Obligations and Contracts PDF

OBLIGATIONS AND CONTRACTS By: ATTY. ROLANDO B. PAGTOLON-AN, REB, REA OBLIGATIONS I. OBLIGATION, defined What is an obligation? - An obligation is a juridical necessity to give, to do or not to do (Art. 1156, Civil Code). - Derived from the Latin word “Obligatio” - It is a tie or bond recognized by law by virtue of which one is bound in favor of another to render somethingand this may consist in giving a thing, doing a certain act, or not doing a certain act. The definition of obligations establishes the unilateral act of the debtor (defined in its passive aspect) either to give, to do or not to do as a patrimonial obligation. It means that the debtor has the obligation while the creditor has its rights. Meaning of Juridical Necessity - Obligation is a juridical necessity because in case of noncompliance, the courts of justice may be called upon by the aggrieved party to enforce its fulfilment or, in default thereof, the economic value that it represents. Elements of an obligation/Essential Requisites The elements are the following: JAPO 1) Juridical tie (vinculum juris)- which binds the parties to the obligation, and which may arise from either bilateral or unilateral acts of persons; 2) Active subject- known as the obligee or creditor, who can demand the fulfilment of the obligation; 1|Page ATTY. ROLANDO B. PAGTOLON-AN, REB, REA iACADEMY School of Business The unauthorized reproduction of this material shall be dealt severely under the laws. 3) Passive subject- known as the obligor or debtor, against whom the obligation is juridically demandable; and 4) Object- the fact, prestation or service which constitutes the object of the obligation. Note: Form is sometimes added as a fifth requisite but as a general rule however, it cannot be considered as essential. Example: Gaya enters into a contract of sale with Tito who paid the purchase of a GE refrigerator. Gaya did not deliver the refrigerator. Gaya is the passive subject or debtor and Tito is the active subject or creditor. The object or prestation is the GE refrigerator and the obligation to deliver by virtue of the contract of sale is the legal tie or the vinculum juris which binds Gaya and Tito. This is also known as a unilateral obligation, that is, the obligation of the debtor to fulfill or comply his commitment, in this case, the delivery of the refrigerator. On the other hand, if Gaya, delivered the refrigerator and Tito did not pay, then Tito becomes the debtor who is bound to pay while Gaya is the creditor who has the right to demand the prestation. II. SOURCES OF OBLIGATIONS What are the sources of obligations? Obligations arise from: (LCQAQ) 1. Law; 2. Contracts; 3. Quasi-contracts; 4. Acts or ommissions punished by law/delicts; and 5. Quasi-delicts (Art. 1157). 1. LAW as a source of obligations – The provisions of Art. 1158 refers to the legal obligations or obligations imposed by specific provisions of law, which means that obligations arising from law are not presumed and that to be demandable must be clearly provided for, expressly or impliedly in the law. Examples: 1. It is the duty of the Spouses to support each other. (Art. 291, New Civil Code) 2|Page ATTY. ROLANDO B. PAGTOLON-AN, REB, REA iACADEMY School of Business The unauthorized reproduction of this material shall be dealt severely under the laws. 2. Under the National Internal Revenue Code, it is the duty of every person having an income to pay taxes. 2. CONTRACT as a source of obligations – Contract as defined in Art. 1305, NCC is the meeting of minds between two persons whereby one binds himself with respect to the other. Obligations arising from contracts have the force of law between the contracting parties because that which is agreed upon in the contract by the parties is the law between them, thus, the agreement should be complied with in good faith. (Art. 1159). For examples: A contract of lease was executed between Gaya as the lessee and Tito as the lessor for the rent of an apartment. The obligation of Gaya as a lessee and the obligation of Tito as the lessor arose from the contract of lease. Although contracts have the force of law, it does not mean that contracts are over and above the law. Contracts are with the limitations imposed by law in Art. 1306, NCC, it states that the contracting parties may establish such stipulations, clauses terms and conditions as, they may deem convenient, provided that they are not contrary to law, morals, good customs, public order or public policy. 3. QUASI-CONTRACTS as a source of obligations The ‘quasi’ literally means ‘as if’. Quasi-contract is the juridical relation resulting from a lawful, voluntary and unilateral act which has for its purpose the payment of indemnity to the end that no one shall unjustly enrich or benefited at the expense of another. (Art. 2142, NCC) Contracts and quasi-contracts distinguished:  in a contract, consent is essential requirement for its validity while in quasicontract, there is no consent as the same is implied by law;  contract is a civil obligation while quasi-contract is a natural obligation. Kinds of Quasi-contracts: 1. Solutio Indebiti (Payment by mistake) It is the juridical relation which arises when a person is obliged to return something received by him through error or mistake. Example- Arvin owed Ian the sum of P1,000.00. By mistake, Arvin paid P2, 000.00. Ian has the obligation to return the P1,000.00 excess because there was 3|Page ATTY. ROLANDO B. PAGTOLON-AN, REB, REA iACADEMY School of Business The unauthorized reproduction of this material shall be dealt severely under the laws. payment by mistake. So eventhough that there is no contract that requires Ian to return the excess P1,000.00, the obligation arose from Art. 2142 of the NCC because it is considered as a Quasi-contract. 2. Negotiorum gestio (management of another’s property) It is the voluntary management or administration by a person of the abandoned business or property of another without any authority or power from the latter. (Art. 2144, NCC) Example- Victor, a wealthy landowner suddenly left for abroad leaving his livestock farm unattended. Ramon, a neighbor of Victor managed the farm thereby incurring expenses. When Victor returns, he has the obligation to reimburse Ramon for the expenses incurred by him and to pay him for his services. It is based on the principle that no one shall enrich himself at the expense of another. So, even if there is no contract that has been executed by Victor and Ramon to manage the former’s farm, the obligation of Victor to reimburse Ramon and pay his services arose out of a quasi-contract. 4. DELICTS or acts or omissions punished by law as a source of obligations Acts or omission punished by law is known as Delict or Felony or Crime. While an act or omission is felonious because it is punished by law, the criminal act gives rise to civil liability as it caused damage to another. Civil liability arising from delicts:  Restitution – which is the restoration of or returning the object of the crime to the injured party.  Reparation – which is the payment by the offender of the value of the object of the crime, when such object cannot be returned to the injured party.  Indemnification – the consequential damages which includes the payment of other damages that may have been caused to the injured party Illustration: Mario was convicted and sentenced to imprisonment by the Court for the crime of theft, the gold wrist watch, of Rito. In addition to whatever penalty that the Court may impose, Mario may also be ordered to return (restitution) the gold wrist watch to Rito. If restitution is no longer possible, for Mario to pay the value (reparation) of the gold wrist watch. In addition to either restitution or reparation, Mario shall also pay for damages (indemnification) suffered by Rito. 4|Page ATTY. ROLANDO B. PAGTOLON-AN, REB, REA iACADEMY School of Business The unauthorized reproduction of this material shall be dealt severely under the laws. 5. QUASI-DELICTS as a source of obligations Concepts of Quasi-Delict – Quasi-delict is one where whoever by act or omission causes damage to another, there being fault of negligence, is obliged to pay for the damage done. Such fault of negligence, if there is no pre-existing contractual relation between the parties. (Art. 2176) Example- If Pedro drives his car negligently and because of his negligence hits Jose, who is walking on the sidewalk of the street, inflicting upon him physical injuries. Then Pedro becomes liable for damages based on quasi-delict. Requisites of a quasi-delicts:  There must be fault of negligence attributable to the offender;  There must be damage or injury caused to another;  There is no pre-existing contract. III. NATURE AND EFFECTS OF OBLIGATIONS A. Obligation to Give: 1. A DETERMINATE or SPECIFIC Thing What is a Determinate or Specific Thing? - A thing is said to be specific or determinate particularly designated or physically segregated others of the same class (Art. 1459). - Examples: a. the car sold by Juan dela Cruz b. the bracelet worn by Maria c. the Honda City with plate number 123ABC d. the house and lot at Block 3 Lot 9 in Uraya Residences with TCT No. 12345 What are the obligations of the person obliged (obligor) to give a determinate or specific thing? a. To perform the obligation specifically; Example: A purchased the 10-hectare farm of B covered by TCT No. 14252 for PHP10million. In this case, after full payment by A, B has the specific obligation to deliver the said specific property (nothing else) to A. b. To take care of the thing with the proper diligence of a good father of a family (ordinary diligence) unless another standard of care is required by law or stipulated by the parties (Art. 1163); 5|Page ATTY. ROLANDO B. PAGTOLON-AN, REB, REA iACADEMY School of Business The unauthorized reproduction of this material shall be dealt severely under the laws. Note: There are two (2) types of diligence mentioned under the law, to wit: 1. Ordinary diligence - Diligence of a good father of family - the phrase has been equated with ordinary care or that diligence which an average ( a reasonably prudent) person exercises over his property ; 2. Extraordinary diligence - Example: Under the law, for instance, a common carrier is bound to carry the passengers safely as far as human care and foresight can provide, using utmost (i.e. extraordinary) diligence of very cautious persons, with a due regard for all the circumstances (Art. 1755). c. To deliver all accessions and accessories of the thing although not mentioned (Art. 1166); Accession – is the right pertaining to the owner of a thing over its products and whatever is attached thereto either naturally or artificially. Example1. Accretion which refers to the process of gradual addition of sediment or soil (alluvium) to the shore by action of water. 2. Fruits of the trees, crops of the plants, the eggs of the chicken, the milk of the cow, etc. 3 types of fruits under the Civil Code: 1. Natural Fruits; 2. Industrial Fruits; and 3. Commercial fruits. Accessories – are those things which are joined or attached to the principal object as an ornament or to render it perfect. Example-  Carport to a 2-storey house; porch to a mansion When does the creditor acquire a right to the thing to be delivered and its fruits? 