidary with Different Terms Compensation with Balance Partial Work with Fixed Price for each part Several Guarantors Demand Division Impossibility/Extreme Difficulty The Parties (Subject) Payor (By Whom) [Art. 1236–1238] ○ WITHOUTCreditor’s Consent Debtor/Obligor Themselves Their heir or assignee Their agent Anyone interested in fulfilling the obligation (e.g. surety or guarantor) [Art. 1236] Guarantor/surety occupy the position of debtor and are solidarily bound ○ WITHCreditor’s Consent (stipulation/agreement) Anyone (stranger/3rd party – no interest in fulfilling the obligation) Obligation to the creditor will be extinguished, but an obligation arises between the third party and the debtor WITH Debtor’s Consent ○ Subrogation (Art. 1236–1237) Right of third party to acquire all the rights of the creditor [Malayan Insurance vs. Alberto] ○ Donation (Art. 1238) A person who gratuitously gives; the debtor is the donee [Art. 725] No contradiction exists in the intention of the third person Obligation will be extinguished via remission WITHOUT Debtor’s Consent ○ Reimbursement (to the extent of the benefit) [Art. 1236, par. 2] ○ Can still invoke unpaid creditor rights [Art. 1177] ○ Invalid Payments [Art. 1239] Person making payment has no right to dispose of it Incapacitated individual, such as minors (below 18) or insane individuals Payee (To Whom) [Art. 1240-1241] ○ Creditor/Obligee Themselves ○ Their successor or transferee Payments to spouse or children of a deceased creditor extinguishes the obligation [Baritua vs. Honorable Court of Appeals] Parents of a deceased creditor may extinguish if creditor lacks legitimate descendants ○ Their agent ○ On Defective Payments 16 P ayments made to persons incapacitated to administer their own property The incapacitated creditor must have kept the thing delivered and the payment benefited the incapacitated creditor ○ Third Person It redounded to creditor’s benefit and only to the extent of such benefit (Art. 1241) Benefit deemed total if falling under the following (Art. 1241, par. 2): After payment, third person acquires creditor’s rights The creditor ratifies payment to the third person Estoppel ○ A person is prohibited from denying something they have previously said or represented as the truth if it will injure another ○ Elements of Estoppel (Creditor) [Manila Memorial Park vs. Linsangan] Debtor led to believe that 3rd person has authority to receive Intent/expectation that the conduct shall be acted upon/influence the other party Knowledge, actual or constructive, of the real facts ○ Elements of Estoppel (Debtor) Lack of knowledge/means of knowledge of the truth as to the facts Reliance, in good faith, upon the conduct or statements of the party Action or inaction based thereon of such character Anyone in Possession of Credit [Art. 1242] ○ Not the creditor itself, nor an authorized representative; someone who appears to own it Possession: actual/apparent ownership of the credit Elements Payment must have been made in good faith Payment must be made to the person in possession of the credit ○ Payment Made to the Creditor by the Debtorafter the latter has been judicially orderedto retain the debt (garnishment) shall not be valid (Art. 1243) The Manner (Process) Place of Payment ○ Generally, the place designated in the obligation ○ If no stipulated location: Determinate Prestation: Wherever the thing is at the moment the obligation was constituted Other Cases: Domicile of Debtor (Art. 1251) Time of Payment ○ Upon Demand ○ Exceptions When time is of the essence When the debtor loses the benefit of the period When the obligation is reciprocal Form of Payment [Art. 1249] ○ Stipulated Currency or Legal Tender in the Philippines (Philippine Peso) ○ Bills of exchange (Checks) produce payment only when cashed or destroyed by creditor ○ Exceptions Extraordinary Inflation/Deflation of Currency [Art. 1250] Uncommon, unforeseen decrease/increase in the currency’s purchasing power Elements ○ Declaration by the BSP [Equitable PCI Bank, et al. vs. Ng, et al.] ○ Contractual Obligation ○ Parties expressly agreed to consider extraordinary inflation/deflation Dation in Payment (Dacion en Pago) [Art. 1245] D elivery and transmission of ownership of a thing by the debtor to the creditor as an accepted equivalent of the performance of the obligation Requisites ○ Existence of a money obligation 17 Alienation of a property by the debtor with the creditor’s consent ○ ○ Satisfaction of the money obligation Dation in payment extinguishes the obligation to the extent of the value of the thing delivered, either as agreed upon by the parties or as may be proved, unless the parties by agreement consider the thing as equivalent to the obligation, in which case the obligation is totally extinguished [Tan Shuy v. Spouses Maulawin, 2012] Application of Payments D esignation of the debt to which should be applied a payment made by a debtor who owes several debts to the same creditor Requisites ○ There is a plurality of debts ○ Debts are of the same kind ○ Debts are owed to the same creditor and by the same debtor ○ All