Obligations and Contracts: Sources 2006 Lectures of Atty.

Lydia Galas (Hann Sevilla), 2007 Case Digests (from Erwin Vicente), Book of Tolentino, RAM Notes Compiled by: Hanniyah Sevilla, Christ May Andolana, Ferlyn Ong for 4th year Batch 2009

OBLIGATIONS & CONTRACTS
Chapter 1Art. 1156. •

GENERAL PROVISIONS

An obligation is a juridical necessity to give, to do or not to do.

An incomplete definition because it only refers to the debt side; it only refers to the conduct to be observed by the obligor; there is no debt without credit.

o

Complete definition: A juridical relation between two persons, known as the creditor and debtor, whereby the former can demand from the latter the observance of a determinate conduct and in case of breach, may obtain satisfaction from the assets of the latter.

• •

Why is it a juridical necessity? Because the term, “juridical necessity” connotes that in case of noncompliance, there will be legal sanction. Note: It covers only civil obligations, not natural obligations. Characteristics of an Obligation: 1. 2. 3. It represents an exclusively private interest It creates ties that are by nature transitory It involves the power to make the juridical tie effective in case of non-fulfillment through an economic equivalent obtained from the debtor's patrimony.

Types of obligations:

a.

Civil obligations - those which derive their binding force from positive law, and can be enforced by court action or the coercive power of public authority. b. Natural obligations - refer to those which derive their binding force from equity and natural justice, and its fulfillment cannot be compelled by court action but depends exclusively on the conscience of the debtor. c. Moral obligations - are those which arise from moral law developed by the church and not enforceable in court. It deals with the spiritual obligation of a person in relation to his God and church ELEMENTS of an OBLIGATION CODE: A P O E

A.

Active subject (creditor, obligee)• Has the power to demand the prestation; it is he who in his favor the obligation is constituted, established or created; it is he who has the right to demand. Passive subject (debtor, obligor) • One who is bound to perform the prestation; passive because without the demand, there will be no action, he has to wait for the demand from the creditor. • Has the juridical necessity of adjusting his conduct to the demand of the creditor pursuant to the obligatory tie.

B.

NB: It is not necessary that the active/passive subject (also known as the personal elements of the obligation) be determinate at the time of the constitution, but they must at least be determinable. When the subject cannot be determined, the obligatory tie can have no effect.

The object or the prestation • The object is not a thing but a particular conduct of the debtor. It is the subject matter of the obligation which has an economic value or susceptible to pecuniary substitution in case of noncompliance. D. Efficient cause or juridical tie between the two subjects • The vinculum by which the debtor is bound to in favor of the creditor to perform the prestation. It is determined by knowing the sources of the obligation (Art. 1157) Note: Additional elements from RAM Notes: 5. Causa debendi/ obligationes (Castan).-- This is what makes the obligation demandable. This is the proximate why of an obligation.

C.

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Obligations and Contracts: Sources 2006 Lectures of Atty. Lydia Galas (Hann Sevilla), 2007 Case Digests (from Erwin Vicente), Book of Tolentino, RAM Notes Compiled by: Hanniyah Sevilla, Christ May Andolana, Ferlyn Ong for 4th year Batch 2009

6.

Form.-- This is controversial. This is acceptable only if form means some manifestation of the intent of the parties.

KINDS OF PRESTATION:

a. b.

“to give” consists of the delivery of a movable or immovable thing which is either determinate (specific) or indeterminate (generic). This is in order to create a real right, or for the use of the creditor, or for its simple possession, or in order to return to its owner. “to do” involves all kinds of work or services whether physical or mental, but in most cases the essence of the act man not be such, but merely the necessity of concluding a juridical operation, such as, when a person promises to give a bond. “not to do” is a negative obligation which consists of abstaining from some act, it includes “not to give”.

c.

REQUISITES OF PRESTATION 1. 2. 3. it must be physically and juridically possible; it must be determinate or at least determinable according to pre-established elements or criteria; it must have a possible equivalent in money or a pecuniary value. (why: so in case of breach, one can demand damages)

a. b. c. d. e.

Article 1157 – Sources of obligation Law; Contracts; Quasi-Contracts; Crimes; Quasi-delicts; • The enumeration of the sources of obligation is exclusive; no obligation exists if its source is not one of those enumerated above.

Note: 1. Unilateral promise is admitted by modern doctrine, which recognizes that unilateral engagements may give rise to obligations without the need of acceptance. 2. Contrary to Pineda, Tolentino supports that it cannot be said with certainty that the enumeration in this article is exclusive because there is nothing which expressly precludes other sources of obligation, such as the unilateral promise to the public of an award for a certain act or accomplishment. 3. The clear implication of Sagrada Orden vs. Nacoco is that, these five (5) are the only sources of obligations.

Articles 1158 - 1162 specify the general principles regarding the sources of obligation enumerated in Art. 1157. Art. 1158. Obligations derived from law are not presumed. Only those expressly determined in this Code or in special laws are demandable, and shall be regulated by the precepts of the law which establishes them; and as to what has not been foreseen, by the provisions of this Book. Note: When we say that law is an independent source of obligation, it does not mean that law and human acts exclude each other completely. The law cannot exist as a source of obligation, unless the acts to which its principles may be applied exists. But once those acts exist, the obligations arising from them by virtue of law are entirely independent of the agreement of the parties. NB: When the law merely acknowledges the existence of an obligation generated by an act which constitutes a contract, quasi-contract, delict or quasi-delict, and its only purpose is to regulate such obligation which did not arise from it, the act itself is the source of obligation and not the law. But, when the law creates the obligation, and the act upon which it is bases is nothing more that a mere factor in determining the moment when it becomes demandable, then the source of obligation is the law itself. (i.e. a husbands’ obligation to his spouse is not anchored upon the contract of marriage but on the law which dictates it.) Art. 1159. Obligations arising from contracts have the force of law between the contracting parties and should be complied with in good faith.

Known as the Principle of autonomy of will. The parties can stipulate anything (they have the freedom), provided that the terms of the contract are not contrary to law, public policy or public order.

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Obligations and Contracts: Sources 2006 Lectures of Atty. Lydia Galas (Hann Sevilla), 2007 Case Digests (from Erwin Vicente), Book of Tolentino, RAM Notes Compiled by: Hanniyah Sevilla, Christ May Andolana, Ferlyn Ong for 4th year Batch 2009

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 consequences which according to their nature, may be in keeping with good faith, usage and law. Since a contract has the force of law between parties, each is bound to fulfill what has been expressly stipulated therein. does not apply to attorney’s contracts: courts can decide whether or not attorney’s fees are reasonable. Art. 1160. Obligations derived from quasi-contracts shall be subject to the provisions of Chapter 1, Title XVII,of this book.

A quasi-contract is a juridical relation which arises from certain lawful, voluntary and unilateral act/s executed by somebody for the benefit of another and for which the former must be indemnified to the end that no one shall be enriched or benefited at the expense of another; It is a kind of contract created without the consent of one party but whose missing consent is given by law (presumptive consent). Characteristics of a Quasi-Contract The acts executed must be lawful The acts executed must be voluntary The acts executed must be unilateral TWO PRINCIPLE TYPES:

• a. b. c.

1.

NEGOTIORUM GESTIO- (officious manager) juridical relation which takes place when somebody takes charge of the agency or management of the business or property of another without any power form the latter. The owner shall reimburse the gestor for the necessary and useful expenses incurred by the latter, and for the damages suffered by him in the performance of his functions.

2.

SOLUTIO INDEBITI – a juridical relation which takes place when somebody received something from another without any right to demand for it, and the thing was unduly delivered through mistake (compared to Art. 22 or unjust enrichment wherein there was no mistake). Obligation to return the thing arises on the part of the recipient. Art. 1161. Civil obligations arising from criminal offenses shall be governed by the penal laws, subject to the provisions of Article 2177, and of the pertinent provisions of Chapter 2, Preliminary Title on Human Relations, and of Title XVIII of this Book, regulating damages. • Basis is Article 100 of RPC, that every person criminally liable is also civilly liable Art. 1162. Obligations derived from quasi-delicts shall be governed by the provisions of Chapter 2, Title XVII of this Book, and by special laws. Chapter 2- NATURE AND EFFECT OF OBLIGATIONS Art. 1163. Every person obliged to give something is also obliged to take care of it with the proper diligence of a good father of a family, unless the law or the stipulation of the parties requires another standard of care. • • • Refers to the obligation to give. The obligation to give may refer to a determinate object / thing or to an indeterminate or generic thing. A generic thing/ indeterminate thing is one that is indicated by its kinds, without being designated and distinguished from the others of the same kind. In an obligation to deliver a generic or indeterminate thing, the thing is determinable and becomes determinate from the time the obligation has been fulfilled or performed. A generic thing is something which is not particularized or specified but has reference to a class or genus. A limited generic obligation is one when a the generic objects are classified to a particular class, i.e. one of my cars A Determinate thing is something which is susceptible of particular designation or specification. It is one which is individualized and can be identified or distinguished form the others of its kind.

• •

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Obligations and Contracts: Sources 2006 Lectures of Atty. Lydia Galas (Hann Sevilla), 2007 Case Digests (from Erwin Vicente), Book of Tolentino, RAM Notes Compiled by: Hanniyah Sevilla, Christ May Andolana, Ferlyn Ong for 4th year Batch 2009

Read in relation to Art. 1173 - The fault or 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. When negligence shows bad faith, the provisions of articles 1171 and 2201, paragraph 2, shall apply. Effect of breach: Liability for damages, unless the loss or damage of the thing is due to a fortuitous event. Art. 1164.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 has been delivered to him.


Delivery is essential to acquire real right1. WHEN DOES OBLIGATION TO DELIVER ARISE? a. b. Perfection of contract if no term/condition; From the moment the term/condition arrives if there is a term

• The creditor has a right to the fruits of the thing from the time to deliver it arises. The fruits referred involve only determinate things.

1) Natural 2) Civil 3) Industrial • The moment when the obligation to deliver arises varies in different types of obligations:

Kinds of fruits: (cf: Property)

a.

In obligations arising form law, quasi-delicts, quasi-contracts and crimes, the specific provisions of law applicable to the obligation determine when the delivery should be made. b. Suspensive conditions attached to an obligation to deliver arises only form the moment the condition happens. c. Suspensive periods agreed upon for the performance of the obligation gives rise to its delivery only upon the expiration of the term. d. Pure obligations are immediately demandable

• The right to the fruits of the thing shall only be personal, and only upon the delivery of the thing, its fruits, accessory and accession shall the creditor acquire a real right over it. • Classes of Delivery or Tradition:

a.

REAL or ACTUAL tradition- This contemplates the actual delivery of the thing from the hand of the grantor to the hand of the grantee , if it is a personal property. If it is a real property, it is manifested by certain possessory acts executed by the grantee with the consent of the grantor such as by taking over the property; occupying the property.

b.

CONSTRUCTIVE tradition- when the delivery of the thing is not actual but representative or symbolical in essence. But there must be intention to deliver the ownership. • Kinds of CONSTRUCTIVE TRADITION: Tradicion Symbolica- delivery of certain symbols or things representing the thing to be delivered such as keys, titles.

i.
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REAL right- is the power belonging to a person over a specific thing, without a passive subject individually determined, against whom such right may be personally exercised. It gives to a person a direct and immediate juridical power over a thing, which is susceptible of being exercised against the whole world. There is a need for tradition or delivery since from the time the obligation to deliver a determinate thing arises, the creditor has only a personal right. He can only demand that the debtor deliver such thing and its fruit. The delivery or tradition of a thing constitutes a necessary and indispensable requisite for the purpose of acquiring ownership. The ownership of things is transferred not by mere agreements but by delivery.

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Obligations and Contracts: Sources 2006 Lectures of Atty. Lydia Galas (Hann Sevilla), 2007 Case Digests (from Erwin Vicente), Book of Tolentino, RAM Notes Compiled by: Hanniyah Sevilla, Christ May Andolana, Ferlyn Ong for 4th year Batch 2009

ii. iii.

Tradicion Instrumental – consists in the delivery of the instrument of conveyance to the grantee by the grantor. Tradicion Longa Manu – consists in the pointing to a movable property within sight by the grantor to the grantee but which at the time of the transaction, the thing could not be placed yet in the possession of the grantee. Tradicion Brevi Manu – consists in the grantee’s continuation of his possession over the thing delivered but now under a title of ownership as in case of a lessee who had purchased the property leased to him. (Jovellanos) Tradicion Constitutum Possessorium – consists in the owner’s continuous possession of the property he had sold to another person and his present possession thereof is no longer that of the owner but of a lessee. Tradicion by operation of law – consists in the delivery of the thing by operation of law such as intestate succession Quasi-Tradicion- consists in the delivery of incorporeal property.

iv.

v.

vi. vii.

Art. 1156. When what is to be delivered is a determinate thing, the creditor, in addition to the right granted to him by article 1170, may compel the debtor to make the delivery. If the thing is indeterminate or generic, he may ask that the obligation be complied with at the expense of the debtor. If the obligor delays, or has promised to deliver the same thing to 2 or more persons who do not have the same interest, he shall be responsible for any fortuitous event until he has effected the delivery. RULES: OBLIGATION TO DELIVER 1. Determinate thing 2. Indeterminate or generic thing REMEDIES OF CREDITOR REMEDY Creditor may compel debtor to deliver Creditor may ask for compliance at the expense of the debtor

a. b. c. d.

Demand for specific performance - This action presupposes that it is based on a contractual relationship between the contending parties. Specific performance is available even if the thing to be delivered is indeterminate. Rescission of the obligation which is under Art. 1380. Resolution of the contract under Art. 1191 if it is a reciprocal obligation. Damages exclusively or in addition to either of the first actions. Obligation to deliver a specific thing is extinguished by fortuitous event; Indeterminate thing is however not

General Rule: extinguished. Exceptions: 1. 2.

If obligor delays or in default; Obligor is guilty of bad faith;

Art. 1166. Obligation to give a determinate thing includes that of delivering all its accessions and accessories, even though they may not have been mentioned.

Art. 1167. If a person obliged to do something fails to do it, the shall be executed at his cost. This same rule shall be observed if he does it in contravention of the tenor of the obligation. Furthermore, it may be decreed that what has been poorly done be undone. Remedies:

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Obligations and Contracts: Sources 2006 Lectures of Atty. Lydia Galas (Hann Sevilla), 2007 Case Digests (from Erwin Vicente), Book of Tolentino, RAM Notes Compiled by: Hanniyah Sevilla, Christ May Andolana, Ferlyn Ong for 4th year Batch 2009

1. 2. •

have obligation executed at debtor’s expense; obtain damages.

a. b. c.

Thing may be ordered undone if done poorly or obligation is a negative one This article presupposes that the thing can be done by the creditor himself or a third person. However, if the prestation can be done only by the debtor, the only recourse available to the creditor is a claim for damages since it is against the constitution to force the debtor to perform the obligation. • Coverage: the obligor failed to fulfill a positive personal obligation, that is TO DO something; he fulfilled the obligation but in contravention of the agreement; There was fulfillment but the same was poor or inadequate. Note: if any of the above happens, the creditor is entitled to have the thing done in a proper manner, by himself or by a third person, at the expense of the debtor. The court has no discretion to merely award damages to the creditor when the act can be done in spite of the refusal or failure of the debtor to do so. Art. 1168. When the obligation consists in not doing and the obligor does what has been forbidden him, it shall also be undone at his expense. Art. 1169. Those obliged to deliver or to do something incur in delay from the time the obligee judicially or extrajudicially demands from them the fulfillment of their obligation

Demand is generally necessary, even if a period has been fixed in the obligation. Even in obligations where there is an acceleration clause, there is still a need for demand. • INSTANCES when demand by Creditor not necessary in order that delay may exist: a. b. c. d. e. when there is an express stipulation between the parties to that effect; where the law so provides; when time or period is the controlling motive or the principal inducement for the creation of the obligation; when demand would useless; when the obligor admits he is in delay

In reciprocal obligations, neither party incurs in delay if the other does not comply or is not ready to comply in a proper manner with what is incumbent upon him. From the moment one of the parties fulfills his obligation, delay by the other begins. • • Note: The demand must refer to the prestation due and not to another, however, there will still be delay even if the demand was wrong if: 1. even if the demand had been absolutely correct, the debtor would not have performed the obligation, or 2. in the light of good faith he should have offered the prestation in the form and manner that it is due. When the time for the fulfillment of the obligation is fixed, no further demand is necessary. In case of doubt on whether the debtor has incurred delay, the doubt is resolved in favor of the debtor. REASON: because the dispensing of demand is only an exception, it is not a general rule. The law does not require expressly that the debtor should know that the fixing of the date for the performance was a controlling motive on the part of the creditor; but this knowledge is essential in order that it can be said that the debtor has tacitly consented to incur delay without the necessity of delay. KINDS OF DELAY: A. MORA SOLVENDI – default on the part of the debtor which may either be ex re (real obligations; obligations to give) or ex persona (personal obligations; obligations to do) B. MORA ACCIPIENDI – default on the part of the creditor C. COMPESATIO MORAE – default on the part of both parties in reciprocal obligations

I. MORA SOLVENDIREQUISITES FOR MORA SOLVENDI TO EXIST: 1. the obligation pertains to the debtor or obligor; 2. the obligation is determinate or liquidated, due and demandable; 3. the obligation has not been performed on its maturity date; 4. there is a demand made by the creditor on the debtor for the fulfillment of the obligation that is due. 1. DOES NOT APPLY IN THE FF. OBLIGATIONS: natural obligations;

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Obligations and Contracts: Sources 2006 Lectures of Atty. Lydia Galas (Hann Sevilla), 2007 Case Digests (from Erwin Vicente), Book of Tolentino, RAM Notes Compiled by: Hanniyah Sevilla, Christ May Andolana, Ferlyn Ong for 4th year Batch 2009

2.

negative obligations CONSEQUENCES/EFFECTS OF MORA SOLVENDI: 1. debtor may be liable for damages or interests; 2. debtor may bear the risk or loss of the things even if the default is due to fortuitous event, subject to equitable mitigation if the loss would have still occurred even if there was no default on the part of the debtor.

II. MORA ACCIPIENDI- delay in the performance of the obligation based on the omission by the creditor of the necessary cooperation, especially in acceptance on his part. it is necessary that it be lawful for the debtor to perform, and that he can perform. REQUISITES FOR MORA ACCIPIENDI TO EXIST 1. an offer of performance by the debtor who has the required capacity; 2. the offer must be to comply with the obligation as it should be performed; 3. the creditor refuses the performance without just cause CONSEQUENCES OF MORA ACCIPIENDI 4. the responsibility of the debtor for the thing is reduced and limited to fraud and gross negligence; 5. the debtor is exempted from the risks of loss of the thing, which automatically pass to the creditor; 6. all expenses incurred by the debtor for the preservation of the thing after the mora shall be chargeable to the creditor; 7. the debtor may relieve himself from the obligation by consignation of the thing. III. COMPENSATIO MORAE – applies only in reciprocal obligations. Where the parties are both guilty of mora or mutual default, the default of one compensates the default of the other. o Delay begins when one party fulfills his obligation. o When one party does not fulfill his obligation, he releases the other from his obligations, who therefore does not become delinquent in the fulfillment. o Neither party incurs delay if the other does not comply or is not ready to comply in a proper manner with what is incumbent upon him. CESSATION OF THE EFFECTS OF DELAY: (may the right to place the debtor in delay be renounced or waived? Yes. How: ) 1. Renunciation by the creditor, which may be implied or expressed. There is implied renunciation when the creditor, even after the delay, grants an extension of time to the debtor or agrees to a novation of the obligation. (remember Tayag vs. Leyva case. The effects of delay was not applied since there was a waiver on the part of Tayag when she accepted the payments even after the due date) 2. Prescription

Art. 1170. Those who in the performance of their obligations are guilty of fraud, negligence, or delay and those who in any manner contravene the tenor thereof, are liable for damages. GROUNDS FOR LIABILITY: 1. Fraud; 2. negligence; 3. default; and 4. violation of terms of obligations. Damages: MENTAL

Indemnity for damages consists of: a. b. that agreed upon; in absence of agreement, legal rate of interest.

Art. 1171. Responsibility arising from fraud is demandable in all obligations. Any waiver of an action for future fraud is void.

Art. 1172. Responsibility arising from negligence in the performance of every kind of obligation is also demandable, but such liability may be regulated by the Courts, according to the circumstances.

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Obligations and Contracts: Sources 2006 Lectures of Atty. Lydia Galas (Hann Sevilla), 2007 Case Digests (from Erwin Vicente), Book of Tolentino, RAM Notes Compiled by: Hanniyah Sevilla, Christ May Andolana, Ferlyn Ong for 4th year Batch 2009

KINDS: 1. 2. 3.

Culpa Contractual – breach of contract Culpa Aquiliana – civil negligence, tort or quasi-delict; Culpa Criminal – criminal negligence that which results in commission of crime or a delict. Culpa Aquiliana N is direct, substantive independent; No pre-existing obligation; - same Defense of a good father of a family Prove that defendant is negligent Culpa Criminal N is direct, substantive No pre-existing obligation except not to harm others Guilt beyond reasonable doubt ER’s guilt- civilly liable in case of insolveny Presumption of innocence until contrary is proved.

Culpa Contractual 1. negligence is incidental; oblig. Existscontract 2. there is pre-existing obligation. 3. preponderance of evidence 4. master-servant rule 5. there is a contract

and

Case: Prudential Bank vs. CA: responsibility from negligence in the performance of every kind of obligation is demandable. While in the case at bar there was no bad faith, respondent still suffered anxiety, embarrassment and humiliation. Hence, entitle to recover (moral) damages. Art. 1173. The fault or 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. When negligence shows bad faith, the provisions of articles 1171 and 2201, paragraph 2, shall apply. If the law or contract does not state the diligence which is to be observed in the performance, that which is expected of a good father of a family shall be required. DILIGENCE REQUIRED: 1. 2. 3. that agreed upon by parties; in the absence of #1, that required by law; in absence of #2, that expected of a good father of a family.

(cases) SABEDA airlines, Prudential Bank cases Art. 1174.Except in cases expressly specified by the law, or when it is otherwise declared by stipulation, or when the nature of the obligation requires the assumption of risk, no person shall be responsible for those events which could not be foreseen, or which, though foreseen, were inevitable. o o General Rule: Fortuitous events absolve Obligor from liability.

ELEMENTS OF FORTUITOUS EVENT:

1. The cause of the unforeseen and unexpected occurrence, or the failure of the debtor to comply with his obligations must be independent of the human will, or of the debtor’s will. In the case of PAL, the hijacking was independent of the will of PAL. 2. It must be impossible to foresee the event which constitute the caso fortuito, or if it can be foreseen, it was inevitable to avoid Although under normal circumstances, it was not impossible for PAL to foresee the hijacking of the airplane, the military take over that took place that afternoon rendered the foreseeability of the event as impossible since it was the army already conducting the checking and frisking. Note: In the case of PHILCOMSAT v Globe: the SC held that although the parties could have foreseen the closure of the military bases, it was impossible to avoid. 3. The occurrence must be of such as to render it impossible for the debtor to fulfill his obligation in a normal manner. 4. The obligor must be free from any participation in, or aggravation of, the injury resulting to the creditor.

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Obligations and Contracts: Sources 2006 Lectures of Atty. Lydia Galas (Hann Sevilla), 2007 Case Digests (from Erwin Vicente), Book of Tolentino, RAM Notes Compiled by: Hanniyah Sevilla, Christ May Andolana, Ferlyn Ong for 4th year Batch 2009

Note: o o o

An obligation consisting of the delivery of a specified thing shall be extinguished when the said thing shall be lost or destroyed without the fault of the obligor and before he is in default. The obligor is released from liability no only when the non-performance of the obligation is due to fortuitous events, but also when it is due to the act of the creditor himself, such as defective packing. EXCEPTIONS: (when obligor is still liable even if there is a fortuitous event) 1. When the law so provides; 2. When it is expressly stipulated by the parties; 3. When the nature of the obligation requires the assumption of risk; 4. When the obligor is in delay already; 5. When the obligor has promised the same thing to two or more persons who do not have the same interest (Art. 1165); 6. When the possessor is in bad faith and the thing is lost or deteriorated due to a fortuitous event; 7. When the obligor contributed to the loss of the thing during the fortuitous event; 8. When the obligor is guilty of fraud, negligence or delay or if he contravened the tenor of the obligation. o ASSUMPTION OF RISKS: (doctrine of created risk)

The exception is based on social justice: If a person, for his convenience or profit, creates risks for the public which formerly did not exist, although morally his fault or negligence may not be the cause of the damages resulting therefrom, he should nevertheless be held liable for such. If he benefits from the means that have produced the loss, it is only equitable that he should bear the consequences of such loss. Case: Yobido vs. CA: Even if the tires are new, or that it had a good brand name, it is settled that all accident caused either by defects in the automobile Or through the negligence of its driver is not a caso fortuito that would exempt the carrier from liability for damages. Moreover, a common carrier may not be absolved from liability in case of force fortuitous event alone. The common carrier must still prove that it was not negligent in causing the death or injury resulting from an accident. Petitioners should have shown that it undertook extraordinary diligence in the care of its carrier, such as conducting daily routinary check-ups of the vehicle's parts. Art. 1175. Usurious transactions shall be governed by special laws. (n) Art. 1176. The receipt of the principal by the creditor without reservation with respect to the interest, shall give rise to the presumption that said interest has been paid. The receipt of a later installment of a debt without reservation as to prior installments shall likewise raise the presumption that such installments have been paid. Art. 1177. The creditors, after having pursued the property in possession of the debtor to satisfy their claims, may exercise all the rights and bring all the actions of the latter for the same purpose, save those which are inherent in his person; they may also impugn the acts which the debtor may have done to defraud them. (1111) Rights of Creditors: 1. 2. 3. 4. exact payment; exhaust debtor’s properties generally by attachment; subrogatory action – exercise all rights and actions except inherent rights; impugn/rescind acts or contracts done by debtor to defraud them. Art. 1178. Subject to the laws, all rights acquired in virtue of an obligation are transmissible, if there has been no stipulation to the contrary. (1112) Gen. Rule: All rights acquired in virtue of an obligation are transmissible.

Exceptions: 1. if law provides otherwise; 2. if contract provides otherwise; 3. if obligation is purely personal Note: The exceptions refer to: a. those not transmissible by their nature, i.e. purely personal rights; and b. those not transmissible by law or by stipulation of the parties.

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Obligations and Contracts: Sources 2006 Lectures of Atty. Lydia Galas (Hann Sevilla), 2007 Case Digests (from Erwin Vicente), Book of Tolentino, RAM Notes Compiled by: Hanniyah Sevilla, Christ May Andolana, Ferlyn Ong for 4th year Batch 2009

CHAPTER 3 DIFFERENT KINDS OF OBLIGATIONS SECTION 1. - Pure and Conditional Obligations PURE AND CONDITIONAL OBLIGATIONS: o Condition: An event which is both future and uncertain upon which the existence or extinguishment of an obligation is made to depend. The element of futurity and uncertainty must concur. The condition must be imposed by the will of a party and must not be a necessary legal requisite of the act.

o

PAST EVENTS can be conditions too. The futurity required in past events is the future knowledge or proof of a past event unknown to the parties, not the event itself. Example: I will pay you 1,000 if the number of people who died in the 9/11 attack exceeds 2,000. In past events, the contract or obligation arises not when the event happened or the fact came into existence, but when the proof of such fact or event is presented, which would be in the future. Art. 1179. Every obligation whose performance does not depend upon a future or uncertain event, or upon a past event unknown to the parties, is demandable at once. Every obligation which contains a resolutory condition shall also be demandable, without prejudice to the effects of the happening of the event. (1113)

o

Kinds of Obligations:

a. PURE - When the obligation contains no term or condition whatever upon which depends the fulfillment of the obligation contracted by the debtor. it is immediately demandable and there is nothing to exempt the debtor from compliance therewith. If the debtor does not fulfill his prestation, especially after a valid demand, he is placed in default. b. CONDITIONAL – with a condition CONDITION- is an uncertain event w/c wields an influence on a legal relation. TERM – is that w/c necessarily must come whether the parties know when it will happen or not. INSTANCES WHEN AN OBLIGATION IS DEMANDABLE AT ONCE: a. b. when it is pure; when it has resolutory condition.

CLASSIFICATION OF CONDITIONS A. SUSPENSIVE - happening of event/condition gives rise to obligation.

RESOLUTORY – happening of event/condition extinguishes the obligation. B. POTESTATIVE – depends upon the will of the debtor. CASUAL – depends on chance/will of a 3rd person. MIXED – depends partly on will of 3rd person and partly on chance. C. DIVISIBLE – capable of partial fulfillment. INDIVISIBLE – not capable of partial fulfillment. D. POSITIVE – an act is to be performed NEGATIVE – something will be omitted. E. CONJUNCTIVE – if all the conditions must be performed. ALTERNATIVE – if only a few of the conditions have to be performed.

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Obligations and Contracts: Sources 2006 Lectures of Atty. Lydia Galas (Hann Sevilla), 2007 Case Digests (from Erwin Vicente), Book of Tolentino, RAM Notes Compiled by: Hanniyah Sevilla, Christ May Andolana, Ferlyn Ong for 4th year Batch 2009

Q: What does automatically/immediately demandable mean? A: Immediate demandability is not impaired when the performance of the obligation is allotted a reasonable time by the court. It does not imply immediate instantaneous compliance. Art. 1180. When the debtor binds himself to pay when his means permit him to do so, the obligation shall be deemed to be one with a period, subject to the provisions of article 1197. (n)
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payment does not depend on debtor’s will for he has promised to pay. TIME when payment is to be made depends upon the DEBTOR. COURTS will fix the duration of the period.

HOW LONG?

Article 1180- read in relation with Art. 1197. in cases falling under this article, the creditor should file an action to fix a period for the payment of the obligation. An action to enforce the obligation is premature if the court has not yet fixed a period. covers cases wherein the debtor binds himself to pay when his means permit him to do so, such as “I’ll pay you little by little; as soon as possible; as soon as I have the money; in partial payments ” Here, the moment of payment is dependent upon the will of he debtor but not the payment. (or not the performance of the condition) Art. 1181. In conditional obligations, the acquisition of rights, as well as the extinguishment or loss of those already acquired, shall depend upon the happening of the event which constitutes the condition. (1114) a. b. Suspensive – conditions precedent/antecedent. The happening of w/c will give rise to the acquisition of a right – future & uncertain event. Resolutory -- conditions subsequent – rights are lost once the condition is fulfilled.

Case: Padilla vs. Paredes: there was no obligation to perform since the suspensive condition did not happen. Art. 1182. When the fulfillment of the condition depends upon the sole will of the debtor, the conditional obligation shall be void. If it depends upon chance or upon the will of a third person, the obligation shall take effect in conformity with the provisions of this Code. (1115)

3 KINDS OF CONDITIONS a. b. c. Potestative (facultative) Casual Mixed

POTESTATIVE ON THE PART OF THE DEBTOR 1. IF SUSPENSIVE – both condition and obligation are void. 2. IF RESOLUTORY – valid. Pure potestative conditions renders the whole obligation void. o This article applies only to potestative SUSPENSIVE CONDITIONS. Potestative and resolutory valid since there is immediate performance on the part of the obligor. o If it depends solely on the will of the creditor, it is valid. Reason: to allow conditions whose fulfillment depends exclusively on the debtor’s will, is to sanction illusory obligations; this cannot happen when the fulfillment depends on the will of the creditor. This is because the creditor is naturally interested in the fulfillment of the condition which will benefit him. Art. 1183. Impossible conditions, those contrary to good customs or public policy and those prohibited by law shall annul the obligation which depends upon them. If the obligation is divisible, that part thereof which is not affected by the impossible or unlawful condition shall be valid. The condition not to do an impossible thing shall be considered as not having been agreed upon. (1116a) EFFECTS:

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Obligations and Contracts: Sources 2006 Lectures of Atty. Lydia Galas (Hann Sevilla), 2007 Case Digests (from Erwin Vicente), Book of Tolentino, RAM Notes Compiled by: Hanniyah Sevilla, Christ May Andolana, Ferlyn Ong for 4th year Batch 2009

1. 2. 3. Note: o o o

If condition is to do an impossible or illegal thing – CONDITION & OBLIGATION ARE VOID. If condition is negative (not to do) DISREGARD CONDITION BUT OBLIGATION REMAINS. If condition is negative (not to do an illegal thing) BOTH CONDITION & OBLIGATION ARE VALID.