6|Page ATTY. ROLANDO B. PAGTOLON-AN, REB, REA iACADEMY School of Business The unauthorized reproduction of this material shall be dealt severely under the laws. The creditor has a right to the fruits of the thing from the time the obligation to deliver it arises. However, he shall acquire no real right over it until the same have been delivered to him. (Art. 1164, NCC) Example – A binds himself to sell his horse to B for PHP10, 000. No date nor condition is stipulated for delivery of the horse. Later, the horse gave birth to a colt. A has right to the colt, if B has not paid the horse. Before delivery, B does not acquire ownership over it. and d. To be liable for damages in case of breach due to delay, fraud, negligence or contravention of tenor thereof (Art. 1170). Types of Damages under the Civil Code: 1) Moral, 2) Exemplary, 3) Nominal, 4) Temperate, 5) Actual and 6) Liquidated Damages. Example: A purchased Unit 1234-A of Shell Residences from B. The truth is, B is not the true registered owner of the said condominium unit, he defrauded A to make the latter believed that he owns the said unit. In this case, B shall be held liable for damages to A. Another example: A purchased a condominium unit from Ayele Land, Inc., specifically Unit 1120 of Stratford Residences. Based on the contract to sell, the turnover of the said unit shall be October 21, 2020. Should Ayele Land, Inc. fail to deliver the said unit on or before the said date, the company is in delay, hence, it shall be held liable for damages to A. What are the rights of the obligee or creditor in an obligation to give a determinate/specific thing? a. To compel specific performance with right to be indemnified for damages (Art. 1165); Based in the above example: A purchased the 10-hectare farm of B covered by TCT No. 14252 for PHP10million. After the full payment by A, B has the obligation to deliver the said specific property (10-hectare farm covered by TCT. No. 14252) to A. If B delivered to A a property different from the property subject of the sale, then A can compel B in 7|Page ATTY. ROLANDO B. PAGTOLON-AN, REB, REA iACADEMY School of Business The unauthorized reproduction of this material shall be dealt severely under the laws. court to deliver the 10-hectare farm covered by TCT. No. 14252 to him plus B shall also be liable for damages. b. To the fruits of the thing from the time the obligation to deliver it arises (Art. 1164); Example: A purchased the condominium unit of B in three (3) installment payments with a TCP of PHP15million. The unit has an existing lessee who pays to B a rental fee of PHP40k per month. Absent any provision in the contract which grants A to receive the rental fee even before his full payment, A cannot demand the delivery of the rental fee to him if he has not yet paid in full the TCP since the property has not yet been delivered unto him. Once he already paid B the full amount and the property has already been delivered to him, then and there he already is entitled to receive the PHP40k rental fee. c. If the obligor delays, or has promised to deliver the same thing to two or more persons who do not have the same interest, the creditor has the right to hold the obligor responsible for any fortuitous event until the latter has effected the delivery (Art. 1164 Par. 3); Example: A purchased the 2-storey house and lot of B in Tagaytay. He already made his full payment of the TCP on Jan. 13, 2020 to B. B is delayed in delivering the title and the possession of the said property to A for already more than a year. When a recent typhoon hit Tagaytay which caused damages to the said 2-storey house and lot before it was delivered to A, then the latter can hold B liable for damages. d. To demand rescission (cancellation) of the obligation with right to recover damages, should the obligation be reciprocal; and Example: A purchased the piggery farm of B located in San Juan, Batangas coverd by TCT-12345 for 10million. Since A has already paid in full, he demanded B for the delivery of the said property. However, for some reason B failed to deliver 8|Page ATTY. ROLANDO B. PAGTOLON-AN, REB, REA iACADEMY School of Business The unauthorized reproduction of this material shall be dealt severely under the laws. it. In this case, A can demand for rescission (cancellation) of the obligation and can hold B liable for damages. e. To demand payment of damages (Art.1170). Remember MENTAL. 2. An INDETERMINATE or GENERIC THING What is an Indeterminate or Generic Thing? - A thing is generic or indeterminate when it refers only to a class or genus to which it pertains and cannot be pointed out with particularity. - Examples: a. A Toyota vios b. a sack of rice c. the sum of PHP15,000.00 d. a Seiko watch What are the duties of a debtor (obligor) in an obligation to give an indeterminate or generic thing? a. To deliver a thing which is neither of superior nor inferior quality (Art. 1246); and b. To be liable for damages in case of breach due to delay, fraud, negligence or contravention of the tenor thereof (Art. 1170). What are the rights of the creditor (obligee) in an obligation to give an indeterminate or generic thing? a. To ask for performance of the obligation; b. To ask that the obligation be complied with at the expense of the debtor (Art. 1165 Par. 2); and c. To recover damages in case of breach of obligation (Art. 1170). B. NATURES AND EFFECTS IN AN OBLIGATION TO DO OR NOT TO DO 1. POSITIVE PERSONAL OBLIGATION (OBLIGATION TO DO) Example: Juan entered into a contract with Pedro wherein Pedro will construct the house of Juan for PHP3,000,000.00. Here, 9|Page ATTY. ROLANDO B. PAGTOLON-AN, REB, REA iACADEMY School of Business The unauthorized reproduction of this material shall be dealt severely under the laws. Pedro has the obligation to do or perform which is to construct the house of Juan. If the person obliged to do something fails to perform the obligation, or does it in contravention of the tenor of the obligation, what are the rights of the obligee (creditor)? The obligee (creditor) has the right (REMEDIES): a. To have the same executed at the cost of the obligor (Substitute Performance); Example: A engaged the services of B wherein the latter shall construct the 2-storey house of A for PHP3million. B failed to construct the house of A. In this case, A can ask C to construct his house at the cost of B. b. He may ask that it may be decreed, that what has been poorly done be undone (Art. 1167); Example: B constructed the house of A but the kitchen was poorly done. The kitchen’s specification on the architect’s plan was not followed and that the materials used were low quality. In this case, A can ask B that what was poorly done be undone. and c. To recover damages because of breach of the obligation (Art. 1170) Note: Unlike obligations to give (referring to the right of the obligee to compel the specific performance of the obligation of the debtor), in obligations to do, the obligee does not possess the power to compel the obligor to comply with his obligation, slavery is not allowed. Example: A entered into an agreement with B wherein the latter will construct the commercial building of A for PHP10,000,000.00 including the professional services fee of B. A already paid B the full amount, however, B still did not construct the said building. In this case, A cannot compel B to construct the building, what A can do is to construct the said building by another contractor (C) at the expense of B. 10 | P a g e ATTY. ROLANDO B. PAGTOLON-AN, REB, REA iACADEMY School of Business The unauthorized reproduction of this material shall be dealt severely under the laws. 2. NEGATIVE PERSONAL OBLIGATION (OBLIGATION NOT TO DO)  Obligation of the Debtor NOT To Do – This is negative personal obligation which is consisting of an obligation, of not doing something. Example: Juan bought a land from Pedro. It was stipulated that Pedro would not construct a fence on a certain portion of his land adjoining that sold to Juan. Should Pedro construct a fence in violation of the agreement, Juan can bring an action in court to have the fence removed at the expense of Pedro. When the obligation consists in not doing, and the obligor does what has been forbidden, what is the remedy of the obligee? The obligee has the right: a. To have the same undone at the expense of the obligor (Art. 1168); and b. To ask for damages because of breach of obligation (Art. 1170). Example- Maria owns 2 lots in Tagaytay City, Cavite, overlooking the Taal Volcano. Letty purchased one lot of Maria with the condition that Letty will not construct a house more than 5 meters in length so that the spectacular view of Maria of Taal Volcano will not be obstructed. So in this example, Letty has a negative personal obligation of not to contstruct a house more than 5 meters in length. Should Letty violate the said agreement, if ever that she constructed a house more than 5 meters in length, Maria has the right to demand from Letty to construct a house that is only 5 meters in length plus the payment of damages. C. BREACHES OF OBLIGATIONS 1. Complete Failure to Perform 2. Default, Delay or Mora What are the kinds of Default? a. Mora Solvendi- delay of the debtor to perform his obligation. It may be: 11 | P a g e ATTY. ROLANDO B. PAGTOLON-AN, REB, REA iACADEMY School of Business The unauthorized reproduction of this material shall be dealt severely under the laws. * Ex re- obligation to give; and * Ex persona- obligation to do. Example: b. Mora Accipiendi- delay of the creditor in accepting delivery of the thing which is the object of the obligation. Example: c. Compensatio Morae- delay of the parties or obligors in reciprocal obligations. Example: Requisites of Delay by the Debtor (Mora Solvendi) 1. Failure of the debtor to perform his (positive) obligation on the date agreed upon; 2. There is demand (not mere reminder or notice) made by the creditor upon the debtor to comply with his obligation which demand may be either judicial (when a complaint is filed in court) or extrajudicial (when made outside of court, orally or in writing) Note: There is no default unless the creditor/s make a demand. Example: Gaya obliged herself to deliver a determinate horse to Tito on June 20 this year. Gaya failed to deliver on the agreed date the said horse. Is Gaya already on delay on June 20? No. Only when Tito makes a judicial or extra-judicial demand and from such date of demand that Gaya is considered to be in default or in delay. 3. There is failure of the debtor to comply with such demand. The above presupposes that the obligation is already due or demandable. 12 | P a g e ATTY. ROLANDO B. PAGTOLON-AN, REB, REA iACADEMY School of Business The unauthorized reproduction of this material shall be dealt severely under the laws. Example: Pedro obliged himself to deliver to Juan his Toyota Vios 1.5AT car with plate number ABC123 on January 10, 2020. If Pedro does not deliver the said car on January 10, 2020, he is only in ordinary delay in the absence of any demand from Juan although a period had been fixed for the fulfilment of said obligation. The law presumes that Juan is giving Pedro an extension of time within which to deliver the car. Hence, there is no breach of the obligation and Pedro is not liable for damages. If a demand is made upon Pedro by Juan on January 20, 2020 and Pedro failed to deliver the car, Pedro is considered in default only from that date. When does a person obliged to deliver or to do something incur in delay? Those obliged to deliver or to do something incur in delay from the time the obligee judicially or extrajudicially demands from them the fulfilment of their obligation. However, the demand by the creditor shall NOT be necessary in order that delay may exist: 1. When the obligation so provides: Example: Mike promised to pay Marvic the sum of PHP50,000 on or before July 12, 2020 without the need of any demand. Therefore, if Mike fails to pay on July 12, 2020, he is then automatically in default. In this case, the parties stipulate to dispense with the demand. Note: The mere fixing of the period is not sufficient to constitute a delay. An agreement to the effect that fulfillment or performance is not made when the obligation becomes due, default or delay by the debtor will automatically arise. The creditor must use words such as “the debtor will be in default” or “the debtor will be liable for damages”. 2. When the law so provides. The express provision of law that a debtor is in default. 13 | P a g e ATTY. ROLANDO B. PAGTOLON-AN, REB, REA iACADEMY School of Business The unauthorized reproduction of this material shall be dealt severely under the laws. For instance, taxes must be paid on the date prescribed by law, and demand is not necessary in order that the taxpayer is liable for penalties. 