debts must be due, unless parties so stipulate, or when application is made by the party for whose benefit the term has been constituted ○ Payment made is not sufficient to cover all debts [Art. 1252] Rules on Application ○ Preferential Right of Debtor (debtor has the right to select which of the debts they’re paying) ○ The debtor makes the designation at the time they make the payment ○ If not, the creditor makes the application, by so stating in the receipt that they issue, unless there is cause for invalidating the contract ○ If neither the creditor nor debtor exercises the right to apply, or if the application is not valid, the application is made by operation of law ○ If debt produces interest, the payment is not to be applied to the principal unless the interests are covered ○ When no application can be inferred from the circumstances of payment, it is applied: To the most onerous debt of the owner If debts have the same nature and burden, all the debts in proportion (exception to integrity) ○ Rules of Application of Payment may not be invoked by a surety or solidary guarantor Payment by Cession S pecial form of payment where the debtor assigns/abandons ALL their property for the benefit of their creditors in order that from the proceeds thereof, the latter may obtain payment of their credits Requisites ○ There is a plurality of debts ○ There is a plurality of creditors ○ Partial/Relative Insolvency of Debtor ○ Acceptance of the cession by the creditors [Art. 1255] Debtor is released only for the net proceeds unless there is a stipulation to the contrary Tender of Payment and Consignation Tender of Payment ○ Manifestation made by the debtor to the creditor of their desire to comply with their obligation, with offer of immediate performance ○ Preparatory Act to Consignation ○ Extrajudicial in Character Consignation ○ Deposit of the object of obligation in a competent court in accordance with the rules prescribed by law whenever the creditor unjustly refuses payment or because of some circumstances which render direct payment to the creditor impossible or inadvisable ○ Principal act which constitutes a form of payment ○ Judicial in character Requisites of Consignation ○ There is a debt due ○ Consignation is made because of some legal cause There was tender of payment and creditor refuses without just cause to accept it Instances when consignation alone would suffice under Art. 1256 18 ○ P revious notice of consignation was given to those persons interested in the performance of the obligation ○ Amount or thing due was placed at the disposal of the court ○ After the consignation has been made, the persons interested were notified thereof When Tender and Refusal Not Required [Art. 1256] ○ Creditor is absent, unknown, or doesn’t appear at place of payment ○ Creditor is incapacitated to receive thing due at time of payment ○ Without just cause, creditor refuses to give receipt ○ Two or more persons claim the same right to collect ○ Title of the obligation has been lost What Constitutes Valid Consignation [Art. 1257] ○ In order that the consignation of the thing due may release the obligor, it must be first announced to the persons interested in the fulfillment of the obligation. Otherwise, consignation shall be ineffectual How Consignation is Made [Art. 1258] ○ Consignation shall be made by depositing the things due at the disposal of judicial authority, before whom the tender of payment shall be proved, in a proper case, and the announcement of the consignation in other cases ○ Any expenses of consignation, when properly made, shall be charged against the creditor [Art 1259] ○ Once consignation is made, the debtor may ask the judge to order the cancellation of the obligation or, if the creditor did not yet accept the consignation, may withdraw the item and the obligation is revived [Art. 1260] Loss of the Thing Due Prerequisites of Loss [Art. 1189, no. 2] ○ Perishes ○ Goes out of Commerce ○ Disappears (Unknown/Irrecoverable Existence) Effects of Loss [Art. 1262–1263] ○ Specific/Determinate Thing [Art. 1262] Obligation is extinguished if the thing was destroyed without fault of the debtor,andbefore they have incurred delay (“irreplaceability”) If it is only a partial loss, the debtor may also be released from the obligation if the courts decide the loss is significant enough to warrant the obligation’s extinguishment [Art. 1264] Primary Exception When law or express stipulation makes the obligor liable even for fortuitous events Includes when the obligation requires the assumption of risk (Insurance) The loss of the thing does not extinguish the obligation; obligor liable for damages ○ Generic/Indeterminate Thing [Art. 1263] Obligation is not extinguished UNLESS it is a delimited generic item If the class of item is both limited and the whole class perishes, the obligation is extinguished Obligation to pay is classified under generic thing; it is not excused by fortuitous loss of any specific property of the debtor [Gaisano v. Insurance Company of North America, 2006] Creditor’s Action Against Third Persons [Art. 1269] ○ 