This article applies only to cases where the conditions was already impossible from the time of the constitution of the obligation, and also to POSITIVE SUSPENSIVE CONDITIONS. The condition must already be existing at the time of the creation of the obligation. Supervening events which would render the obligation no longer impossible does not affect the effect of annulling the obligation. In order for the condition to be considered as illicit or juridically impossible, it must consist of an act or fact for one of the parties. The mere mention of a juridically impossible condition does not annul the obligation. The criterion is the effects upon one of the parties. o Reason: one who promises something under a condition that is impossible or illicit knows that it cannot be fulfilled, and manifests that he does not have any intention to be bound. o NEGATIVE SUSPENSIVE CONDITIONS have the effect of converting the obligation into a pure and simple one. It is simply considered not written, thus as if no condition exists. Art. 1184. The condition that some event happen at a determinate time shall extinguish the obligation as soon as the time expires or if it has become indubitable that the event will not take place. (1117) - positive condition

Effect if Period of Fulfillment is not fixed: the Court considering the parties intentions should determine what period was really intended. Art. 1185. The condition that some event will not happen at a determinate time shall render the obligation effective from the moment the time indicated has elapsed, or if it has become evident that the event cannot occur. If no time has been fixed, the condition shall be deemed fulfilled at such time as may have probably been contemplated, bearing in mind the nature of the obligation. – Negative Condition

Art. 1186. The condition shall be deemed fulfilled when the obligor voluntarily prevents its fulfillment. (1119) Requisites: 1. 2. Voluntarily made – the intent to prevent is present. Actual prevention of compliance.

Note: This refers to Constructive Fulfillment/ Implied fulfillment o o o Applies to a condition which, although not exclusively within the will of the debtor, may in some way be prevented by the debtor from happening. There is constructive fulfillment only if the act of the debtor had in fact prevented compliance with the condition. EXCEPTION: if in preventing the fulfillment of the condition the debtor acts pursuant to a right, the condition will not be deemed fulfilled. Example: B ordered A to stop building because it was against the city ordinance. Art. 1187. The effects of a conditional obligation to give, once the condition has been fulfilled, shall retroact to the day of the constitution of the obligation. Nevertheless, when the obligation imposes reciprocal prestations upon the parties, the fruits and interests during the pendency of the condition shall be deemed to have been mutually compensated. If the obligation is unilateral, the debtor shall appropriate the fruits and interests received, unless from the nature and circumstances of the obligation it should be inferred that the intention of the person constituting the same was different.

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Obligations and Contracts: Sources 2006 Lectures of Atty. Lydia Galas (Hann Sevilla), 2007 Case Digests (from Erwin Vicente), Book of Tolentino, RAM Notes Compiled by: Hanniyah Sevilla, Christ May Andolana, Ferlyn Ong for 4th year Batch 2009

In obligations to do and not to do, the courts shall determine, in each case, the retroactive effect of the condition that has been complied with. (1120)     In conditional oblig, to give, once fulfilled, shall retroact to the day of the constitution of obligation. In reciprocal oblig. – the fruits and interests during the pendency of condition, shall be deemed to have been mutually compensated. In unilateral oblig. – the debtor shall appropriate the fruits and interests received UNLESS from the nature of the obligation it should be inferred that the intention of person was different. In Obligation to do or not to do – the Court shall determine the retroactive effect of condition that has been complied with. Remember: between the constitution and the happening of the suspensive condition, the creditor cannot enforce the obligation. The right of the creditor during the period is mere expectancy. (Jovellanos case: The right of Daniel to the property was merely inchoate and expectant right which would ripen into a vested right only upon his acquisition of the ownership) The moment the suspensive condition happens, the right becomes enforceable and the debtor may be compelled to perform the obligation. Cause of action accrues, and prescription is computed from this time. The EFFECTS, however, RETROACTS to the moment of constitution of such obligation. Reason: suspensive conditions are merely accidental to the obligation, they are not essential elements of the obligation. An obligation is deemed constituted when all the necessary elements are present. The suspensive condition only prevents the efficacy of the obligation. Case: DBP vs. CA Limitations to retroactivity: the right to the fruits or interests of the thing accruing before the happening of the condition, unless otherwise stipulated by the parties. Art. 1188. The creditor may, before the fulfillment of the condition, bring the appropriate actions for the preservation of his right. The debtor may recover what during the same time he has paid by mistake in case of a suspensive condition. (1121a) APPROPRIATE ACTIONS FOR CREDITOR TO PRESERVE HIS RIGHTS: a. b. c. d. action for prohibition restraining the alienation of the thing pending the happening of the condition petition for the annotation of the creditor’s right, if real property is involved; action to demand security in case the debtor becomes insolvent; action to set aside alienations made by the debtor in fraud of the creditors;

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2nd Par: a case of solutio indebiti (undue payment) if creditor is in bad faith, debtor is entitled to fruits and interests. IF PAYMENT WAS NOT BY MISTAKE, CAN THERE BE RECOVERY? a. b. Note: If condition is fulfilled – NO RECOVERY If condition is not fulfilled, there should be recovery EXCEPT when a pure donation was intended. Before the happening of the suspensive condition, the debtor cannot alienate the subject property if it is a determinate thing. If the obligor alienated the determinate property to a 3rd person (good faith on part of the 3rd person), the creditor cannot reclaim the property as the delivery of the thing vests ownership. His only recourse is damages against the debtor. However, if there was bad faith on the part of the 3rd person, he may be compelled to deliver the thing to the creditor. Creditors can however, alienate their inchoate right. If payment was a determinate thing, the cause of action is accion revindicatoria, otherwise the provisions of solution indebiti applies. If however, payment was made with the knowledge of the condition, there is an implied waiver of the condition and what has been paid cannot be recovered. No express provision regarding fruits and interests, however, there can be recovery by the provisions of solution indebiti. Art. 1189. When the conditions have been imposed with the intention of suspending the efficacy of an obligation to give, the following rules shall be observed in case of the improvement, loss or deterioration of the thing during the pendency of the condition:

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Obligations and Contracts: Sources 2006 Lectures of Atty. Lydia Galas (Hann Sevilla), 2007 Case Digests (from Erwin Vicente), Book of Tolentino, RAM Notes Compiled by: Hanniyah Sevilla, Christ May Andolana, Ferlyn Ong for 4th year Batch 2009

(1) If the thing is lost without the fault of the debtor, the obligation shall be extinguished; (2) 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: a. when it perishes; (physical loss) or b. goes out of commerce; (legal loss) or c. disappears in such a way that its existence is unknown or it cannot be recovered; (civil loss) (3) When the thing deteriorates without the fault of the debtor, the impairment is to be borne by the creditor; (4) If it deteriorates through the fault of the debtor, the creditor may choose between the rescission of the obligation and its fulfillment, with indemnity for damages in either case; (5) If the thing is improved by its nature, or by time, the improvement shall inure to the benefit of the creditor; (6) If it is improved at the expense of the debtor, he shall have no other right than that granted to the usufructuary. (1122) Article applies if: a. b. suspensive condition is fulfilled; and if object is specified (not generic) Art. 1190. When the conditions have for their purpose the extinguishment of an obligation to give, the parties, upon the fulfillment of said conditions, shall return to each other what they have received. In case of the loss, deterioration or improvement of the thing, the provisions which, with respect to the debtor, are laid down in the preceding article shall be applied to the party who is bound to return. As for the obligations to do and not to do, the provisions of the second paragraph of article 1187 shall be observed as regards the effect of the extinguishment of the obligation. (1123) EFFECTS WHEN RESOLUTORY CONDITION IS FULFILLED: 1. 2. 3. 4. Obligation is extinguished; Parties shall return what they have received, including fruits & interests; Courts shall determine the retroactivity of resolutory conditions In case of loss, deterioration, or improvement, apply Art. 1189. 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. 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. (1124) CHARACTERISTICS OF RIGHT TO RESCIND

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Obligations and Contracts: Sources 2006 Lectures of Atty. Lydia Galas (Hann Sevilla), 2007 Case Digests (from Erwin Vicente), Book of Tolentino, RAM Notes Compiled by: Hanniyah Sevilla, Christ May Andolana, Ferlyn Ong for 4th year Batch 2009

1. 2. 3. 4. 5. 6. o a) b)

It exists only in reciprocal obligations. If there is a fixed period, no actions can be done before the expiration of period. can be demanded only if the plaintiff is ready, willing and able to comply with his own obligation and the other is not. not absolute  slight breach is not sufficient as held in Tayag vs. CA- The right to rescind is not absolute and will not be granted if there has been substantial performance by partial payments. it needs judicial approval in some cases – when there has already been delivery of thing. If there’s no delivery, judicial approval may not be needed; if there has been delivery, the contract stipulates for rescission in case the other has not performed. the right to rescind is implied to exist; the right to rescind may be waived expressly or impliedly DAMAGES FOR BREACH OF LEASE CONTRACT: If he selects specific performance as an action, he can demand the accrued rent plus the future rent for the unexpired term; If lessor demands rescission, he gets only the back rents and ouster the lessee plus damages but not future rents.

Note: This article is applicable only to reciprocal obligations. Reciprocal obligations are those which arise from the same cause, and in which each party is a debtor and a creditor of each other, such that the obligation of one is dependent upon the obligation of the other. They are to be performed simultaneously, so that the performance of one is conditioned upon the simultaneous fulfillment of the other. It is not enough that both parties are creditor and debtor or each other, the reciprocity in the obligation must arise from the same cause. Even if there is no corresponding agreement between the parties, the law provides for such power to rescind. This article does not apply when the parties made a stipulation providing for the automatic rescission of the contract in case of violation of the terms thereof without need of judicial intervention or permission. The breach contemplated is the obligor’s failure to comply with an obligation already existing, not a failure of a condition to render binding that obligation. There can be no breach of a non-existent obligation. Case: “Failure to pay, in this instance, is not even a breach but merely an event which prevents the vendor's obligation to convey title from acquiring binding force. Hence, the agreement of the parties in the case at bench may be set aside, but not because of a breach on the part of petitioner for failure to complete payment of the purchase price. Rather, his failure to do so brought about a situation which prevented the obligation of respondent spouses to convey title from acquiring an obligatory force. (Ong vs. CA) Case: Padilla vs. Paredes : There can be no rescission of an obligation that is non-existent, considering that the suspensive condition has not yet happened. The right of rescission of a party to an obligation under Article 1191 of the Civil Code is predicated on a breach of faith by the other party who violates the reciprocity between them. The breach contemplated in the said provision is the obligor’s failure to comply with an existing obligation. When the obligor cannot comply with what is incumbent upon it, the obligee may seek rescission and, in the absence of any just cause for the court to determine the period of compliance, the court shall decree the rescission. “Rescission” here is to be understood as “resolution” or cancellation of the contract. Who can demand rescission: The party who can demand rescission should be the party who is ready, willing and able to comply with his own obligations while the other is not capable to perform his own. A party who has not performed his pat of the obligation cannot rescind. When one party fails to comply with his obligation under a contract, the other party has the right to either demand performance, or ask for the resolution of the contract. These remedies/choices are mutually exclusive. One cannot choose specific performance then rescission. Case: Velarde vs. CA: when Padilla chose to rescind the contract, although Velarde opted to pay, the choice had already been made and to allow Velarde to pay the existing amount would tantamount to a novation of the contract In cases of specific performance, there is always a need for judicial action if the other party refuses to make the delivery of the thing promised. exception: when the injured party chose specific performance, and the prestation had become impossible to perform, he may then cancel or rescind the contract. However, so long as there has been no judgment declaring rescission, however, the creditor who has asked for it may change his mind and demand specific performance instead, or vice-versa, unless he has previously renounced one of these remedies. Where both parties have committed a breach of obligation, and it cannot be determined who was the first infractor, the contract shall be deemed extinguished and each shall bear his own damages.

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Obligations and Contracts: Sources 2006 Lectures of Atty. Lydia Galas (Hann Sevilla), 2007 Case Digests (from Erwin Vicente), Book of Tolentino, RAM Notes Compiled by: Hanniyah Sevilla, Christ May Andolana, Ferlyn Ong for 4th year Batch 2009

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EXTRAJUDICIAL rescission produces legal effects. Once one of the parties fails to comply with his obligation, the other is relieved from complying with his, and he may therefore by his own declaration elect to rescind by not performing his own undertaking. When can there be extrajudicial rescission? When there has been no performance of the obligation or whatsoever. If the obligation has not yet been performed, extra-judicial declaration of rescission by the party who is ready and willing to perform would suffice. However, if the injured party has already performed such as when property has already been delivered by him to the other party, he cannot by his own declaration rescind the contract. Hence, the court must declare the rescission. Case: Cannu vs. GalangLimitations/Restrictions on the right to rescind: 1. 2. 3. DUE PROCESS MUST BE OBSERVED- the rescission authorized is judicial rescission; the other party must be given his day in court. It is the judgment of the court and not the mere act of the vendor which produces the rescission of the sale (Cannu) The right to rescind is SUBORDINATED TO THE RIGHTS OF 3RD PERSONS who acquired the thing in good faith. The injured party must respect the power of the court to fix period in lieu of decreeing rescission. (case: Central Univ- the court may fix the period for the fulfillment of the obligation, however, in this case, the court held that there was no need to fix the period since sufficient time had already lapse for the plaintiff to fulfill the condition.)

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Note: When the contract, however, is one of lease, and the lessee fails to pay the rents stipulated within the time agreed upon, the court will have no discretion to grant the lessee a period within which to pay the rents. 4. 5. o Evidence is needed to justify the rescission. Slight breach of the contract will not justify rescission, the breach should be substantial and fundamental as to defeat the object of the parties in making the contract. EFFECTS OF RESCISSION

Note that the exercise of the power to rescind extinguishes the obligatory relation as if it had never been created, the extinction having a retroactive effect. The rescission has the effect of abrogating the contract in all parts and The parties will be brought back, as much as possible to the status quo before they entered into the contract. Hence, there is always a need for restitution. The resolution or cancellation shall take effect only after the creditor has notified the debtor of his choice of rescission.

(case: Laperal vs. Solid Homes. Rescission under Art. 1191 always carries with it the obligation of mutual restitution. However, in this case, Laperal was not made to pay restitution since the parties had expressly stipulated the payment for damages in case of breach.) In Ong vs. CA, the SC held that Ong was not entitled to reimbursement as regards the improvements he made on the property because he contracted these improvements in bad faith. In estimating the damages to be awarded in case of rescission or resolution, those elements of damages only can be admitted that are compatible with the idea of rescission In case of resolution of a contract of sale, the purchaser is entitled to indemnity for damages. This indemnity, in case of resolution for non-delivery of the thing sold cannot consist in the fruits, to which he is entitled only when delivery is made. Having chosen rescission, he is only entitled to the interest on the amount he has paid. Tayag case: WAIVER. o Inapplicability of Art. 1191: 1. 2. 3. 4. in obligations of sales of real property by installments since Maceda Law RA 6552 governs; sales of personal property by installments governed by RA 1484 (Recto Law) Contracts of partnerships Contracts of lease

o Cases when judicial approval is not needed in rescission: a. b. if there is an express stipulation of automatic rescission; if there is no express stipulation of automatic rescission in case of breach, judicial approval is needed when there has been already delivery of the object—unless the debtor voluntarily returned the thing.

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Obligations and Contracts: Sources 2006 Lectures of Atty. Lydia Galas (Hann Sevilla), 2007 Case Digests (from Erwin Vicente), Book of Tolentino, RAM Notes Compiled by: Hanniyah Sevilla, Christ May Andolana, Ferlyn Ong for 4th year Batch 2009

Art. 1192. 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 first violated the contract, the same shall be deemed extinguished, and each shall bear his own damages. (n) SECTION 2. - Obligations with a Period Art. 1193. Obligations for whose fulfillment a day certain has been fixed, shall be demandable only when that day comes. Obligations with a resolutory period take effect at once, but terminate upon arrival of the day certain. A day certain is understood to be that which must necessarily come, although it may not be known when. If the uncertainty consists in whether the day will come or not, the obligation is conditional, and it shall be regulated by the rules of the preceding Section. (1125a) Period: A certain length of time which determines the effectivity or the extinguishments of obligations. PERIOD vs. CONDITION A. As to their fulfillment – 1. 2. B. a condition is an uncertain event; a period is an event which must happen sooner or later at a date known beforehand or a time which cannot be determined.

With reference to time 1. 2. Period refers to future; Condition may under the law refer to past.

C.

As to Influence on the obligation 1. 2. Condition causes an obligation to arise or to cease; Period merely fixes the time or the efficaciousness of an obligation.

DIFFERENT KINDS OF TERMS/PERIODS a. b. DEFINITE – exact date/time is known and given INDEFINITE – something that will surely happen, but date of happening is unknown. LEGAL – a period granted by law CONVENTIONAL/VOLUNTARY – period agreed upon or stipulated by parties. JUDICIAL – period or term fixed by Courts for the performance of an obligation, or for its termination.

c. EX DIE or SUSPENSIVE PERIOD– a period with suspensive effect. Obligation begin only from a day certain; upon arrival of period. IN DIEM or RESOLUTORY PERIOD– a period/term with a resolutory effect. Termination of obligation upon the arrival of said period. REQUISITES FOR A VALID PERIOD/TERM

1. 2. 3.

Must refer to the future; must be certain but can be extended; must be physical and legally possible otherwise it is void.

NOTE: An action may be brought to immediately enforce an obligation originally with a term if: a. the contract in which the terms is imposed has been cancelled by mutual agreement of the parties; or

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Obligations and Contracts: Sources 2006 Lectures of Atty. Lydia Galas (Hann Sevilla), 2007 Case Digests (from Erwin Vicente), Book of Tolentino, RAM Notes Compiled by: Hanniyah Sevilla, Christ May Andolana, Ferlyn Ong for 4th year Batch 2009

b.

When the non-fulfillment of the terms of the contract resolves the period and authorizes the creditor to immediately demand performance. (the obligation is converted into a pure obligation) Art. 1194. In case of loss, deterioration or improvement of the thing before the arrival of the day certain, the rules in article 1189 shall be observed. (n)

Article 1194- Article 1189 is applicable in cases of loss, deterioration, and improvement during the pendency of condition. Thing Is Lost When – 1. It perishes. 2. It goes out of commerce. 3. 4. It disappears in such a way that its existence is unknown. It disappears in such a way that it cannot be recovered.

Note: “Genus nunquam perit” – in an obligation to deliver generic thing the loss or destruction of anything of the same kind does not extinguish the obligation. • If the thing is lost through the fault of the debtor, he shall be obliged to pay damages.

• If the thing deteriorates through the fault of the debtor, the creditor may choose between (1) rescission of the agreement or obligation plus damages, or (2) fulfillment of the obligation plus damages. • If the thing is improved by nature, or by time, the creditor gets the benefit.

• If the thing has improved through the expense of the debtor, he shall have the rights granted to a usufructuary for improvements on a thing held in usufruct.

Art. 1195. Anything paid or delivered before the arrival of the period, the obligor being unaware of the period or believing that the obligation has become due and demandable, may be recovered, with the fruits and interests. (1126a) PERIOD W/IN W/C RECOVERY MAY BE MADE Without Debtor’s knowledge – 1. Before the debt matures ( Art. 1194) 2. Even after maturity – if creditor is in bad faith – the right prescribes in 5 years after premature payment With Debtor’s knowledge – NO RECOVERY (implied waiver) Note: the law presumes that the debtor knew of the prematureness. Art. 1196. Whenever in an obligation a period is designated, it is presumed to have been established for the benefit of both the creditor and the 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. (1127) Art. 1197. If the obligation does not fix a period, but from its nature and the circumstances it can be inferred that a period was intended, the courts may fix the duration thereof. The courts shall also fix the duration of the period when it depends upon the will of the debtor. In every case, the courts shall determine such period as may under the circumstances have been probably contemplated by the parties. Once fixed by the courts, the period cannot be changed by them. (1128a) WHEN THE COURT MAY FIX A PERIOD 1. 2. When the duration depends upon the will of the debtor. When although the obligation does not fix a period, it can be inferred that a period was intended.

INSTANCES WHEN THE COURT MAY NOT FIX THE TERM:

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Obligations and Contracts: Sources 2006 Lectures of Atty. Lydia Galas (Hann Sevilla), 2007 Case Digests (from Erwin Vicente), Book of Tolentino, RAM Notes Compiled by: Hanniyah Sevilla, Christ May Andolana, Ferlyn Ong for 4th year Batch 2009

1. 2. 3. 4. 5.

When no term was specified because no term was ever intended; When the obligation or not is “payable on demand”; When specific periods are provided for in the law; When what appears to be a term is really a condition; When the period w/in which to ask the court to have the period fixed has itself already prescribed.

PRESCRIPTIVE PERIOD: ACTION MUST FIX THE PERIOD – 10 YEARS Art. 1198. 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; (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 satisfactory; (4)When the debtor violates any undertaking, in consideration of which the creditor agreed to the period; (5)When the debtor attempts to abscond. (avoid legal process) (1129a) – actual absconding, intent to do so is sufficient. Note: the insolvency referred to does not have to be judicially declared; it is sufficient for him to find a hard time paying off his obligations because of financial reverses that have made his assets less than his liabilities.

SECTION 3. - Alternative Obligations Art. 1199. A person alternatively bound by different prestations shall completely perform one of them. The creditor cannot be compelled to receive part of one and part of the other undertaking. (1131) Alternative Obligation is one where out of the 2 or more prestations which may be given, only one is due. Art. 1200. The right of choice belongs to the debtor, unless it has been expressly granted to the creditor. The debtor shall have no right to choose those prestations which are impossible, unlawful or which could not have been the object of the obligation. (1132) In obligation with a term – general rule: term is for both parties’ benefit In obligation/alternative oblig – general rule: Debtor has the right of choice. The Debtor Shall Have No Right To Choose Those Prestations Which Are: 1. Impossible. 2. Unlawful. 3. Or which could not have been the object of the obligation. Art. 1201. The choice shall produce no effect except from the time it has been communicated. (1133) Means of Communication to other party – oral, written, implied, express EFFECT OF NOTICE THAT CHOICE HAS BEEN MADE  Obligation becomes a simple obligation to do or deliver the object selected.  PURPOSE: To inform the creditor that the obligation is now a simple one, no longer alternative and if already due, for the creditor to receive the object being delivered, if tender of the same has been made.

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Obligations and Contracts: Sources 2006 Lectures of Atty. Lydia Galas (Hann Sevilla), 2007 Case Digests (from Erwin Vicente), Book of Tolentino, RAM Notes Compiled by: Hanniyah Sevilla, Christ May Andolana, Ferlyn Ong for 4th year Batch 2009

REQUISITES FOR MAKING A CHOICE 1. Made properly so that creditor or agent will know; 2. made with full knowledge that a selection is indeed being made (if there is error – choice can be annulled) 3. made voluntarily and freely (no force, coercion etc. ) 4. made in due time and that is before or upon maturity; 5. made to all the proper persons; 6. made w/o conditions unless agreed to by the creditor; 7. may be waived, expressly/impliedly. Art. 1202. The debtor shall lose the right of choice when among the prestations whereby he is alternatively bound, only one is practicable. (1134) Example: Objects A,B & C. A&B are destroyed; C can only be delivered- if C is destroyed (fortuitous event) obligation is extinguished. Art. 1203. If through the creditor's acts the debtor cannot make a choice according to the terms of the obligation, the latter may rescind the contract with damages. (n) Art. 1204. The creditor shall have a right to indemnity for damages when, through the fault of the debtor, all the things which are alternatively the object of the obligation have been lost, or the compliance of the obligation has become impossible. The indemnity shall be fixed taking as a basis the value of the last thing which disappeared, or that of the service which last became impossible. Damages other than the value of the last thing or service may also be awarded. (1135a) Art. 1205. When the choice has been expressly given to the creditor, the obligation shall cease to be alternative from the day when the selection has been communicated to the debtor. Until then the responsibility of the debtor shall be governed by the following rules: (1) If one of the things is lost through a fortuitous event, he shall perform the obligation by delivering that which the creditor should choose from among the remainder, or that which remains if only one subsists; (2) If the loss of one of the things occurs through the fault of the debtor, the creditor may claim any of those subsisting, or the price of that which, through the fault of the former, has disappeared, with a right to damages; (3) If all the things are lost through the fault of the debtor, the choice by the creditor shall fall upon the price of any one of them, also with indemnity for damages. The same rules shall be applied to obligations to do or not to do in case one, some or all of the prestations should become impossible. (1136a)  if contract does not state to whom the right to choose is given, THE DEBTOR MAY CHOOSE.

Effect if Creditor delays in making the choice:  he cannot hold the debtor in default for the debtor does not know what to deliver;  if debtor wants to relieve himself from the obligation, he may petition the court to compel Creditor to accept in the alternative, at the petitioner’s option with damages. Art. 1206. When only one prestation has been agreed upon, but the obligor may render another in substitution, the obligation is called facultative. The loss or deterioration of the thing intended as a substitute, through the negligence of the obligor, does not render him liable. But once the substitution has been made, the obligor is liable for the loss of the substitute on account of his delay, negligence or fraud. (n) FACULTATIVE OBLIGATION – it is one where only one prestation has been agreed upon but the obligor may render another in substitution.

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Obligations and Contracts: Sources 2006 Lectures of Atty. Lydia Galas (Hann Sevilla), 2007 Case Digests (from Erwin Vicente), Book of Tolentino, RAM Notes Compiled by: Hanniyah Sevilla, Christ May Andolana, Ferlyn Ong for 4th year Batch 2009

DISTINCTIONS ALTERNATIVE 1. various things are due, but giving of one is enough; 2. if one prestation is illegal, others may be valid and the obligation remains; 3. if it is impossible to give all except one, the one left must still be given. 4. the right to choose may be given either to debtor/creditor FACULTATIVE 1. only one thing is principally due but may be substituted. 2. if principal obligation is void, giving of the substitute is no longer necessary. (NULLITY OF PRINCIPAL CARRIES WITH IT THE NULLITY OF SUBSTITUTE.) 3. If it is impossible to give the principal, the substitute does not have to be given; if vice versa, the principal must be given. 4. The right to choose is given only to the debtor.

SECTION 4. - Joint and Solidary Obligations Art. 1207. The concurrence of two or more creditors or of two or more debtors in one and the same obligation does not imply that each one of the former has a right to demand, or that each one of the latter is bound to render, entire compliance with the prestation. There is a solidary liability only when the obligation expressly so states, or when the law or the nature of the obligation requires solidarity. (1137a) JOINT Each of the debtors is liable only for a proportionate part of the debt and each creditor is entitled to a proportionate part of the credit. • 1. 2. 3. • GENERAL RULE: SOLIDARY Each debtor – entire obligation; each creditor is entitled to demand the whole obligation.

When there are 2 or more debtors or creditors, the obligation is JOINT.

EXCEPTIONS: when there is a stipulation in the contract that the obligation is solidary; when the nature of the obligation requires liability to be solidary; when the law declares so • a. b. c. d. e. INSTANCES WHERE LAW IMPOSES SOLIDARY LIABILITY obligation arising from torts; quasi-contracts; legal provisions re: the obligation of legatees and devisees; liability of principals, accomplices and accessories of a felony; bailees in commodatum.

a) b) c)

There may be plurality of creditors Plurality of both debtors and creditors; Plurality of debtors.

EFFECTS OF JOINT LIABILITY a. b. c. d. e. Demand by one creditor upon one debtor produces effects of default only with respect to both parties but not with respect to the others; Interruption of prescription by judicial demand of one creditor upon one debtor does not benefit the other creditors; Vices of each obligation arising from personal defect of a particular debtor or creditor does not affect the obligation or rights of the others; Insolvency of a debtor does not increase the responsibility of his co-debtors nor does it authorize a creditor to demand anything from his co-creditors; In joint divisible obligation, the defense of res judicata is not extended from one debtor to another. Art. 1208. If from the law, or the nature or the wording of the obligations to which the preceding article refers the contrary does not appear, the credit or debt shall be presumed to be divided into as many shares as there are creditors or debtors, the credits or debts being considered distinct from one another, subject to the Rules of Court governing the multiplicity of suits. (1138a)

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Obligations and Contracts: Sources 2006 Lectures of Atty. Lydia Galas (Hann Sevilla), 2007 Case Digests (from Erwin Vicente), Book of Tolentino, RAM Notes Compiled by: Hanniyah Sevilla, Christ May Andolana, Ferlyn Ong for 4th year Batch 2009

Art. 1209. 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. (1139)  Indivisible joint obligation – requires the consent of all debtors

CHARACTERISTICS


   

Obligation is joint but since it is indivisible, creditor must proceed against all the joint debtors. Demand must be to all joint debtors; In case of insolvency of one debtor; others are not liable for his share; If there are joint creditors, delivery must be made to all unless authorized by others; Each joint creditor may renounce his share Art. 1210. The indivisibility of an obligation does not necessarily give rise to solidarity. Nor does solidarity of itself imply indivisibility. (n)

 

Solidarity ---the tie between parties Indivisibility --- subject matter

KINDS OF SOLIDARITY 1. 2. 3. 4. 5. ACTIVE – on the part of creditors/obliges PASSIVE – debtors/obligors part MIXED – both CONVENTIONAL – agreed by parties LEGAL – imposed by law

Art. 1211. Solidarity may exist although the creditors and the debtors may not be bound in the same manner and by the same periods and conditions. (1140) Art. 1212. Each one of the solidary creditors may do whatever may be useful to the others, but not anything which may be prejudicial to the latter. (1141a) Art. 1213. A solidary creditor cannot assign his rights without the consent of the others. (n) Art. 1214. 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. (1142a) Art. 1215. 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. (1143) NOVATION; EFFECT  Modification of an obligation by changing its object or principal conditions; by substituting the person of debtor; subrogation COMPENSATION  Is that w/c takes place when 2 persons in their own right, are creditors and debtors of each other. CONFUSION/ MERGER  W/c takes place when the characters of creditor and debtor are merged in the same person, as when a check issued by A, in the course of negotiation, is eventually endorsed to him.  The solidary obligation is extinguished; but the other is still indebted to the other for his share. REMISSION (WAIVER)  That act of liberality whereby a creditor condones the obligation of the debtor; that where the creditor tells the debtor to “forget about the whole thing.”

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Obligations and Contracts: Sources 2006 Lectures of Atty. Lydia Galas (Hann Sevilla), 2007 Case Digests (from Erwin Vicente), Book of Tolentino, RAM Notes Compiled by: Hanniyah Sevilla, Christ May Andolana, Ferlyn Ong for 4th year Batch 2009

Art. 1216. 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. (1144a.) Effect of not proceeding against ALL – there is no waiver against those not yet sued; they may be proceeded against later.  Applies only to solidary obligation, not joint. PASSIVE SOLIDARITY & SURETYSHIP (similarities) 1. both the solidary debtor and the surety guarantee for another person. 2. both can demand reimbursement Differences: 1. 2. 3. Solidary debtor indebted for own share only; SURETY is indebted only for the share of the principal debtor; Solidary debtor can be reimbursed with what he has paid less his own share; SURETY can be reimbursed for everything he has paid. SD receives an extension of period of payment, others are still liable for the whole obligation minus the share of the debtor who has extension. If the principal debtor receives extension w/out surety’s consent, the surety is released. Art. 1217. 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 co-debtors 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. (1145a) Art. 1218. Payment by a solidary debtor shall not entitle him to reimbursement from his co-debtors if such payment is made after the obligation has prescribed or become illegal. (n) Art. 1219. The remission made by the creditor of the share which affects one of the solidary debtors does not release the latter from his responsibility towards the codebtors, in case the debt had been totally paid by anyone of them before the remission was effected. (1146a) Art. 1220. The remission of the whole obligation, obtained by one of the solidary debtors, does not entitle him to reimbursement from his co-debtors. (n) Art. 1221. If the thing has been lost or if the prestation has become impossible without the fault of the solidary debtors, the obligation shall be extinguished. If there was fault on the part of any one of them, all shall be responsible to the creditor, for the price and the payment of damages and interest, without prejudice to their action against the guilty or negligent debtor. If through a fortuitous event, the thing is lost or the performance has become impossible after one of the solidary debtors has incurred in delay through the judicial or extrajudicial demand upon him by the creditor, the provisions of the preceding paragraph shall apply. (1147a) PAYMENT Payment is one of the ways by which an obligation is extinguished and consists in the delivery of the thing or the rendition of the service which is the object of the obligation EFFECTS OF LOSS/ IMPOSSIBILITY 1. if w/out fault – no liability 2. if w/ fault – liable + damages and interest 3. fortuitous event after default – there is liability because of default.