3. (When time is of the essence) When from the nature and the circumstances of the obligation it appears that the designation of time when the thing is to be delivered or the services is to be rendered was a controlling motive for the establishment of the contract; Example, Gaya binds herself to sew the wedding gown of Maya to be used by the latter on her wedding date. Gaya did not deliver the wedding gown on the date agreed upon. Even without demand, Gaya will be in delay because time is of the essence. In the foregoing case, the debtor is fully aware that the performance of the obligation after the designated time would no longer benefit the creditor. In agreements of this kind, time element is important as performance itself. 4. When demand would be useless, as when the obligor has rendered it beyond his power to perform. For instance, when the object of the obligation is lost or destroyed through the fault of the debtor, demand is not necessary. Example: Pedro obliged himself to deliver a dog named “Susy” to Maria on July 19, 2020. Through Pedro’s negligence, the dog died on July 10, 2020. In this situation, any demand for the delivery of the dog would be useless as Pedro has made it impossible for him to perform his obligation. 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. So neither party incurs in delay. 14 | P a g e ATTY. ROLANDO B. PAGTOLON-AN, REB, REA iACADEMY School of Business The unauthorized reproduction of this material shall be dealt severely under the laws. Example: In a contract of sale, if the seller has not yet delivered the object to the buyer, and the buyer has not paid yet the purchase price of the object to the seller, neither party incurs in delay. 5. However, in reciprocal obligations, from the moment one of the parties fulfils his obligation, delay by the other begins (Art. 1169). For instance, in a contract of sale, if the seller delivers the object to the buyer and the buyer does not pay, then delay on the part of the buyer begins and vice versa, if the buyer pays and the seller did not deliver the object, then the seller is on delay. There is no need for demand on that. 3. Fraud in the Performance of Obligation What is Fraud or Dolo? Fraud consists in the conscious and intentional proposition to evade the normal fulfilment of an obligation. It implies some kind of malice or dishonesty and it cannot cover cases of mistake and errors of judgment made in good faith. Example: Pedro obliged himself to deliver to Maria 10 bottles of perfume, of a particular brand. Subsequently, Pedro delivered 10 bottles knowing that they contain cheaper perfume. Pedro is guilty of fraud and is liable for damages to Maria. (This example is fraud in performance. 2 Types of Fraud: FRAUD IN PERFORMANCE Present only during the performance of a preexisting obligation. Employed for the purpose of evading the normal fulfilment of an obligation. FRAUD IN CONSTITUTION Present only at the time of the birth of the obligation. Employed for the purpose of securing the consent of the other party to enter into the contract. 15 | P a g e ATTY. ROLANDO B. PAGTOLON-AN, REB, REA iACADEMY School of Business The unauthorized reproduction of this material shall be dealt severely under the laws. Results in the nonfulfillment of the obligation. Hence, this is the type of fraud which breaches the obligation. Results in the vitiation of consent. The contract will be considered to be voidable. Since the contract is voidable, the aggrieved party can annul the same. The creditor has the right The innocent party has to recover damages. the right to ask for the annulment of the contract if fraud is casual, to recover damages if fraud is incidental. Example of Fraud in constitution (casual fraud): In the above scenario, if Maria bought the 10 bottles of perfume on the false representation of Pedro that the perfume is that represented by the labels, the fraud committed by Pedro is casual fraud. Without the fraud, Maria would not have given her consent to the contract. She has the right to have the contract annulled on the ground of fraud. 4. Negligence (Culpa) in the Performance of Obligation What is fault or negligence? - It is any voluntary act or omission, there being no bad faith or malice, which prevents the normal fulfilment of an obligation. The negligence of the obligor 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 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, like the extraordinary diligence required of common carriers. Example: 16 | P a g e ATTY. ROLANDO B. PAGTOLON-AN, REB, REA iACADEMY School of Business The unauthorized reproduction of this material shall be dealt severely under the laws. Jose is a passenger in a taxi. Here, there is considered a contract of carriage between Jose and the owner of the taxi company. In consideration of the fare to be paid by Jose, the owner of the taxi company, through the driver, agrees to safely bring Jose to his destination. If, through the recklessness of the driver, like for example, driving when he is drunk, an accident occurs, as a result of which Jose is injured, there is negligence which would make the owner liable for damages. Extraordinary diligence- In general, extraordinary diligence is that extreme care and caution which Every prudent and thoughtful persons exercise under the same or similar circumstances. As applied to the preservation of property, the term "extraordinary diligence" means that extreme care and caution which very prudent and thoughtful persons use in securing and preserving their own property. 3. If both the contract and law are silent, then the diligence expected of a good father of a family is applicable Ordinary diligence (diligence of a good father of a family)- In general, ordinary diligence is that degree of care which is exercised by ordinarily prudent persons under the same or similar circumstances. As applied to the preservation of property, the term "ordinary diligence" means that care which every prudent man takes of his own property of a similar nature. 5. Contravention of the Tenor of Obligation - This is the violation of the terms and conditions stipulated in the obligation. The violation must not be due to fortuitous event. Example: Echo leased the apartment of Richie for PHP20,000.00 a month to be paid in advance during the first week of every month as stipulated in the lease contract. The obligation of Echo is to pay the stipulated rent. The obligation of Richie, as lessor, is to maintain Echo in the peaceful possession of the apartment being leased. 17 | P a g e ATTY. ROLANDO B. PAGTOLON-AN, REB, REA iACADEMY School of Business The unauthorized reproduction of this material shall be dealt severely under the laws. If Echo violates his obligation, say for example he was not able to pay the monthly rent for 2 consecutive months, Richie has the right to eject him from the premises and recover damages. What kind of acts is included in the phrase “in any manner contravene the tenor” of the obligation? It includes not only any illicit act which impairs the strict and faithful fulfilment of the obligation, but every kind of defective performance (Arrieta vs. National Rice and Corn, Corp.) Legal Excuse for Breach of Obligation: FORTUITIOUS EVENT -is an event which cannot be foreseen, which though foreseen is inevitable. Fortuitous event are the proper acts of God such as volcanic eruption, earthquake, lightning, etc. It is similar with “force majeure” or acts of man such as conflagration, war, robbery, fire, etc. Is the obligor responsible for those acts which, could not be foreseen, or which though foreseen, were inevitable? Generally, no person shall be responsible for those acts which, could not be foreseen, or which though foreseen were inevitable. So, as a general rule, the happening of a fortuitous event which renders the performance of the obligation to be impossible, is considered as a legal excuse to the breach of obligation. Example: Gaya obliged herself to deliver a specific car to Tito on Dec. 30, 1998. Before the arrival of the period, the car was struck by lightning and was totally destroyed. Gaya cannot be held responsible for the destruction of the car, hence her obligation to deliver is extinguished. The exceptions are: 1. When expressly specified by law; 18 | P a g e ATTY. ROLANDO B. PAGTOLON-AN, REB, REA iACADEMY School of Business The unauthorized reproduction of this material shall be dealt severely under the laws. a) The debtor is guilty of fraud, negligence or delay or contravention of the tenor of the obligation. Example: Shaira is obliged to deliver a specific car to Brando on July 10, 2021. Shaira did not deliver the said car on the said date. If, on July 11, the car was completely damaged because of lightning, Shaira is not liable if no demand was made by Brando. Her obligation is extinguished. If the car was completely damaged after a demand was made by Brando, Shaira is liable for damages because she is guilty of (legal) delay. In this case, the obligation of Shaira to deliver the car is also extinguished, but it is converted into monetary obligation to pay damages (Art. 1165, part. 3). If the car was completely damaged in any event even if no demand had been made by Brando, Shaira would still be liable. A debtor in default becomes liable even for loss due to a fortuitous event. However, the court may reduce the amount of damages. b) The debtor has promised to deliver the same (specific) thing to two (2) or more persons who do not have the same interest. Example: If Shaira sold and promised to deliver the same car to Brando and Charlie separately, Shaira is liable even for a fortuitious event. The reason is because it would be impossible for Shaira to comply with her obligation to both Brando and Charlie even without any fortuitous event taking place. c) The obligation to deliver a specific thing arises from a crime (Art. 1268) Example: 19 | P a g e ATTY. ROLANDO B. PAGTOLON-AN, REB, REA iACADEMY School of Business The unauthorized reproduction of this material shall be dealt severely under the laws. Shane stole the dog of Brian which is a golden retriever named Nightbirde. Shane has the obligation, arising from the crime, to return the dog. Even if the dog dies or is lost through a fortuitous event, Shane is stil liable for damages unless Brian is in mora accipiendi. A person is responsible for the results of whatever cause which flow from his criminal act. 2. When otherwise declared by stipulation; - The basis for this exception rests upon the freedom of the contract. 3. When the nature of the obligation requires the assumption of risk (Art. 1174); Example: Brenda insured her house against fire for PHP100,000.00 with CBD insurance company. Later, the house was destroyed by accidental fire. Although the cause of the loss is a fortuitous event, Brenda may recover the amount of the policy. In a contract of insurance, the insurer (CBD), in consideration of the premium paid by the insured (Brenda), undertakes to indemnify the latter for the loss of the thing insured by reason of the peril insured against even if the cause of the loss is a fortuitous event. 4. When the obligation is generic. Example: The loss or destruction of a generic thing like rice or corn, etc. does not produce the extinction of the obligation because the debtor can still comply with his obligation by delivering another thing of the same kind in accordance with the principle that “genus never perishes” 20 | P a g e ATTY. ROLANDO B. PAGTOLON-AN, REB, REA iACADEMY School of Business The unauthorized reproduction of this material shall be dealt severely under the laws. What are the requisites of a fortuitous event? 1. Event must be independent of the human will or at least of the obligor’s will; 2. The event could not be foreseen, or if it could be foreseen, must have been impossible to avoid; 3. The event must be of such a character as to render it impossible for the obligor to fulfil his obligation in a normal manner; and 4. Obligor must be free from any participation in the aggravation of the injury resulting to the obligee (Lasam vs. Smith). D. REMEDIES AVAILABLE TO CREDITOR IN CASES OF BREACH What are the remedies of the creditor should the obligor fail to perform his obligation? 