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 third persons by reason of the loss Other Cases of Loss Attributed to Debtor ○ Fortuitous Events [Arts. 1942, 1979, 2147, 2159] ○ Express Stipulation ○ Nature of the obligation requires an assumption of risk (insurance) ○ Fault or negligence concurs with the fortuitous event ○ Loss occurs after (legal) delay ○ Debtor has promised to deliver the same thing to two or more parties [Art. 1165, par. 3] ○ Obligation arises from a criminal act [Art. 1268] If the item cannot be returned, the obligor must pay the price, unless the obligee refused without justification to accept it [The People of The Philippines vs. Daniela and Baylosis] ○ Borrower in commodatum (i.e. loan for use or temporary possession; loan not for consumption): obligor saves their own things and not the thing of the creditor during fortuitous events Loss of the Thing When in Possession of the Debtor [Art. 1265] 19 Loss was due to the debtor’s fault ○ ○ Burden of explaining the loss of the thing falls upon them, unless due to natural calamities In Reciprocal Obligations ○ Extinguishment of the obligation due to loss of the thing or impossibility of performance affects both the creditor and debtor ○ The entire juridical relation is extinguished Partial Loss [Art. 1264] ○ The courts shall determine whether, under the circumstances, the partial loss of the object of the obligation is so important as to extinguish the obligation ○ Partial loss due to fortuitous events does not extinguish the obligation ○ Thing must be delivered in its present condition, without any liability on the part of the debtor ○ Exception: the obligation is extinguished when the part lost rendered the thing useless Impossibility of Performance (Applicable to Obligations to Do) [Art. 1266–1267] ○ When prestation becomes legally or physically impossible (due to force majeure or fortuitous events), the debtor is released, so long as the impossibility occurred without debtor’s fault and after the constitution of the obligation [Philippine Home Assurance Corporation vs. Court of Appeals] ○ Subjective Impossibility Where there is no physical or legal loss, but the thing belongs to another, the performance by the debtor becomes possible Debtor must indemnify the creditor for damages ○ Partial Impossibility The court will determine whether it is important enough to extinguish the obligation If the debtor has performed part of the obligation when the impossibility occurred, creditor must pay the part done as long as they benefitted from it If debtor received full payment from creditor, they must return the excess amount corresponding to the part which was impossible to perform ○ Doctrine of Unforeseen Events [Art. 1267] When the “service” (performance of the obligation) has become so difficult as to be manifestly beyond the contemplation of all the parties, the obligor may also be released therefrom, in whole or in part Condonation or Remission of the Debt [Art. 1270-1274] A n act of liberality, by virtue of which, without receiving any equivalent, the creditor renounces the enforcement of the obligation Obligation is extinguished, either in whole or in such part of the same to which remission refers Requisites of Condonation/Remission ○ Debt must be existing and demandable ○ Renunciation must be gratuitous (Donation); without consideration If renunciation is not gratuitous, the nature of the act changes: Dation in Payment (creditor receives a thing different from that stipulated) Novation (the object or principal conditions of the obligation have changed) Compromise (the matter renounced is in litigation or dispute and in exchange for some concession which the creditor receives) ○ Debtor must accept the remission [Art. 1270] ○ Condonations should comply with the requirements of donation [Art. 1270] Condonation should not be inofficious (Must not affect the legitime/compulsory share of the inheritance of compulsory heirs in the creditor) Solidary creditors can condone the whole debt, but the creditor will be liable to other co-creditors Kinds ○ As to Extent Total (extinguishes the entire obligation) Partial (only a particular aspect of the obligation, e.g., to the amount of indebtedness or to an accessory obligation only) ○ As to Form Express Condonation Formal expression of condonation In accordance with forms of ordinary donations [Art. 1270] 20 E xpress remission must be accepted to be effective If debt is a movable/personal property, refer to Art. 748, para. 3 (if value exceeds Php 5000, must be in writing, otherwise donation is void) Implied Condonation (inferred from the acts of the parties) Presumptions ○ Whenever the private document in which the debt is found is in the possession of the debtor, it shall be presumed the creditor delivered it voluntarily, unless the contrary is proved [Art. 1272] ○ Delivery of a private document evidencing credit made voluntarily by the creditor to the debtor implies the renunciation of the action of the creditor against the latter [Art. 1272] ○ Accessory obligation of pledge (Collateral) has been remitted when the