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Obligations and Contracts: Sources 2006 Lectures of Atty. Lydia Galas (Hann Sevilla), 2007 Case Digests (from Erwin Vicente), Book of Tolentino, RAM Notes Compiled by: Hanniyah Sevilla, Christ May Andolana, Ferlyn Ong for 4th year Batch 2009

Art. 1222. 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. (1148a) KINDS OF DEFENSES a. b. Those derived from the nature of the obligation Those personal to the debtor sued. SECTION 5. - Divisible and Indivisible Obligations Art. 1223. The divisibility or indivisibility of the things that are the object of obligations in which there is only one debtor and only one creditor does not alter or modify the provisions of Chapter 2 of this Title. (1149)   Divisible obligation – capable of partial performance; Indivisible – not capable of partial fulfillment.

INDIVISIBILITY vs. SOLIDARITY SOLIDARITY 1. refers to the tie between parties; 2. needs at least 2 debtors or creditors; 3. fault of one is fault of others CLASSES/KINDS OF INDIVISIBILITY 1. 2. 3. Conventional – agreed to by parties; Natural/absolute – nature of obligation Legal – by law INDIVISIBILITY  Refers to nature of obligation;  May exist even if there is one debtor and one creditor;  Fault of one – not fault of others

KINDS OF DIVISION 1. Quantitative – depends of quantity 2. Qualitative – depends of quality 3. Intellectual/ moral – one that exists merely in the mind and not in physical reality Art. 1224. A joint indivisible obligation gives rise to indemnity for damages from the time anyone of the debtors does not comply with his undertaking. The debtors who may have been ready to fulfill their promises shall not contribute to the indemnity beyond the corresponding portion of the price of the thing or of the value of the service in which the obligation consists. (1150) EFFECT OF NON-COMPLIANCE – the obligation is converted into a monetary one for indemnity. Art. 1225. For the purposes of the preceding articles, obligations to give definite things and those which are not susceptible of partial performance shall be deemed to be indivisible. When the obligation has for its object the execution of a certain number of days of work, the accomplishment of work by metrical units, or analogous things which by their nature are susceptible of partial performance, it shall be divisible. However, even though the object or service may be physically divisible, an obligation is indivisible if so provided by law or intended by the parties. In obligations not to do, divisibility or indivisibility shall be determined by the character of the prestation in each particular case. (1151a)

OBLIGATIONS THAT ARE DEEMED INDIVISIBLE 1. Obligations to give definite things.

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Obligations and Contracts: Sources 2006 Lectures of Atty. Lydia Galas (Hann Sevilla), 2007 Case Digests (from Erwin Vicente), Book of Tolentino, RAM Notes Compiled by: Hanniyah Sevilla, Christ May Andolana, Ferlyn Ong for 4th year Batch 2009

2. 3. 4.

Those which are not susceptible of partial performance. Even if the thing is physically divisible, it may be indivisible if so provided by law. Even if the thing is physically divisible, it may be indivisible if such was the intention of the parties concerned.

OBLIGATIONS THAT ARE DEEMED DIVISIBLE 1. When the object of the obligation is the execution of a certain number of days of work. 2. When the object of the obligation is the accomplishment of work by metrical units. 3. When the purpose of the obligation is to pay a certain amount in installments. 4. When the object of the obligation is accomplishment of work susceptible of partial performance. SECTION 6. - Obligations with a Penal Clause Art. 1226. In obligations with a penal clause, the penalty shall substitute the indemnity for damages and the payment of interests in case of noncompliance, if there is no stipulation to the contrary. Nevertheless, damages shall be paid if the obligor refuses to pay the penalty or is guilty of fraud in the fulfillment of the obligation. The penalty may be enforced only when it is demandable in accordance with the provisions of this Code. (1152a) • • a. b. c. d. PENAL CLAUSE – a coercive means to obtain from debtor compliance. It is an accessory undertaking to assume greater liability in case of breach. KINDS OF PENAL CLAUSE legal; conventional/ voluntary Subsidiary – when only penalty may be asked. Joint – when both the principal contract and penal clause can be enforced

*** be noted on this points (read the book)  Penal Clause constitutes an obligation although an accessory  May become demandable in default of the unperformed principal obligation PURPOSE: to insure performance and also to substitute for damages and the payment of interest in case of non-compliance EXCEPTIONS: 1. Expressly stipulated – to the effect that damages and interests may still be recovered despite the presence of Penal clause 2. When debtor refuses to pay the penalty imposed in the obligation. 3. When debtor is guilty of fraud or dolo in the fulfillment of the obligaton. (reason: no waiver of future action for fraud) Art. 1227. The debtor cannot exempt himself from the performance of the obligation by paying the penalty, save in the case where this right has been expressly reserved for him. Neither can the creditor demand the fulfillment of the obligation and the satisfaction of the penalty at the same time, unless this right has been clearly granted him. However, if after the creditor has decided to require the fulfillment of the obligation, the performance thereof should become impossible without his fault, the penalty may be enforced. (1153a) Art. 1228. Proof of actual damages suffered by the creditor is not necessary in order that the penalty may be demanded. (n) Art. 1229. The judge shall equitably reduce the penalty when the principal obligation has been partly or irregularly complied with by the debtor. Even if there has been no performance, the penalty may also be reduced by the courts if it is iniquitous or unconscionable. (1154a) WHEN PENAL CLAUSE CANNOT BE ENFORCED: a) b) c) The breach is the fault of creditor; Fortuitous event intervened unless the debtor expressly agreed on his liability in case of fortuitous event.; When debtor is not yet in default.

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Obligations and Contracts: Sources 2006 Lectures of Atty. Lydia Galas (Hann Sevilla), 2007 Case Digests (from Erwin Vicente), Book of Tolentino, RAM Notes Compiled by: Hanniyah Sevilla, Christ May Andolana, Ferlyn Ong for 4th year Batch 2009

Art. 1230. The nullity of the penal clause does not carry with it that of the principal obligation. The nullity of the principal obligation carries with it that of the penal clause. (1155) CHAPTER 4 EXTINGUISHMENT OF OBLIGATIONS Art. 1231. Obligations are extinguished: (1) By payment or performance: (2) By the loss of the thing due: (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. Other causes of extinguishment of obligations, such as annulment, rescission, fulfillment of a resolutory condition, and prescription, are governed elsewhere in this Code. (1156a) CLASSIFICATION OF CAUSES OF EXTINGUISMENT A. VOLUNTARY 1. Performance payment consignation 2. Substitution of Performance compensation novation dacion en pago 3. Agreement to Obligation a. b. B. Subsequent to Obligation unilateral waiver natural waiver remission mutual dissent compromise Simultaneous with Creation of Obligation resolutory term or extinctive period resolutory condition or condition subsequent

INVOLUNTARY a) by failure to bring an action (prescription) b) resolutory/ condition subsequent (merger/confusion; in personal obligation- death; change of civil status) c) by reason of object – impossibility of performance; loss of thing due SECTION 1. - Payment or Performance Art. 1232 Payment means not only the delivery of money but also the performance, in any other manner, of an obligation. (n)

PAYMENT – mode of extinguishing obligation consists of: c. delivery of money; d. performance in any other manner of an obligation; Payment is defined as not only the delivery of money but also the performance, in any other manner, of an obligation. Payment is the satisfaction or fulfillment of a prestation that is due, resulting in the extinguishment of the obligation of the debtor. (Pineda); Payment and performance is identical. Two kinds of payment: 1. It is normal (or voluntary) when the obligor voluntarily pays the obligation. 2. It becomes abnormal (involuntary) when the creditor institutes an action to collect payment in order that the obligor shall comply with his obligation.

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Obligations and Contracts: Sources 2006 Lectures of Atty. Lydia Galas (Hann Sevilla), 2007 Case Digests (from Erwin Vicente), Book of Tolentino, RAM Notes Compiled by: Hanniyah Sevilla, Christ May Andolana, Ferlyn Ong for 4th year Batch 2009

• 1. 2. 3. 4. 5.

Requisites of a valid payment: Capacity of the person paying; Capacity of the person receiving the payment; Delivery of the full amount or the full performance of the prestation; Propriety of time, place and manner of payment; Acceptance of the payment by the creditor.

Art. 1233: A debt shall not be understood to have been paid unless the thing or service in which the obligation consists has been completely delivered or rendered, as the case may be. (1157) Requisites of Valid Payment: 1. 2. the very thing/ service contemplated must be paid; fulfillment must be complete.

HOW PAYMENT/ PERFORMANCE IS MADE 1. 2. 3. If monetary obligation, by delivery of money – in full payment unless otherwise stipulated in contract; if debt is delivery of thing/s, by delivery of such thing/s if debt is doing of a personal undertaking, by performance of said undertaking;if debt is not doing of something, by refraining from doing such.

Note: A debtor cannot compel the creditor to accept partial payment. But, he can accept partial payment. If he voluntarily accepts such payments then he is deemed to have waived the requirements in Art. 1233 that the performance of the obligation is not considered complete unless there is complete delivery or complete performance. While it may be true that there is no payment if there is no complete delivery or performance of the service, there are two exceptions to the general rule. And those are Art. 1234 and 1235. Art. 1234. If the obligation has been substantially performed in good faith, the obligor may recover as though there had been a strict and complete fulfillment, less damages suffered by the obligee. Note: 1. In 1234 there has been substantial performance by the obligor in good faith. So, if there has been substantial performance IN GOOD FAITH by the obligor, then the obligor can recover as though there had been strict and complete fulfillment, less of course the damages suffered by the creditor. 2. The omission or defect must be slight and unimportant, that is, it must not be so material as to frustrate the accomplishment of the intended work. 3. There must be no willful or intentional deviation from the contract or prestation by the debtor, and the omission or defect must not be material, otherwise, the performance will not amount to substantial compliance. Art. 1235. When the obligee accepts the performance, knowing its incompleteness or irregularity, and without expressing any protest or objection, the obligation is deemed fully complied with. (n)  In this case, OBLIGEE is in ESTOPPEL – barred from further action for claims.

How shall it happen? The creditor accepts the performance despite knowledge of the incompleteness or irregularity and without protest or objection accepts the performance. In effect, he is deemed to have waived the irregularity because the law requires that he must know the incompleteness or irregularity of the performance and accept it without protest or objection. Art. 1236. The creditor is not bound to accept payment or performance by a third person who has no interest in the fulfillment of the obligation, unless there is a stipulation to the contrary. Whoever pays for another may demand from the debtor what he has paid, except that if he paid without the knowledge or against the will of the debtor, he can recover only insofar as the payment has been beneficial to the debtor. (1158a)

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Obligations and Contracts: Sources 2006 Lectures of Atty. Lydia Galas (Hann Sevilla), 2007 Case Digests (from Erwin Vicente), Book of Tolentino, RAM Notes Compiled by: Hanniyah Sevilla, Christ May Andolana, Ferlyn Ong for 4th year Batch 2009

Art. 1237. Whoever pays on behalf of the debtor without the knowledge or against the will of the latter, cannot compel the creditor to subrogate him in his rights, such as those arising from a mortgage, guaranty, or penalty. (1159a) The creditor can refuse payment by a 3rd person, EXCEPT: a.

b.

When stipulated; If said 3rd person has an interest in the fulfillment of the obligation.

Instance when RECOVERY can be had from Creditor and not from Debtor: 1. 2. 3. 4. NB: Prescription; Remission; Paid/performed debt; When legal compensation had already taken place

• If the 3rd person pays the obligation of the debtor with the knowledge and consent of the debtor, the payor is entitled to be
reimbursed for the full amount. The same applies if the debtor knows that the third person is making the payment but he did not object thereto, or he did not repudiate the same at anytime.

• If payment was made without the knowledge or without the consent of the debtor, the reimbursement shall be only up to the amount or extent by which the debtor was benefited. (With knowledge but without consent of debtor falls under this situation)

o From transcription: So, if he does not consent even if he knew about it, how much can the 3rd person demand
reimbursement? Only to the extent that the debtor is benefited. What if he has the knowledge but he does not say anything? Full reimbursement, because the law does not require that knowledge and consent must come together. There can be knowledge without the consent, in effect he has the knowledge but the consent is tacit or implied. Because if he does not want that the 3rd person will pay his obligation, then definitely he would express his refusal, diba? This is just like the MU sa inyo. So, if he pays with the knowledge, then the third person can demand full reimbursement, or with the consent. Consent of course always means with the knowledge. Knowledge does not always mean there is consent because consent can be implied. But with the knowledge but without the consent, only so much as the payment redounded to the benefit of the debtor, and we call that beneficial reimbursement. • Consequently, if the debt had already prescribed or had already been compensated, the payment would no longer be beneficial. Under this situation, the payor is definitely not entitled to reimbursement from the debtor.

• Another effect if payment was with the knowledge and consent is that the 3 rd is subrogated into the rights of the former

creditor. He becomes the new creditor. But if it is without the consent or against the will of the debtor or without the knowledge, then he has no right to demand that he be subrogated into the right of the creditors. Such right is not granted to him by law as stated in Art. 1237. SUBROGATION – act of putting somebody into the shoes of the Creditor, hence, enabling the former to exercise all the rights and actions that could be exercised by the creditor. Rights w/c may be exercised by Person subrogated in the Place of Creditor: 1. 2. 3. arising from mortgage; guaranty; penalty REIMBURSEMENT    no recourse new creditor has different rights Personal action

SUBROGATION 1. recourse can be had to the mortgage or guaranty or pledge; 2. debt is extinguished in one sense but a new creditor appears with same rights; 3. there is something more than a personal action of recovery.

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

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Obligations and Contracts: Sources 2006 Lectures of Atty. Lydia Galas (Hann Sevilla), 2007 Case Digests (from Erwin Vicente), Book of Tolentino, RAM Notes Compiled by: Hanniyah Sevilla, Christ May Andolana, Ferlyn Ong for 4th year Batch 2009

If the creditor accepts payment even if it is against the will of the debtor, the payment is still valid, only that we will apply 1236, with respect to reimbursement. But take note that if the payment made by the third person who does not intend to be reimbursed exceeds P5,000 the requirement of the law is that the payment must be in writing.(to be considered as a valid donation) But the payment is still valid since the consent of the debtor is immaterial as the extinguishment of the obligation is concerned. Art. 1239. In obligations to give, payment made by one who does not have the free disposal of the thing due and capacity to alienate it shall not be valid, without prejudice to the provisions of article 1427 under the Title on "Natural Obligations." (1160a) PAYMENT BY AN INCAPACITATED PERSON GENERAL RULE: If payment is made by a person incapacitated to give: 1. payment is not valid – if accepted; 2. creditor cannot be compelled to accept; 3. remedy of consignation is not proper. EXCEPT: Art. 1247 -- The minors who entered into a contract, without the consent of the parents or the guardian, but voluntarily pays a sum of money or delivers a fungible thing for the fulfillment of the obligation, the minor cannot recover the same from the creditor who accepted it or consumed it in good faith. Art. 1240. Payment shall be made to the person in whose favor the obligation has been constituted, or his successor in interest, or any person authorized to receive it. (1162a) TO WHOM PAYMENT MUSTBE MADE 1. 2. 3. To person in whose favor the obligation has been constituted (creditor); successor in interest; to any person authorized to receive it (eg. Guardian of insane, agent)

Q: Pedro borrowed money (900,000) from Juan, who is married to Petra. Petra died. They had a child, JR (17 years old). Juan remarried to Jane. Juan died. Pedro, when the obligation became due and demandable, paid Jane. Is the payment valid? Answer: The payment is not valid despite the authority of Juan. It belongs to the first marriage. What about the authority? Authority terminates upon the death of the person executing that authority. It terminates upon the death, diba? So, the payment is not valid. So, kanino pala nya ibayad? To the administrator of the property. Now, if JR is of age, then the payment to JR is valid. But definitely not to the 2nd wife, because the 2nd wife is not part of the agreement. This belongs to the estate of the former marriage. (Discussion of Culaba case) Art. 1241. Payment to a person who is incapacitated to administer his property shall be valid if he has kept the thing delivered, or insofar as the payment has been beneficial to him. Payment made to a third person shall also be valid insofar as it has redounded to the benefit of the creditor. Such benefit to the creditor need not be proved in the following cases: (1) If after the payment, the third person acquires the creditor's rights; (2) If the creditor ratifies the payment to the third person; (3) If by the creditor's conduct, the debtor has been led to believe that the third person had authority to receive the payment. (1163a) • •

If payment was made to the incapacitated creditor who cannot administer his property, or if he has not kept the thing delivered, the debtor may be compelled by the creditor to pay anew when he regains capacity, or by the latter’s representative during the time of the incapacity of the creditor. (Pineda) Benefit may be in the form of financial, moral or intellectual advantages which must be proved.

From Transcription:

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Obligations and Contracts: Sources 2006 Lectures of Atty. Lydia Galas (Hann Sevilla), 2007 Case Digests (from Erwin Vicente), Book of Tolentino, RAM Notes Compiled by: Hanniyah Sevilla, Christ May Andolana, Ferlyn Ong for 4th year Batch 2009

Payment to a third person shall also be valid if it has redounded to the benefit of the creditor. So, you have the burden of proving that payment made to the third person redounded to the benefit of the creditor. But benefit need not be proved in the following instances: 1. if after the payment, the third person acquires the creditor's rights – Ex: you have an obligation to deliver a diamond ring, and it was received by a third person, and later on you saw the third person wearing the same ring, the presumption is that he had acquired ownership over the property you had delivered; 2. the creditor ratifies the payment to the third person. So it follows that at the time of payment, the creditor had no authority to accept payment, but when you made the payment, he ratified it. Ratification comes after, because if it is prior, ano yan? Authorization. The presumption is that the payment was without his authority, only that he ratified it. 3. You lead the debtor to believe that the third person is authorized to receive payment. • Other instances where payment to a third person releases the debtor:

1. When the creditor assigns his credit to a third person, without the consent of the debtor, and the debtor paid the original creditor. When a creditor assigns credit to a third person, the third person becomes the new creditor, but in as much as he did not inform the debtor, and the debtor paid the old creditor, the payment is still valid. Why? Because he did not inform the debtor. 2. Another instance is, under 1242 payment is made to a third person in possession of the credit. In possession of the credit, not the evidence of the credit. What is the difference between a person in possession of the credit? An example of a document which is the credit itself is a check payable to the order of the bearer, or in cash. But if what is presented is the evidence of the credit, an example a promissory note payable to the order of Pedro, the person must present evidence that he is Pedro. So, that is the difference between possession of the credit and the evidence of the credit. Cases: Culaba vs. CA; PnB vs. CA; Sering vs. CA; Meat Packing vs. Sandiganbayan; FEB vs. Diaz Realty; Seguvia Dev't case; Pabugais vs. Sahijwani; Torquator vs. Bernabe; Art. 1242. Payment made in good faith to any person in possession of the credit shall release the debtor. (1164) Requisites: 1. 2. payment must be in good faith; payee must be in possession of the credit itself. Art. 1243. Payment made to the creditor by the debtor after the latter has been judicially ordered to retain the debt shall not be valid. (1165)  judicial order prompted by an order of attachment, injunction, or garnishment

GARNISHMENT- takes place when the debtor of a debtor is ordered not to pay the latter so that preference would be given to the latter’s creditor. INTERPLEADER – action in w/c a certain person in possession of certain property wants claimants to litigate among themselves for the same. INJUNCTION – a judicial process by virtue of w/c a person is generally ordered to refrain from doing something. Art. 1244. The debtor of a thing cannot compel the creditor to receive a different one, although the latter may be of the same value as, or more valuable than that which is due. In obligations to do or not to do, an act or forbearance cannot be substituted by another act or forbearance against the obligee's will. (1166a) EXCEPTIONS: a) b) c) In case of FACULTATIVE OBLIGATION In case there is another agreement resulting in: Dation in payment Novation In case of waiver by creditor

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Obligations and Contracts: Sources 2006 Lectures of Atty. Lydia Galas (Hann Sevilla), 2007 Case Digests (from Erwin Vicente), Book of Tolentino, RAM Notes Compiled by: Hanniyah Sevilla, Christ May Andolana, Ferlyn Ong for 4th year Batch 2009

SPECIAL FORMS OF PAYMENT A. B. C. D. Dation in payment Application of payments Assignment in favor of Creditors (cession) Tender of payment and consignation.

I.

DATION IN PAYMENT /DATION EN PAGO/ ADJUDICACION EN PAGO

Art. 1245. Dation in payment, whereby property is alienated to the creditor in satisfaction of a debt in money, shall be governed by the law of sales. (n) Concept: Property is alienated to the creditor in satisfaction of a debt in money. At the time of the constitution of the obligation what is due is money, but at the time of fulfillment, the debtor could no longer deliver the money. So, what he did instead is to offer that instead of the money, he will deliver another thing in lieu of the money. If the creditor accepts, then the obligation is extinguished, depending on the agreement of the parties. If it extinguishes the entire obligation then there is full extinguishment. But, if it will only be based on the value of the thing that is delivered, and it is not sufficient to cover the monetary obligation, then there is partial fulfillment. Take note that as soon as the agreement has been perfected, it is no longer governed by the law on obligations and contracts but the law on sales. SALE 1. no pre-existing credit; 2. gives rise to obligations; 3. cause/consideration is the price or obtaining the object; 4. greater freedom in determining price; 5. giving of price may generally end the obligation of buyer. CONDITIONS under w/c a Dation in Payment is valid a) b) c) If creditor consents; If dation in payment will not prejudice the other creditors; If debtor is not judicially declared insolvent. DATION IN PAYMENT There is pre-existing credit; Extinguishes the obligation; Extinguishment of his debt & acquisition of object offered in credit (part of creditor); Less freedom May extinguish completely or partially the credit.

1. 2. 3. 4. 5.

Q: Suppose there was an agreement between the parties but the debtor delivered a car and the creditor accepts, what presumption arises? Is dation in payment presumed? A: When there is delivery and you cannot presume what the agreement of the parties is, and money is exchanged for the delivery, the presumption is there is merely a pledge. Art. 1246. When the obligation consists in the delivery of an indeterminate or generic thing, whose quality and circumstances have not been stated, the creditor cannot demand a thing of superior quality. Neither can the debtor deliver a thing of inferior quality. The purpose of the obligation and other circumstances shall be taken into consideration. (1167a) Except: if there is WAIVER.  When the Kind and quantity cannot be determined w/out need of a new agreement, the contract is VOID.

Art. 1247. Unless it is otherwise stipulated, the extrajudicial expenses required by the payment shall be for the account of the debtor. With regard to judicial costs, the Rules of Court shall govern. (1168a)

Art. 1248. Unless there is an express stipulation to that effect, the creditor cannot be compelled partially to receive the prestations in which the obligation consists. Neither may the debtor be required to make partial payments.

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Obligations and Contracts: Sources 2006 Lectures of Atty. Lydia Galas (Hann Sevilla), 2007 Case Digests (from Erwin Vicente), Book of Tolentino, RAM Notes Compiled by: Hanniyah Sevilla, Christ May Andolana, Ferlyn Ong for 4th year Batch 2009

However, when the debt is in part liquidated and in part unliquidated, the creditor may demand and the debtor may effect the payment of the former without waiting for the liquidation of the latter. (1169a)


GEN. RULE: Payment shall be complete EXCEPT: 1. when it is stipulated otherwise; 2. when different prestations are subject to different conditions or terms; 3. when debt is part liquidated and part unliquidated; 4. when a joint debtor pays his share or the creditor demands the same; 5. when a solidary debtor pays only the part demandable; 6. in case of compensation, when one debt is bigger than the other; 7. when work is to be done by parts. Art. 1249. The payment of debts in money shall be made in the currency stipulated, and if it is not possible to deliver such currency, then in the currency which is legal tender in the Philippines. The delivery of promissory notes payable to order, or bills of exchange or other mercantile documents shall produce the effect of payment only when they have been cashed, or when through the fault of the creditor they have been impaired. In the meantime, the action derived from the original obligation shall be held in the abeyance. (1170)

LEGAL TENDER – is that w/c a debtor may compel a creditor to accept in payment of the debt. case of International Corporate Bank vs. Gueco Art. 1250. In case an extraordinary inflation or deflation of the currency stipulated should supervene, the value of the currency at the time of the establishment of the obligation shall be the basis of payment, unless there is an agreement to the contrary. (n) • Applies only to cases where a contract or agreement is involved. This does not apply where obligation to pay arises from law, independent of contracts. (This applies only to contractual obligations, to indebtedness. This will not apply to quasi-delict, quasi-contract, to obligations arising from law. Purely contractual obligations; payment of monetary obligations.

Case of Filipino Bank vs. MWSA, Art. 1251. Payment shall be made in the place designated in the obligation. There being no express stipulation and if the undertaking is to deliver a determinate thing, the payment shall be made wherever the thing might be at the moment the obligation was constituted. In any other case the place of payment shall be the domicile of the debtor. If the debtor changes his domicile in bad faith or after he has incurred in delay, the additional expenses shall be borne by him. These provisions are without prejudice to venue under the Rules of Court. (1171a)

WHERE PAYMENT MUST BE MADE 1. 2. If there is a stipulation – in designated place. if there is no stipulation i. if its determinate, at the place where the thing might be at the time the obligation was constituted. ii. If its generic/personal, at the domicile of the Debtor. • Note: the creditor shall bear the expenses, unless the debtor changes his domicile in bad faith.

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Obligations and Contracts: Sources 2006 Lectures of Atty. Lydia Galas (Hann Sevilla), 2007 Case Digests (from Erwin Vicente), Book of Tolentino, RAM Notes Compiled by: Hanniyah Sevilla, Christ May Andolana, Ferlyn Ong for 4th year Batch 2009

Transcription: Now what about if payment is made through couriers, like the LBC? Suppose the debtor sent the money through the LBC, and the courier ran away with the money, who shall bear the loss? It depends. If it was the creditor was the one who said that it should be sent to him through the courier, then he bears the loss. What will the creditor do? Wala na syang pagasa? The creditor would run after the courier. But if it was through the initiative of the debtor, then he should bear the loss? Merisi. Why is he merisi? What will be your defense? In the absence of any stipulation, payment shall be made in the domicile of the debtor. II. APPLICATION OF PAYMENT

Art. 1252. He who has various debts of the same kind in favor of one and the same creditor, may declare at the time of making the payment, to which of them the same must be applied. Unless the parties so stipulate, or when the application of payment is made by the party for whose benefit the term has been constituted, application shall not be made as to debts which are not yet due. If the debtor accepts from the creditor a receipt in which an application of the payment is made, the former cannot complain of the same, unless there is a cause for invalidating the contract. (1172a) • being paid.

APPLICATION OF PAYMENT – shows w/c debt, out of 2 or more debts owing the same creditor, is

Note: The right to choose w/c debt to serve first is vested to the DEBTOR except:  If there was a valid prior but contrary agreement;  Debtor cannot choose to pay part of the principal ahead of the interest unless the creditor consents. Note: When shall the debtor make the choice? At the time payment shall be made, but subject to certain conditions: First, that he cannot apply it to a debt which will not cover the entire obligation because under the law, the creditor cannot be compelled to accept partial payment. Second, he cannot choose to apply it first to the principal. The law says interest should be paid first before the principal. Third, he cannot choose a debt that is not yet due and demandable. Fourth, he cannot choose a debt or an obligation which is not of the same kind of the other debt. So those are the limitations. • 1. 2. 3. 4. 5. REQUISITES FOR APPLICATION OF PAYMENT There must be 2 or more debts (severalty of debts); Debts must be of the same kind; Debts are owed by the same debtor in favor of the same creditor; All debts must be due unless contrary is provided – eg. Stipulated by parties. Payment is not enough to extinguish all the debts.


a. b.

RULE WHEN DEBTS ARE NOT YET DUE – there may be application of payments when:

the parties so stipulate; when application of payment is made by the party for whose benefit the term has been constituted.

HOW APPLICATION IS MADE A. Debtor designates B. If not, creditor makes it – known or made at the time of the issuance of the receipt; unless there is cause for voiding the contract ( ex. Creditor does it w/o debtor’s consent) C. • If both do not avail of it, by operation of law. (Applying Arts. 1253 and 1254) REVOCATION GEN. RULE: EXCEPT: Once application of payment is made, it cannot be revoked.

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Obligations and Contracts: Sources 2006 Lectures of Atty. Lydia Galas (Hann Sevilla), 2007 Case Digests (from Erwin Vicente), Book of Tolentino, RAM Notes Compiled by: Hanniyah Sevilla, Christ May Andolana, Ferlyn Ong for 4th year Batch 2009

If both parties agree Even if both parties agree, if it will prejudice 3rd persons—cannot revoke


WHEN APPLICATION CANNOT BE AVAILED OF? 1. 2. In case of partner-creditor Surety or a solidary guarantor – one debt only not several.

From transcription: Now, suppose, the debtor has 50,000, and the debtor has to make the choice under the given situation: 3. 4. 5. 6. 1. 20,000 due on June 25, 2004 with an interest of 6% plus a penalty of 2% on the interest in case of delay; 20,000 due on Dec. 25, 2004, secured by a mortgage. 10,000 without interest; a 4 carat pink diamond ring 50,000 with interest and penalty due on Dec. 24, 2006.

To where shall the 50,000 be applied? To the most onerous of the debts already due and demandable. The most onerous of the 3 debts due is the 20,000 because of the penalty. The debt with a mortgage is less onerous because there is only that tendency to lose the mortgage, and once the mortgage is foreclosed, the obligation is extinguished. A simple debt, (without interest) is the least onerous because it can run up to how many years and the amount would be the same. Number 4 cannot be the subject of application of payment because it is not of the same kind. Likewise, 50,000 is the most onerous of the debts, however, it is not yet due and demandable. So, the application of payment will only be centered on the 3. Art. 1253. If the debt produces interest, payment of the principal shall not be deemed to have been made until the interests have been covered. (1173)  Interest must be paid first except if creditor consents to payment of the principal first

WHAT INTEREST IS SUPPOSED TO BE PAID? a. interest by way of compensation; b. interest by way of damages by way of default. Art. 1254. When the payment cannot be applied in accordance with the preceding rules, or if application cannot be inferred from other circumstances, the debt which is most onerous to the debtor, among those due, shall be deemed to have been satisfied. If the debts due are of the same nature and burden, the payment shall be applied to all of them proportionately. (1174a) Burdensome Debts 1. Older accounts in case of running accounts 2. Interest-bearing debts; 3. If 2 interest-bearing debts, that w/c charges the higher interest; 4. debts secured by mortgage/pledge; 5. debts w/ penal clause; 6. advances for subsistence than cash advances; 7. a debt where debtor is in mora (default) 8. exclusive debt than solidary Note: The “more burdensome rule” does not apply if debtor has used “application of payment”. From transcription; What are the rules to remember? 1. Creditor cannot be forced to accept partial payment. 2. Payment cannot be applied to the principal first if there is interest due. Except: if creditor agrees. 3. The debtor cannot also pay the debt not yet due. Exception: if the period is for the benefit of the debtor, he can choose a debt not yet due. 4. When the parties have an agreement as to which debt shall be paid first, then the debtor cannot vary the agreement. 5. All obligations must be due and of the same kind, generally. Exception: unless the obligation is converted into the payment of damages. It becomes monetary in character. III. PAYMENT BY CESSION OR ASSIGNMENT

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Obligations and Contracts: Sources 2006 Lectures of Atty. Lydia Galas (Hann Sevilla), 2007 Case Digests (from Erwin Vicente), Book of Tolentino, RAM Notes Compiled by: Hanniyah Sevilla, Christ May Andolana, Ferlyn Ong for 4th year Batch 2009

It is the process of transfer of debtor’s property to creditors not subject to execution so that the latter may sell them and thus apply the proceeds to their credits. The purpose of the transfer or the assignment or the cession, is for the creditors to sell these properties, and to apply the proceeds in proportion to their respective credit. An assignment of credit is an agreement by virtue of which the owner of a credit, by legal causes (such has sale, dation, etc) without the need of the debtor’s consent, transfers the credit and its accessory rights to another who acquires the power to enforce it to the same extent as the assignor could have enforced it against the debtor. Art. 1255. The debtor may cede or assign his property to his creditors in payment of his debts. This cession, unless there is stipulation to the contrary, shall only release the debtor from responsibility for the net proceeds of the thing assigned. The agreements which, on the effect of the cession, are made between the debtor and his creditors shall be governed by special laws. (1175a)

2 Kinds of Assignment a. Legal – majority of creditors must agree b. Voluntary – all creditors must agree • 1. 2. 3. 4. 5. REQUISITES FOR VOLUNTARY ASSIGNMENT

More than 1 debt More than 1 creditor Complete or partial insolvency of debtor Abandonment of all debtor’s property not exempt from execution to the creditors Acceptance or consent on creditor’s part • EFFECTS OF VOL. ASSIGNMENT

a) b) c)

Creditors do not become owners; merely assignees with authority to sell; Debtor is released up to the amount of the net proceeds unless stipulated; Creditors will collect credits in the order of preference agreed upon or in default, in the order established by law. DACION EN PAGO CESSION In general, affects all properties; Requires more than 1 creditor; All creditors’ consent; (there are various creditors) Requires full/partial insolvency; (there is presumption of insolvency) Does not transfer ownership, only possession and administration are transferred to the creditors with the authorization to convert the property into cash with which the debts shall be paid. Not an act of novation Only extinguishes the credits to the extent of the amount realized from the properties assigned, unless otherwise agreed upon.