1. Specific Performance in an obligation to deliver a specific thing (Art. 1165 par. 1); 2. Substitute Performance by a third person in an obligation to deliver a generic thing (Art. 1165 par. 2) and in an obligation to do except in the latter case when the obligation to do is a purely personal act; 3. Rescission - the revocation, cancellation, or repeal of a law, order, or agreement Can the injured party choose rescission after he has chosen fulfilment of the obligation? Yes. Art. 1191. The power to rescind obligations is implied in reciprocal ones, in case one of the obligors should not comply with what is incumbent upon him. The injured party may choose between the fulfillment and the rescission of the obligation, with the payment of damages in either case. He may also seek rescission, even after he has chosen fulfillment, if the latter should become impossible. Example: A purchased the house and lot of B. B already delivered the property despite the fact that A was not able to make the full payment of 21 | P a g e ATTY. ROLANDO B. PAGTOLON-AN, REB, REA iACADEMY School of Business The unauthorized reproduction of this material shall be dealt severely under the laws. the purchase price and even if B had already made several demands for the payment of the same. B filed a case in court to compel A to fulfil his obligation to pay the purchase price in full with payment of damages. A has become insolvent, hence he has no longer funds to pay B the full amount of the purchase price. Making his obligation impossible to fulfil. Knowing the situation of A, B, instead, asked for the rescission of the contract plus damages. In this case, B can still choose rescission plus damages since the first remedy had become impossible to fulfil. The court shall decree the rescission claimed, unless there be just cause authorizing the fixing of a period. This is understood to be without prejudice to the rights of third persons who have acquired the thing, in accordance with Articles 1385 and 1388 and the Mortgage Law. Note: Rescission requires judicial permission to rescind. Such permission is not required where the contract itself contains a resolutory provision by virtue of which the obligation may be cancelled in case of breach. Example: A was already in default in delivering the property purchased by B. In the contract, it was stated that the contract can be rescinded in case the contracting parties breached their respective obligations. In this case, there is no need for judicial permission to rescind the said contract & obligation since it is stated in the contract per se that the obligation may be cancelled in case of breach of the parties. 4. Damages (MENTAL) What are the instances when the obligor is liable for damages? a. Fraud; b. Negligence; c. Delay; and 22 | P a g e ATTY. ROLANDO B. PAGTOLON-AN, REB, REA iACADEMY School of Business The unauthorized reproduction of this material shall be dealt severely under the laws. d. Those who in any manner contravene the tenor thereof (Art. 1170). How shall damages be paid in case both parties have committed a breach of the obligation? In case both parties have committed a breach of the obligation, the liability of the first infractor shall be equitably tempered by the courts. If it cannot be determined which of the parties violated the contract, the same shall be deemed extinguished, and each shall bear his own damages (Art. 1192). IV. KINDS OF CIVIL OBLIGATIONS A. PURE What is pure obligation? A pure obligation is one as wherein effectivity or extinguishment does not depend on the fulfilment or nonfulfillment of a condition or on expiration of a term or period, and which as a consequence, is characterized by the quality of immediate demandability. Example: A has to pay B PHP50,000.00. B. CONDITIONAL What is a conditional obligation? A conditional obligation is one whose effectivity is subrogated to the fulfilment or non-fulfillment of a future and uncertain fact or event. Example: A will pay B his loan obligation subject to the condition that he already receives his 13th month pay. What is a condition? A condition may be defined as a future and uncertain fact or event upon which an obligation is subordinated or made to depend. 23 | P a g e ATTY. ROLANDO B. PAGTOLON-AN, REB, REA iACADEMY School of Business The unauthorized reproduction of this material shall be dealt severely under the laws. POTESTATIVE, CASUAL AND MIXED CONDITIONS POTESTATIVE CONDITION When the fulfilment of which depends upon the will of the party (either debtor or creditor) to the obligation. CASUAL CONDITION When its fulfilment depends on chance and/or the will of a third person. MIXED CONDITION When its fulfilment of condition depends partly on the will of a party to the obligation and partly on chance and/or will of a third person. Example: Example: Example: A will pay B A will pay B A will pay B soon as PHP50,000.00 when PHP50,000.00 his means will permit his means permit when the former him to pay his loan him to do so. wins the lotto. obligation and partly when he wins A will pay B the lotto. PHP50,000.00 if C will pay A his loan obligation in the amount of PHP60,000.00. Is the conditional obligation void if its fulfilment depends upon the will of the debtor? It depends. When the fulfilment of the condition depends upon the sole will of the debtor, the conditional obligation shall be void (Art. 1182). (Potestative-will of the debtor) Example: A has a loan obligation to B. A will only pay B if he will sell his car. In this case, the conditional obligation is void since it depends on the will of A. What if A will not sell his car? When the fulfilment depends upon the will of a party to the obligation and partly upon chance and/or the will of a third person, the obligation including such condition shall take effect. (Mixed condition) Example: 24 | P a g e ATTY. ROLANDO B. PAGTOLON-AN, REB, REA iACADEMY School of Business The unauthorized reproduction of this material shall be dealt severely under the laws. A will pay his loan obligation to B upon payment of C of his loan obligation to A. In this case, the obligation partly depends on the will of a third person and the will of a party to the obligation. If it depends exclusively on the will of the creditor, the same is valid (Potestative-will of the creditor) Example: A is the debtor. He obtained a loan from B payable when B comes back home to the Philippines next year for vacation. In this case, since the conditional obligation depends on B, the same is valid. SUSPENSIVE AND RESOLUTORY CONDITIONS SUSPENSIVE CONDITION A condition is suspensive when its fulfilment results in ACQUISITION OF RIGHTS arising out of the obligation. RESOLUTORY CONDITION A condition is resolutory when its fulfilment results in the EXTINGUISHMENT OF RIGHTS arising out of the obligation. Example: A bought a property from B in instalment, hence subject to the condition that the title will only be transferred upon full payment by A. Once A has paid B in full, A already acquires a right to the property of B. But before full payment, the said right has yet been suspended. Example: A gave a usufructuary right to use and possess his farm in favor of B until B’s son finishes college. If B’s son already finished college, B no longer has the right to use and possess the farm of A since his right had already extinguished. Effect of improvement, loss or deterioration of specific thing before the happening of a suspensive condition in an obligation to give: The rules are the following: a. If the thing is lost without the fault of the debtor/obligor, the obligation shall be extinguished. b. If the thing is lost through the fault of the debtor, he shall be obliged to pay damages; It is understood that the thing is lost when it perishes, or goes out of commerce, or disappears in such a way that its existence is unknown or it cannot be recovered. 25 | P a g e ATTY. ROLANDO B. PAGTOLON-AN, REB, REA iACADEMY School of Business The unauthorized reproduction of this material shall be dealt severely under the laws. c. When the thing deteriorates without the fault of the debtor, the impairment is to be borne by the creditor. d. If it deteriorates through the fault of the debtor, the creditor may choose between the: 1. rescission of the obligation; 2. and its fulfilment, with indemnity for damages in either case. e. If the thing is improved by its nature, or by time, the improvement shall inure to the benefit of the creditor. f. If it is improved at the expense of the debtor, he shall have no other right than that granted to the usufructuary (Art. 1189). He may, however, remove such improvements, should it be possible to do so without damage to the property. The usufructuary may also set-off the improvements he may have on the property against any damage to the same (Art. 580). C. OBLIGATION WITH A PERIOD OR A TERM What is a period or term? A period is a future and certain event upon the arrival of which the obligation (or right) subject to it either arises or is terminated. Example: A borrowed money from B payable after a year they executed the agreement. In this case, the period which makes the obligation on the part of A to pay the money and the right of B to demand payment will rise shall be after the arrival of the 1 year period. Whenever a period has been designated in an obligation, for whose benefit is it presumed? Whenever in an obligation a period has been designated, it shall be presumed to have been established for the benefit of BOTH the creditor and debtor, unless from the tenor of the same or other circumstances it should appear that the period has been established in favor of one or of the other (Art. 1196). 26 | P a g e ATTY. ROLANDO B. PAGTOLON-AN, REB, REA iACADEMY School of Business The unauthorized reproduction of this material shall be dealt severely under the laws. Can the debtor perform the obligation before the expiration of such period? When a period is designated for the performance or fulfilment of an obligation, it is presumed to have been established for the benefit of both creditor and the debtor. Consequently, as a general rule, the creditor cannot demand the performance of the obligation before the expiration of the designated period; neither can the debtor perform the obligation before the expiration of the period. Effect if Given to Debtor Alone 1. He may oppose any premature demand on the part of the creditor for performance of the obligation; or 2. If he so desires, he may renounce the benefit of the period by performing his obligation in advance. What are the instances when the debtor loses the benefit of the period? The debtor shall lose every right to make use of the period: 1. When after the obligation has been contracted, he becomes INSOLVENT, unless he gives a guaranty or security for the debt; Note: The insolvency need not be judicially declared in an insolvency proceeding. 2. When he DOES NOT FURNISH to the creditor the GUARANTIES OR SECURITIES which he has promised; 3. When by his own acts he has IMPAIRED SAID GUARANTIES or securities after their establishment, and when through a FORTUITOUS EVENT THEY DISAPPEAR, unless he immediately gives new ones equally satisfactorily; 4. When the debtor VIOLATES ANY UNDERTAKING, in consideration of which the creditor agreed to the period; or 5. When the debtor attempts to ABSCOND (Art. 1198). Resolutory Period - period upon terminates the arrival of which the obligation When does the obligation with a resolutory period take effect? 