thing after its delivery is found in the possession of the debtor or third person [Art. 1274] If creditor returns the thing pledged, it is presumed condoned, but the debt itself remains If the debt is condoned, the pledge is condoned Effect [Art. 1273] ○ Renunciation of the principal debt shall extinguish the accessory obligations ○ Remission of accessory obligations leaves the principal obligation in force Confusion or Merger of Rights [Art. 1275-1277] Confusion ○ the meeting in one person of the qualities of creditor and debtor of the same obligation ○ The debtor and creditor become one and the same person with respect to the same obligation Usual Causes of Confusion ○ Succession (compulsory, testate, intestate) ○ Donation ○ Negotiation of a Negotiable Instrument Requisites ○ Takes place between principal debtor and creditor [Art. 1276] ○ Very same obligation must be involved ○ Confusion must be total, i.e. as regards the whole obligation Effects ○ In General (Obligation is extinguished from the time the characters of the debtor and creditor are merged in the same person) [Art. 1275] ○ Joint and Solidary Obligations Joint (Extinguishes the share of the person in whom the two characters concur [Art. 1277] Solidary (Extinguishes the entire obligation, but the other debtors may be liable for reimbursement if payment was made prior to remission) ○ Principal Debtor and Guarantors In the person of the Principal Debtor/Creditor: Benefits the Guarantors In the person of the Guarantor: Does not extinguish the obligation Compensation [Art. 1278-1290] O ffsetting of two obligations which are reciprocally extinguished if they are of the same value or extinguished to the concurrent amount if of different values Prevents unnecessary lawsuits and payments through the mutual extinction by operation of law of concurring debts [Compañia General de Tabacos vs. French and Unson] Requisites [Art. 1279] ○ Each obligor is bound principally; at the same time, a principal creditor of the other ○ Both debts must consist in a sum of money, or if the things due are fungible (same kind & quality) ○ Both debts are due ○ Debts are liquidated (known and/or determinable amount) [Selegna Management and Development Corporation vs. United Coconut Planters Bank] and demandable ○ There must be no retention controversy over either of the debts, commenced by 3rd persons and communicated in due time of debtor ○ Compensation is not prohibited by law 1 2 ○ Debtor’s admission of their obligation must be clear and categorical; not one which merely arises by inference or implication from the customary execution of official documents in assuming the responsibilities of a predecessor [Bangko Sentral ng Pilipinas vs. Commission on Audit, 2006] Effects ○ Both debts are extinguished to the concurrent amount, even though the creditors and debtors are not aware of the compensation ○ Accessory obligations are also extinguished ○ Effects arise from the moment all the requisites concur ○ Debtor claiming its benefits must prove compensation; once proven, effects retroact from the moment when the requisites concurred Compensation vs. Confusion Compensation Confusion Two Obligations One Obligation wo persons, who are mutually debtors and T here is only one person whom the characters of the T creditors of each other in two separate obligations, creditor and debtor meet each arising from the same cause Kinds of Compensation ○ As to Extent Total (two debts are the same amount) [Art. 1281] Partial ○ As to Cause Legal Compensation [Art. 1290] By operation of law from the moment all requisites are present (need not be pleaded or invoked) Since it takes placeipso jure(when used as a defense), it retroacts to the date when all its requisites are fulfilled Extinguishes even without awareness from the debtors and creditors Voluntary Compensation [Art. 1282] Takes place when parties who are mutually creditors and debtors of each other agree to compensate their respective obligations even though one of the requisites of compensation may be lacking Both parties must be able to dispose of the credit they seek to compensate AND they both agree to the mutual extinguishment of their credits [United Planters Sugar Milling Co., Inc. (UPSUMCO) vs. The Honorable Court of Appeals] Judicial Compensation (Set-off) [Art. 1283] Takes place by judicial decree When one party sues a second party over the obligation, and the latter has a counterclaim for damages or other obligations of the first party, the second party may raise the counterclaim in trial Facultative Compensation When it can be claimed by one of the parties who, however, has the right to object it As opposed to conventional compensation, facultative compensation is unilateral and does not depend upon the agreement of the parties Obligations which cannot be compensated [Arts. 1287-1288] ○ Contracts of Depositum (Not a Banking-Client Relationship) Depositary receives a specific/determinate thing belonging to the depositor with the obligation of safely keeping it and returning the same Only one party (the depositor) can set up compensation, but