1. does not affect all properties; 2. does not require plurality of creditors; 3. only the specific creditor’s consent is needed; (transfer is only in favor of one creditor to satisfy a debt) 4. may take place during solvency; (no presumption of insolvency) 5. transfers ownership upon delivery;

6. there is an act of novation 7. May totally extinguish the obligation and release the debtor

SUBSECTION 3. - Tender of Payment and Consignation IV. TENDER OF PAYMENT AND CONSIGNATION TENDER OF PAYMENT – the act of offering the creditor what is due him together with a demand that the creditor accept the same. CONSIGNATION – the act of depositing the thing due with court or judicial authorities whenever the creditor cannot accept or refuse to accept payment.

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Obligations and Contracts: Sources 2006 Lectures of Atty. Lydia Galas (Hann Sevilla), 2007 Case Digests (from Erwin Vicente), Book of Tolentino, RAM Notes Compiled by: Hanniyah Sevilla, Christ May Andolana, Ferlyn Ong for 4th year Batch 2009

From transcription: tender of payment is the manifestation made by the debtor to the creditor of his desire to comply with his obligation with the offer of immediate performance. But mere tender alone does not extinguish the obligation. It must be followed by consignation, if the creditor refuses what you have tendered, without just cause. Note: Tender and consignation is only true if there is a debt due. Because if it were in an exercise of a right, then mere tender is sufficient, as in the case of exercising the right to repurchase (Meat Packing case). Like the case of DBP, that act of the respondent in buying the property was an exercise of the right to repurchase. Art. 1256. If the creditor to whom tender of payment has been made refuses without just cause to accept it, the debtor shall be released from responsibility by the consignation of the thing or sum due. Consignation alone shall produce the same effect in the following cases: (1) When the creditor is absent or unknown, or does not appear at the place of payment; (2) When he is incapacitated to receive the payment at the time it is due; (3) When, without just cause, he refuses to give a receipt; (4) When two or more persons claim the same right to collect; (5) When the title of the obligation has been lost. (1176a)

• a) b) c) d)

REQUISITES OF A VALID TENDER OF PAYMENT

Must be in legal tender (lawful currency) – not a check but if there is consent – valid; It must include whatever interest is due; It must be unconditional; but if made with conditions and no protest on creditor’s part, he cannot later on prescribe the terms for the validity of the acceptance w/c he had already made – complete payment; The obligation must be due. •

Requisites wherein the creditor is deemed to have unjustly refused the tender of payment 1. That there was previous tender of payment 2. That the tender of payment was of the very thing due, or in case of money obligations, that the legal tender currency was offered; 3. That the tender of payment was unconditional; and, 4. that the creditor refused to accept payment without just cause. Art. 1257. In order that the consignation of the thing due may release the obligor, it must first be announced to the persons interested in the fulfillment of the obligation. The consignation shall be ineffectual if it is not made strictly in consonance with the provisions which regulate payment. (1177) REQUISITES OF CONSIGNATION a) b) c) d) e) f) g) Existence of a valid debt; Valid prior tender of payment, unless tender is excused; Prior notice of consignation (before deposit); Actual consignation (deposit); Subsequent notice of consignation Hearing; Judgment

DEPOSIT; EFFECTS OF a) b) c) d) The property is in “custodia legis”; Not exempt from attachment and execution; But if property be perishable by nature, the court may order the sale of the property; The debtor by consigning the thing practically makes himself the agent or receiver of the court, particularly if for some reason, the property cannot actually be placed in the hands of the court.

From transcription:

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Obligations and Contracts: Sources 2006 Lectures of Atty. Lydia Galas (Hann Sevilla), 2007 Case Digests (from Erwin Vicente), Book of Tolentino, RAM Notes Compiled by: Hanniyah Sevilla, Christ May Andolana, Ferlyn Ong for 4th year Batch 2009

REQUISITES FOR VALID CONSIGNATION 1. There must be a debt due; there must be a debt owing. 2. That the consignation was made because of some legal cause provided in the present article. (the unjust refusal of the creditor) 3. Previous notice of the consignation has been given to the persons interested in the performance of the obligation. 4. That the amount or thing due was placed at the disposal of the court (actual consigning or depositing the thing due with the clerk of court); and 5. That after the consignation had been made, the persons interested were notified thereof.

Q: what if the debtor decides to withdraw what has been consigned, would that be allowed? A: Yes. The original obligation is revived. Q: Can he withdraw after the court finds that consignation is proper? A: Generally, no, unless or the exception is the creditor consents. Q: what are the consequences if the creditor consents to the withdrawal after the finding of the court that consignation is proper? One of the consequences is that the creditor loses the preference of credit; He loses the security attached to that obligation. EFFECT OF PROPER CONSIGNTATION: It retroacts to the time of consignation. Likewise, all interest shall be deemed to stop running from the time of consignation. Art. 1258. Consignation shall be made by depositing the things due at the disposal of judicial authority, before whom the tender of payment shall be proved, in a proper case, and the announcement of the consignation in other cases. The consignation having been made, the interested parties shall also be notified thereof. (1178)

HOW IS CONSIGNATION MADE? 1. 2. The things due must be deposited with the proper judicial authorities; There must be proof that:  Tender was previously made;  Or that the creditor had previously notified the debtor that consignation will be made (in case tender is not required) Art. 1259. The expenses of consignation, when properly made, shall be charged against the creditor. (1178) Art. 1260. Once the consignation has been duly made, the debtor may ask the judge to order the cancellation of the obligation. Before the creditor has accepted the consignation, or before a judicial declaration that the consignation has been properly made, the debtor may withdraw the thing or the sum deposited, allowing the obligation to remain in force. (1180) VALID CONSIGNATION, EFFECTS OF: 1. 2. 3. Debtor may ask the judge to cancel the obligation; The running of interest is suspended; It should be observed that before the creditor accepts or before the judge declares that consignation has been properly made, the obligation remains.

IMPROPER CONSIGNATION; EFFECTS: 1. 2. If improperly made, obligation remains; At the time of consignation, the debt already due; requisites are absent – DEBTOR is in default.

Art. 1261. If, the consignation having been made, the creditor should authorize the debtor to withdraw the same, he shall lose every preference which he may have over the thing. The co-debtors, guarantors and sureties shall be released. (1181a)

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Obligations and Contracts: Sources 2006 Lectures of Atty. Lydia Galas (Hann Sevilla), 2007 Case Digests (from Erwin Vicente), Book of Tolentino, RAM Notes Compiled by: Hanniyah Sevilla, Christ May Andolana, Ferlyn Ong for 4th year Batch 2009

Effects of Withdrawal a) Obligation remains; b) Creditor loses any preference over the thing; c) Co-debtors, guarantors and sureties are released (unless they consented) LOSS OF THE THING DUE WHEN IS A THING CONSIDERED LOST a) b) c) When it perishes; When it goes out of commerce; When it disappears in such a way that:  Its existence is unknown; or  It cannot be recovered.

Note: The term loss does not refer strictly to actual or physical loss but contemplates also impossibility of performance. WHAT IMPOSSIBILITY OF PERFORMANCE INCLUDES a) b) Physical impossibility; Legal impossibility;  Directly – prohibited by law;  Indirectly – e.g when debtor is required to enter a military draft. Moral impossibility

c)

Art. 1262. An obligation which consists in the delivery of a determinate thing shall be extinguished if it should be lost or destroyed without the fault of the debtor, and before he has incurred in delay. When by law or stipulation, the obligor is liable even for fortuitous events, the loss of the thing does not extinguish the obligation, and he shall be responsible for damages. The same rule applies when the nature of the obligation requires the assumption of risk. (1182a) 2 Kinds of Obligation “to give” 1. to give a generic thing; 2. to give a specific thing Effect of Loss GEN. RULE: Obligation is extinguished EXCEPTIONS 1. If debtor is at fault; 2. When debtor is made liable for fortuitous event because of:  Provision of law;  Contractual stipulation;  Nature of obligation requires the assumption of risk (debtor) INSTANCES when Law requires Liability even in case of Fortuitous Event: 1. 2. 3. 4. 5. 6. Debtor is in default; When debtor has promised to deliver the same thing to 2 or more persons who do not have the same interest; Obligation arises from a crime; When borrower has lent the thing to another who is not a member of his own HH; When thing loaned has been delivered with appraisal of value unless stipulated exempting borrower from responsibility; When payee in solutio indebiti is in bad faith.

Q: What about partial loss? Will that extinguish the obligation? It depends. Why? Generally, if the partial loss is due to a fortuitous event, the obligor has to deliver the object at its deteriorated state. But if the loss is such that led the parties to enter into the contract, then there is extinguishment of the obligation. For instance, you bought a lot at Royal Pines because of the view that it affords. And then a high rise hotel was constructed which obstructed the view. Is there total loss? No, but there is extinguishment of the obligation. Art. 1263. In an obligation to deliver a generic thing, the loss or destruction of anything of the same kind does not extinguish the obligation. (n)

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Obligations and Contracts: Sources 2006 Lectures of Atty. Lydia Galas (Hann Sevilla), 2007 Case Digests (from Erwin Vicente), Book of Tolentino, RAM Notes Compiled by: Hanniyah Sevilla, Christ May Andolana, Ferlyn Ong for 4th year Batch 2009

GEN. RULE: Genus never perishes EXCEPTIONS 1. If the generic thing is delimited; 2. If generic thing has been segregated or set aside – it becomes specific now. e.g. MONEY Art. 1264. The courts shall determine whether, under the circumstances, the partial loss of the object of the obligation is so important as to extinguish the obligation. (n) Art. 1265. Whenever the thing is lost in the possession of the debtor, it shall be presumed that the loss was due to his fault, unless there is proof to the contrary, and without prejudice to the provisions of article 1165. This presumption does not apply in case of earthquake, flood, storm, or other natural calamity. (1183a) Art. 1266. The debtor in obligations to do shall also be released when the prestation becomes legally or physically impossible without the fault of the obligor. (1184a)  Article 1266 refers to impossibility in obligations to do when the prestation has become legally or physically impossible without the fault of the obligor. The impossibility must arise after the constitution of the obligation. Because if it were prior or at the time of the inception, the nullity of the contract. Legal/physical impossibility must be after the constitution of obligation.

Effect of Loss Thru Fortuitous Event in Reciprocal Obligation GEN. RULE: The obligation that was not extinguished by the fortuitous event remains.

EXCEPTIONS: 1. In case of lease – if object is destroyed, both lease and rent are extinguished; 2. In contracts for a piece of work. Note from transcription: what are the forms of impossibility? 1. It might be physical, when by reason of its nature the act cannot be performed.

2. 3. 4.

Second, legal: a law is subsequently passed making the act illegal. Objective when the act or service itself, without considering the person of the obligor, becomes impossible. It is the act itself. The last is subjective which is the opposite of objective. The act or service cannot be done by the obligor, and the reason why you entered into the obligation is the person who would perform the act or the service.

Q: What happens if there is temporary impossibility? A: You merely wait for the impossibility but you still have to comply with the obligation. Exception is if the obligation is to be performed at a definite time, and that time is within the period of that impossibility, so the obligation is extinguished. Q: What happens if the debtor has complied with the obligation then here comes this temporary impossibility by reason of a circumstance or a situation. Is he entitled to the payment of his performance of what he has partially performed? A: Yes, of course, unless it is an indivisible obligation. If it turns out the impossibility has become permanent, and you have not yet paid, then you have to pay, unless there is extinguishment of the obligation (falling under 1234 and 1235), Art. 1267. When the service has become so difficult as to be manifestly beyond the contemplation of the parties, the obligor may also be released therefrom, in whole or in part. (n)     Requisites: 1. Even or change of circumstances could not have been forseen at the time of the execution of the contract; Refers to moral impossibility or impracticability due to change of certain conditions; Refers to personal obligation (or obligations to do) and not real ( to give) Does not cover highly speculative contracts or agreements such as stocks and aleatory contracts such as insurance contracts Based on the doctrine of unforeseen events or rebus sic stantibus

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Obligations and Contracts: Sources 2006 Lectures of Atty. Lydia Galas (Hann Sevilla), 2007 Case Digests (from Erwin Vicente), Book of Tolentino, RAM Notes Compiled by: Hanniyah Sevilla, Christ May Andolana, Ferlyn Ong for 4th year Batch 2009

2. Performance is extremely difficult but not impossible; 3. The impossibility was not due to acts of any of the parties; 4. The prestation refers to a future one, not an immediate fulfillment; Art. 1268. When the debt of a thing certain and determinate proceeds from a criminal offense, the debtor shall not be exempted from the payment of its price, whatever may be the cause for the loss, unless the thing having been offered by him to the person who should receive it, the latter refused without justification to accept it. (1185)  Effect of Loss in Criminal Offenses – DOES NOT EXTINGUISH OBLIGATION, EVEN IF FORTUITOUS EVENT INTERVENES e.g theft. So this is one of the exceptions to the rule that if a determinate thing is lost through fortuitous events, the obligation is extinguished.  Exception is when Creditor is in Mora Accipiendi (default); otherwise stated, if the thing was offered to the person who should receive it and the latter refused without just cause. Art. 1269. The obligation having been extinguished by the loss of the thing, the creditor shall have all the rights of action which the debtor may have against third persons by reason of the loss. (1186) CONDONATION/REMISSION OF A DEBT

It is the gratuitous abandonment by the creditor of his right against the debtor. Condonation/remission is essentially a donation of the credit to the debtor. It is a bilateral act (not reciprocal), which requires the acceptance by the donor. It is therefore, subject to the rules on donations with respect to acceptance, amount and revocation 2. It may be made expressly or impliedly. Express condonation shall, furthermore, comply with the forms of donation. Art. 1270. Condonation or remission is essentially gratuitous, and requires the acceptance by the obligor. It may be made expressly or impliedly. One and the other kind shall be subject to the rules which govern inofficious donations. Express condonation shall, furthermore, comply with the forms of donation. (1187) • 1. 2. 3. 4. 5. 6. 7. 8. 9.

ESSENTIAL REQUISITES FOR REMISSION

There must be an agreement; Parties must be capacitated and must consent; There must be subject matter (object/prestation); The cause or consideration must be liberality – essentially gratuitous; Obligation remitted must be demandable at the time of remission; The remission must not be inofficious – not excessive; Formalities of a donation are required in case of an express remission; Waivers/remissions are not to be presumed generally – it must be expressed or implied; The debtor must accept the remission. • CLASSES OF REMISSION AS TO EFFECT/EXTENT 1. Total 2. Partial (upto the portion/ or may refer to accessory obligation) AS TO DATE OF EFFECTIVITY 1. Inter vivos (during lifetime) 2. Mortis Causa (after death) AS TO FORM 1. Implied (no formality) – conduct is enough 2. Express/formal

A.

B.

C.

2

Note: On acceptance: see Art. 745, on amount Arts 750-752, and on revocation, Arts. 760-765 of the New Civil Code (more thoroughly discussed in property) 40

Obligations and Contracts: Sources 2006 Lectures of Atty. Lydia Galas (Hann Sevilla), 2007 Case Digests (from Erwin Vicente), Book of Tolentino, RAM Notes Compiled by: Hanniyah Sevilla, Christ May Andolana, Ferlyn Ong for 4th year Batch 2009

If debtor does not accept and creditor does not collect within the statute of limitations, the debt may be said to have been extinguished by Prescription.

Note from transcription: Now, may the creditor waive interest but demand fulfillment of the principal? Yes. May the court waive interest? No. Can the court lower interest? Yes, if unconscionable or inequitous. May the court lower penalty? Yes. Can it erase penalty? No. (Ligutan case, RCBC case) Art. 1271. The delivery of a private document evidencing a credit, made voluntarily by the creditor to the debtor, implies the renunciation of the action which the former had against the latter. If in order to nullify this waiver it should be claimed to be inofficious, the debtor and his heirs may uphold it by proving that the delivery of the document was made in virtue of payment of the debt. (1188) Art. 1272. Whenever the private document in which the debt appears is found in the possession of the debtor, it shall be presumed that the creditor delivered it voluntarily, unless the contrary is proved. (1189)    Presumption of remission prevails over presumption of payment. The private document must refer to the original of the original (because it may be issued in duplicate copies) Not true in case of public documents because there is always a copy in the archives to prove the credit.

PRESUMPTION IN JOINT/SOLIDARY OBLIGATION  In Solidary, whole obligation is remitted;  In joint, only the share of the Debtor to whom creditor has granted remission. Art. 1273. The renunciation of the principal debt shall extinguish the accessory obligations; but the waiver of the latter shall leave the former in force. (1190) Art. 1274. 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. (1191a)  Only the accessory is remitted, the principal obligation remains in force. CONFUSION OR MERGER OF RIGHTS Art. 1275. The obligation is extinguished from the time the characters of creditor and debtor are merged in the same person. (1192a) MERGER/CONFUSION – the meeting in one person of the qualities of creditor and debtor with respect to the same obligation. REQUISITES 1. 2. 3. 4. It should take place between principal debtor and creditor.  No confusion if Debtor and Creditor represent different juridical entities even if both are the same. Merger must be clear and definite. The very obligation involved must be the same or identical The confusion must be total or as regards the entire obligation (exception Art. 1277)   If the reason for confusion ceases, the obligation is revived. (Example: when the merger takes place by a particular title, this may be set aside for causes of nullity or rescission of contract. Effect if mortgagee becomes owner --- mortgage is extinguished but principal obligation may remain.

Art. 1276. Merger which takes place in the person of the principal debtor or creditor benefits the guarantors. Confusion which takes place in the person of any of the latter does not extinguish the obligation. (1193)  The extinguishment of the principal obligation through confusion releases the guarantors because the obligation of the latter is merely accessory. However, when the merger takes place in the person of a guarantor, the obligation is not extinguished.

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Obligations and Contracts: Sources 2006 Lectures of Atty. Lydia Galas (Hann Sevilla), 2007 Case Digests (from Erwin Vicente), Book of Tolentino, RAM Notes Compiled by: Hanniyah Sevilla, Christ May Andolana, Ferlyn Ong for 4th year Batch 2009

Art. 1277. Confusion does not extinguish a joint obligation except as regards the share corresponding to the creditor or debtor in whom the two characters concur. COMPENSATION OR OFF SETTING  It is a mode of extinguishing to the concurrent amount, the obligations of those persons who in their own right are reciprocally debtors and creditors of each other. It is the offsetting of 2 obligations which are reciprocally extinguished if they are of equal value, or extinguished to the concurrent amount if of different values. It is a simplified or abbreviated payment because the 2 debts are extinguished without requiring the transfer of money or property from one party to the other.

Kinds/Classes of Compensation IAS TO ITS EXTENT

a) b)
II-

TOTAL – obligation are completely extinguished because they are of the same amount. PARTIAL - when a balance remains.

AS TO ITS ORIGIN/CAUSE

a) b)

LEGAL – takes place by operation of law. VOLUNTARY/CONVENTIONAL- agreed to by parties; Requisites: (1) each of the parties can dispose of the credit he seeks to compensate; (2) the parties agree to mutual extinguishment of their credits. JUDICIAL (SET-OFF)- must be pleaded; effective upon order of the Court. (Two debts arising from final and executory judgment) FACULTATIVE – one party has the choice of claiming the compensation. This is compensation which can be set up only at the option of a creditor when legal compensation cannot take place because of want of some legal requisites for the benefit of the creditor.

c) d)

DISTINCTIONS PAYMENT Payment must be complete and indivisible; Involves action/delivery Capacity to dispose of the thing paid and capacity to receive payment are required COMPENSATION 2 persons who are mutually creditor and debtor to each other; 2 obligation COMPENSATION Partial extinguishment is always allowed. True or legal compensation takes place by operation of law. No such capacity is necessary

As to # of Persons As to # of Obligation

-

-

MERGER one person in whom is merged the qualities of C and D; one obligation

-

COMPENSATION Takes place by operation of law and extinguishes reciprocally the 2 debts as soon as they exist simultaneously to the amount of respective sums

-

COUNTERCLAIM OR SET-OFF Must be pleaded to be effectual Works as a sort of judicial compensation, provided that requirements of ROC are observed.

Art. 1278. Compensation shall take place when two persons, in their own right, are creditors and debtors of each other. (1195) Art. 1279. In order that compensation may be proper, it is necessary: (although the parties may not be aware of it – CF Art. 1290)

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Obligations and Contracts: Sources 2006 Lectures of Atty. Lydia Galas (Hann Sevilla), 2007 Case Digests (from Erwin Vicente), Book of Tolentino, RAM Notes Compiled by: Hanniyah Sevilla, Christ May Andolana, Ferlyn Ong for 4th year Batch 2009

(1) That each one of the obligors be bound principally, and that he be at the same time a principal creditor of the other; (2) That both debts consist in a sum of money, or if the things due are consumable, they be of the same kind, and also of the same quality if the latter has been stated; (3) (4) That the two debts be due; That they be liquidated and demandable;

(5) That over neither of them there be any retention or controversy, commenced by third persons and communicated in due time to the debtor. (1196)

NEGATIVE REQUISITES OF LEGAL COMPENSATION That over neither of the debts must there be any retention or controversy commenced by 3rd persons and communicated in due time to the debtor. There must have been no waiver of the compensation; The compensation of debts must not have been prohibited by law.  PROHIBITED COMPENSATION

a)
b) c)

1. 2. 3. 4. 5. 6.

Debts arising from a depositum except bank deposits; Debts arising from the obligations of a depositary; Debts arising from the obligations of a bailee in commodatum; Debts arising from a claim for future support due by gratuitous title; Debts consisting in civil liability arising from a penal offense; Damages suffered by a partnership through the fault of a partner cannot be compensated with profits and benefits w/c he may have earned for the partnership by his industry.

Note: There can be no compensation when the object of the obligation is specific or determinate because there is only one determinate or specific thing, you cannot duplicate that. Q: May there be compensation of obligations subject to conditions? A: It depends. If the conditions are resolutory, pwede. But if one is reciprocal and the other is suspensive, there can be no compensation. Art. 1280. Notwithstanding the provisions of the preceding article, the guarantor may set up compensation as regards what the creditor may owe the principal debtor. (1197) Why is a guarantor allowed to set up compensation? Because it will be beneficial to him, he will be released from the debt. Art. 1281. Compensation may be total or partial. When the two debts are of the same amount, there is a total compensation. (n)  True for all different kinds of compensation whether voluntary, legal, etc.

Art. 1282. The parties may agree upon the compensation of debts which are not yet due. (n)  Applies to conventional or voluntary compensation. Art. 1283. If one of the parties to a suit over an obligation has a claim for damages against the other, the former may set it off by proving his right to said damages and the amount thereof. (n)

JURISDICTION OF COURT RE: VALUE OF DEMAND GEN. RULE: Jurisdictionn depends upon the totality of the demand in all the causes of action, irrespective of whether the plural cases arose out of the same or different transactions. EXCEPTIONS

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Obligations and Contracts: Sources 2006 Lectures of Atty. Lydia Galas (Hann Sevilla), 2007 Case Digests (from Erwin Vicente), Book of Tolentino, RAM Notes Compiled by: Hanniyah Sevilla, Christ May Andolana, Ferlyn Ong for 4th year Batch 2009

1. Where the claim joined under the same complainant are separately owed by, or due to, different parties in w/c cases each separate claim furnishes the jurisdictional test. 2. Where not all the causes of action joined are demands or claims for money. Art. 1284. When one or both debts are rescissible or voidable, they may be compensated against each other before they are judicially rescinded or avoided. (n) Note: The rescissible obligations here refer to Art. 1381. Art. 1285. The debtor who has consented to the assignment of rights made by a creditor in favor of a third person, cannot set up against the assignee the compensation which would pertain to him against the assignor, unless the assignor was notified by the debtor at the time he gave his consent, that he reserved his right to the compensation. If the creditor communicated the cession to him but the debtor did not consent thereto, the latter may set up the compensation of debts previous to the cession, but not of subsequent ones. If the assignment is made without the knowledge of the debtor, he may set up the compensation of all credits prior to the same and also later ones until he had knowledge of the assignment. (1198a) RULES:

1. 2. 3.

Assignment with consent of debtor -- Compensation cannot be set-up, it serves as a waiver except if the right to compensation is reserved Assignment with knowledge but without consent of debtor --- compensation can be set-up re: debts before the cession, but not after the assignment. Assignment made w/out knowledge of debtor -- debtor can set up compensation as a defense for all debts maturing prior to his knowledge of assignment.

From transcription: Situation: A owes B : 1. a bracelet worth 100,000 due on Jan 1, 2004; 2. 75,00 due on June 1,2006, 3. 100,000 due on Dec. 1, 05, 4. 25,000 due on Aug. 1, 04 B owes A 1. 80,000 due on Feb. 25, 06; 2. 50,000 due on Aug. 15,05. 3. 75, 000 due on Oct. 10,04. 4. A dining set worth 200,000 due on April 1, 03 5. A cow worth 15,000 eonverted into damages by reason of non performance. B assigned his credit to C on Dec. 25, 2005. Q: What are the rights of A? What debts can he claim compensation? What debts can be the subject of compensation? A: It depends: 1. If with consent, wala. (unless there is reservation of right to claim.) 2. If with knowledge, without consent: all debts previous to the assignment. (#2, #3, #5) 3. Assign without knowledge: it would now depend when A acquired knowledge, because Dec. 25, 05 is not the reckoning point. Art. 1286. Compensation takes place by operation of law, even though the debts may be payable at different places, but there shall be an indemnity for expenses of exchange or transportation to the place of payment. (1199a)    Applies to compensation by operation of law; Indemnity for expenses of transportation (of goods/objects) Indemnity for expenses of exchange.

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Obligations and Contracts: Sources 2006 Lectures of Atty. Lydia Galas (Hann Sevilla), 2007 Case Digests (from Erwin Vicente), Book of Tolentino, RAM Notes Compiled by: Hanniyah Sevilla, Christ May Andolana, Ferlyn Ong for 4th year Batch 2009

Art. 1287. Compensation shall not be proper when one of the debts arises from a depositum or from the obligations of a depositary or of a bailee in commodatum. Neither can compensation be set up against a creditor who has a claim for support due by gratuitous title, without prejudice to the provisions of paragraph 2 of article 301. (1200a) Art. 1288. Neither shall there be compensation if one of the debts consists in civil liability arising from a penal offense. (n) • 1. 2. 3. 4. 5. WHEN LEGAL COMPENSATION CANNOT TAKE PLACE

When one debt arises from a depositum; When one debt arises from the obligation of a depositary; When one debt arises from the obligation of a bailee in commodatum; When one debt arises because of a claim for support due to gratuitous title. When the debt arises from a criminal liability. But the offended party may claim compensation (this is an example of a facultative obligation) • OBLIGATIONS OF A DEPOSITARY

a)

b) c)
d) e)

The Depositary is obliged to keep the thing safely and to return it when required to the depositor, or to his heirs and successors or to person who may have been designated in the contract. Unless stipulated to contrary, the depositary cannot deposit the thing to 3rd persons. If deposit to 3rd person is allowed, the depositary is liable for the loss if the person is careless or unfit. Depositary is responsible for the negligence of his employees. Depositary cannot make use of the thing deposited w/out express permission of depositor otherwise he shall be liable for damages – except preservation of thing requires its use. Art. 1289. If a person should have against him several debts which are susceptible of compensation, the rules on the application of payments shall apply to the order of the compensation. Art. 1290. When all the requisites mentioned in article 1279 are present, compensation takes effect by operation of law, and extinguishes both debts to the concurrent amount, even though the creditors and debtors are not aware of the compensation. (1202a)    Legal compensation takes place automatically unless there has been valid waiver thereof. Compensation w/c extinguishes principal obligation carries with it the extinguishments of the accessory obligation. “to the Concurrent amount” means if one debt is bigger than the other, the balance subsists as debt.

Q: May it be possible for one claiming compensation despite the fact that the one claiming has a debt that already prescribed? A: Yes, for as long as the requisites have met at a certain point, even if one of the debts had already prescribed at the time of the claim for compensation. As long as at one point, all the requisites mentioned in 1279 are present before the debt actually prescribed, then there can be compensation. Q: May the benefit of compensation be renounced or waived? A: Yes. Example of which would be 1285 paragraph 1. NOVATION NOVATION – substitution or change of an obligation by another w/c extinguishes/modifies the 1 st either by changing its object or principal condition or substituting another in place of debtor, or subrogating a 3rd person in the rights of creditor. Art. 1291. Obligations may be modified by: (1) Changing their object or principal conditions; (2) Substituting the person of the debtor; (3) Subrogating a third person in the rights of the creditor. (1203) KINDS OF NOVATION I- According to its Object/Purpose

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Obligations and Contracts: Sources 2006 Lectures of Atty. Lydia Galas (Hann Sevilla), 2007 Case Digests (from Erwin Vicente), Book of Tolentino, RAM Notes Compiled by: Hanniyah Sevilla, Christ May Andolana, Ferlyn Ong for 4th year Batch 2009

a) b)

c)

Real/objective – changing the object/principal conditions of obligation. Personal/subjective – change of persons i. Substituting the person of debtor. ii. Subrogating a 3rd person in the rights of creditor (by agreement or by law) Mixed (change of object and parties)

II- According to Form of its Constitution a) Express b) Implied (incompatibility of 2 obligation) III- According to its Extent/Effect a) Total or extinctive (old obligation is totally extinguished) b) Partial or modificatory (imperfect or improper

REQUISITES OF NOVATION a) The existence of a valid old obligation  If valid – nothing to novate  If voidable – possible novation before annulment Intent to extinguish or to modify the old obligation by substantial difference The capacity and consent of all the parties except in case of expromision – old debtor does not participate Validity of new obligation

b) c) d)

Is there novation if the amount in the new obligation is increased? No. But if the new obligation is increased but if separate from the old obligation? (There is an increase in the old but it is found in a separate document) There is because the prior promissory notes are extinguished and superceded by the new promissory notes. If the period is increased, is there novation or lengthened or shortened? No. Why? It merely affects the performance of the obligation. If the evidence of credit from promissory note payable to order to payable to bearer? There is no novation. Renunciation of security? None ha, it merely becomes a simple debt. From alternative to simple or simple to alternative? Yes. Surrender of the evidence of credit? No. (remission) There is no novation there because the obligation is extinguished. From contract of donation to contract of sale? Yes, anong change dun? The juridical tie. But there is no novation in a subsequent execution of a real estate mortgage as security, why? The mortgage being merely an accessory obligation to secure the loan or promissory note. Obligations to pay a sum of money is not novated by a new instrument which merely changes the terms of payment. Novation however is proper in case of change of juridical relation, example would be from commodatum to lease of thing. Even if that is merely an implied novation, are there incompatible in all material points. Yes. In commodatum, it is a free use of thing while in lease, you have to pay. It also says from negotiorum gestio to contract of agency, because it is from a noncontractual relation to a contractual relation. From mortgage to antichrisis. Yes, there is a novation. There is a novation if there is a change in the nature of the prestation. Take note that novation is never presumed. In order that there is implied novation, the agreements must be incompatible with each other. Otherwise, if the change is merely accessory or accidental, it does not affect either the principal object, condition, person of the creditor or debtor, there is no novation. In order that there shall be novation, four requisites must be complied with: 1. There must be a previous valid obligation; 2. The consent of the parties to extinguish the prior obligation; 3. A valid new obligation. 4. The extinguishment of the old obligation. (Absent any, there is no novation) Art. 1292. In order that an obligation may be extinguished by another which substitute the same, it is imperative that it be so declared in unequivocal terms, or that the old and the new obligations be on every point incompatible with each other. (1204) a) b) Express Novation – declared in unequivocal terms Implied – complete/substantial incompatibility - substantial changes:  In object/subject matter of contract  In cause or consideration of contract  In principal terms or conditions of contract  If debt subject to condition is made an absolute one w/out a condition  Reduction of term/period stipulated  W/out consent of subscribers

INSTANCES WHEN COURT HELD: NO EXTINCTIVE NOVATION

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Obligations and Contracts: Sources 2006 Lectures of Atty. Lydia Galas (Hann Sevilla), 2007 Case Digests (from Erwin Vicente), Book of Tolentino, RAM Notes Compiled by: Hanniyah Sevilla, Christ May Andolana, Ferlyn Ong for 4th year Batch 2009

a) b) c) d) e) f) g) h) i) j)

Slight alterations or modifications in construction plans of buildings. New contract merely contains supplementary agreement When additional interest is agreed upon When additional security is given When after a final judgment, a contract was entered into precisely to provide a method of payment other than that stated in judgment. When a guarantor enters into an agreement with creditor that he (guarantor) will also be a principal debtor. When creditor in the meantime refrains from suing debtor or even when creditor merely extends the term of payment for here the period merely affects performance, not the creation of the obligation. Place of payment is changed or there is variation in amount of partial payments. When a public instrument is executed to confirm a valid contract. When payment of purchase price for certain trucks is made by execution of promissory note for said price.