27 | P a g e ATTY. ROLANDO B. PAGTOLON-AN, REB, REA iACADEMY School of Business The unauthorized reproduction of this material shall be dealt severely under the laws. Obligations with a resolutory period take effect at once, but terminates upon arrival of the day certain (Art. 1193). Example: A gave a usufructuary right to use and possess his farm in favor of B until 2022. In 2022, B no longer has the right to use and possess the farm of A since his right has already extinguished. Definite or Indefinite Period When can the court fix a period? The court may fix the period: a. If the obligation does not fix a period, but from its nature and the circumstances it can be inferred that a period was intended; or b. When it depends upon the will of the debtor (i.e., when the debtor binds himself to pay when his means permit him to do so) (Art. 1180). When the obligation fails to fix a period, or when it depends upon the will of the debtor, what should the creditor do before he can demand payment? The creditor must ask the court to set the period, before he can demand payment. The period to be fixed by the court becomes part of the contract and until it has expired no action to enforce payment can be maintained (Art. 1197). Example: A entered into a loan agreement with B, wherein A will borrow PHP10,000.00. The said loan agreement failed to mention the specific date when will A pay B. In this case, B will have to ask the court to set the period, before he can demand payment from A. E. ALTERNATIVE OR FACULTATIVE ALTERNATIVE OBLIGATION FACULTATIVE OBLIGATION An obligation is alternative when Facultative obligation refers two or more things are equally to a type of obligation where 28 | P a g e ATTY. ROLANDO B. PAGTOLON-AN, REB, REA iACADEMY School of Business The unauthorized reproduction of this material shall be dealt severely under the laws. due, under an alternative. The obligor is bound to render only one of two or more items of performance. Several objects are due. It may be complied with by the delivery of one of the objects or by performance of one of the prestations which are alternatively due. The right of choice may pertain to the debtor. If expressly granted, the right of choice may also pertain to the creditor or third person. Loss/impossibility of all objects/prestations due to fortuitous event shall extinguish the obligation. As to culpable loss before choice, it may give rise to liability on the part of the debtor. Example: A is obligated to give B either 1 sack of rice or 1 sack of corn. In this case, since A’s obligation to give 1 sack of rice or corn is in the alternative, the fulfilment of 1 extinguishes the obligation. one thing is due, but another is paid in its place. In such type of obligations there is no alternative provided. The debtor is given the right to substitute the thing due with another that is not due. Only one object is due. It may be complied with by the delivery of another object or by the performance of another prestation in substitution of that which is due. The right of choice pertains only to the debtor. Loss/impossibility of the object/prestations due to fortuitous event is sufficient to extinguish the obligation. It does not give rise to any liability on the part of the debtor. Example: A is obligated under a contract to give B a Samsung 2-door refrigerator on January 02, 2020, but he is allowed to substitute it to another thing that is not due. On the said date, A, the obligor-debtor, may render a Hanabishi 2-door fridge to B in substitution to the Samsung refrigerator. F. JOINT AND SOLIDARY OBLIGATIONS 1. JOINT (DIVISIBLE) OBLIGATION Example: A and B are jointly liable to C for PHP10,000.00. Concurrence of Two or More Creditors and/or Two or More Debtors 29 | P a g e ATTY. ROLANDO B. PAGTOLON-AN, REB, REA iACADEMY School of Business The unauthorized reproduction of this material shall be dealt severely under the laws. What is the liability when there is concurrence of two or more creditors or of two or more debtors in one and the same obligations? The general rule is that joint obligation is presumed. The exceptions are: 1. The obligation expressly stated that there is solidarity; 2. The law requires solidarity, i.e. tort, quasi-contracts, liability of principals, accomplices and accessories of a felony. 3. Nature of the obligation requires solidarity (Art. 1207) i.e. criminal offenses and torts. Can the joint debtor be required to pay for the share of another? No debtor can be compelled to answer for the liability of the others. Consequently, if there is a breach of the obligation by reason of the act of one of the debtors, the damages due to its breach must be borne by him alone. Similarly, if there is any defense which is purely personal to one of the debtors, he alone can avail himself of such defense. Thus, it has been held that payment or acknowledgment by one of the joint debtors will not stop the running of the period of prescription as to the others. In case of insolvency of one of the joint debtors, can the creditor proceed against the others for the share of the insolvent debtor? If one of the joint debtors should be insolvent, the others shall not be liable for his share (Art. 1209). Example: Four foreign students rented an apartment of Natasha for a period of one (1) year. After one semester, three (3) of them, returned to their home country and the fourth student transferred to a boarding house. Natasha discovered that they left unpaid internet bills in the total amount of PHP10,000.00. The lease contract provides that the lessees shall pay for the internet services in the leased premises. Natasha demanded that the fourth student pay the entire amount of the unpaid internet bills, but 30 | P a g e ATTY. ROLANDO B. PAGTOLON-AN, REB, REA iACADEMY School of Business The unauthorized reproduction of this material shall be dealt severely under the laws. the latter is willing to pay only ¼ of it or PHP2,500.00. Who is correct? The fourth student is correct. His liability is only joint. Hence, pro rata. There is solidary liability only when the obligation expressly so state or when the law or nature of the obligation requires solidarity. The contract of lease in the case at bar does not, in any way, stipulate solidarity. 2. JOINT INDIVISIBLE OBLIGATION When is there a joint indivisible obligation and what are the effects? If the division is impossible, the right of the creditors may be prejudiced only by their collective acts, and the debt can be enforced only by proceeding against all the debtors. If one of the latter should be insolvent, the others shall not be liable for his share (Art. 1209). Example: A and B are jointly liable to give C their condominium unit. Should any one of the joint debtors fail to comply with his undertaking, are the other joint debtors liable for damages? It depends. 1. In case of joint divisible obligation, the other debtors cannot be compelled to answer for the liability of others as the debt is divided into as many equal shares as there are debts (Art. 1208). For instance, A and B are jointly liable to C for PHP10,000.00. Here, A and B have obligations to pay C PHP5,000.00 each. If A cannot pay C, B cannot be compelled by C to pay him for the liability of A. 2. In case of a joint indivisible obligation, it gives rise to indemnity for damages from the time any one of the debtors does not comply with his undertaking. The debtors who may have been ready to fulfil their promises shall not contribute to the indemnity beyond the corresponding portion of the price of the thing or of the 31 | P a g e ATTY. ROLANDO B. PAGTOLON-AN, REB, REA iACADEMY School of Business The unauthorized reproduction of this material shall be dealt severely under the laws. value of the service in which the obligation consists (Art. 1224). For instance, A and B are jointly liable to give C their condominium unit. If B does not want to give to C the condominium unit even if A is ready to fulfil the said obligation, it gives rise for indemnity for damages against B by C. 3. SOLIDARY OBLIGATION (JOINTLY AND SEVERALLY) Mutual Agency among Solidary Creditors What are the effects of mutual agency among solidary creditors? 1. The debtor may pay any one of the solidary creditors; but if any demand, judicial or extrajudicial, has been made by one of them, payment should be made to him (Art. 1214). 2. Novation, compensation, confusion or remission of the debt, made by any of the solidary creditors or with any of the solidary debtors, shall extinguish the obligation, without prejudice to the provisions of Article 1219. The creditor who may have executed any of these acts, as well as he who collects the debt, shall be liable to the others for the share in the obligation corresponding to them (Art. 1215). Example: A and B borrowed PHP10,000.00 from C. They bound themselves solidarily to pay the amount to C. In this case, A and B are only liable for PHP5,000.00 each. However, C may demand that A or B pay the full amount of PHP10,000.00. If for example, A pays the whole PHP10,000.00 upon C’s demand. B has the obligation to reimburse A with PHP5,000.00, his share in the obligation. Mutual Guaranty among Solidary Debtors What are the effects of mutual guaranty among solidary debtors? 32 | P a g e ATTY. ROLANDO B. PAGTOLON-AN, REB, REA iACADEMY School of Business The unauthorized reproduction of this material shall be dealt severely under the laws. 1. The creditor may proceed against any one of the solidary debtors or some or all of them simultaneously. The demand made against one of them shall not be an obstacle to those which may subsequently be directed against the others, so long as the debt has not been fully collected (Art. 1216). 2. Payment made by one of the solidary debtors extinguishes the obligation. If two or more solidary debtors offer to pay, the creditor may choose which offer to accept. He who made the payment may claim from his codebtors only the share which corresponds to each, with the interest for the payment already made. If the payment is made before the debt is due, no interest for the intervening period may be demanded. When one of the solidary debtors cannot, because of his insolvency, reimburse his share to the debtor paying the obligation, such share shall be borne by all his co-debtors, in proportion to the debt of each (Art. 1217). 3. A solidary debtor may, in actions filed by the creditor, avail himself of all defenses which are derived from the nature of the obligation and of those which are personal to him, or pertain to his own share. With respect to those which personally belong to the others, he may avail himself thereof only as regards that part of the debt for which the latter are responsible (Art. 1222). Example: A, B and C borrowed PHP12,000.00 from X on June 01, 1966. They executed a promissory note: binding themselves jointly and severally to pay the obligation on June 01, 1968. X brought an action against A for the payment of the entire obligation plus interest. A interposed the following defences: 1) That B was only a minor at the time of the celebration of the contract and that such fact was known to X; and 2) that X had granted an extension of two years to C within which to pay. Can A avail himself of these defences? 33 | P a g e ATTY. ROLANDO B. PAGTOLON-AN, REB, REA iACADEMY School of Business The unauthorized reproduction of this material shall be dealt severely under the laws. Yes. Under Art. 1222 of the Civil Code, there are three (3) kinds of defences which are available to a solidary debtor if the creditor proceeds against him alone for payment of the entire obligation. They are: 1. Defenses derived from the nature of the obligation; 2. Defenses personal to him or pertaining to his share; and 3. Defenses personal to the others, but only as regards that part of the debt for which the latter are responsible. D. DIVISIBLE AND INDIVISIBLE Divisible obligations are those which have as their object a prestation which is susceptible of partial performance without the essence of the obligation being changed. Indivisible obligations, on the other hand, are those which have as their object a prestation which is not susceptible of partial performance, because, otherwise, the essence of the obligation will be changed. E. OBLIGATIONS WITH A PENAL CLAUSE Is the obligor liable for damages despite the fact that the obligation is with penal clause? It depends. Generally, the penalty shall substitute the indemnity for damages and the payment of interests in case of noncompliance. The exceptions are: 1. If there is stipulation to the contrary; 2. If the obligor refuses to pay the penalty; or 3. The obligor is guilty of fraud in the fulfilment of the obligation. EXTINGUISHMENTS OF OBLIGATIONS What are the modes of extinguishment of obligations? 