not the depositary ○ Contracts of Commodatum One person gratuitously grants the use of a thing to another, but reserves ownership thereof Person allowed to use it is obliged to return it upon owner’s demand [Quintos vs. Beck] ○ Future Support due by Gratuitous Title ○ Civil Liability arising from a Penal Offense ○ Obligations due to the Government ○ Damage Caused to the Partnership by a Partner 2 2 Right of a Guarantor (Guarantor may set up compensation as regards what the creditor may owe the principal debtor) [Art. 1280] Effect of Assignment by Creditor to 3rd Person [Art. 1285] ○ With Debtor’s Consent (Debtor cannot set up against assignee compensation pertaining to them against assignor UNLESS they reserve such right at the time they gave their consent) ○ With Debtor’s Knowledge, but Without Consent (Debtor may set up compensation of debts previous to the assignment but not of subsequent ones) ○ Without Debtor’s Knowledge (Debtor may set up compensation of all credits prior and also later to the assignment until they had knowledge of the assignment) Novation [Art. 1291-1304] E xtinguishment of an obligation by substituting or changing the obligation by a subsequent one, extinguishing or modifying the first obligation either by changing the object or principal conditions, or by substituting the person of the debtor, or by subrogating a third person in the rights of the creditor [Agro Conglomerates, Inc. vs. Court of Appeals] Unlike other modes of extinguishment, it is a juridical act of dual function–it extinguishes an obligation, and at the same time, it creates a new one in lieu of the old It operates as a relative, not an absolute, extinction ○ Extinctive (old obligation is extinguished by the creation of a new one taking place of the former) [St. James College of Parañaque vs. Equitable PCI Bank] ○ Modificatory (old obligation survives to the extent it remains compatible with the amended agreement) [Gammon Philippines, Inc. vs. Metro Rail Transit Development Corporation] Requisites of Novation ○ A previous valid obligation ○ Agreement of all the parties to the new obligation ○ Animus novandior intent to novate ○ Substantial difference between old and new obligations and, consequently, extinguishment of the old obligation ○ Validity of the new obligation Kinds of Novation ○ As to Form Express (Declared in unequivocal terms) Implied (the old and new obligations areon every pointincompatible with each other) Novation is not Presumed [California Bus Line vs. State Investment, 2003] In the absence of an unequivocal declaration of extinguishment of the pre-existing obligation, only proof of incompatibility between the old and new obligation would warrant a novation by implication Test of Incompatibility Whether the old and new obligation can stand together, each one having an independent existence No incompatibility, therefore no novation, exists when they can stand together Existence of incompatibility, therefore novation, exists when they cannot stand together ○ As to Essence/Object Objective/Real (Change of object, subject matter, cause, principal conditions) Subjective/Personal Substitution of Debtors (Creditor’s Consent Required) ○ Expromision Initiative for change does not emanate from the debtor, and may even be made without their knowledge Consent of the third person and the creditor would be required [Boysaw vs. Interphil Promotions, Inc.] New debtor may demand reimbursement from the old debtor to the amount the old debtor benefited If the new debtor is insolvent, the obligations of the old debtor will not be revived ○ Delegacion 23 D ebtor [delegante] offers or initiates the change, and the creditor [delegatorio] accepts a third person [delegado] as consenting to the substitution All parties must consent New debtor can demand full reimbursement from the old debtor Generally, the obligations of the old debtor will not be revived if the new debtor is insolvent, except if insolvency was existing at the time of substitution Subrogation of a Third Person to the Rights of the Creditor ○ Conventional (By agreement of the parties) ○ Legal (By operation of law) Mixed (both Objective and Subjective) Miscellaneous Info ○ On Accessory Obligations and Novation Will survive if the obligation will benefit third persons who didn’t consent to the novation Ex. stipulation pour auturi ○ Novation and Void Obligations If the new obligation is void, the original one will continue to exist unless the parties insist on changing the original obligation If the original obligation is void, then the novation must be void Voidable Obligations If the old obligation is voidable, the new obligation will also be voidable unless the old one is ratified or not annulled (therefore, the new one is permanently valid) Should the new obligation be annulled, then the previous rule will reply 24 Obligations in Contracts Definition, Stages, and Kinds of Contracts Definition of a Contract [Art. 1305] A meeting of the minds between two persons wherein one binds themselves, with respect to the other, to give something or to render a service An agreement whe