Art. 1293. Novation which consists in substituting a new debtor in the place of the original one, may be made even without the knowledge or against the will of the latter, but not without the consent of the creditor. Payment by the new debtor gives him the rights mentioned in articles 1236 and 1237. (1205a) 2 Kinds of Personal/Subjective Novation 1. Change of debtor (passive) 2. Change of Creditor (active) FORMS (Passive Novation) IExpromision – initiative comes from 3rd person; it is essential that old debtor be released from his obligation.

Requisites

1.
2. 3.

Initiative from 3rd person New debtor and creditor must consent Old debtor must be released from his obligations

IIDelegacion – initiative from debtor for it is he who delegates another to pay; 3 parties (old, new debtor and creditor) must agree. Requisites 1. Initiative from old debtor 2. All parties concerned must consent  Implied/express  Before/after new debtor has given consent  Maybe conditional – has to be fulfilled. 3 Parties Delegante – original debtor Delegatario – creditor Delegado – new debtor 1293: is expromission. In expromission, the original debtor's consent is not necessary. Now, what would be the effect: 1236 and 1237. What happens if the new debtor is insolvent? Is the old debtor liable for the new debtor? No, precisely because he did not consent or it was made without his knowledge. He cannot be held liable by reason of insolvency of the new debtor. Now, what about delegacion. Who proposes the new debtor? The old debtor. So in both cases the consent of the creditor is always necessary. Now what happens if the new debtor is insolvent. Will that revive the old obligation? It does not. Exception: If the insolvency of the new debtor is of public knowledge and existing and known to the (old) debtor, even if it is not of public knowledge, then there is revival of the original obligation. What happens if the obligation is one with an accessory obligation or contract and the principal obligation is extinguished? Would that carry the extinguishment of the accessory obligation? Yes. exception if there is a stipulation pour autrui. (an example is being named as a beneficiary of an insurance policy, review PNB vs. CA compensation case) Art. 1294. If the substitution is without the knowledge or against the will of the debtor, the new debtor's insolvency or non-fulfillment of the obligations shall not give rise to any liability on the part of the original debtor. (n)  Refers to expromision

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Obligations and Contracts: Sources 2006 Lectures of Atty. Lydia Galas (Hann Sevilla), 2007 Case Digests (from Erwin Vicente), Book of Tolentino, RAM Notes Compiled by: Hanniyah Sevilla, Christ May Andolana, Ferlyn Ong for 4th year Batch 2009

Art. 1295. 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 said insolvency was already existing and of public knowledge, or known to the debtor, when the delegated his debt. (1206a)  Refers to delegacion Requisites to Hold Old debtor Liable 1. Insolvency was already existing and of public knowledge at time of Delegation. 2. Or the insolvency was already existing and known to the debtor at the time of delegation. When Art. 1295 does not apply: a. 3rd person is only an agent, messenger or employee of debtor

b.
c. d.

3rd person action only as guarantor/ surety New debtor merely agreed to make himself solidarily liable for the obligation. New debtor merely agreed to make himself jointly or partly liable for the obligation

Art. 1296. When the principal obligation is extinguished in consequence of a novation, accessory obligations may subsist only insofar as they may benefit third persons who did not give their consent. (1207) Art. 1297. If the new obligation is void, the original one shall subsist, unless the parties intended that the former relation should be extinguished in any event. Now, what happens if the new oblilgation is void? Would that extinguish the old obligation? It does not. This is 1297. Now what if the old obligation is void, would that extinguish the new obligation? Yes. Art. 1298. The novation is void if the original obligation was void, except when annulment may be claimed only by the debtor or when ratification validates acts which are voidable. (1208a)  If old obligation is void – no valid novation;  If old obligation is voidable and annulled – no more obligation; novation is also void. 1298: When can a debtor claim annulment? What would be an instance wherein a debtor can claim annulment? A very common defense would be prescription of debt. But can a prescribed debt be the subject of novation? Can a prescribed debt be an object of a contract? Yes. So a prescribed debt can be the subject of novation in as much as the prescribed debt can be the subject of a contract. But can it be a defense of the obligor? The prescription of the debt? Yes. Can minority be a defense? Yes. But can it also be subject to ratification? Yes. Art. 1299. If the original obligation was subject to a suspensive or resolutory condition, the new obligation shall be under the same condition, unless it is otherwise stipulated. (n) GEN. RULE: The conditions attached to the old obligation are also attached to the new obligation. EXCEPTION: If there is a contrary stipulation. Art. 1300. Subrogation of a third person in the rights of the creditor is either legal or conventional. The former is not presumed, except in cases expressly mentioned in this Code; the latter must be clearly established in order that it may take effect. Now what if the original obligation has a suspensive or resolutory condition? Would the new obligation that novates the old obligation carry with it the condition? Yes. 1299 says the new obligation shall be under the same condition, unless it is otherwise stipulated. SUBROGATION SUBROGATION – transfer to a 3rd person all the rights appertaining to creditor – right to proceed against guarantors, possessors of mortgages etc. ASSIGNMENT OF CREDIT  Mere transfer of same right or credit (transfer does not extinguish credit);  Does not require consent of debtor;  Defect in credit/right is not cured by assigning CONVENTIONAL SUBROGATION Extinguishes obligation and creates a new one; Requires consent; Defect obligation cured in debtor’s in old may be such a

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Obligations and Contracts: Sources 2006 Lectures of Atty. Lydia Galas (Hann Sevilla), 2007 Case Digests (from Erwin Vicente), Book of Tolentino, RAM Notes Compiled by: Hanniyah Sevilla, Christ May Andolana, Ferlyn Ong for 4th year Batch 2009

the same.

way that the new obligation becomes entirely valid.

Art. 1301. Conventional subrogation of a third person requires the consent of the original parties and of the third person. Subrogation is different from ex promission or delegacion because the latter involves a change in the person of the debtor, while subrogation involves change in the person of the creditor. But subrogation is classified into conventional (by agreement of the parties) or legal (1302). But may a legal subrogation be changed into conventional subrogation? Yes, diba? Autonomy of will. So, when is there conventional subrogation? It would require the consent of the original parties and of the third person. (Licaros vs. Gatmaitan case) Art. 1302. It is presumed that there is legal subrogation: (1) When a creditor pays another creditor who is preferred, even without the debtor's knowledge; (2) When a third person, not interested in the obligation, pays with the express or tacit approval of the debtor; (3) When, even without the knowledge of the debtor, a person interested in the fulfillment of the obligation pays, without prejudice to the effects of confusion as to the latter's share. So, when is there legal subrogation? (1302) 1. when the creditor pays another creditor who is preferred, even without the debtor's knowledge; *Who is the creditor who is preferred? A, whose credit of 100,000 has an interest of 12% per annum, or B, whose credit of 100,000 is secured by a chattel mortgage? B is preferred, because in the event of default by the debtor, need not go to court to file an action for the collection of the 100,000. All he has to do is to foreclose the mortgage and his credit is extinguished by reason of the foreclosure. So, in this case, if A pays B, even without the knowledge of the debtor, A now steps into the shoes of creditor B and is entitled to the security of B. 2. When a third person, not interested in the obligation, pays with the tacit or express approval of the debtor; 3. When, even without the knowledge of the debtor, a person interested in the fulfillment of the obligation pays, without prejudice to the effects of confusion as to the latter's share. So, those are the situations when legal subrogation takes place. Art. 1303. Subrogation transfers to the persons subrogated the credit with all the rights thereto appertaining, either against the debtor or against third person, be they guarantors or possessors of mortgages, subject to stipulation in a conventional subrogation. (1212a)  If transferred credit is subject to suspensive condition, new creditor cannot collect until after such condition is fulfilled. 1303: So despite the fact that there is legal subrogation, the parties may still enter into a conventional subrogation. Art. 1304. A creditor, to whom partial payment has been made, may exercise his right for the remainder, and he shall be preferred to the person who has been subrogated in his place in virtue of the partial payment of the same credit. 1304: Speaks of two creditor. The old creditor whose debt has been partially performed, and the new creditor whose debt has also been partially performed. As between the two, who is preferred? The old creditor. For as long as the original credit has not been fully satisfied, then he has a right of preference over the new creditor.

CONTRACTS Art. 1305. A contract is a meeting of minds between two persons whereby one binds himself, with respect to the other, to give something or to render some service. (1254a) CONTRACT – is a juridical convention manifested in legal form, by virtue of w/c, one or more persons bind themselves in favor of another or others, or reciprocally, to the fulfillment of a prestation to give, to do or not to do. ELEMENTS (Essential) Consent Subject matter Cause/consideration NATURAL Elements – those found in certain contracts and presumed to exist, unless the contrary has been stipulated. ACCIDENTAL Elements – various particular stipulations that may be agreed upon by the contracting parties in a contract.

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CLASSIFICATION OF CONTRACTS A. a. b. c. B. a. b. c. C. a. b. c. D. a. b. E. a. b. F. a. b. G. a. b. H. a. b. c. I. a. b. J. a. b. K. a. b. L. a. b. M. a. b. According to Formation Consensual – perfected by consent Real - perfected by delivery Formal/solemn – those where special formalities are essential before contract may be perfected. According to Cause/Equivalence of Value of Prestations Onerous – interchange of equivalent valuable considerations Gratuitous/ lucrative – free, one party receives no equivalent prestation Remunerative – one where one prestation is given for a benefit or service that had been rendered previously. According to Importance/ Dependence of One upon Another Principal – contract stands alone by itself Accessory – depends for its existence upon another contract. (eg. Mortgage; principal is Loan) Preparatory – contract is not the end itself but as means through w/c future transactions or contracts may be made. Parties Delegated Unilateral – one party has obligation Bilateral – both parties are obliged to give or render reciprocal prestations Name/Designation Nominate – contract has a name Innominate – contract has no name Risk of Fulfillment Commutative – parties contemplated a real fulfillment; equivalent value are given (lease) Aleatory – fulfillment is dependent upon chance; values vary. Time of Performance Executed – one contemplated at time the contract is entered into, that is, obligations are complied with at this time (eg. Contract of sale) Executory – prestations are to be complied with at some future time (eg. Property not yet delivered and price not yet given) Subject Matter Contract involving things (eg. Sale) Contract involving Rights/credits (usufruct, assignment of credits) Contract involving services (carriage) Obligation Imposed and regarded by Law Ordinary Institutional Evidence Required for its Proof Parol/oral Required written proof No. of Persons actually and physically entering into Contracts Ordinary (2) Auto-contracts – one represents 2 opposite parties but in different capacities #of Persons participating in Drafting a Contract Ordinary – e.g sale Contract of Adhesion – buyer or person interested is insured, signifies his consent by signing the contract. Nature Personal Impersonal

STAGES OF CONTRACT 1. 2. 3. Preparation (conception) – negotiations between parties Perfection (birth) – agreement; elements of subject matter and valid cause – accepted by mutual consent. Consummation (termination) – terms of contract are perfected.

Basic Principles/Characteristics of Contract

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1. 2. 3. 4. 5.

Freedom to stipulate Obligatory force and compliance in good faith Perfection by mere consent Both parties are mutually bound Relativity

Contract: juridical convention manifested in legal form, by virtue of which one or more persons bind themselves in favor of another or others, or reciprocally, to the fulfillment of a prestation to give, to do, or not to do. 1305 says that a contract is the meeting of minds between two persons whereby one binds himself with respect to the other to give some thing or to render some service. It does not mean that the parties are only limited to only two persons. The appropriate term is to parties because there can be as many persons in a contract as they are interested in the contract. May a person enter into a contract with himself? Yes, but in different capacities. (contracts of adhesion) He can be a vendor and a vendee at the same time only that in one contract he might merely be an agent and the other the buyer. So different capacities in one person. Now, may any person just enter into a contract? Is that right absolute? No, because there are certain limitations. Such as: husbands and wives cannot enter into contracts involving properties, except if there is complete separation of property. Other limitations: in agency, if the agent is authorized to borrow money, can the agent also be the lender? Or if he is authorized to lend, may he borrow money? But if he is authorized to lend, can he use his own money? o The existence of a contract is not determined by the number of persons who intervene in it, but by the number of declarations of will. (Contracts of adhesion) What are contracts of adhesion? Example of which would be an insurance contract. Now, we learned before that in cases of contracts of adhesion, in case of doubt, the construction is construed strictly against that person who prepared that contract, and liberally in favor of the person who does nothing but merely affixes his signature to the already prepared contract. Because in that case, the parties do not stand on equal footing. The debtor, especially if he borrows money from the bank, cannot stipulate his term. He cannot say that this is onerous on my part. He cannot do that. The only option is to either to sign or not to sign. So in those cases in case of doubt, the interpretation would always be in favor of the person who merely affixed his signature thereto and who did not participate in the preparation of the contract. Now, what are the characteristics of a contract? Contracts have three characteristics: we have the obligatory force of contracts. Now, what is meant by obligatory force of contracts? Just like autonomy of will, what has been stipulated in the contract is the law between the parties to the contract. And one cannot be heard later on to say that the agreement is disadvantageous on his part. The presumption is that at the time of the negotiation, prior to the perfection of the contract, the parties freely stipulates the conditions, terms and stipulations that may have agreed which arrived at and belong to the perfection of the contract. The second is mutuality of contract. The validity and performance cannot be left to the performance of one of the contracting parties and leaving the other free from complying with what is stipulated in the contract. The third is the principle of relativity of contracts. That it only binds the parties to the contract and their successors in interest. One of the exceptions there is: if there is a stipulation in favor of a third person. Now, contracts have 3 elements. We have the essential elements. Consent, subject matter, and the cause. The cause is the why of the contract, the reason why parties entered into the contract. Then we have the natural elements, which are those elements that even if not agreed upon by the parties form part of the contract. An example of which would be the warranty against hidden defects. The third element would be the accidental elements. The accidental elements are the ones that must be agreed upon by the parties. That if it is not stipulated there, the presumption is that it is not part of the agreement. An example would be that if the parties agree that in case of breach, their liability would be solidary. Because, under the law, solidary liability is not presumed. To arrive at a consummated or perfected contract, there are three stages: when the parties bargain or negotiate, you call that preparation or generation. Ano ang kasama sa negotiation? The price. Then you have perfection, the birth and the perfection of the contract. And when you pay the price and he delivers what you have bought, then that is consummation or death of the contract. Because there is now fulfillment or performance of the terms agreed upon in the contract. Now, how are contracts classified? First is according to the degree of dependence, a contract may be preparatory in nature such as a contract of agency because this would lead to future transactions. Why is it called preparatory? It is called such in as much as it looks forward to future transactions. Now what are those future transactions that will arise from a contract of agency? It would depend to the powers granted. If Y is authorized to lend money, what would be the future transaction that would arise? A contract of loan. This is what you call as future transactions. So, the contract of loan is the principal contract. A contract might also be considered accessory because its existence will depend on the principal contract. So if the loan is guaranteed by a mortgage, then this is the accessory contract. So the contract of loan is the principal contract, the contract of agency the prepratory contract and the contract of mortgage the accessory contract.

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So, how are contracts perfected? It might be perfected by mere consent and they are called as consensual, such as sale. Now, if a contract of sale does not have any document is that a valid contract? Yes, because it is perfected by mere consent. Is marriage a consensual contract? Yes. You don't have to have the contract or certificate of marriage. Hindi man yan kailangan. But there are certain contracts that will require delivery aside from consent, an example of which would be antichresis. Remember antichresis? You have to deliver the property in order that antichresis shall be perfected. Because there can be no antichresis if the debtor does not deliver the property. Art. 1306. The contracting parties may establish such stipulations, clauses, terms and conditions as they may deem convenient, provided they are not contrary to law, morals, good customs, public order, or public policy. 1306: Autonomy of contract = to autonomy of will; it is the obligatory force between the parties. 1306 Autonomy of Contracts: But there are certain limitations. As I said, it must not be contrary to law, likewise even if the parties would say "this is valid between us ha, the promissory note of a gambling debt". So, if X and A played Tong-its and then their bet is 50K, natalo si A at umabot ang utang nya ng 300,000. So, sabi ni A, i don't have the money now, but i will furnish you a promissory note, this PN if suppose A would not pay what is stated on it, X will not have a cause of action against A. X cannot sue A by reason of the PN, because this is not a contractual debt. The cause of the issuance is an illegal cause, it is from gambling. (except those allowed). So in this case, A in fact can recover what he had lost from X kung nagbigay sya ng pera, of course he cannot recover under the circumstances of the promissory note, because as I've said, the PN cannot be the basis for X to file a case against A because the source is from a polluted source from one not allowed by law. (illegal gambling) But suppose X would negotiate the PN to Y, who received the PN in good faith and paid value for it. (like, sige discounted ko yan, 20K). Now, Y would demand from A the value of the PN. A cannot invoke as a defense that the PN is a void PN as against a 3rd person who acted in good faith and paid the PN with consideration. Between Y and A, Y can still collect the amount stated in the PN. he is not affected by the agreement between X and A. (because 3rd persons are always protected.) Now, parties are free to stipulate. Yes, but the juridical relations as well as the rights and obligations that would arise by reason of that contract that you have entered into is not governed by the stipulation of the parties, but rather by law. Such as what? Suppose A executed a deed of Sale with right to repurchase in favor of C. The deed of Sale with right to repurchase contains that A, for and in consideration of the sum of 20K hereby transfers, sells, conveys, disposes, alienates his parcel of land covered by TCT 123 located in Ecoland D.C. consisting of 500 sq. m. And if A will be unable to repurchase the property within the period of 1 year, then B's right over the property shall be absolute and unconditional. Now, looking at it, would you believe that that is a valid deed of sale taking into account that the land is located in Ecoland, and only for 20K for 500sq. m.? Would the parties now be bound by that agreement in case there is a doubt? No, because while it might be true that the stipulation is the law between the parties, however, the rights and obligations which arise by reason of this contract is not governed by the stipulations. In fact, by looking at it, it would seem that the contract entered into is one of mortgage, only couched differently by the parties. For one, the consideration is very very low. Second, there is a period to repurchase within one year. So those are the considerations that must be taken together when the parties entered into the agreement. There would be no question if the consideration was 20million, that would really be a deed of sale with right to repurchase because the consideration given is really equivalent to the value of the property based on its location. So in that case, the SC said, in case of doubt, it is one of equitable mortgage, not of sale with right to repurchase. So, that is an example of the principle that while it may be true that parties are bound by their stipulations and it shall constitute the law between them, however, the juridical relations as well as the rights and obligations that will arise by reason of the contract is not governed by the stipulation but rather by law. not absolute because there are limitations, such as husband and wives cannot enter into a contract subject to certain exceptions, an agent authorized to lend cannot borrow.

Art. 1307. Innominate contracts shall be regulated by the stipulations of the parties, by the provisions of Titles I and II of this Book, by the rules governing the most analogous nominate contracts, and by the customs of the place. (n) 4 Kinds of Innominate Contracts i. Do ut Des ( I give that you may give) ii. Do ut Facias ( I give that you may do) iii. Facio ut Des (I do that you may give) iv. Facio ut Facias (I do that you may do) Rules Governing Innominate i. Stipulations of parties ii. Provisions of Title I and II iii. Rules governing most analogous nominate contract iv. Customs of place

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Obligations and Contracts: Sources 2006 Lectures of Atty. Lydia Galas (Hann Sevilla), 2007 Case Digests (from Erwin Vicente), Book of Tolentino, RAM Notes Compiled by: Hanniyah Sevilla, Christ May Andolana, Ferlyn Ong for 4th year Batch 2009

1307: Innominate Contracts These are contracts that have no specific name. Unlike when you enter into a contract of sale, there is this deed of sale; when you rent, there is this contract of lease, or when you borrow money, and it is secured by a pledge, it is a loan with pledge. Here, the agreement has no specific name, like when a lawyer and a client enters into an agreement whereby the client hires the services of the lawyer, there is no specific name. There are four kinds of innominate contracts 1. Do ut des ( I give and you give) 2. Do ut facias ( I give and you do) 3. Facio ut des ( I do and you give) 4. Facio ut facias ( I do and you do) There was this very old case. There was this Spaniard who came to the Philippines and wanted to tour the Philippines. Unfortunately, he did not know how to speak the local dialect. When one of the Filipinos learned the dilemma of the Spaniard, the presented himself to do the interpretation. So he went around the island. After the tour, the Filipino now demanded payment for his services. The Spaniard countered that there was no contract between them because the Filipino presented himself, voluntarily entered into the request of the Spaniard. But the SC said that as soon as you have hired the services of the person and you made use of the talent of that person, he is therefore entitled for compensation. Regardless if there is a contract or not. Now, in one bar examination, the question goes like this: X called B, "can you go to the store to buy for me the following items?". Was there a contract entered into by the parties, and if there was what kind of a contract was it? Can the person demand payment for the services he rendered, assumed that the person consented the request. There is a contract, because he rendered his services and he is entitled to compensation. o Innominate contracts are, in the absence of stipulations and specific provisions of law on the matter, to be governed by rules applicable to the most analogous contract. Art. 1308. them. (1256a)  The contract must bind both contracting parties; its validity or compliance cannot be left to the will of one of Mutuality of contracts – both parties are bound.

Consequences of Mutuality 1. A party cannot revoke or renounce a contract w/o the consent of the other, nor can have it set aside on the ground that he had made a bad bargain. 2. When the fulfillment of condition depends upon the sole will of debtor, the conditional obligation is void if the condition is suspensive; if it is resolutory it is valid. 1308: Speaks of mutuality of contracts that both parties must be bound by the agreements that they have entered into. Its validity and compliance cannot be left to the will of only one of them. So, in this case, the presumption is that both parties at the time of the negotiation, at the time of the bargaining stage, they stood on equal footing. Meaning each one of them participated during the negotiation stage, precisely which lead to the perfection of the contract. So, mutuality is that both parties must be bound to the contract, it cannot be left to one of the parties alone leaving the other party free from complying with what is incumbent upon him. 1308: The contract must bind both contracting parties; its validity cannot be left to the will of one of them. Mutuality of contract. The binding effect of the contract on both the parties is based on the principles that (1) obligations arising from contracts have the force of law between the contracting parties; and (2) there must be mutuality between the parties based on their essential equality. Just as nobody can be forced to enter into a contract, in the same manner once a contract is entered into, no party can renounce it unilaterally or without the consent of the other. The fact that a party may not have fully understood the legal effect of the contract is no ground for setting it aside. The unilateral act of one party in terminating the contract without legal cause makes it liable for damages. Allied Bank case: . It is a purely executory contract and at most confers a right to obtain a renewal if there is compliance with the conditions on which the right is made to depend. The right of renewal constitutes a part of the lessee’s interest in the land and forms a substantial and integral part of the agreement. The fact that such option is binding only on the lessor and can be exercised only by the lessee does not render it void for lack of mutuality. After all, the lessor is free to give or not to give the option to the lessee. And while the lessee has a right to elect whether to continue with the lease or not, once he exercises his option to continue and the lessor accepts, both parties are thereafter bound by the new lease agreement. Their rights and obligations become mutually fixed, and the lessee is entitled to retain possession of the property for the duration of the new lease, and

-

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Obligations and Contracts: Sources 2006 Lectures of Atty. Lydia Galas (Hann Sevilla), 2007 Case Digests (from Erwin Vicente), Book of Tolentino, RAM Notes Compiled by: Hanniyah Sevilla, Christ May Andolana, Ferlyn Ong for 4th year Batch 2009

the lessor may hold him liable for the rent therefor. The lessee cannot thereafter escape liability even if he should subsequently decide to abandon the premises. Mutuality obtains in such a contract and equality exists between the lessor and the lessee since they remain with the same faculties in respect to fulfillment. The questioned provision states that the lease "may be renewed for a like term at the option of the lessee." The lessor is bound by the option he has conceded to the lessee. The lessee likewise becomes bound only when he exercises his option and the lessor cannot thereafter be excused from performing his part of the agreement Art. 1309. The determination of the performance may be left to a third person, whose decision shall not be binding until it has been made known to both contracting parties. (n)

E.g. in a contract of sale, the fixing of price and delivery date can be left to a 3 rd person; the decision binds the party only after it is made known to both.

Art. 1310. The determination shall not be obligatory if it is evidently inequitable. In such case, the courts shall decide what is equitable under the circumstances. (n) Art. 1311. Contracts take effect only between the parties, their assigns and heirs, except in case where the rights and obligations arising from the contract are not transmissible by their nature, or by stipulation or by provision of law. The heir is not liable beyond the value of the property he received from the decedent. If a contract should contain some stipulation in favor of a third person, 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. (1257a)

Principle of Relativity  Contracts are generally effective only between the parties, their assigns and their heirs.

Exceptions: 1. Where obligations arising from the contract are not transmissible by their nature, by stipulation in favor of a 3rd party.

2.
3.

4.
5.

Where there is stipulation Pour Autri ( a stipulation in favor of 3rd person) Where a third person induces another to violate his contract Where in some cases, 3rd persons may be adversely affected by a contract where they did not participate. Where law authorizes the creditor to sue on a contract entered into by his debtor.

Requisites of Stipulation Pour Autri

a) b)
c) d)

There must be a stipulation in favor of a 3rd person; Contracting parties must have clearly and deliberately conferred a favor upon a 3rd person; A mere incidental benefit or interest of a person is not sufficient The stipulation must be part of contract and not the whole of the contract; 3rd person communicated his acceptance to obligor before its revocation; There must be no relation of agency between either of the parties and 3rd person. (Neither the contracting parties bears the representation or authorization of the 3rd party.) That the favorable condition should not be conditioned or compensated by any kind of obligation or whatsoever; 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. Art. 1314. Any third person who induces another to violate his contract shall be liable for damages to the other contracting party.

e) f)
g)

Requisites: 1. Existence of a valid contract; 2. Knowledge by the 3rd person of the existence of the contract; 3. Interference of the 3rd person in the contractual relation without legal justification.

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Obligations and Contracts: Sources 2006 Lectures of Atty. Lydia Galas (Hann Sevilla), 2007 Case Digests (from Erwin Vicente), Book of Tolentino, RAM Notes Compiled by: Hanniyah Sevilla, Christ May Andolana, Ferlyn Ong for 4th year Batch 2009

Art. 1315. 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 consequences which, according to their nature, may be in keeping with good faith, usage and law. (1258)

 

Consensual contracts are perfected from the moment there is agreement (consent) on the subject matter, and the Cause or consideration. Note: Contracts are not what the parties choose to call them, but what they really are as determined by the principles of laws. The validity of stipulations is one thing, and the juridical qualification of the contract resulting therefrom is another.

Art. 1316. Real contracts, such as deposit, pledge and Commodatum, are not perfected until the delivery of the object of the obligation. (n)  Requires Consent, Subject matter, Cause/consideration and Delivery.

Art. 1317. No one may contract in the name of another without being authorized by the latter, or unless he has by law a right to represent him. 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. (1259a) Requisites for a Person to Contract in the Name of Another a) b) c) He must be duly authorized (express/impliedly) He must have by law a right to represent him (guardian/administrator) Contract must be subsequently ratified (express/implied, by word or deed)

Unenforceable contracts are valid contracts but they cannot be enforced through court actions. CF: Law on agency ESSENTIAL REQUISITES OF CONTRACTS Art. 1318. There is no contract unless the following requisites concur: (1) Consent of the contracting parties; (2) Object certain which is the subject matter of the contract; (3) Cause of the obligation which is established. Note: 1. Consent presupposes legal capacity, otherwise, contract is voidable. 2. Object certain means at the very least determinable I. CONSENT It is the meeting of the minds between parties on the subject matter and the cause of the contract, even if neither one has been delivered. Consent may be express or implied. • Theories:

1. Cognition Theory – Contracts are perfected only upon the knowledge of the offer of the acceptance of the offeree. (Used if consent is manifested through letter or telegram; adhered in the Phil.) 2. Manifestation Theory – Contracts are perfected upon the moment acceptance is declared, regardless of whether the declaration has come to the knowledge of the offeror or not. 3. Expedition Theory – Contracts are perfected the moment the offeree transmits the acceptance to the offeror, such as the letter or telegram of acceptance is placed in the mail box. 4. Reception Theory – Contracts are perfected upon the time the acceptance is in the hand of the offeror (regardless of knowledge or if he read the same) Note: Offer by telephone similar to face to face conversation.

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Note: In our law, according to ma’am G., silence does not authorize any definite conclusion. However, according to Tolentino, there are requisites in order that silence produces tacit acceptance, namely: a. There is a duty or the possibility to express oneself; b. The manifestation of the will cannot be interpreted in any other way; c. There is a clear identity in the effect of the silence and the undisclosed will. Art. 1319. 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. Acceptance made by letter or telegram does not bind the offerer except from the time it came to his knowledge. The contract, in such a case, is presumed to have been entered into in the place where the offer was made. (1262a) Requisites of Consent a) b) c) d) e) Plurality of subjects/parties; Parties must be capable or capacitated; There must be no vitiation of consent or consent must be made intelligently and freely; There must be no conflict between what was expressly declared and what was really intended; The intent must be declared properly (legal formalities must be complied with)

Note: Accdg. to Tolentino: (f) express or tacit manifestation of the will and (g) conformity of the internal will and its manifestation. Requisites for Meeting of Minds a) An offer that must be certain An offer must be definite, complete and intentional. b) And an acceptance that must be Unqualified and absolute.  If there are 2 contracts and they are independent of each other, acceptance of one does not imply acceptance of the other. A qualified acceptance constitutes a counter-offer.