1. By payment or performance; 2. By lost of the thing due; 34 | P a g e ATTY. ROLANDO B. PAGTOLON-AN, REB, REA iACADEMY School of Business The unauthorized reproduction of this material shall be dealt severely under the laws. 3. By the condonation or remission of the debt; 4. By the confusion or merger of the rights of creditor and debtor; 5. By compensation; 6. By novation; 7. Annulment; 8. Rescission; 9. Fulfilment of a resolutory condition; 10. Prescription; 11. Renunciation or waiver by the obligee or creditor; 12. Compromise; 13. Expiration of the resolutory term or period; 14. Death of one of the contracting parties in purely personal obligations; 15. The will of one of the contracting parties in certain contracts; or 16. The agreement of both contracting parties or what is sometimes known as mutual assent or dissent. I. PAYMENT What is the effect of payment made by a third person in order to extinguish the obligation? a. The creditor is not bound to accept payment or performance by a third person who has no interest in the fulfilment of the obligation, unless: 1. There is a stipulation to the contrary (Art. 1236 par.1); or 2. When it is made by a third person who has an interest in the fulfilment of the obligation, such as a joint debtor, guarantor, or surety. b. Whoever pays for another may demand from the debtor what he has paid, except that if he paid: 1. Without the knowledge; or 2. Against the will of the debtor. 35 | P a g e ATTY. ROLANDO B. PAGTOLON-AN, REB, REA iACADEMY School of Business The unauthorized reproduction of this material shall be dealt severely under the laws. Note: He can recover only insofar as the payment has been beneficial to the debtor (Art. 1236 par.2) c. When a person pays on behalf of the debtor without the knowledge or against the will of the latter, he cannot compel the creditor to subrogate him in his rights, such as those arising from a mortgage, guaranty, or penalty (Art. 1237). Dation in Payment/ Dacion en pago Dation in payment is where property is alienated to the creditor in satisfaction of a debt in money, shall be governed by the law on sales (Art. 1245). Form of Payment Can payment be made through a promissory note or bills of exchange? Generally, payment must be made in legal tender in the Philippines. However, the delivery of promissory notes payable to order, or bills, of exchange or other mercantile documents shall produce the effect of payment only: 1. When they have been cashed; or 2. When through the fault of the creditor they have been impaired. Application of Payment What is the concept of application of payment? Designation of the debt to which the payment must be applied when the debtor has several obligations of the same kind in favor of the same creditor. Requisites: 1. There must be only one debtor and only one creditor; 2. There must be two or more debts of the same kind; 3. All of the debts must be due except: a. If there is stipulation to the contrary; or 36 | P a g e ATTY. ROLANDO B. PAGTOLON-AN, REB, REA iACADEMY School of Business The unauthorized reproduction of this material shall be dealt severely under the laws. b. Application of payment is made by the party for those whose benefit the term has been constituted (Art. 1196); and 4. Amount paid by the debtor is insufficient to cover the total amount of all the debts. Tender of Payment and Consignation Tender of payment is the manifestation of the debtor to the creditor of his decision to comply immediately with his obligation, preparatory act and extrajudicial in character. Consignation is to deposit the object of the obligation in a competent court in accordance with the rules prescribed by law, after refusal or inability of the creditor to accept the tender of payment; principal act and judicial in character. What are the instances where a consignation produces the effect of payment even without prior tender of payment: 1. Creditor is absent or unknown, or does not appear at the place of payment; 2. Creditor is incapacitated to receive the payment at the time it is due; 3. When without just cause, the creditor refuses to give a receipt; 4. When two or more persons claim the right to collect; and 5. When the title of the obligation has been lost (Art. 1256). May the debtor withdraw the consignation made? Yes. The debtor may withdraw the thing or sum deposited: 1. Before the creditor has accepted the consignation; 2. Before judicial declaration that the consignation has been properly made (Art. 1260); or 37 | P a g e ATTY. ROLANDO B. PAGTOLON-AN, REB, REA iACADEMY School of Business The unauthorized reproduction of this material shall be dealt severely under the laws. 3. The creditor should authorize the debtor to withdraw the same. II. LOSS OF DETERMINATE THING DUE OR IMPOSSIBLITY OR DIFFICULTY OF PERFORMANCE What are the instances when a debtor in an obligation to do shall be released from the non-performance of his obligation? The instances are the following: 1. When the obligation becomes legally or physically impossible without the fault of the debtor, obligor is released from the obligation; and 2. When the service has become so difficult as to be manifestly beyond the contemplation of the parties, the court should be authorized to release the obligor in whole or in part. III. CONDONATION OR REMISSION OF DEBT Express Condonations and Required Formality thereof Requisites: 1. It must be gratuitious; 2. It must be accepted by the obligor; 3. The obligation must be demandable; 4. Parties must have the capacity; 5. Not inofficious; and 6. Must comply with the forms of donation should it be express. Implied What are the instances of implied condonation? 1. The delivery of a private document evidencing the credit, made voluntarily by the creditor to the debtor; 2. Whenever the private document in which the debt appears is found in the possession of the debtor; and 38 | P a g e ATTY. ROLANDO B. PAGTOLON-AN, REB, REA iACADEMY School of Business The unauthorized reproduction of this material shall be dealt severely under the laws. 3. It is presumed that the accessory obligation of pledge has been remitted when the thing pledged, after its delivery to the creditor, is found in the possession of the debtor, or of a third person who owns the thing (Art. 1274). D. CONFUSION What are the requisites of confusion or merger of rights? 1. Merger of the characters of the creditor and debtor must be in the same person; 2. Must take place in the person of either the principal creditor or the principal debtor; and 3. Whether the merger refers to the entire obligation or only part thereof, there must be complete and definite meeting of all qualities of creditor and debtor in the obligation or in part thereof affected by the merger. E. COMPENSATION When does compensation take place? It shall take place when two (2) persons, in their own right, are creditors and debtors of each other (Art. 1278). What are the requisites of legal compensation? 1. There must be two (2) parties, who, in their own right, are principal creditors and principal debtors of each other except in case of a guarantor (Art. 1280); 2. Both debts must consists in sum of money; 3. Both debts must be due, except voluntary compensation (Art. 1282); and 4. Both debts must be liquidated and demandable; 5. There must be no retention or controversy commenced by third persons over either of the debts and communicated in due time to the debtor (Art. 1279); and 6. The compensation must not be prohibited by law. 39 | P a g e ATTY. ROLANDO B. PAGTOLON-AN, REB, REA iACADEMY School of Business The unauthorized reproduction of this material shall be dealt severely under the laws. NOVATION What are the instances when novation takes place? The instances are the following: 1. Changing their object or principal conditions; 2. Substituting the person of the debtor; and 3. Subrogating a third person in the rights of the creditor (Art. 1291). Note: If a period for payment if an obligation is: *Shortened --------------------- there is novation *Extended --------------------- no novation *Postponed -------------------- no novation the date of payment In order for an obligation to be extinguished by reason of novation, what form of extinguishment is required? 1. Express- wherein the extinguishment by reason of novation must be so declared in unequivocal terms; or 2. Implied- when the old and the new obligations be on every point incompatible with each other (Art. 1292). EXPROMISION What is a substitution of the debtor by expromision? It is that which is 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. What are the effects of a substitution of a new debtor without the knowledge or against the will of original debtor? 40 | P a g e ATTY. ROLANDO B. PAGTOLON-AN, REB, REA iACADEMY School of Business The unauthorized reproduction of this material shall be dealt severely under the laws. 1. He can recover only insofar as the payment has been beneficial to the debtor (Art. 1236); Note: However, he cannot compel the creditor to subrogate him in his rights, such as those arising from a mortgage, guaranty or penalty (Art. 1237); 2. The new debtor’s insolvency or non-fulfilment of the DELEGACION When the substitution of the debtor was proposed by the original debtor and accepted by the creditor, what is the effect of insolvency of the new debtor? The insolvency of the new debtor, who has been proposed by the original debtor and accepted by the creditor, shall not revive the action of the latter against the original obligor, except when: 1. Said insolvency was already existing and of public knowledge; or 2. Known to the debtor when he delegated his debt (Art. 1295). In delegacion, if the new debtor paid the obligation, his rights are: 1) Demand reimbursement from the original debtor of the amount paid; and 2. Compel the creditor to subrogate him of his rights. 41 | P a g e ATTY. ROLANDO B. PAGTOLON-AN, REB, REA iACADEMY School of Business The unauthorized reproduction of this material shall be dealt severely under the laws. CONTRACTS What is a contract? A contract is a meeting of the minds between two persons whereby one binds himself, with respect to the other to give something or to render some service (Art. 1305) I. Four (4) Most Essential Characteristics 1. Obligatory force/character of contract -the principle that once a contract is perfected, it shall be obligatory upon both of the contracting parties. - It constitutes the law as between the parties. 2. Autonomy of Contracts - the contracting parties may establish such stipulations, terms and conditions as they may deem convenient, provided they are not contrary to law, morals, good customs, public order or public policy. 3. Mutuality of contracts - the contracts must bind both contracting parties; its validity or compliance must not be left to the will of one (1) of them. Hence, its validity or compliance cannot be left to the will of one of them. This principle is based on the essential equality of the parties. It is elementary rule that no party can renounce or violate the law of the contract without the consent of the other. (11 Manresa 380) 42 | P a g e ATTY. ROLANDO B. PAGTOLON-AN, REB, REA iACADEMY School of Business The unauthorized reproduction of this material shall be dealt severely under the laws. Example, Gaya and Laura entered into a contract to sell whereby Gaya binds herself to sell her only parcel of land to Laura if Gaya decides to leave for States. The contract is void because the fulfillment of the condition depends on the will of Gaya. 4. Relativity of contracts - contracts take effect only between the parties, their assigns and heirs. Exceptions: Art. 1311. Xxx If a contract should contain some stipulation in favor of a third person, (STIPULATION POUR AUTRUI) he may demand its fulfillment provided he communicated his acceptance to the obligor before its revocation. A mere incidental benefit or interest of a person is not sufficient. The contracting parties must have clearly and deliberately conferred a favor upon a third person. Art. 1312. In contracts creating real rights, third persons who come into possession of the object of the contract are bound thereby, subject to the provisions of the Mortgage Law and the Land Registration Laws. Example, Gaya mortgaged her parcel of land in favor of Laura as collateral for her debt. The mortgage is duly registered. Later on, Gaya sold the same land to Tito. In this case, Tito bought the land subject to the mortgage constituted thereon. Tito, although a stranger in the mortgage, being a real right follows the property on the right of Laura to the mortgage Art. 1313. Creditors are protected in cases of contracts intended to defraud them. Art. 1314. Any third person who induces another to violate his contract shall be liable for damages to the other contracting party. II. Essential Requisites 1. Consent of the contracting parties; 2. Object certain which is the subject matter of the contract; and 43 | P a g e ATTY. ROLANDO B. PAGTOLON-AN, REB, REA iACADEMY School of Business The unauthorized reproduction of this material shall be dealt severely under the laws. 3. Cause of the obligation which is established (Art. 1318) - absent any of the essential requisites/elements in a contract, will make the said contract void CONSENT What are the requisites of consent? 1. Must be manifested by the concurrence of the offer and acceptance (Art. 1319-1326); 2. Parties must possess the necessary legal capacity (Art. 1327); and 3. Must be intelligent, free, spontaneous and real (Art. 1330-1346). Note: Consent is manifested by the meeting of the offer and the acceptance upon the thing and the cause which are to constitute the contract. The offer must be certain and the acceptance absolute. A qualified acceptance constitutes a counter-offer (Art. 1319). Cognition Theory - the contract is perfected from the moment the acceptance comes to the knowledge of the offeror. - An offer becomes ineffective upon the death,civil interdiction, insanity, or insolvency of either party before acceptance is conveyed. Art. 1324 - When the offerer has allowed the offeree a certain period to accept, the offer may be withdrawn at any time before acceptance by communicating such withdrawal, except when the option is rounded upon a consideration, as something paid or promised. - Art.1325. Unless it appears otherwise, business advertisements of things for sale are not definite offers, but mere invitations to make an offer. - Art. 1326. Advertisement for bidders are simply invitations to make proposals, and the advertiser is not bound to accept the highest or lowest bidder, unless the contrary appears. - Art. 1327 The following cannot give consent to a contract: - 1.) Unemancipated minors; 44 | P a g e ATTY. ROLANDO B. PAGTOLON-AN, REB, REA iACADEMY School of Business The unauthorized reproduction of this material shall be dealt severely under the laws. - 2.) Insane or demented persons, and deaf-mutes who do not know how to read and write. (1263a) - Art. 1328 Contracts entered into during a lucid interval are valid, contracts agreed to in a state of drunkenness or during a hypnotic spell are voidable. (see below discussion on Voidable contracts): OBJECT What are the requisites of a valid object of a contract? 1. Must be within the commerce of man; 2. Should be real or possible; 3. Should be licit; and 4. Should be determinate, or at least possible determination as to its kind. of CAUSE What are the requisites of cause? 1. Existing at the time of the celebration of the contract; 2. Licit or lawful; and 3. True. Art. 1352. Contracts without cause, or with unlawful cause, produce no effect whatever. The cause is unlawful if is contrary to law, morals, good customs, public order or public policy. (1275a)Art. 1353. The statement of a false cause in contracts shall render them void, if it should not be proved that they were rounded upon another cause which is true and lawful. Stages of A Contract 1. Preparatory or conception – process of formation such as bargaining, negotiation to arrive at a definite contract. 2. Perfection or birth – there is now a meeting of minds to arrive at a definite agreement as to the subject matter, cause or consideration, terms and conditions of contract. 3. Consumption or death – which is the fulfillment or performance of the terms and conditions agreed upon in the contract may be said to have been fully accomplished or executed. III. Kinds of Contracts As to Perfection: A. Consensual Contracts When is a consensual contract perfected? Contracts are perfected by mere consent, and from that moment the parties are bound not only to the fulfillment of what has been expressly stipulated but also to all the 45 | P a g e ATTY. ROLANDO B. PAGTOLON-AN, REB, REA iACADEMY School of Business The unauthorized reproduction of this material shall be dealt severely under the laws. consequences which, according to their nature, may be in keeping with good faith, usage and law (Art. 1315). B. Real Contracts When is a real contract perfected? Real contracts, such as deposit, pledge and Commodatum, are not perfected until the delivery of the object of the obligation (Art. 1316). Example: Deposit, pledge, or commodatum. As to dependence to other contract. a. Principal – one which can stand alone. Ex. A contract of sale, lease. b. Accessory – those which are dependent upon another contract. Ex. Contract of mortgage, pledge or guaranty. c. Preparatory – those which are created in order that a future transaction or contract may be entered into by the parties. Ex. Contract of partnership or agency. According to name or designation a. Nominate – one which has particular name or designation such as sale, agency, etc. b. Innominate – those without particular name. According to the nature of obligation a. Unilateral – where only one has an obligation to perform. Ex. Contract of donation b. Bilateral – where both parties have reciprocal obligation to perform. Ex. Sale. According to risk involved a. Commutative - where there is an exchange of values, such as lease. b. Aleatory - one which the fulfillment of the obligation depends upon chance. Ex. Contract of insurance. According to cause a. Onerous – one which imposes valuable consideration such as sale, mortgage. b. Gratuitous – one which one of the parties does not receive any valuable consideration, such as commodatum, donation, usufruct, etc. According to form a. Oral – by word of mouth of the parties b. Written – the agreement which is reduced in writing which may be public or private document 46 | P a g e ATTY. ROLANDO B. PAGTOLON-AN, REB, REA iACADEMY School of Business The unauthorized reproduction of this material shall be dealt severely under the laws. IV. Formality What form is required in a contract in order to be valid? The general rule is that contracts are obligatory, in whatever form they may have been entered into, provided all the essential requisites for their validity are present. The exceptions are: 1. When the law requires that a contract be in some form in order that it may be valid or enforceable; or 2. When the law requires that a contract be proved in a certain way. What are the contracts that must be in a public instrument? Art. 1358. The following must appear in a public document: (1) Acts and contracts which have for their object the creation, transmission, modification or extinguishment of real rights over immovable property; Sales of real property or of an interest therein are governed by Articles 1403, No. 2, and 1405; (2) The cession, repudiation or renunciation of hereditary rights or of those of the conjugal partnership of gains; (3) The power to administer property, or any other power which has for its object an act appearing or which should appear in a public document, or should prejudice a third person; (4) The cession of actions or rights proceeding from an act appearing in a public document. All other contracts where the amount involved exceeds five hundred pesos must appear in writing, even a private one. But sales of goods, chattels or things in action are governed by Articles, 1403, No. 2 and 1405. What are the rules as to formal requirements of a donation? Art. 748. The donation of a movable may be made orally or in writing. An oral donation requires the simultaneous delivery of the thing or of the document representing the right donated. If the value of the personal property donated exceeds five thousand pesos, the donation and the acceptance shall be made in writing, otherwise, the donation shall be void. 47 | P a g e ATTY. ROLANDO B. PAGTOLON-AN, REB, REA iACADEMY School of Business The unauthorized reproduction of this material shall be dealt severely under the laws. Art. 749. In order that the donation of an immovable may be valid, it must be made in a public document, specifying therein the property donated and the value of the charges which the donee must satisfy. The acceptance may be made in the same deed of donation or in a separate public document, but it shall not take effect unless it is done during the lifetime of the donor. If the acceptance is made in a separate instrument, the donor shall be notified thereof in an authentic form, and this step shall be noted in both instruments. V. Defective Contracts What are the distinctions between a void, voidable, rescissible and unenforceable contracts? VOID The defect is caused by: 1. LACK OF ESSENTIAL ELEMENTS OF A CONTRACT; 2. ILLEGALITY VOIDABLE The defect is caused by VICE OF CONSENT RESCISSIBLE The defect is caused by INJURY/DAMAGE either to one of the parties or to a third person The contract does not, as a general rule, produce any legal effect The contract is valid and enforceable until it is annulled by court The contract can be ratified Assailed only by a contracting party and not by third persons The contract is valid and enforceable until rescinded by court The contract cannot be ratified Can be challenged or assailed by: 1. a contracting party; and 2. a third party whose interest is The contract need not be ratified Can be challenged or assailed by a contracting party and a third person who is prejudiced or damaged by the contract UNENFORCEABLE The defect is caused by LACK OF FORM, AUTHORITY, or CAPACITY OF BOTH PARTIES not cured by prescription The contract cannot be enforced by a proper action in court The contract can be ratified Assailed only by a contracting party and not by third persons 48 | P a g e ATTY. ROLANDO B. PAGTOLON-AN, REB, REA iACADEMY School of Business The unauthorized reproduction of this material shall be dealt severely under the laws. directly affected. Example: There is a deed of sale in favor of B involving A’s multi-million house and lot in Tagaytay. In the said contract, the price declared is only PHP10,000.00. In this case, the price is simulated, hence, it is void. Example: A executed a deed of sale involving his condominium unit in favor of B while the latter points a gun to him. In this case, the contract is voidable. It is valid until annulled. Example: Bruce’s parents died. He inherited their mansion worth PHP40,000,000.00. Bruce was still a minor so Alfred was appointed as his guardian. Later, Alfred sold the mansion on behalf of Bruce for PHP29,000,000.00. In this case, Alfred sold the mansion for a lower price by more than onefourth (1/4) of its market value to the prejudice of Bruce. Bruce can ask for the rescission of the sale. Example: A represented herself as the representative of B, the owner of the farm which is the subject of sale in favor of C. It turned out however, that A is not authorized by B to enter into a contract of sale involving his property. In this case, the contract is unenforceable. A. RESCISSIBLE CONTRACTS What contracts are rescissible? Art. 1481. The following contracts are rescissible: (1) Those which are entered into by guardians whenever the wards whom they represent suffer lesion by more than one-fourth of the value of the things which are the object thereof; (2) Those agreed upon in representation of absentees, if the latter suffer the lesion stated in the preceding number; (3) Those undertaken in fraud of creditors when the latter cannot in any other manner collect the claims due them; Art. 1387. All contracts by virtue of which the debtor alienates property by gratuitous title are presumed to have been entered into in fraud of creditors, when the 49 | P a g e ATTY. ROLANDO B. PAGTOLON-AN, REB, REA iACADEMY School of Business The unauthorized reproduction of this material shall be dealt severely under the laws. donor did not reserve sufficient property to pay all debts contracted before the donation. Alienations by onerous title are also presumed fraudulent when made by persons against whom some judgment has been issued. (4) Those which refer to things under litigation if they have been entered into by the defendant without the knowledge and approval of the litigants or of competent judicial authority; (5) All other contracts specially declared by law to be subject to rescission. Additional: (6) A contract of sale entered into in violation of a right of 1st refusal of another person, while valid is rescissible. What are the requisites of rescission? 