Note: Offer and acceptance may be withdrawn before perfection of the contract. If a persons offers the same thing to two persons, at different times, and the second offeree accepts the offer before the first, the offeror becomes liable for damages to the 1st offeree if he does not withdraw his offer prior to the acceptance of the 2nd offeree. Q: Is there a perfected contract in a qualified acceptance? No, there is no contract if there is a qualified acceptance. What happens is a counter-offer. Note: Another type of acceptance is amplified acceptance. Here, there is acceptance but there is a qualification. So, there is no perfected contract. When we say amplified, "I'm selling you mangosteen at 5/kl but you have to get 100 kilos. I will buy another 100 for the same price." Is there a perfected contract there? Yes, with respect to the first but not to the 2nd. There is a perfected contract with respect to the first (sell at 5/kilo) but not to the second offer (buy 100 kilos). Note: Rule on public offers: A promise may be made publicly by way of advertising a reward, compensation, or prize for any person who performs of executes a particular act or obtains a particular result. This is a unilateral promise. A unilateral promise is not recognized by our Code as having obligatory effect. In order that such promise can be enforced, there must be an acceptance that shall convert it into a contract. So the performance of the act for which a reward or prize is promised can be considered as an acceptance. Art. 1320. An acceptance may be express or implied. (n) Forms of Acceptance 1. express 2. implied 3. presumed (by law) 1321: The person making the offer may fix the time, place and manner of acceptance, all of which must be complied with. Note: When the offeror has not fixed a period and the offer is made to a person present, the acceptance must be made immediately.

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Obligations and Contracts: Sources 2006 Lectures of Atty. Lydia Galas (Hann Sevilla), 2007 Case Digests (from Erwin Vicente), Book of Tolentino, RAM Notes Compiled by: Hanniyah Sevilla, Christ May Andolana, Ferlyn Ong for 4th year Batch 2009

1322: An offer made through an agent is accepted from the time acceptance is communicated to him. Art. 1323. An offer becomes ineffective upon the death, civil interdiction, insanity, or insolvency of either party before acceptance is conveyed. (n) Other instances when Offer becomes Ineffective a) When the offeree expressly or impliedly rejects the offer; b) When the offer is accepted with a qualification or condition; c) When before acceptance is communicated, the subject matter has become illegal or impossible; d) When the period of time given to the offeree w/in which he must signify his acceptance has already lapsed. e) When the offer is revoked in due time (before the offeror has learned of its acceptance by the offeree) 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 founded upon a consideration, as something paid or promised. (n) GEN. RULE: If the offeror has allowed the offeree a certain period to accept, the offer may be withdrawn at any time before acceptance (of thing being offered) by communicating such withdrawal. Exception: when the option is founded upon a consideration as something paid or promised.

OPTION CONTRACT– contract granting a person the privilege to buy or not to buy certain objects at anytime w/in the agreed period at a fixed price. It must have its own cause/consideration because it is a distinct contract; and the grant must be exclusive The cause is not only price but something/anything of value; may also come in the form of a forfeiture. It binds the party who has given the option not to enter into the principal contract with any other person during the period designated and, within that period, to enter into such contract with the one to whom the option was granted if the latter should decide to use the option. From Transcription: Suppose Y will say "give me 3 days to decide, but here is 10,000 as earnest money" and A says "okay, i will accept it. We will just execute the deed of sale as soon as you deliver the balance." Then that is removed from 1324 because it says part of the purchase price. Earnest money is actually part of the purchase price. there is no contract of option here but a perfected contract of sale. Art. 1325. Unless it appears otherwise, business advertisements of things for sale are not definite offers, but mere invitations to make an offer. (n) Unless the object is determinate, the business advertisement is not an offer. Art. 1326. Advertisements 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. (n) Exceptions: Judicial sales and if specifically stated in the advertisement Art. 1327. The following cannot give consent to a contract: (1) Unemancipated minors; (2) Insane or demented persons, and deaf-mutes who do not know how to write. (1263a) In General, Contracts w/c they enter into are Voidable, Unless: a) b) c) d) e) f) Upon reaching the age of majority, they ratify the same; They were entered into through a guardian and the court having jurisdiction had approved it; Contracts of life insurance in favor of their parents, spouse, children, brothers and sisters and provided furthermore that the minor is 18 years and above. In the form of savings account, provided that minor was at least 7 years old. They were contracts for necessities such as food, but here the people who are legally bound to give them support should pay therefore. They were contracts where the minor misrepresented his age and pretended to be one of major age and is thus in Estoppel.

INSANE/DEMENTED PERSONS– no proper declaration of insanity by the court is required, as long as it is shown that at the time of contracting, the person was really insane. Note: But if both are incapable of giving consent, the contract is unenforceable.

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Obligations and Contracts: Sources 2006 Lectures of Atty. Lydia Galas (Hann Sevilla), 2007 Case Digests (from Erwin Vicente), Book of Tolentino, RAM Notes Compiled by: Hanniyah Sevilla, Christ May Andolana, Ferlyn Ong for 4th year Batch 2009

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. (n) Voidable Contracts: a) b) c) Entered into by insane/demented persons (unless they acted during a lucid interval) Those in state of drunkenness Under hypnotic spell

Art. 1329. The incapacity declared in article 1327 is subject to the modifications determined by law, and is understood to be without prejudice to special disqualifications established in the laws. (1264) Incompetents under Rules of Court a) Under Civil interdiction b) Hospitalized lepers c) Prodigals d) Deaf and dumb; unable to read and write e) Unsound mind even though they have lucid intervals f) Those who by reason of age, disease, weak mind, and other similar causes, cannot w/o aid, take care of themselves and manage their property. Art. 1330. A contract where consent is given through mistake, violence, intimidation, undue influence, or fraud is voidable. (1265a) Vices/Causes of Vitiated Consent  Mistake (error)  Fraud (deceit)  Violence  Intimidation  Undue influence Note: Vitiated consent does not avoid the contract but merely renders it voidable.  Mere preponderance of evidence is not sufficient. Art. 1331. In order that mistake may invalidate consent, it should refer to the substance of the thing which is the object of the contract, or to those conditions which have principally moved one or both parties to enter into the contract. Mistake as to the identity or qualifications of one of the parties will vitiate consent only when such identity or qualifications have been the principal cause of the contract. A simple mistake of account shall give rise to its correction. (1266a) Requisites For Mistake to Vitiate Consent a) The error must be substantial regarding:  Object of contract  The conditions w/c principally moved/induced one of the parties.  Identity or qualifications but only if such was the principal cause of the contract. b) The error must be excusable (not caused by negligence) c) The error must be a mistake of fact and not of law. (Mistake of law is not a ground for annulment of contracts) • Error of law refers to a mistake as to the existence of a legal provision or as to its interpretation or application. Note: If the error refers to the rights of the parties in the contract, the contract is not invalidated. Errors which do not affect the validity of the contract: 1. error with respect to accidental qualifies of the object of the contract; 2. error in the value of the thing; 3. error which refers to accessory matters in the contract foreign to the determination of the object. 4. error in the name of the person, but without error as to the person. Error as to the person will invalidate consent when the consideration of the person has been the principal cause of the contract. 5. error as to the solvency of the party; 6. error as to the motive of a party

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Obligations and Contracts: Sources 2006 Lectures of Atty. Lydia Galas (Hann Sevilla), 2007 Case Digests (from Erwin Vicente), Book of Tolentino, RAM Notes Compiled by: Hanniyah Sevilla, Christ May Andolana, Ferlyn Ong for 4th year Batch 2009

Art. 1332. When one of the parties is unable to read, or if the contract is in a language not understood by him, and mistake or fraud is alleged, the person enforcing the contract must show that the terms thereof have been fully explained to the former. (n) Presumption: One always acts with due care and signs with full knowledge of all the contents of a document even if the mind of the party signing was confused at the time of signing as long as he knew what he was doing. When Presumption Cannot Apply a) When one of the parties is unable to read b) Or if contract is in a language not understood by one of the parties  In both cases, the person enforcing the contract must show that the terms thereof have been fully explained to the former. Art. 1333. contract. (n) There is no mistake if the party alleging it knew the doubt, contingency or risk affecting the object of the

Art. 1334. Mutual error as to the legal effect of an agreement when the real purpose of the parties is frustrated, may vitiate consent. (n) Requisites for Mutual Error To Vitiate Consent a) There must be mutual error b) The error must refer to the legal effect of the agreement. c) The real purpose of the parties is frustrated.  If there is no meeting of the mind and both parties erroneously that their acts is intended towards a particular contract but the same was not met/frustrated – then the remedy is annulment, otherwise it is REFORMATION. 1334: The provision here refers to mistakes of doubtful questions of law. Legal effects. Doubtful questions of law, or the different interpretations or construction of the law. So in that case, you cannot agree to a certain provision, that might lead to frustration of the real intention of the parties that would warrant annulment. Art. 1335. There is violence when in order to wrest consent, serious or irresistible force is employed. 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. A threat to enforce one's claim through competent authority, if the claim is just or legal, does not vitiate consent. (1267a) Requisites for Violence to Vitiate Consent a) Employment of serious or irresistible force. b) It must have been the efficient cause why the contract was entered into. Requisites for Intimidation to Vitiate Consent a) Reasonable and well-grounded fear b) Of an imminent and grave evil c) Upon his person, property or upon the person or property of his spouse, descendants or ascendants; d) Efficient cause of the execution of the contract; e) The threat must be an unjust act, an actionable wrong. Now, when is there violence, when is there intimidation? The same definition that you have in your criminal law. (1335) Violence, in order to wrest consent, serious or irrisistible force is employed. Intimidation: compelled by a resonable and well-grounded fear of an imminent and grave evil upon the person or property of one of the contracting parties, or employed upon the spouse, descendants or ascendants, to give his consent. (or their properties). Take note of third paragraph, it is also found in your criminal law. The last paragraph is enforcement of one's claim through competent authority. Undue influence: when a person takes improper advantage of his powe over the will of another, depriving the latter of a reasonable freedom of choice. The following shall be considered: the confidential (the priest), family, spiritual and other relations between the parties, or that the person alleged to have been unduly influenced was suffering from mental weakness, or was ignorant or in financial distress. Art. 1336. Violence or intimidation shall annul the obligation, although it may have been employed by a third person who did not take part in the contract. (1268)

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Obligations and Contracts: Sources 2006 Lectures of Atty. Lydia Galas (Hann Sevilla), 2007 Case Digests (from Erwin Vicente), Book of Tolentino, RAM Notes Compiled by: Hanniyah Sevilla, Christ May Andolana, Ferlyn Ong for 4th year Batch 2009

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. (n) 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. (1269) Kinds of Fraud A. Fraud in the Celebration of Contract a) Dolo Causante – were it not for the fraud, the other party would not have consented--the contract is voidable b) Dolo Incidente – even w/o the fraud, the parties would have still agreed, fraud is incidental--Contract is valid but damages may be recovered.

B. Fraud in Performance of Obligations stipulated in the Contract Requisites of Dolo Causante a) Fraud must be material and serious; induced the other to consent; b) Fraud must have been employed by only one of the contracting parties, because if both committed fraud, the contract would remain valid. c) There must be a deliberate intent to deceive or to induce therefore misrepresentation in good faith is not fraud. d) The other party must have relied on the untrue statement and must himself not be guilty of negligence in ascertaining the truth. 1338: There is fraud when, through insidouse words or machinations, the other party was induced. And it must not be employed on a co-party. It must be employed against the other contracting parties. And if both parties employed fraud, the courts will leave them where they are. It is as if they were in good faith because of the fact that they are in pari delicto. Now, the fraud here is fraud at the time of the inception of the contract, not the fraud at the time of the fulfillment of the contract. Because if it were the latter, that belongs to 1171, and it cannot result to the nullity or annulment of the contract but will only be a ground for damages. But if it were fraud under 1338, it can be a ground for nullity or annulment of the contract plus damages. But the fraud here must be one that is causal. (dolo causante). Because if it were merely dolo incidente, no annulment, merely damages. And the fraud alleged by the other party seeking annulment must be clearly and convincingly established by sufficient and clear evidence, not by mere preponderance. So, requisites of fraud: 1. It must have been employed by one contracting party upon the other contracting party, not against a co-party. 2. It must have induced the other party to enter into the contract; example: when you apply for insurance policy and the amount is one that will not require you to undergo medical examination but only to fill up a certain form. You are a chain smoker, and there is a question there do you smoke and how many packs, you answer no, i don't smoke. And you were approved. This is an example of material misrepresentation. 3. It must have been serious and must have resulted in damage or injury to the other party now seeking annulment of the contract. 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. 1339: Confidential relations: between the principal and the agent. Like if the principal authorizes the agent to sell the property at 100,000. The agent now was able to sell it at 200,000. Is the agent bound to disclose to the principal this fact? Yes, because of the confidential relation between them. Failure to do so 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. 1340: Dolos Bonus. Tolerated fraud. common victims are the women. For as long as the other party has the opportunity to know the facts. The rule is: let the buyer beware. According to authors, the reason for the loss is the stupidity of the person. Why will you immediately believe that this particular product is a miracle. Basta what is required here is that you must have the opportunity to know the facts. And if it turns out that the facts are not true, you cannot sue. Because that what we call as tolerated fraud. And the rule is let the buyer beware, caveat emptor. 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.

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Obligations and Contracts: Sources 2006 Lectures of Atty. Lydia Galas (Hann Sevilla), 2007 Case Digests (from Erwin Vicente), Book of Tolentino, RAM Notes Compiled by: Hanniyah Sevilla, Christ May Andolana, Ferlyn Ong for 4th year Batch 2009

1341: So, you ask the opinion of a person if this is a true diamond, and the person says yes. Is there fraud? No, because that is merely an opinion. Exception, if you seek the opinion of an expert, an expert would be one that is knowledgeable in that specific area. Exception to the exception, if the expert is the employee of the person seeking the opinion of the expert. If it turns out the the opinion of the expert is false, then you cannot sue your own employee. Even if it is given by an expert, but the expert is your employee, then there can be no annulment of the contract based on fraud. Art. 1342. Misrepresentation by a third person does not vitiate consent, unless such misrepresentation has created substantial mistake and the same is mutual. 1342: There was this case Diaz vs. CA whereby the mistake was committed by a surveyor with respect to the particular location of a particular lot. So in that case, the mistake was not committed by both parties but by a third person, committed by the surveyor and there was mutual mistake by both parties and the SC said that annulment is proper because of the mistake. Art. 1343. Misrepresentation made in good faith is not fraudulent but may constitute error.

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. (1270) Fraud should not be employed by a party against a co-party, i.e. between two partners. This will not annul the contract. Requisites for Fraud to Vitiate Consent a) Fraud must be serious b) The parties must not be in pari delicto; otherwise there can be no annulment.  Incidental Fraud – not a cause for annulment, only damages can be recovered.

Art. 1345. Simulation of a contract may be absolute or relative. The former takes place when the parties do not intend to be bound at all; the latter, when the parties conceal their true agreement. (n) Simulation of Contract – process of intentionally deceiving others by producing the appearance of a contract that really does not exist (absolute) or w/c is different from the true agreement (relative). Requisites of Simulation a) Outward declaration of will different from the will of the parties; b) False appearance must have been intended by mutual agreement; c) The purpose is to deceive 3rd persons. Effect: If Absolute simulation, the contract is void. The parties did not intend to be bound by the agreement. But if it were relative simulation, then it shall bind the parties provided that no third person shall be prejudiced by such relative simulation. Art. 1346. An absolutely simulated or fictitious contract is void. A relative simulation, when it does not prejudice a third person and is not intended for any purpose contrary to law, morals, good customs, public order or public policy binds the parties to their real agreement. (n) Kinds of Simulated Contracts A. Absolutely Simulated (simulados) fictitious contracts:  Parties do not intend to be bound;  EFFECT: Contract is Void. Relatively Simulated (disimulados) disguised contracts:  Parties conceal their true agreement  EFFECT: Parties are bound to the real or true contract/agreement except: o If contract should prejudice a 3rd person; or o If the purpose is contrary to law, morals, good customs, public order or public policy.

B.

Accdg. to Tolentino: If the absolute simulation does not have an illicit purpose, the parties to the contract ma prove the simulation in order to recover whatever may have been given under such simulated act. But if the simulated contract has an illegal object, the provisions of Art. 1411 and 1412 will apply.

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Obligations and Contracts: Sources 2006 Lectures of Atty. Lydia Galas (Hann Sevilla), 2007 Case Digests (from Erwin Vicente), Book of Tolentino, RAM Notes Compiled by: Hanniyah Sevilla, Christ May Andolana, Ferlyn Ong for 4th year Batch 2009

ABSOLUTE SIMULATION 1. Implies that there is no existing contract; no real act executed; 2. Can be attacked by any creditor, including one subsequent to the contract 3. The insolvency of the debtor making the simulated transfer is not a pre-requisite to the nullity of the contract; 4. The action to declare a contract absolutely simulated does not prescribe

FRAUDULENT ALIENATION 1. Means there is a true and existing transfer or contract; 2. Can be assailed only by the creditors before the alienation; 3. The action to rescind (accion pauliana) requires that the creditor cannot recover in any other manner what is due to him; 4. Accion pauliana to rescind a fraudulent alienaction prescribes in 4 years.

OBJECTS OF CONTRACTS Art. 1347. All things which are not outside the commerce of men, including future things, may be the object of a contract. All rights which are not intransmissible may also be the object of contracts. No contract may be entered into upon future inheritance except in cases expressly authorized by law. All services which are not contrary to law, morals, good customs, public order or public policy may likewise be the object of a contract. (1271a) Requisites of Object of a Contract a) b) c) d) e) Notes: 1. There can be sale of future things or objects having potential existence. Also there can be sale of hope, but no of vain hope (CF: Sales) 2. No contract may be entered upon future inheritance, exceptions: (1) marriage settlements. Spouses are allowed to donate to each other future properties provided that they comply with the forms of will; (2)partition of the property during the lifetime of the testator. (3) When one’s right over the property is not as an heir but as a creditor. Your rights to the credit are subordinated to the death of the debtor. So, in that case that is not within the meaning of future inheritance. Ex: X borrows money from Y, and Y says I will pay you when I die. So in that case, X can enter into a contract involving that credit but subordinated to the death of Y. Art. 1348. Impossible things or services cannot be the object of contracts. (1272) The thing or service must be w/in the commerce of man; Must be transmissible; Must not be contrary to law, morals, good customs, public order or policy; Must not be impossible; Must be determinate as to its kind or determinable w/o need of a new contract or agreement.

Nature of Impossibility a) Nature of transaction or because of law b) Absolute (objectively impossible) – “nobody can do it” c) Relative (subjectively impossible) – “particular debtor cannot comply” Note: The impossibility must exist at the time of the constitution of the contract. Art. 1349. The object of every contract must be determinate as to its kind. The fact that the quantity is not determinate shall not be an obstacle to the existence of the contract, provided it is possible to determine the same, without the need of a new contract between the parties. (1273)   Object must be determinate determinable (w/out need of a new agreement); otherwise the contract is void for want of an essential requisite – the object of contract. Difficulty of performance – A showing of mere inconvenience, unexpected impediments, or increased expenses is not enough to relieve a debtor from the obligation Equity cannot relieve from bad bargains simply because they are such. The debtor who does not perform in such cases must be held liable for damages.

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Obligations and Contracts: Sources 2006 Lectures of Atty. Lydia Galas (Hann Sevilla), 2007 Case Digests (from Erwin Vicente), Book of Tolentino, RAM Notes Compiled by: Hanniyah Sevilla, Christ May Andolana, Ferlyn Ong for 4th year Batch 2009

CAUSE OF CONTRACTS It is the essential and impelling reason why a party assumes, an obligation. It is the prestation to be performed by the other contracting party. Art. 1350. In onerous contracts the cause is understood to be, for each contracting party, the prestation or promise of a thing or service by the other; in remuneratory ones, the service or benefit which is remunerated; and in contracts of pure beneficence, the mere liberality of the benefactor. (1274) Classification of Contracts As to Cause

a) b) c)

Onerous – the cause is for each contracting party, the prestation/promise of thing/service. Remuneratory – the past service/benefit w/c by itself is a recoverable debt. Gratuitous or contracts of pure beneficence– the cause is the mere liberality of the benefactor.    Contract of guaranty is gratuitous unless there is stipulation to the contrary. Cause in Accessory Contracts Like Mortgage & Pledge – the same as the cause for principal contract of loan. Moral obligation may be the cause of civil obligation – if it does not exist , no valid cause. Art. 1351. The particular motives of the parties in entering into a contract are different from the cause thereof. (n)

Q: Is the cause the same as the motive of the contract? No. No matter how illegal the motive is for as long as the cause is legal and lawful, it does not affect the validity of the contract. Exception: if the motive predetermines the purpose of the contract then the motive becomes the cause of the contract. Case: Lopez fell in love with Conchita, a 15 year old girl. Because of Lopez' desire and lust for the body of Conchita, he told the parents and Conchita that he will be donating a parcel of coconut land if you agree to cohabit with me. The parents and Conchita consented and they lived and had sexual intercourse. Then Lopez died. Conchita now demanded for the delivery of the parcel of land. The heirs of Lopez now said that the motive predetermined the purpose of the contract. And while it may be true that the cause is the liberality, however the real cause is the motive and the motive is to have sexual intercourse. Conchita said the cause is the liberality. The SC said the contract is void. While it is true that motive differs from the cause, still a contract conditioned upon the attainment of an immoral motive should be considered void. For here, it may be regarded as cause when it predetermines the purpose of the contract. It cannot be said that the donation is a contract of pure benifecence or a contract designed solely and exclusively for the benefit of the donee. The donation was designed both for the benefit of the donee and satisfy the sexual desire of Mr. Lopez. But because the donor cannot invoke his own immorality, then the more reasons that the heirs are barred in questioning the validity of the donation. Therefore Conchita is entitled to the land. In the MFR filed by the heirs, according to JBL Reyes, the pari delicto rule cannot apply in the case. Remember that Conchita is a minor, the guilt of the minor cannot be judged with equal severity with the guilt of an adult. Minors occupy a privilege position before the law. MOTIVE May vary although he enters into same contract; Maybe unknown to the other; Its presence cannot cure the absence of cause CAUSE   The same Always known

   

ILLEGAL CAUSE makes a contract void, ILLEGAL MOTIVE not necessarily renders the contract void. Art. 1352. Contracts without cause, or with unlawful cause, produce no effect whatever. The cause is unlawful if it is contrary to law, morals, good customs, public order or public policy. (1275a)

Requisites for Cause a) It must be present – no cause, contract is void b) It must be true – if cause is false, contract is void unless some other cause w/c is lawfully really exists.

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Obligations and Contracts: Sources 2006 Lectures of Atty. Lydia Galas (Hann Sevilla), 2007 Case Digests (from Erwin Vicente), Book of Tolentino, RAM Notes Compiled by: Hanniyah Sevilla, Christ May Andolana, Ferlyn Ong for 4th year Batch 2009

c)

It must be lawful

From transcription: There was this case: X is an employee of a business establishment, and it was found out that she was stealing money from the business establishment. When she was about to be prosecuted for what she did, the father and the husband of X executed a PN covering the value of what has been lost by reason of X's stealing. But X was not made a signatory to the PN. Now, the PN remained as a PN, so the employer was not able to collect. So the employer filed an action to collect the amount stated in the PN. The case was dismissed because accdg. to the court, the cause was the stifling of the criminal prosecution of X. Cause is void. But in another case, there was A who was given money by B to buy palay within a certain period or if unable to secure the palay by that time, to return the money to B. No palay was bought, no money was returned. So what B did was file a case against A for estafa. Now, before the hearing, a friend entered before and in behalf of A, with B seeking consideration that the case would be dismissed because he will try to convince A to issue a promissory note to cover the amount that was not returned. A executed a PN, but the amount was not paid. So what B did was to file an action to recover the amount. A moved for the dismissal of the case, stating that the cause for the action was illegal because it was to stifle a criminal prosecution. But the SC said that motion should be denied because there was an admission on the part of A that he really owed B money. This is different from the first case. Art. 1353. The statement of a false cause in contracts shall render them void, if it should not be proved that they were founded upon another cause which is true and lawful. (1276)  False cause does not necessarily mean that contract is void; the parties are given a chance to show that a cause really exists and is lawful and true.

Art. 1354. Although the cause is not stated in the contract, it is presumed that it exists and is lawful, unless the debtor proves the contrary. (1277)  Cause must exist but is not necessary to state the cause;  Under Statute of Frauds – certain agreement must be in writing, 1354: So, no matter how inadequate the consideration is, the presumption is that the contract is valid. The exception there is when fraud is employed, or there is mistake or there is undue influence. Like the actual value is 1M and he's only selling it for 100K, and the buyer is the son or daughter, then that is not an absolutely simulated contract but only a relatively simulated one, and the parties bound to it unless third persons are prejudiced by such simulation. Art. 1355. Except in cases specified by law, lesion or inadequacy of cause shall not invalidate a contract, unless there has been fraud, mistake or undue influence. (n) LESION – inadequacy of cause – (eg. Insufficient price of a thing sold)

Rules on Lesion Gen. Rule: Lesion/inadequacy of price does not invalidate a contract. Exceptions: a. When together with lesion there has been i. Fraud; ii. Mistake; or iii. Undue Influence b. In cases expressly provided by law. FORMS OF CONTRACTS The general principle is that the law looks more into the spirit, rather than in form. Underlying principle that in the interpretation and/or construction of the law, we must interpret not by the letter that killeth, but by the spirit that giveth life. That is how one should construct or interpret the law. But in contracts, there are certain exceptions. Because if you were the one who prepared the contract, then the contract should be construed strictly against the person who prepared it, and liberally in favor of the person who merely affixed his signature and did not participate in the making of the contract. But with respect to form, contracts are obligatory, in whatever form they may have been entered into, provided that all the essential requisites for the validity are present. And what are the essential requisites? Consent, cause or consideration and object/subject matter. So, for as long as the three are found, then the contract is presumed valid, regardless of the form.

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Obligations and Contracts: Sources 2006 Lectures of Atty. Lydia Galas (Hann Sevilla), 2007 Case Digests (from Erwin Vicente), Book of Tolentino, RAM Notes Compiled by: Hanniyah Sevilla, Christ May Andolana, Ferlyn Ong for 4th year Batch 2009

When we say form, it may refer to the manner in which the contract is executed, which may be written or oral. So, a sale of a parcel of land orally made is valid. So a sale involving real property is valid in whatever form it is entered into. Even if it is orally made between the parties. For what purpose then is the form? It is not for validity, but rather to transfer ownership over the property in favor of the vendee. The register of deeds will not transfer the title of the property from the vendor to the vendee unless it is in a public document. So that is the purpose of the form. And to inform third person that the property has already been bought. But for validity, no. It is valid. Even if there is no (written) contract, for as long as there has been payment (vendee) and there has been delivery on the part of the vendor. But there are certain contracts which would require that they be in a certain form. One is for validity, and the other for enforceability. A contract may be valid, but it is unenforceable. When we say enforceable, it cannot be enforced through court action. You cannot maintain an action in court because there is a lack in that particular document. But there are certain documents which will require a certain form in order that it be valid. An example of which would be a donation of a real property which must be in a public document in order to be valid. And not only that, the acceptance of the donee must also be in a public document to be valid. Absent one makes the donation void. Another example of a contract which would require a certain form is donation involving movable property and the value exceeds 5K. The law require that it must be in writing, but it need not be in a public document to be valid. Now, what else? Contracts involving antichresis. That must be in writing otherwise void. And another is when you are into lending money, agreements for the payment of interests must be in writing otherwise one cannot collect. The authority of the agent to sell property must be in writing, if not, then the sale is void. Now, another exception is for purposes of enforceability. Now what would be required, under 1403, paragraph 2, it must be in writing or in some memorandum or note, subscribed by the parties. (Statute of Fraud). So those are only the exceptions for purposes of validity or enforceability. So that a contract may prove in a certain way, that requirement is absolute and indispensable. So, if it is absolute and indispensable, noncompliance with it means the contract is void. In such cases, the right of the parties stated in the following article cannot be exercised. Art. 1356. Contracts shall be obligatory, in whatever form they may have been entered into, provided all the essential requisites for their validity are present. However, when the law requires that a contract be in some form in order that it may be valid or enforceable, or that a contract be proved in a certain way, that requirement is absolute and indispensable. In such cases, the right of the parties stated in the following article cannot be exercised. (1278a) GEN. RULE:   NO FORM IS REQUIRED IN CONSENSUAL CONTRACTS Formal Contracts – requires form ( eg. Donation) Real Contracts – requires delivery

WHEN FORM IS IMPORTANT a) For validity b) Enforceability (Statute of Frauds); may be waived by acceptance of benefits (partial) or by failure to object to presentation of oral or parol evidence. c) For convenience 1356 is the spiritual system of a contract, which means that, contracts are obligatory in whatever form they may have been entered into, provided that all the essential requisites for its validity are present. But the spiritual system of contract cannot be adopted in unqualified manner. Otherwise, oral agreements would often lead to fraud in the fulfillment of the obligation. Because the faintest ink is better than the sharpest memory. Because if worse comes to worst, you file a case in court and what is your proof? It was orally admitted. Who were there when you entered into the agreement? There were only two of us, then that is highly debatable. So, whether a certain form is required or not, better put it into writing. Now, there is this case of Hernaez vs. Delos Angeles. Hernaez was a star of Philippine Cinema. And her services were engaged by one of the producers. She was paid but there was a balance. So after rendering service, Ms. Hernaez now demanded for the payment of the balance. The movie company refused to honor the agreement stating that the agreement is deemed void because it was not in writing, and the balance exceeds 500 pesos. So, they went to court. Delos Angeles is the judge, he sided with the movie company. The SC said that the dismissal was not proper. Under 1356, all contracts are valid regardless of form, there are only two exceptions. One is when the contractual form is needed for validity. As in a case of a donation of real property which needs to be in a public document. Second when form is needed for enforceability, under the Statute of Fraud. The contract covered by Art. 1358 are binding and enforceable by action despite the absence of writing because the Article nowhere provides that the absence of written form will make the agreement invalid or unenforceable. Art. 1357. If the law requires a document or other special form, as in the acts and contracts enumerated in the following article, the contracting parties may compel each other to observe that form, once the contract has been perfected. This right may be exercised simultaneously with the action upon the contract.

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Obligations and Contracts: Sources 2006 Lectures of Atty. Lydia Galas (Hann Sevilla), 2007 Case Digests (from Erwin Vicente), Book of Tolentino, RAM Notes Compiled by: Hanniyah Sevilla, Christ May Andolana, Ferlyn Ong for 4th year Batch 2009

1357: If the law requires that a document or other special form, as in the acts and contracts enumerated in 1358, the contracting parties may compel each other to observe that form, once the contract has been perfected. This right may be exercised simultaneously with the action upon the contract. 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 a 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. 1358: Is the requirement that it must be in a public document for the purpose of validity? No. Only for purposes of affecting third persons, or for efficacy against third persons. So, those enumerated under 1358, even if not in a public docu are valid. The reason why there is this requirement that it must be in a public document, is that it is to enforce against third person. Because by itself, it is already valid. Now what are those contracts? 1. Acts and contracts which have for their object the creation, transmission, modification or extinguishment of real rights over immovable property. An example of this is waiver of a right, assignment, barter, mortgage (modification of one's proprietarial rights), when you enter into a contract of usufruct because there is a transfer of ownership. [Take note that sale involving real properties is already removed from par. 1 of 1358] 2. The cession, repudiation, or renuncitation of hereditary rights, or of those if the conjugal partnership of gains. You renounce your right over the inheritance that has already become vested in favor of your siblings; 3. The powers 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 In your family code, when one spouse desires to transfer administration over his communal or paraphernal property to the other spouse, the transfer must be in a public document. The reason is to inform 3rd persons that the administration has been transferred. 4. The cession of actions or rights proceeding from an act appearing in a public document [example Claim of ownership] All other contracts where the amount involved exceeds 500 must appear in writing, even a private one. But sales of goods, chattels, or things in action are governed by Art. 1403. Nowhere does it say that if it is not in writing, the contract is void. That's the essence of the Hernaez case. REFORMATION REFORMATION OF INSTRUMENTS (n)  Remedy in equity by means of w/c a written instrument is made or construed so as to express or conform to the real intention of the parties when some error or mistake has been committed. Art. 1359. When, there having been a meeting of the minds of the parties to a contract, their true intention is not expressed in the instrument purporting to embody the agreement, by reason of mistake, fraud, inequitable conduct or accident, one of the parties may ask for the reformation of the instrument to the end that such true intention may be expressed. If mistake, fraud, inequitable conduct, or accident has prevented a meeting of the minds of the parties, the proper remedy is not reformation of the instrument but annulment of the contract. Requisites for Action for Reformation 1. There must be meeting of the minds 2. True intention is not expressed in the instrument 3. There must be clear and convincing proof thereof 4. It must be brought w/in the proper prescriptive period. 5. Document must not refer to a simple unconditional donation inter vivos or to wills or to a contract where real agreement is void. Art. 1360. The principles of the general law on the reformation of instruments are hereby adopted insofar as they are not in conflict with the provisions of this Code. Why is there a need to reform instruments? Instruments are reformed in order that the true intention of the parties is expressed. But all the essential requisites are present. Only that when the parties reduced the agreement into writing, the writing failed to keep the true intention. By reason of what? Fraud, mistake, inequitable conduct or accident, one of the parties may ask for the reformation of the instrument to the end that such true intention may be expressed.

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Obligations and Contracts: Sources 2006 Lectures of Atty. Lydia Galas (Hann Sevilla), 2007 Case Digests (from Erwin Vicente), Book of Tolentino, RAM Notes Compiled by: Hanniyah Sevilla, Christ May Andolana, Ferlyn Ong for 4th year Batch 2009

But if any of the vices of consent have prevented the meeting of the minds of the parties, then there is no reformation but rather annulment. So here is there was failure on the part of the parties to express their true intention. By reason of Fraud, mistake, inequitable conduct or accident. But if it prevented the meeting of the minds, then no reformation but annulment. What are the requisites in order that reformation is proper? 1. There must have been a meeting of the minds upon the contract; 2. The instrument or document evidencing the contract does not express the true agreement between the parties; 3. the failure of the instrument to express the agreement must be due to mistake, fraud, inequitable conduct or accident. Art. 1361. When a mutual mistake of the parties causes the failure of the instrument to disclose their real agreement, said instrument may be reformed. Requisites: 1. Mistake must be mutual 2. Mistake may be unilateral under the conditions set forth in Art. 1362 and 1363. 3. Mistake must be of fact. 1361: The error is thru mistake but all the essential requisites are present Art. 1362. If one party was mistaken and the other acted fraudulently or inequitably in such a way that the instrument does not show their true intention, the former may ask for the reformation of the instrument. 1362: Now, there was this case of Ong vs. Car (?), involving a Spaniard and a Chinese. Now the Chinese does not know how to read or speak English. So the Spaniard was interested to buy the property of the Chinese. Now the Chinese said the agreement should be a pacto de retro. The Spaniard said, ok. When the document was already prepared, the Chinese aske if he included the condition that the sale should be one with a right to repurchase. The Spanish said yes when in truth the Spaniard omitted that it was a sale of pacto de retro because he intended to mortgage the property. Now in that case, there has been an agreement. There was already a meeting of the mind with respect to object and the cause, and the parties have consented. What was only omitted was the right of the buyer to repurchase, through the fraudulent acts of the other. Art. 1363. When one party was mistaken and the other knew or believed that the instrument did not state their real agreement, but concealed that fact from the former, the instrument may be reformed. Art. 1364. When through the ignorance, lack of skill, negligence or bad faith on the part of the person drafting the instrument or of the clerk or typist, the instrument does not express the true intention of the parties, the courts may order that the instrument be reformed. 1364: This is very common in law firms, because lawyers trust their secretaries. (typographical error) Art. 1365. If two parties agree upon the mortgage or pledge of real or personal property, but the instrument states that the property is sold absolutely or with a right of repurchase, reformation of the instrument is proper. 1365: Now there are money lenders who would, instead of having executed a deed of real estate mortgage, would say that let's just execute a deed of sale with a right to repurchase. That is under a different guise. Very common is equitable mortgage although the document is denominated as deed of sale with a right to repurchase. It has the following indicators: 1. The seller remains in possession of the property; 2. the buyer retains a portion of the purchase price. That portion represent actually the interest. 3. The seller, aside from he remains in possession of the property, continues to pay the taxes on the property. [Because if it were sale, then definitely the seller has to vacate the property and why should he continue to pay the taxes. Moreover, why should the buyer retain a portion of the purchase price. ] Now read 1502 Art. 1366. There shall be no reformation in the following cases: (1) Simple donations inter vivos wherein no condition is imposed; (2) Wills; (3) When the real agreement is void. 1366: #1 and 2 are contracts based purely on the liberality of the testator, and being gratuitous you cannot question the intention of the person giving or donating the thing/property. #3, being void, how can you reform it. No legal effect shall come from a void contract. There is no force or effect that arise from a void contract. In fact, in a void contract, parties do not intend to be bound by their agreement. Art. 1367. When one of the parties has brought an action to enforce the instrument, he cannot subsequently ask for its reformation. (estoppel, waiver or ratification)

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Obligations and Contracts: Sources 2006 Lectures of Atty. Lydia Galas (Hann Sevilla), 2007 Case Digests (from Erwin Vicente), Book of Tolentino, RAM Notes Compiled by: Hanniyah Sevilla, Christ May Andolana, Ferlyn Ong for 4th year Batch 2009

1367: You cannot ask for reformation and at the same time ask for enforcement. One is inconsistent with the other. If you say that it does not express the true intention of the parties, yet at the same time you are asking for performance. So, those are contrary to each other. Art. 1368. Reformation may be ordered at the instance of either party or his successors in interest, if the mistake was mutual; otherwise, upon petition of the injured party, or his heirs and assigns. Prescriptive period for reformation of contracts is 10 years Art. 1369. The procedure for the reformation of instrument shall be governed by rules of court to be promulgated by the Supreme Court. INTERPRETATION OF CONTRACTS: Art. 1370. If the terms of a contract are clear and leave no doubt upon the intention of the contracting parties, the literal meaning of its stipulations shall control. If the words appear to be contrary to the evident intention of the parties, the latter shall prevail over the former. So, how do you interpret contracts? If the stipulations of the contract are clear and leave no room for doubt, literal interpretation. Now, the important task of contract interpretation is to always ascertain the intention of the contracting parties. And guided by the principle again that we should interpret not by the letter that killeth, but by the spirit that giveth life. However, that will not find any application if the stipulation of the parties are clear and unambiguous which leaves no room for interpretation. Then we must interpret the law as it is written. Ita Scripta Lex. So, if the words appear contrary to the intention of the parties, then the intention shall prevail. (1370) If the written instrument is different from what has been verbally agreed upon? Reformation because it does not express the true agreement. So, if you say the sale of land with all the improvements thereon, what are included? Everything that is incorporated with the land. Art. 1371. In order to judge the intention of the contracting parties, their contemporaneous and subsequent acts shall be principally considered. 1371: So going back to the example of equitable mortgage, if the buyer is not yet in possession after several years, so what is the presumption? The presumption is that what was entered into by the parties is not one of sale but mortgage. And the determination is based on their subsequent acts. Art. 1372. However general the terms of a contract may be, they shall not be understood to comprehend things that are distinct and cases that are different from those upon which the parties intended to agree. 1372: Example is your best friend executed an SPA for you to encumber her property. So you used it as a collateral in your loan. It does not follow that even if your property was used as a surety, you would also be liable for the debt of your friend. Because those are different and distinct from the agreement. Art. 1373. If some stipulation of any contract should admit of several meanings, it shall be understood as bearing that import which is most adequate to render it effectual. (1284) Art. 1374. The various stipulations of a contract shall be interpreted together, attributing to the doubtful ones that sense which may result from all of them taken jointly. 1374: (Allied Bank) Harmoninize the provisions. If it cannot be harmonized, remove those which are incompatible. Then you ascertain the intention of the parties. The various stipulations of a contract shall be interpreted together, attributing to the doubtful ones that sense which may result from all of them taken jointly. So for instance it is a pacto de retro sale. But upon demand, the price varies. Anong presumption dyan? The difference in the payment actually refers to the payment of interest. Art. 1375. Words which may have different significations shall be understood in that which is most in keeping with the nature and object of the contract. 1375: If you are appointed as an administrator, it does not involve acts of dominion or acts of ownership. Art. 1376. The usage or custom of the place shall be borne in mind in the interpretation of the ambiguities of a contract, and shall fill the omission of stipulations which are ordinarily established. (1287) Art. 1377. obscurity. The interpretation of obscure words or stipulations in a contract shall not favor the party who caused the

1377: Very common in contracts of adhesion.

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Obligations and Contracts: Sources 2006 Lectures of Atty. Lydia Galas (Hann Sevilla), 2007 Case Digests (from Erwin Vicente), Book of Tolentino, RAM Notes Compiled by: Hanniyah Sevilla, Christ May Andolana, Ferlyn Ong for 4th year Batch 2009

Art. 1378. When it is absolutely impossible to settle doubts by the rules established in the preceding articles, and the doubts refer to incidental circumstances of a gratuitous contract, the least transmission of rights and interests shall prevail. If the contract is onerous, the doubt shall be settled in favor of the greatest reciprocity of interests. If the doubts are cast upon the principal object of the contract in such a way that it cannot be known what may have been the intention or will of the parties, the contract shall be null and void. 1378: So between a commodatum and donation, which has the least transmission of rights? Commodatum, why? Because there is no transfer of ownership in commodatum. Whereas if it were a donation, the property has left the patrimony of the donor forever. Usufruct or the donation? Usufruct, because the usufructuary is under obligation to return the property. (2nd sentence) Now, what if the contract is onerous? The doubt shall be resolved in favor of the greatest reciprocity of interest. So a person giving a ring to the other person, and the other person gives money. What is the presumption? Pledge, because that would fall under the greatest reciprocity of interest. Between pledge or mortgage? If there is doubt, mortgage. Why? Because there is no transfer of possession, but the creditor still enjoys the interest on the money that was loaned. Between antichresis and mortgage? Mortgage parin. (Last paragraph) Lack of object which makes the contract void because the intention of the parties cannot be ascertained. Art. 1379. The principles of interpretation stated in Rule 123 of the Rules of Court shall likewise be observed in the construction of contracts. RESCISSIBLE CONTRACTS 4 Kinds of Defective Contracts 1. Rescissible – contract w/c is valid until rescinded; extrinsic defect consists of economic lesion or damage. 2. Voidable – valid until annulled except if ratified – intrinsic defect as in vitiated consent. 3. Unenforceable – cannot be sue upon or enforced unless ratified; no effect now but it may be upon ratification. 4. Void (inexistent or illegal) – no effect at all; nor can be ratified or validated. Rescissible Contracts are valid contracts. Of the four of defective kinds of contracts, rescissible contracts occupy the highest lesion. The contracts are valid but by reason of economic injury caused either to one of the parties, or to a third person, the contract has to be rescinded. And unlike 1191, when we speak of rescission, there is no breach of faith in the performance but rather the ground of rescission is more on the economic injury suffered by the parties or a third person. Art. 1380. Contracts validly agreed upon may be rescinded in the cases established by law. (1290)

Requisites for Rescission 1. There must be at the beginning either a valid or a voidable contract. 2. There is an economic or financial prejudice to someone ( a party or a third person) 3. Requires mutual restitution. RESCISSION (1380)  Based on lesion or fraud upon creditors; The action is instituted by either of the parties or by third parties; Courts cannot grant a period or term w/in w/c to comply Non-performance by other party is immaterial. RESCISSION (1191)  Based on nonperformance or nonfulfillment of the obligation.  Action may be instituted only by the injured party to the contract;  In some cases, the courts may grant a term. Non-performance of the party is important.

Fictitious contract cannot be rescinded since it is null and void. What rescission presupposes is a valid contract.

Rescission under 1381 is a subsidiary remedy, especially if it is found in number 3 of 1381. You have to prove before the court that you have exhausted all the remedies available to you as a creditor before you are given a right to institute an action for rescission

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Obligations and Contracts: Sources 2006 Lectures of Atty. Lydia Galas (Hann Sevilla), 2007 Case Digests (from Erwin Vicente), Book of Tolentino, RAM Notes Compiled by: Hanniyah Sevilla, Christ May Andolana, Ferlyn Ong for 4th year Batch 2009

1380: What are those cases? 1381 provides those cases. Art. 1381. The following contracts are rescissible: (1) Those which are entered into by guardians whenever the wards whom they represent suffer lesion by more than onefourth 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; (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. LESION – disparity between price and the value. mere inadequacy of price, unless shocking to the conscience is not a sufficient ground for setting aside a sale, if there is no showing that, in the event of a resale, a better price can be obtained. EFFECT OF CONTRACTS ENTERED IN BEHALF OF WARD (1) (2) If an act ownership, Court approval is required otherwise it is unenforceable whether there is lesion or not. If act of administration i. With Court approval – valid regardless of lesion ii. W/out Court approval – rescissible, if lesion is more than ¼ contract may be rescinded on the ground of lesion is a partition of inheritance.

(3) Accion Pauliana – action to rescind made in fraud of creditors. Requisites a. There must be a creditor who became such Prior to the contract sought to be rescinded – (a person asking for a rescission is a judgment creditor – immaterial) b. There must be an alienation made subsequent to such credit. c. The party alienating must be in bad faith (he knew that damages would be caused) d. There must be no other remedy for the prejudiced creditor – “inability to collect to the claims due them.”  (4) Action to rescind may be brought even if debtor has not been judicially declared insolvent and even if the creditor has not yet brought an action to collect. THINGS IN LITIGATION (eg. A sues B for recovery of ring – pendente ite, B sells ring to C – sale to C is rescissible) Property is in litigation after defendant received service of summons.

1381: #1 and 2: The guardian with respect to the ward, and the representative with respect to the absentee are only given the powers of administration. The powers mentioned in 1381 are powers of administration and the representative or the guardian entered into a contract and the object of the contract resulted to the economic injury of either the ward or the absentee. By more than 1/4 of value of the object thereof. So example, you wanted to enhance the development of the farm, so what you did was to buy an equipment, a tractor. But you also have other motives in mind. And you tell now the dealer, "can you increase the price by 30%? You get 5%, I get 25%", so in that case the contract entered into by the administrator can be rescinded because it will result to the economic injury of the ward by more than 1/4 of the value of the object which is the tractor. But, even if it exceeds more than 1/4, but the administrator obtained judicial authorization, then there can be no rescission. Only in cases where there has been no judicial authorization obtained by the representative or the guardian. But what if the guardian or the representative speaks of getting money in order to develop the property. He now mortgaged the property. What kind of a contract is that? Unenforceable contract, beyond his authority. Now, if you remember in your Family Code, when can you consider a person an absentee for purposes of administration? 2 years if without administrator, and 5 years if there is an administrator. In those cases there is a need for judicial declaration as an absentee. And normally the spouse is given priority. So the spouse' authority only includes powers of administration, it does not include acts of ownership. Because if you co-relate that with the provisions of the Family Code and there is a need to encumber or dispose a portion of the property of the absentee, what will you do? For purposes of supporting the family? You gain judicial authority in a summary proceeding, otherwise that act of the other spouse is void but it is a continuing offer between the spouse who did not give consent and the offeree unless earlier revoked. Pag third person ang magbenta, ano? Unenforceable. If the representative is a third person, unenforceable. But if it were the spouse, void yan. summary: -This only refers to acts of administration, and not acts of ownership

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Obligations and Contracts: Sources 2006 Lectures of Atty. Lydia Galas (Hann Sevilla), 2007 Case Digests (from Erwin Vicente), Book of Tolentino, RAM Notes Compiled by: Hanniyah Sevilla, Christ May Andolana, Ferlyn Ong for 4th year Batch 2009

- if the guardian or representative would exercise acts of ownership beyond what is authorize, the act will not be rescissible but rather unenforceable. That is acted without or in excess of the authority granted to him. But if the representative is the spouse, the act is void. But such act prior to the effectivity of the family code is not void, but voidable. So this would only refer to in excess of the authority granted to the present spouse and the encumbrance/alienation refers to the paraphernal property and the capital(?) property of the absentee. -But if it were acts of administration, to fall whether in number one or number two 1381, it must exceed 1/4 of the value of the object of the contract. - But even if it exceeds more than one fourth of the value, but there is court approval or judicial authorization, then there can be no rescission. -The exception in #1 and 2 is judicial authorization, no rescission if with court approval, even if the wife or the absentee suffers lesion by more than one fourth. 3.) Those undertaken in fraud of creditors when teh latter cannot in any other manner collect the claim due them. Now the creditor cannot ask for annulment precisely because he is not a party to the contract. He can only ask for rescission. The court cannot just grant rescission since there are certain requisites that must be complied with. In order that rescission will lie. It will be found in the cases that i've assigned. Now if the transfer is onerous, we have to take into account the good faith or bad faith of the transferee. So the exception in number three would now depend on the kind of transfer. If suppose it is an onerous transfer, meaning there is an equivalent consideration given. So if it is onerous and ther is good faith from the first transferor to the first transferee (meaning the transferee acted in good faith), then the creditor who is prejudiced by the transfer could no longer ask for the rescission of the transfer because of the good faith. His only recourse is to ask damages from the transferor. Exception: even if the first transferee acted in GF, subsequent transferee acted in bad faith, and there is collusion between the transferor and the second transfeee, to cleanse the transfer of any defect, they would now use the first transferee as an intermediary or a bridge, then there can be rescission. But if there was no collusion between the transferor and the 2nd transferee, the good faith of the first transferee will cleanse the transfer, hence there can no longer be rescission, even if the subsequent transfer is in bad faith. The good faith of the first transfer cures the bad faith of the second transfer. Now, if there is bad faith from the first to the 2nd then definitely there can be rescission. OR suppose there are several transfer. From the 1st transferee who acted in bad faith, to the second transferee who acted in bad faith, to the third transferee who still acted in bad faith and the fourth transferee who acted in good faith. Then it ends now to the fourth transferee regardless of the bad faith of the subsequent transferee because it ended with the person who acted in good faith, when he received the thing transferred. Then there can be damages, not rescission because there has been good faith of the last transferee. So all the of the transferee will be liable, from the first transferee to the third transferee. Now what if the transfer is gratuitous? Do we also follow the same principle? No. The good faith or bad faith of the transferee is immaterial. Regardless of the good faith or bad faith of the receiver, the contract has to be rescinded. Why? There is no consideration given by the transferee, so he cannot be prejudiced by the rescission. Now, In Oria vs. Manikil (?), there are also what we call as the badges of fraud with respect to alienation in order to defraud creditors. Now what are the badges of fraud: 1. the fact that the consideration of the conveyance is inadequate 2. a transfer made by the debtor after suit has been begun and while it is pending against him. -meaning there is already a case filed against him involving collection or money claim, then the debtor now would start to dispose or encumber the properties that might answer for the judgment award that may be rendered by the court against him. 3. a sale upon credity by an insolvent debtor - So if you are insolvent, why will you sell your property on credit when you are actually in need of money. 4. Evidence of large indebtedness or complete insolvency. -Your assets cannot meet your obligations. Obligations exceeds assets. 5. the transfer of all or nearly all of his property by a debtor, especially when he is insolvent or greatly embarrassed financially, especially if the transfer is gratuitous in nature. 6. the fact that the transger is made between father and son, when there are present any of the above circumstances. -The mere fact that there is a transfer between a parent and a child does not arise that there is a fraudulent transfer. But if it is a transfer between a father and a son and it is accompanied by a sale upon credit by an insolvent debtor (Chua vs. CA), then definitely the presumption will arise that the transfer is to defraud creditors. 7. the failure of the vendee to take exclusive possession of all the property So those are the badges of fraud. And if any of those will be found, then the presumption will arise especially if the transfer is made after incurring the obligation and it can be shown that the debtor has no other property which can answer for that obligation except that property which he has transferred, then the presumption will arise that he intended to defraud the creditors when he made that transfer.

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4.) Those which refer to things under litigation if they have been enterd into by the defendant without the knowledge and approval of the litigants or of competent judicial authority Example of this would be a claim for reconveyance, meaning you're asking for the return of real or movable property, if what is involved is real property and you are the complainant, to protect your right, to prevent the defendant in possession of the property from alienating it without your knowledge or without the approval of court, then you may go to the office of the Register of Deeds and have it annotated at the back of the title of the property that this property is under litigation. And we call that notice of lis pendens. Or if what is involved is personal property, then you pray before the court that a writ of attachment be issued or a receiver be appointed over the property which is the subject matter of the litigation, in order to place the property in custodia legis and to take it away from the possession of the debtor. 5.) All other contracts specially declared by law to be subject to rescission Those referred to in Art. 78 with respect to partiton of the estate of the deceased when one of the heirs suffer lesion by more than 1/4 of the value which he is supposed to receive. Others would be those falling under the Law on Sales, 1524, 1526, and 1529 Art. 1382. Payments made in a state of insolvency for obligations to whose fulfillment the debtor could not be compelled at the time they were effected, are also rescissible. (1292) Requisites (1) The Debtor-payer must have been insolvent (no judicial declaration needed) (2) Debt was not yet due and demandable. Now another act which can be the subject of rescission can be found in 1382: obligations not yet due. That is what is meant by to whom fulfillment the debtor could not be compelled at the time they were effected, are also rescissible. So it refers to obligations not yet due, yet despite the fact that the debtor is insolvent pays the obligation, so there can also be rescission. And that is why we said that the action for rescission is subsidiary, the person who will be prejudiced by such must show proof before court that he had already exhausted all efforts to recover what is due him, and he failed, and he found out that the debtor has already transferred nearly all his property to answer for the credit that is due him. So it cannot be instituted except when the party suffering damage has no other legal means to obtain reparation for the same. (1383) And he cannot ask for more than what is due him. He can only ask to the extent necessary to cover the damages caused. (1384) Art. 1383. The action for rescission is subsidiary; it cannot be instituted except when the party suffering damage has no other legal means to obtain reparation for the same. (1294) Art. 1384. Rescission shall be only to the extent necessary to cover the damages caused. (n)  Partial rescission is possible; benefits only the creditor who has asked for rescission. Art. 1385. Rescission creates the obligation to return the things which were the object of the contract, together with their fruits, and the price with its interest; consequently, it can be carried out only when he who demands rescission can return whatever he may be obliged to restore. Neither shall rescission take place when the things which are the object of the contract are legally in the possession of third persons who did not act in bad faith. In this case, indemnity for damages may be demanded from the person causing the loss. (1295)  Mutual restitution Requisites before Rescission can be Brought a) Generally, plaintiff must be able to return what has been received by virtue of rescissible contract. Except when it is prejudicial to creditors. The thing-object of the contract is not in the legal possession of 3rd persons in good faith. There must be no other legal remedy. The action must be brought w/in proper prescriptive period.

b)
c) d)

1385: So what must be returned? The object of the contract, the fruits, the price and the interest. And if you cannot return this then you cannot ask for rescission. It can be carried out only when he who demands rescission can return whatever he will be obliged to return. So just like 1191, there is mutual restitution. And you cannot ask for rescission unless you can return what you have received from the other party. Neither shall rescission take place when the things which are the object of hte contract are legally in the possession of third persons who did not act in bad faith. In this case, indemnity for damages may be demanded from the person causing the loss.

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Now, if the transfer is gratuitous and you acted in good faith, you received the property believing in good faith that the transfer gratuitously is legal and valid, are you also obliged to return the thing, the fruits, the price and the interest? If you are a transferee in good faith, your obligations are to return the thing but not to pay for the fruits already received. Second, if you have incurred necessary expenses, then you can ask for reimbursement. Third, you return the thing in the condition that it is found. Meaning if there has already been deterioration, then you return the thing in that state. Unless, if the deterioration is caused by your negligence or through fraud after receiving the summons for rescission. But if it was due to a fortuitous event and before you have received the summons, then you will not be liable for the deterioration of the thing which is the subject matter for rescission. Now, restoration or restoration applies only to what under Art. 1381? #1 and 2 and 3, exception is onerous and good faith, and in number 4, exception you are the complainant and you have not annotated it, and the 3rd person who acquired it had no constructive knowledge of the litigation. Art. 1386. Rescission referred to in Nos. 1 and 2 of article 1381 shall not take place with respect to contracts approved by the courts. 1386: Rescission referred to in Nos. 1 and 3 of 1381 shall not take place with respect to contracts approved by the courts 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 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. The decision or attachment need not refer to the property alienated, and need not have been obtained by the party seeking the rescission. In addition to these presumptions, the design to defraud creditors may be proved in any other manner recognized by the law of evidence. (1297a) PRESUMPTIONS OF FRAUD Gratuitous Alienations contracted “before” the donation. presumed fraudulent: when debtor did not reserve sufficient property to pay all debts

Onerous Alienations Presumed fraudulent – when made by persons: 1. Against whom some judgment has been rendered in any instances (even if not final); or 2. Against whom some writ of attachment has been issued. BADGES OF FRAUD (circumstances that a certain alienation has been made in fraud of creditors) 1. The fact that consideration of the conveyance is fictitious or inadequate; 2. A transfer made by a debtor after suit has been began and while it is pending against him; 3. A sale upon credit by an insolvent debtor; 4. The transfer of all or nearly all of his property by a debtor, especially when he is insolvent or greatly embarrassed financially; 5. Evidence of large indebtedness or complete insolvency; 6. The fact that the transfer is made between father and son; 7. The failure of vendee to take exclusive possession of all the property. A gratuitous conveyance or donation, validly executed is presumed valid unless it can be shown that at the time of execution of conveyance, a creditor/s is/are adversely affected by said transaction. Fraud is not sufficient to rescind; for after all transferee may have been in good faith and is now in legal possession of the property. 1387: Presumptions Par. 1: It is absolutely necessary when you prepare a deed of donation for the donor to state that he has reserved sufficient property for himself to answer for his support as well as the obligations that he has incurred prior to this donation. Otherwise, if that is not found then the presumption is that you intend to defraud your creditors.  Par. 2: So the first is that, even if it is by onerous title, 1. there is already an on going case filed against you for collection of money, or 2. there is a writ of attachment ( a writ of attachment is issued during the pendency of the case asked by the complainant upon the court that the defendant is about to dispose nearly all his property and which if judgment shall be rendered by the court in favor of the complainant, the writ of execution issued by the court by reason of that favorable judgment will be returned unsatisfied by the sheriff) Par. 3: Badges of fraud Art. 1388. Whoever acquires in bad faith the things alienated in fraud of creditors, shall indemnify the latter for damages suffered by them on account of the alienation, whenever, due to any cause, it should be impossible for him to return them. If there are two or more alienations, the first acquirer shall be liable first, and so on successively. (1298a)

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 

“due to any cause” includes fortuitous event. Rescission is merely a secondary remedy --- only if debtor cannot pay.

Transfers  If transferee is in good faith; good/ bad faith of next transferee is immaterial;  If transferee is in bad faith; the next transferee is only liable if he is in bad faith. 1388: So in this case, the first acquirer shall be liable, then as we said, he transfers it to T2 and then to T3, the liability will be only upto T3. He will not be liable to return, precisely because he has transferred it, but he will be liable for damages. Because of the impossibility to return what he is supposed to return to the debtor for purposes of answering the liabilities of the debtor. Art. 1389. The action to claim rescission must be commenced within four years. For persons under guardianship and for absentees, the period of four years shall not begin until the termination of the former's incapacity, or until the domicile of the latter is known. (1299) WHO CAN BRING ACTION? 1. The injured party (or defrauded creditor) 2. His heir or successor-in-interest 3. Creditors of (a) and (b) by virtue of Art. 1177 of C.C 1389 Now when do you institute the action for rescission? Must be commenced within four years. For persons under guardianship and for absentees, the four years shall not begin until the termination of the former's incapacity, or until the domicile of the latter is known. Now suppose it does not fall under numbers 1 and 2. When shall you start counting the four year period? That was answered in the case of Cheng vs. CA. VOIDABLE CONTRACTS Art. 1390. 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; (2) Those where the consent is vitiated by mistake, violence, intimidation, undue influence or fraud. These contracts are binding, unless they are annulled by a proper action in court. They are susceptible of ratification. (n) RESCISSION Basis is lesion (damage) Defect is external/extrinsic Action is subsidiary A remedy Private interest governs Equity predominates Plaintiff may be party or 3rd person There is damage If plaintiff is indemnified; rescission will not prosper Compatible w/ perfect validity To prevent rescission, ANNULMENT Basis is vitiated consent or incapacity to consent Defect is internal/intrinsic (in the meeting of mind) Action is principal A sanction Public interest governs Law predominates Plaintiff must be a party to the contract Damage is immaterial Indemnity is not a bar to the action Defect is presupposed To prevent annulment,

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 

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ratification is not required.

ratification required.

is

There are only two kinds of voidable contracts, and these can be annulled by the court even if there may have been no damage to the contracting parties. So one would be when one of the parties is incapable of giving consent to a contract, 2. where any of hte vices of consent is employed in order to obtain the consent by one of the contracting parties. These contracts are binding, unless there are annulled by a proper action in court. They are susceptible of ratification. And voidable or annullable contracts cannot be attacked collaterally. You must institute a direct proceeding asking that the contract be annulled. What do you mean by collateral attack? You say, "By the way, the contract is voidable because one of the parties is a minor". When you say direct, you insitute an action asking the court asking the court to annul the contract on the ground of 1 or 2. Or you can state it in the counterclaim if you are a defendant. And when will you bring the action for annulment? Four years, and the period shall begin 1. If it were intimidation, violence or undue influence, form the time the defect of the consent ceases; 2. In cases of mistake or fraud, from the time of the discovery of the same; 3. and when the action refers to contracts entered into by minors or other incapacitated persons, from the time the guardianship ceases. May the guardian bring also an action for annulment? of course. But if it were the minor, then upon reaching the age of majority, if the incapacitated, then from the time of the cessation of guardianship. What happens if there is ratification? Ratification cleanses the contract of its defects, and it shall retroact to the day of the inception of the contract. It has retroactive effect, and it cleanses the contract of whatever defects it creates. So it becomes a valid contract. Now ratification may be express or tacit. It is understood as tacit 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. Now who has the right to invoke it? May the capacitated person invoke the incapacity of the other party? Or the person who employed any of the vices of the consent on the ground that the contract is voidable because he used fraud or there was mistake, and he was the one who caused the mistake? No. It can only be brought by the aggrieved party.Who? The minor, the incapacitated, the person upon whom any of the vices of consent were employed. So when is there tacit ratification? For instance, the minor sells the property during minority. Upon reaching the age of majority, instead of asking for the annulment of the contract, he will now rent the very property. Or he buys the property during minority, and instead of having that contract of sale annulled upon reaching the age of majority, he now donates the property. Or during the minority the purchase price has not been fully paid, and upon reaching the age of majority, he asks for the balance of the purchase price. So the guardian may effect the ratification. 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. (1301a) Art. 1392. Ratification extinguishes the action to annul a voidable contract. (1309a)

Requisites of Ratification 1. Contract is voidable 2. Person ratifying must know the reason for the contract being voidable (cause is known) 3. Cause must not exist/continue to exist anymore at time of ratification 4. Ratification is made expressly or by an act implying a waiver of action to annul 5. Person ratifying must be the injured party. 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. (1311a) Art. 1394. Art. 1395. annulment. Ratification may be effected by the guardian of the incapacitated person. (n) Ratification does not require the conformity of the contracting party who has no right to bring the action for

1395: Ratification does not require the conformity of the contracting party who has no right to bring the action for annulment. Ratification does not require the consent of the party who has no right to institute the action for annulment.

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Obligations and Contracts: Sources 2006 Lectures of Atty. Lydia Galas (Hann Sevilla), 2007 Case Digests (from Erwin Vicente), Book of Tolentino, RAM Notes Compiled by: Hanniyah Sevilla, Christ May Andolana, Ferlyn Ong for 4th year Batch 2009

So who can ask for annulment? Those who may be obliged either principally or subsidiarily (guarantors, sureties, mortgagors). 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. So we apply the principle of estoppel with respect to those who are capable, they cannot ask for annulment on the ground that the other party is incapacitated. Now the exception there is if there is active misrepresentation on the part of the incapacitated person. Then the incapacitated person cannot be heard later on when asking for annulment that at the time he entered into the contract, he was incapacitated because there was active misrepresentation. Active misrepresentation, for example: "You are a minor" and you say "No, i am 18 and I have a cedula to show you" but the cedula is doctored. Art. 1396. Ratification cleanses the contract from all its defects from the moment it was constituted. (1313)

Retroactive Effect of Ratification Once ratified, annulment based on original defect cannot prosper. - Rights of innocent 3rd persons must not be prejudiced. 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. (1302a) WHO MAY ASK FOR ANNULMENT: o The victim (principal or subsidiary party) o EXCEPT: If person not obliged principally/ subsidiarily in a contract may exercise an action for nullity if he is prejudiced in his rights w/ respect to one of the contracting parties. Creditors of victim cannot ask for annulment except when it prejudice them and the debtor has no other property. Art. 1398. An obligation having been annulled, the contracting parties shall restore to each other the things which have been the subject matter of the contract, with their fruits, and the price with its interest, except in cases provided by law. In obligations to render service, the value thereof shall be the basis for damages. (1303a) Effects of Annulment 1. If contract is not complied w/, parties are excused from the obligation. 2. If contract has already been performed . . . Mutual Restitution of: a. The thing with fruits; b. The price with interest.   Cannot be availed of by strangers to contract and innocent third parties cannot be obliged to restore. Husband cannot barter away his wife’s paraphernal properties except when she consents.