1. The contract must be rescissible under Art. 1381 and 1382; 2. Party asking for rescission must have no other legal means to obtain reparation for the damages suffered by him (Art. 1382); 3. Person demanding rescission must be able to return whatever he may be obliged to restore if rescission is granted (Art. 1385); 4. Things which are the object of the contract must not have passed legally to the possession of a third person acting in good faith (Art. 1385); and 5. Action must be brought within four (4) years. B.VOIDABLE CONTRACTS What are voidable contracts? The following contracts are voidable or annullable, even though there may have been no damage to the contracting parties: 1. Those where one of the parties is incapable of giving consent to a contract; and 2. Those where the consent is vitiated by mistake, violence, intimidation, undue influence or fraud. 50 | P a g e ATTY. ROLANDO B. PAGTOLON-AN, REB, REA iACADEMY School of Business The unauthorized reproduction of this material shall be dealt severely under the laws. Note: Voidable contracts are binding, unless they are annulled by a proper action in court. These contracts are susceptible of ratification (Art. 1390) Incapacitated Who are those persons incapacitated to give consent to a contract? 1. Minors; 2. Insane or demented persons, and deaf-mutes who do not know how to read and write (Art. 1329); and 3. Person in a state of drunkenness or during a hypnotic spell (Art. 1328). Mistake Mistake of Fact When one or both contracting parties believe that a fact exists when in reality it does not, or that such fact does not exists when in reality it does Mistake of Law When one or both parties arrive at an erroneous conclusion regarding the interpretation of a question of law or the legal effects of certain act or transaction Note: As a general rule, it is only mistake of fact which will vitiate consent thus rendering the contract voidable. Mistake of law, does not render the contract voidable because of the well-known principle that “Ignorance of the law excuses no one from compliance therewith” or “Ignorancia legis nemenem excusat”. Violence When is there violence? There is violence when in order to wrest consent, serious or irresistible force is employed (Art. 1335). Intimidation When is there intimidation? 51 | P a g e ATTY. ROLANDO B. PAGTOLON-AN, REB, REA iACADEMY School of Business The unauthorized reproduction of this material shall be dealt severely under the laws. There is intimidation when one of the contracting parties is compelled by a reasonable and well-grounded fear of an imminent and grave evil upon his person or property, or upon the person or property of his spouse, descendants or ascendants, to give his consent. To determine the degree of intimidation, the age, sex and condition of the person shall be borne in mind (Art. 1335). Undue Influence When is there undue influence? Art. 1337. There is undue influence when a person takes improper advantage of his power over the will of another, depriving the latter of a reasonable freedom of choice. The following circumstances shall be considered: the confidential, family, spiritual and other relations between the parties, or the fact that the person alleged to have been unduly influenced was suffering from mental weakness, or was ignorant or in financial distress. Fraud When is there fraud? Art. 1338. There is fraud when, through insidious words or machinations of one of the contracting parties, the other is induced to enter into a contract which, without them, he would not have agreed to. Art. 1339. Failure to disclose facts, when there is a duty to reveal them, as when the parties are bound by confidential relations, constitutes fraud. Art. 1340. The usual exaggerations in trade, when the other party had an opportunity to know the facts, are not in themselves fraudulent. Art. 1341. A mere expression of an opinion does not signify fraud, unless made by an expert and the other party has relied on the former's special knowledge. 52 | P a g e ATTY. ROLANDO B. PAGTOLON-AN, REB, REA iACADEMY School of Business The unauthorized reproduction of this material shall be dealt severely under the laws. Art. 1342. Misrepresentation by a third person does not vitiate consent, unless such misrepresentation has created substantial mistake and the same is mutual. Art. 1343. Misrepresentation made in good faith is not fraudulent but may constitute error. When can fraud make a contract voidable? Art. 1344. In order that fraud may make a contract voidable, it should be serious and should not have been employed by both contracting parties. Incidental fraud only obliges the person employing it to pay damages. When should an action for annulment be brought? Art. 1391. The action for annulment shall be brought within four years. This period shall begin: In cases of intimidation, violence or undue influence, from the time the defect of the consent ceases. In case of mistake or fraud, from the time of the discovery of the same. And when the action refers to contracts entered into by minors or other incapacitated persons, from the time the guardianship ceases. What is ratification and what are its effects in action to annul a voidable contract? Art. 1396. Ratification cleanses the contract from all its defects from the moment it was constituted. Note: Art. 1392. Ratification extinguishes the action to annul a voidable contract. What are kinds of ratification? 53 | P a g e ATTY. ROLANDO B. PAGTOLON-AN, REB, REA iACADEMY School of Business The unauthorized reproduction of this material shall be dealt severely under the laws. Art. 1393. Ratification may be effected expressly or tacitly. It is understood that there is a tacit ratification if, with knowledge of the reason which renders the contract voidable and such reason having ceased, the person who has a right to invoke it should execute an act which necessarily implies an intention to waive his right. Who are the persons who may institute an action for the annulment of contracts? Art. 1397. The action for the annulment of contracts may be instituted by all who are thereby obliged principally or subsidiarily. However, persons who are capable cannot allege the incapacity of those with whom they contracted; nor can those who exerted intimidation, violence, or undue influence, or employed fraud, or caused mistake base their action upon these flaws of the contract. C. UNENFORCEABLE CONTRACTS What are the instances when a contract is unenforceable? Art. 1403. The following contracts are unenforceable, unless they are ratified: (1) Those entered into in the name of another person by one who has been given no authority or legal representation, or who has acted beyond his powers; (2) Those that do not comply with the Statute of Frauds as set forth in this number. In the following cases an agreement hereafter made shall be unenforceable by action, unless the same, or some note or memorandum, thereof, be in writing, and subscribed by the party charged, or by his agent; evidence, therefore, of the agreement cannot be received without the writing, or a secondary evidence of its contents: (a) An agreement that by its terms is not to be performed within a year from the making thereof; (b) A special promise to answer for the debt, default, or miscarriage of another; 54 | P a g e ATTY. ROLANDO B. PAGTOLON-AN, REB, REA iACADEMY School of Business The unauthorized reproduction of this material shall be dealt severely under the laws. (c) An agreement made in consideration marriage, other than a mutual promise to marry; of (d) An agreement for the sale of goods, chattels or things in action, at a price not less than five hundred pesos, unless the buyer accept and receive part of such goods and chattels, or the evidences, or some of them, of such things in action or pay at the time some part of the purchase money; but when a sale is made by auction and entry is made by the auctioneer in his sales book, at the time of the sale, of the amount and kind of property sold, terms of sale, price, names of the purchasers and person on whose account the sale is made, it is a sufficient memorandum; (e) An agreement of the leasing for a longer period than one year, or for the sale of real property or of an interest therein; (f) A representation as to the credit of a third person. (3) Those where both parties are incapable of giving consent to a contract. Note: The Statute of frauds is applicable only to executory contracts and not to totally or partially performed contracts. What is the form of ratification of unenforceable contracts? Art. 1317. A contract entered into in the name of another by one who has no authority or legal representation, or who has acted beyond his powers, shall be unenforceable, unless it is ratified, expressly or impliedly, by the person on whose behalf it has been executed, before it is revoked by the other contracting party. Art. 1405. Contracts infringing the Statute of Frauds, referred to in No. 2 of Article 1403, are ratified by the failure to object to the presentation of oral evidence to prove the same, or by the acceptance of benefit under them. 55 | P a g e ATTY. ROLANDO B. PAGTOLON-AN, REB, REA iACADEMY School of Business The unauthorized reproduction of this material shall be dealt severely under the laws. Note: Art. 1408. Unenforceable contracts cannot be assailed by third persons. D. VOID CONTRACTS What is the difference between void contracts and inexistent contracts? Void Contracts Inexistent Contracts Void contracts are those where all of the requisites of a contract are present, but the cause, object or purpose is contrary to law, morals, good customs, public order or public policy, or contract itself is prohibited or declared void by law. Inexistent contracts are those where one or some or all of those requisites which are essential for the validity of a contract are absolutely lacking, such as those which are absolutely simulated or fictitious, or those where the cause or object did not exist at the time of the transaction. Void contracts do not allow Inexistent contracts are open to either party thereto to be heard attack even by the parties and invoke its unlawful character thereto. as a ground for relief. Enumerate the void and inexistent contracts: Art. 1409. The following contracts are inexistent and void from the beginning: (1) Those whose cause, object or purpose is contrary to law, morals, good customs, public order or public policy; (2) Those which are absolutely simulated or fictitious; (3) Those whose cause or object did not exist at the time of the transaction; (4) Those whose object is outside the commerce of men; (5) Those which contemplate an impossible service; 56 | P a g e ATTY. ROLANDO B. PAGTOLON-AN, REB, REA iACADEMY School of Business The unauthorized reproduction of this material shall be dealt severely under the laws. (6) Those where the intention of the parties relative to the principal object of the contract cannot be ascertained; (7) Those expressly prohibited or declared void by law. Note: These contracts cannot be ratified. Neither can the right to set up the defense of illegality be waived. What is the principle of In Pari Delicto? When the defect of a void contract consists in the illegality of the cause or object of the contract, and both parties are at fault or in pari delicto, the law refuses them every remedy and leaves them where they are. 57 | P a g e ATTY. ROLANDO B. PAGTOLON-AN, REB, REA iACADEMY School of Business The unauthorized reproduction of this material shall be dealt severely under the laws.

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