1398: If there is annulment, what will be the obligation of the parties, again, mutual restitution. And what shall it consist? The subject matter, the fruits, the price with its interest. But this will only apply to contracts falling under Number 2. (employment of any of the vices of consent) Art. 1399. When the defect of the contract consists in the incapacity of one of the parties, the incapacitated person is not obliged to make any restitution except insofar as he has been benefited by the thing or price received by him. 1399: Contract entered into by the incapacitated (number 1). He is only obliged to restore in so far as he has been benefited by the thing or price received by him. In relation to that 1241, if he has kept the thing delivered, or if he has disposed the thing and the disposal was to his benefit, those are the exception. No restoration except if he has kept the thing delivered, or if he has disposed of it and was benefited by the disposal. So those are the only instances wherein restoration will be possible with respect to the incapacitated. The defendant in an annullable contract would either be the capacitated or the person who employed the vices of the consent. Now, if he were the one who lost the thing which is the object of the contract which is annullable, then he shall have the obligation to return the fruits received, the price or the value of the thing plus the interest. So those are the object that he would have to return in case annulment is possible but he could no longer do it because it has been lost by fault (or fraud), then he has to return the value, the price and the interest. Now what happens if the thing is lost and the person obliged to return it is the incapacitated, or the person upon whom any of the vices of consent were employed? 1401 says that if the thing is lost through the fault of the person who has the right to institute the action, then the petition for annulment is extinguished.

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Obligations and Contracts: Sources 2006 Lectures of Atty. Lydia Galas (Hann Sevilla), 2007 Case Digests (from Erwin Vicente), Book of Tolentino, RAM Notes Compiled by: Hanniyah Sevilla, Christ May Andolana, Ferlyn Ong for 4th year Batch 2009

Now, if the lost is fortuitous, then the action will prosper because the law says through the fault or fraud. So it were lost through fortuitous event, however the defendant cannot be compelled to restore what he is obliged to restore because the essence of mutual restitution becomes untenable in as much as there can be no mutual restitution. But it will prosper if the plaintiff if the person who has the right to institute the action for annulment offers to pay the value of the thing that he has lost. Now, what will be the basis of the valuation? The value at the time of the loss of the object. Now the defendant will be obliged to return, but the plaintiff will only be obliged to pay the value. He is exempt from paying the value because the lost is through fortuitous event. Art. 1400. Whenever the person obliged by the decree of annulment to return the thing can not do so because it has been lost through his fault, he shall return the fruits received and the value of the thing at the time of the loss, with interest from the same date. (1307a) Art. 1401. The action for annulment of contracts shall be extinguished when the thing which is the object thereof is lost through the fraud or fault of the person who has a right to institute the proceedings. If the right of action is based upon the incapacity of any one of the contracting parties, the loss of the thing shall not be an obstacle to the success of the action, unless said loss took place through the fraud or fault of the plaintiff. 1401 2nd paragraph speaks of the action instituted by the incapacitated. So the loss shall not be an obstacle to the success of the action. If you remember also, if it were the incapacitated who lost or squandered the object he is not under obligation to return it. The law only obliges him to return it if it has redounded to his benefit or he has kept the thing. So here, under the 2nd par of 1401, it shall not be an obstacle to the action, unless the loss is through the fault or fraud of the incapacitated. Now what if the defendant loss the object of the contract through a fortuitous event and a petition for annulment is filed by the party who has the right to institute the action? Is he still obliged to pay the value, interest and fruits? No. Because he is in good faith, and the loss is not due to his fault, then he is only obliged to pay the value no longer the interest. Art. 1402. As long as one of the contracting parties does not restore what in virtue of the decree of annulment he is bound to return, the other cannot be compelled to comply with what is incumbent upon him. (1308)  Principle of mutual restitution 1402: As long as one of the contracting parties doesn not restore what in virtue of the decree of annulment he is bound to return, the other cannot be compelled to comply with what is incumbent upon him. There is that mutual obligation to restore. And if the thing is lost, and the party who lost it has the right to institute the action, and it is lost through fortuitous event, he can still compel if he offers to pay the value of the object of what he is bound to return. If the thing is lost through the fault or negligence of the defendant or the capacitated or the person who excercised the fraud, then he is obliged to pay the value, plus interest, plus damages because there was negligence. CHAPTER 8 UNENFORCEABLE CONTRACTS (n)  Contracts that cannot be sued upon or enforced unless RATIFIED --- no effect yet. KINDS OF UNENFORCEABLE CONTRACTS a) Unauthorized contracts b) Those that fail to comply with the Statute of Frauds c) Those where both parties are incapable of giving consent to a contract. 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; (c) An agreement made in consideration of marriage, other than a mutual promise to marry; (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.  Mere lapse of time, no matter how long, is not the ratification required by law.

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Obligations and Contracts: Sources 2006 Lectures of Atty. Lydia Galas (Hann Sevilla), 2007 Case Digests (from Erwin Vicente), Book of Tolentino, RAM Notes Compiled by: Hanniyah Sevilla, Christ May Andolana, Ferlyn Ong for 4th year Batch 2009

W/out ratification, the “agent” assumes personal liability.

STATUTE OF FRAUDS Purpose:  to prevent fraud; thus some agreement are required to be in writing. Waivable (defense) Personal defense, cannot be assailed by 3rd persons Does not apply to contracts fully or partially performed. Does not apply to contract of loan.


 

2 Ways to Waive This Defense (1) Timely failure to object to presentation of oral evidence to prove the oral agreement. (2) Acceptance of benefits under them (as where contract is totally or partially performed) Art. 1403;2 (b) - special promise refers to a subsidiary/collateral promise to pay like contract of guaranty. 2(c) – agreements in consideration of marriage – marriage settlement; donations propter nuptias STATUTE OF FRAUDS – laws, statutes or provisions w/c require certain agreements to be in writing before they can be enforced in a judicial action.  statutes are applicable only to executory contracts, not to partially or totally executed or performed contracts.  It may be invoked in actions for damages for breach of said agreement or for specific performance. UNENFORCEABLE CONTRACT There are three kinds of unenforceable contracts. Unenforceable contracts cannot be enforced through court action, unless first ratified. The first two are enforceable thru court action. There can be compulsion through specific performance. Here specific performance will not lie, unless the unenforceable contract is ratified. Now, unenforceable contracts are valid contracts only that because they are still in the stage where there is no performance yet by either of the parties, there can be no action that can be maintained before the court precisely because the agreement is in its executory stage. That is why you cannot prove the existence of the contract through parol or oral evidence. That is why, say A and B would enter into an agreement. A says to B that I am selling my house for 500K, and B says I will buy your house. That is an oral agreement. Valid? Yes, because contracts are valid in whatever form they are entered into unless forms are necessary for its validity or enforceable. So this one is a purely executory but valid contract. There is an offer and there is an unqualified acceptance. So there is a perfected contract only that there is no execution yet by the parties. Now suppose A now would change his mind and later on sell it to C, can B sue A for breach of contract? Can B go to court and compel A to perform? In that case oral evidence is not allowed to prove the existence of the agreement because this is a purely executory agreement involving the sale of real property. So this will only apply to purely executory contracts. But suppose B says, I have 50K, as earnest money, then even if A does not issue a receipt, that agreement is removed from the ambit of purely executory contracts. There is now what we call as partial fulfillment or partial execution. So in that case if A changes his mind and sells to C, B now can go to court and prove before the court the agreement. And there can be oral proof as to the agreement because of this partial payment. It applies only to purely executory contracts, and not to contract which have been consummated, or partially consummated. So let's say its the other way around. B says sige bilihin ko, and A now got hold of his diary and tore a piece of paper and writes that B agreed to buy my property, located at so and so and covered by TCT# 1111, this is already a sufficient note or memorandum. So in that case, if B changes his mind, A now can compel B to pay the purchase price, there is now a perfection of the contract and the proof is the note. It does not have to be a public document. Unenforceable contracts are not curable by any lapse of time. Unlike voidable which prescribe in 4 years, if you do not institute the action, and the lapse of four years will be deemed a waiver of your right to question the voidability of the contract. Another would be, in rescissible contract, the prescriptive period is also 4 years. But here there is no prescription. It gives rise to a defense against its enforcement. You cannot enforce it thru court action precisely because it is a purely executory contract. But not an action to set aside a contract. So you cannot enforce it through court action, but not an action to set aside. It is a defense against its enforcement. So in this case, if B sues A, then A can say that it cannot be enforced precisely because there was no note or memorandum. But A cannot ask for the setting aside of the agreement. So it a sheild but not a sword. So, what are those contracts which are unenforceable unless ratified? (1403) 1. Those entered into in the name of another person by one who has been given no authority or legal representaion or who has acted beyond his powers. If you remember, we discussed this already under 1317. The agent is given the authority to rent, but not the authority to sell. Then in that case if he sells, then the authority is in excess of his authority and in that case the

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contract entered into by the agent is unenforceable. How shall the principal ratify it? If he demands for the payment of the purchase price. Or he delivers the DOS and asks for the purchase price. But before the ratification comes, the buyer cannot compel the principal to execute the deed of sale precisely because the agent was in excess of his authority. 2. Those that do not comply with the Statute of Frauds. The enumeration in paragraph 2 is exclusive, what is not found there is not considered to be included. a. an agreement that by its terms is not be be performed within a year from the making thereof. So the agreement must not be performed within a year from the time of its constitution. It will not apply if part of it will be performed within the year although the completion of it will take five years. No part of it shall be performed within the entire 1 year period. Or even if on your part it is to be performed within one year but the other party has already performed his part, even partially. That is no longer covered. b. A special promise to answer for the debt, default or miscarriage of another. An example of this would be a contract of guaranty. But not a credit extended to a debtor upon the exclusive promise of the promissor. So if the promissor says, you sell me your credit, ako ang bahala. That is not within the purview of this paragraph, because that will be what, the exclusive promise of the promissor, but if he guarantees, then it falls within this paragraph. c. An agreement made n consideration of marriage other than the mutual promise to marry. Remember in your Family Code that a breach of action to marry is not an actionable wrong. It becomes actionable if the breach is coupled with seduction. What would fall under letter c would be marriage settlements, the ante-nuptial agreements or prenuptial agreements. If you remember your requirements in order that prenuptial agreements will be valid, there are only three: writing, signed by the parties, and executed by the parties before the celebration of the marriage. No where does it provide it be in a public document. Before the effectivity of the family code, donations propter nuptias are also covered by letter c but with the effectivity of the FC, letter C is no longer applicable because now it states that donations propter nuptias must observe the forms on ordinary donations. And if you do not comply with the formalities of ordinary donations, it is void. Now there is this case of Domalagan vs. Bolifer, sabi ni Domalagan, kunin ko yung 500 ko, because hindi sila nagkatuluyan. You read this case and Locquiao case. d. An agreement for the sale of goods, chattels or things in action (those movables not susceptible of possession, such as credit, negotiable instruments) , 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 art of the purchase money; Now, what if you buy a certain good and the price is less than 500, but if you take all together, the price is more than 500. Must it be in writing to be enforceable? How will you now interpret the agreement as such? The determining factor is the intention of the parties. If the intention is that it should be taken as a whole, then it must be in writing, subscribed and sworn by the person charged to be enforceable. e. an agreement for the leasing for a longer period than one yaer, of for the sale of real property or of an interest therein; contract of lease for more than one year must be in writing to be enforceable. Take note of the sale of real property that is why in 1358, sale of real property is definitely excluded. As well as of the interest therein, meaning the real property. When we say interest, does that include boundaries, partition? (Rosencor case) f. A representation to the credit of a third person. An example of this is suppose Lorelie would like to borrow money from Mr. Tan, and asks Mr. Vicente, kilala mo ba si Lorelie? Ah Oo kilala ko yan. Is she a good payor. Ah yes. You are not vouching for the obligation, you are merely vouching for the credit standing of the third person. That is a representation to the credit of a third person. 3. Those where both parties are incapable of giving consent to a contract. Now what if one of the representatives of the incapacitated person would ratify the contract, what would now be the nature of the agreement? Voidable. If both the guardians would ratify, valid. It becomes valid and enforceable. Art. 1404. Unauthorized contracts are governed by article 1317 and the principles of agency in Title X of this Book.

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. So 1405 is the exception. The failure to object to the presentation of oral evidence to prove the unenforceable agreement because it is not in writing. That is one exception. Art. 1406. When a contract is enforceable under the Statute of Frauds, and a public document is necessary for its registration in the Registry of Deeds, the parties may avail themselves of the right under Article 1357.  This right is given only when contract is both valid and enforceable.

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1406: Remember the case of Martinez vs. CA. The public document is only necessary for the registration with the Registry of Deeds and you can compel the other contracting party to observe the required form, and not for purposes of validity or enforceability. But for purposes of registration. Art. 1407. In a contract where both parties are incapable of giving consent, express or implied ratification by the parent, or guardian, as the case may be, of one of the contracting parties shall give the contract the same effect as if only one of them were incapacitated. If ratification is made by the parents or guardians, as the case may be, of both contracting parties, the contract shall be validated from the inception. 1407: I have discussed this already. Art. 1408: Unenforceable contracts cannot be assailed by third persons. Only the parties because the defense of Statute of Fraud is personal to the contracting parties. CHAPTER 9 VOID AND INEXISTENT CONTRACTS VOIDABLE May be ratified Produces effect until annulled Defect: incapacity/ vitiated consent Valid until annulled VOID Cannot be ratified No effect Defect is ordinarily against public policy Void from the very beginning; no action is required to set aside, UNLESS contract has been performed Cannot be cured by prescription Available to anybody – 3rd persons provided that their interests are affected Absolute nullity.

  

 

May be cured by prescription Defense may be invoked only by parties or their successors-ininterest Referred to as relative/ conditional nullity

-

-

-

UNENFORCEABLE 1. may be ratified 2. there is contract but it is unenforceable; 3. cannot be assailed by third parties

-

VOID Cannot be ratified No contract at all Can be assailed by anybody directly affected.

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; -- (the object could not come into existence because the object may legally be a future thing) (4) Those whose object is outside the commerce of men; (5) Those which contemplate an impossible service; (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. These contracts cannot be ratified. Neither can the right to set up the defense of illegality be waived.

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Special Classification 1. Inexistent – essential formalities are not complied with. 2. Illegal/ illicit ones Simulate Contracts 1. Absolute – void for lack of consent 2. Relative – hidden/intended contract is binding CHARATERISTICS OF VOID CONTRACTS a. Right to set up the defense of illegality cannot be waived; appealable even if not raised in trial court. b. Action/defense for declaration as inexistent does not prescribe. c. Not available to third persons whose interests are not directly affected. d. Cannot give rise to a contract e. Produces no effect f. No action to declare them void is needed g. Cannot be ratified. VOID/INEXISTENT CONTRACTS And there are 7 (1409). Take note that it is void or inexistent from the beginning. These contracts cannot be ratified. Neither can the right to set up the defense if illegality be waived. There are certain contracts which are void, remember that void contracts do not produce any legal effect and no obligation shall arise from a void contract. Exception to the void contracts that cannot be ratified: The contract is void and yet the law says that it can be ratified. Ano yon? Any encumbrance or disposition of the property by the present/capacitated spouse without the written consent of the incapacitated or absentee spouse or without judicial authority is void. But it shall be a continuing offer between the spouse who did not obtain consent and the third person, and shall be considered as a perfected contract as soon as the written consent of the incapacitated spouse or absent spouse is obtaine or judicial authorization. Another is marriage. What kind? When the authority of the solemnizing officer is absent, but one or both the contracting parties believed in good faith that the solemnizing officer has the authority to do. Believed in good faith lang ang kailangan. It cannot prescribe but can be defeated by laches. When is there laches? When you sleep on your rights. You know that the contract is defective, it is void but you did not institute the appropriate action. Because while it may be true that void contracts have no legal effect from the very beginning. However, if there has been performance by one of the contracting parties, there is still a necessity for the declaring of the contract void. There is no need to declare nullity by the competent court if the contract is still purely executory, but if there is performance already, then you have to go to court and let the court declare that the contract is void. Art. 1410. The action or defense for the declaration of the inexistence of a contract does not prescribe.

So the right might be lost by the unreasonable passage of time and not by prescription. (1410) 1410: The action of defense for the declaration of teh inexistence of a contract does not prescribe. But as I said, it can be defeated by laches. Art. 1411. When the nullity proceeds from the illegality of the cause or object of the contract, and the act constitutes a criminal offense, both parties being in pari delicto, they shall have no action against each other, and both shall be prosecuted. Moreover, the provisions of the Penal Code relative to the disposal of effects or instruments of a crime shall be applicable to the things or the price of the contract. This rule shall be applicable when only one of the parties is guilty; but the innocent one may claim what he has given, and shall not be bound to comply with his promise. (1305) Art. 1412. If the act in which the unlawful or forbidden cause consists does not constitute a criminal offense, the following rules shall be observed: (1) When the fault is on the part of both contracting parties, neither may recover what he has given by virtue of the contract, or demand the performance of the other's undertaking; (2) When only one of the contracting parties is at fault, he cannot recover what he has given by reason of the contract, or ask for the fulfillment of what has been promised him. The other, who is not at fault, may demand the return of what he has given without any obligation to comply his promise. 1411and 1412: 1411 referst to a contract that is void because it proceeds from the illegality of the cause or object and the act constitutes a criminal offense. Either both parties are in pari delicto, or only one of the parties is guilty. So what would be the rules if both parties are in bad faith or in pari delicto? They shall have no action against each other and both shall be prosecuted. And if you remember your provisions in the RPC, what would be the general rule with respect to the effects of a crime or its instruments? It shall be seized by the State. An example of which would be, illegal drugs.

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This rule shall be applicable when only one of the parties is guilty; but the innocent one may claim what he has given and shall not be bound to comply with his promise. The very common example of this is you deal in drugs. The rule is that when both parties are in bad faith, then the law leaves them where they are and they have no cause of action against each other. No action can be maintained in an illicit transaction. So take note that 1411 speaks of an act which has an illegal cause and the act constitutes a criminal offense. 1412 is also a void contract but the unlawful or forbidden cause does not constitute a criminal offense but nevertheless it is unlawful or forbidden. When the fault is on the part of both contracting parties, again neither may recover what he has given by virtue of the contract, or demand the performance of the other's undertaking. When only one of the contracting parties is at fault, he cannot recover what he has given by reason of the contract, or ask for the fulfillment of what has been promised by him. The other, who is not at fault, may demand the return of what he has given without any obligation to comply with his promise. That is the distinction between 1411 and 1412. One is that, 1411 refers to a contract which has an illegal cause which act proceeds from a criminal offense, whereas 1412, it is unlawful or forbidden but it does not constitute a criminal offense. Now what would be an unlawful or forbidden cause but does not constitute a criminal offense? Is a contract involving a sale of land to a foreigner valid? No. Is that a criminal offense? No. So if the State will find that out, what happens? Just like when you are a benificiary of CARP, you are prohibited to sell, transfer, encumber the property you acquired by reason of the implementation of CARP within 10 years, and if you violate that undertaking, the government will take back what has been given to you. And if you were the one who bought it, you could no longer get the money back as a form of punishment because there is really that prohibition. So take note of 1411 and 1412. Now, would that apply to inexistent contracts? Inexistent contracts does not necessarily mean a void contract, because when we say inexistent, it does not actually exist, it is purely or absolutely simulated contract. Would that fall under 1411 and 1412, no. If you have read the case of Modina vs. CA and Guan vs. Ong. That will not fall under here because what has been entered into by the parties are what we call as absolutely simulated contracts. Now we no longer have the Usury Law. The laws on usury have been repealed, and parties can agree with respect to the rate of interest, provided that the rate of interest agreed upon is not unconscionable and inequitous which is for the court to be determine. Moreover, regardless of whether the rate of interest is unconscionable or inequitous, your utang shall subsist. It does not mean that the obligation is deemed extinguished by reason of the rate of interest imposed by the creditor. Art. 1413. Interest paid in excess of the interest allowed by the usury laws may be recovered by the debtor, with interest thereon from the date of the payment. Art. 1414. When money is paid or property delivered for an illegal purpose, the contract may be repudiated by one of the parties before the purpose has been accomplished, or before any damage has been caused to a third person. In such case, the courts may, if the public interest will thus be subserved, allow the party repudiating the contract to recover the money or property.  Recovery even if it is in pari delicto provided  The purpose has not yet been accomplished; or  If damage has not been caused to any third person.  Applies also if parties are not equally guilty and where public policy would be advanced by allowing the suit for relief. 1414: So suppose Miranda would give Querubin 100K to kill Gloria. Now suppose he later on has a change of heart and tells Quirubin please do not proceed with our plan. In that case if Miranda would decide to repudiate the plan and has a change of heart, then he can now get back what he has earlier given to Querubin before the purpose has been accomplished, and when public interest will be subserved, then the other can recover what he has given either money or property. Art. 1415. Where one of the parties to an illegal contract is incapable of giving consent, the courts may, if the interest of justice so demands allow recovery of money or property delivered by the incapacitated person. 1415: Suppose a minor buys a gram of shabu. Remember the penalty for illegal possession of drugs has been repealed and is now made to depend on the amount of the drugs. But if it were the incapacitated or the minor, then definitely the law will treat them differently. If you remember the Liguez case (?), Conchita was allowed to get what was promised to her because according to the court, being a minor, she occupies a privileged position under our law. And if you also notice most of the provisions in the RPC regarding minors would always lean to the protection of the minor Art. 1416. When the agreement is not illegal per se but is merely prohibited, and the prohibition by the law is designated for the protection of the plaintiff, he may, if public policy is thereby enhanced, recover what he has paid or delivered. Contracts:

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(1) (2) -

Illegal per se – forbidden for it is against public interest. And merely prohibited contracts forbidden because of private interest recovery is permitted provided that:    contract is not illegal per se prohibition is for protection of plaintiff; public policy is enhanced.

1416: Example of this is donation of all the properties of the donor, so it is not illegal per se, but it is prohibited because one is, it might prejudice the creditor. Second is you may no longer have anything to support your needs when you will be giving all your properties. Especially if donations inter vivos. This provision is actually designed for the protection of the donor. And in that case he can recover what he has delivered. Another example would be homestead lands. Art. 1417. When the price of any article or commodity is determined by statute, or by authority of law, any person paying any amount in excess of the maximum price allowed may recover such excess. 1417: This is true in basic necessities. And you have your friendly neigborhood variety store. So if your sari-sari store sells you more than what is permitted by DTI, you can go to DTI and complain. So here is you can recover the excess of what you have paid. Art. 1418. When the law fixes, or authorizes the fixing of the maximum number of hours of labor, and a contract is entered into whereby a laborer undertakes to work longer than the maximum thus fixed, he may demand additional compensation for service rendered beyond the time limit. 1418: So when the maximum hours of work is fixed, you can demand for overtime pay. May overtime pay be waived? It depends. If for service rendered, yes. But if you are still going to render service. No, that is against the law. Art. 1419. When the law sets, or authorizes the setting of a minimum wage for laborers, and a contract is agreed upon by which a laborer accepts a lower wage, he shall be entitled to recover the deficiency.  Cannot be waived;  Any contract in violation of this article shall be invalid. 1419: Is minimum wage. Art. 1420. enforced.   In case of a divisible contract, if the illegal terms can be separated from the legal ones, the latter may be If indivisible, the whole contract is void. If divisible, the legal terms may be enforced if they can be separated from illegal terms.

1420: In case of a divisible contract, if the illegal terms can be separated from the legal ones, the latter may be enforced. So an example of that would be a pledge, and there is that stipulation that you cannot redeem what has been pledged and it becomes the property of the creditor, that is a void agreement.So in that case, the loan obligation shall remain but the pledge shall be stricken out. Art. 1421. The defense of illegality of contract is not available to third persons whose interests are not directly affected.

1421: So third persons can invoke as a defense the illegality of the contract for as long as they will be affected by such an illegal contract. Art. 1422. A contract which is the direct result of a previous illegal contract, is also void and inexistent.

1422: A contract which is the direct result of a previouis illegal contract, is also void and inexistent. Precisely because the previous contract might either be one that has an illegal object or an illegal cause or forbidden cause. In short, the contract that will arise from such forbidden contract would also be void and inexistent . Now there is this case Osmena vs. Commission on Audit. Now the City of Cebu appropriated 5 million for the construction of a modern abatoir but the allocation exceeded the budget. The construction company that won the bidding had already started building the slaughter house, and it demanded for the payment of what it had constructed. The parties and the City of Cebu arrived at a compromise agreement, the obligation as demanded by the constructor is about 2.5 million so they arrived at about 1.5 M as a compromise but it was questioned with respect to the compromise and it went to SC. SC said the compromise agreement is void because it is a derivative of a void contract. Title III. - NATURAL OBLIGATIONS

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Obligations and Contracts: Sources 2006 Lectures of Atty. Lydia Galas (Hann Sevilla), 2007 Case Digests (from Erwin Vicente), Book of Tolentino, RAM Notes Compiled by: Hanniyah Sevilla, Christ May Andolana, Ferlyn Ong for 4th year Batch 2009

Art. 1423. Obligations are civil or natural. Civil obligations give a right of action to compel their performance. Natural obligations, not being based on positive law but on equity and natural law, do not grant a right of action to enforce their performance, but after voluntary fulfillment by the obligor, they authorize the retention of what has been delivered or rendered by reason thereof. Some natural obligations are set forth in the following articles. Voluntary Fulfillment – debtor complies with the same even if he knows that he could not have been legally forced to do so.  In case of partial voluntary fulfillment, the balance cannot be recovered since on said balance, no legal obligation has yet been created. In case of Prescription  If prescription is unknown, there can be recovery.  If it is known, no recovery, for this is a case of natural obligation. Example of Natural Obligation (1) Obligation to pay interest for use of money, even if not agreed upon in writing. (2) Duty to support natural or spurious children. (3) Giving of material and financial assistance to children upon their marriage.  Moral obligation has no juridical tie; though it may be converted into civil obligation. (e.g. acknowledgment of a prescribed debt)

NATURAL OBLIGATIONS Four kinds of obligations according to juridical science: moral obligations, these are obligations which are purely based on conscience or what we call as duty. Natural obligations are obligations not sanctioned by any action (court action). Civil obligations which are obligations enforceable in court, except unenforceable contracts. Mixed is either civil with moral, or moral with natural. But natural obligations may be converted into civil obligations by novation or by acknowledgement or confirmation such as that of a prescribed debt. 1423: Obligations are either civil or natural. Civil obligations give a right of action to compel their performance. Precisely when demand is made and the other person does not perform what is incumbent upon him, the creditor can institute an action to compel the obligor to perform his obligation. But such is not true in natural obligations because natural obligations are not based on positive law but on equity and natural law and being such they do not grant a right of action to enforce their performance, but after voluntary fulfillment by the obligor, they authorize the retention of what has been delivered and rendered by reason thereof. So if there has been voluntary performance then the person who has performed can no longer recover or demand for the return or the payment of what he has delivered or rendered. Art. 1424. When a right to sue upon a civil obligation has lapsed by extinctive prescription, the obligor who voluntarily performs the contract cannot recover what he has delivered or the value of the service he has rendered. So what are the different kinds of natural obligations? One of which is found in 1424. So in all instances the performance must be accompanied by voluntary because if there is no voluntariness in the performance, then the person who perform can demand the restoration or the payment of whatever has been delivered or rendered. So there is always that voluntariness on the part of the person who performs the obligation. Here is the civil obligation has already prescribed, so a debt has already prescribed because no demand was made within the period of 10 years and therefore the creditos could no longer sue the debtor for the non payment. But the obligor is conscience stricken, he voluntarily delivers. So in that case he can no longer demand for the return of what has been delivered. Art. 1425. When without the knowledge or against the will of the debtor, a third person pays a debt which the obligor is not legally bound to pay because the action thereon has prescribed, but the debtor later voluntarily reimburses the third person, the obligor cannot recover what he has paid. Another example would be 1425. Remember 1236 and 1237. Because the action the has already prescribed, but the debtor later voluntarily reimburses the third person, the obligor cannot recover what he has paid. He is not under obligation under the law to reimburse the third person because the payment did not redound to his benefit. Art. 1426. When a minor between eighteen and twenty-one years of age who has entered into a contract without the consent of the parent or guardian, after the annulment of the contract voluntarily returns the whole thing or price received, notwithstanding the fact the he has not been benefited thereby, there is no right to demand the thing or price thus returned. 1426. (15 years old to 17) Remember 1241: the minor is not obliged to restore. He is only obliged to restore if he has kept the thing or if it has redounded to his benefit.

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Art. 1427. When a minor between eighteen and twenty-one years of age, who has entered into a contract without the consent of the parent or guardian, voluntarily pays a sum of money or delivers a fungible thing in fulfillment of the obligation, there shall be no right to recover the same from the obligee who has spent or consumed it in good faith. 1427 no longer applies to 18-21, but by analogy it applies to those below 18. Correlate to 1239: delivers a sum of money a sum of money or a fungible thing in fulfillment of an obligation there shall be no right to recover the same from the obligee who has spent or consumed it in good faith. This was mentioned in 1239, you remember that. Art. 1428. When, after an action to enforce a civil obligation has failed the defendant voluntarily performs the obligation, he cannot demand the return of what he has delivered or the payment of the value of the service he has rendered. 1428: This time suppose A files a case against B. But the court decided in favor of B, therefore the complaint of A against B did not prosper so whatever he has prayed for in that complaint could no longer be recovered from B since there was an unfavorable judgment against A. However, if B decides to honor what has been written in the complaint and delivers voluntarily he could no longer asks for the return of what he has delivered or payment for the service he has rendered. Art. 1429. When a testate or intestate heir voluntarily pays a debt of the decedent exceeding the value of the property which he received by will or by the law of intestacy from the estate of the deceased, the payment is valid and cannot be rescinded by the payer. 1429: Remember 1311that the heirs is not liable beyond the value of what he has received, so he is not liable for the debts of the decedent which exceeds the amount he received from the decedent. Art. 1430. When a will is declared void because it has not been executed in accordance with the formalities required by law, but one of the intestate heirs, after the settlement of the debts of the deceased, pays a legacy in compliance with a clause in the defective will, the payment is effective and irrevocable.  If the will is void, the legacy is also void and the deceased is considered to have died without a will. 1430: Wills are classified either notarial or holographic. Let us go to holographic or simple will. It has 3 requirements, one is it must be entirely handwritten by the testator, dated by the testator and signed by the testator. The requirement dated and signed applies to all pages of the will. If there are alterations, there must be a signature otherwise the will be void. Now suppose one of the pages was not dated. So if the testator dies what will the heirs do, they will now file before the court a special proceeding for the probate of the will. Now if one of the pages was undated, then the court declares the will void. So in that case, the stipulations in the will will no longer govern the distribution of the estate of the deceased. So if what is stated here is a legacy (personal movable property) of a car and the will is void, then suppose the heirs are A, B, and C could now ignore the provisions in the holographic will. Despite the fact, the heirs chose to honor the legacy stated in the will. A, B, C as heirs of X. X already died, the will of X contains a stipulation in favor of D which was a legacy. The court declared the will void because one of the pages was not signed by the testator. But B and C now chose to honor the legacy, A did not want to. But he was forced by B and C, so there was force employed upon him, therefore consent was vitiated. Now A died a year later, the heirs of A, Y and R filed now a petition for rescission because the consent of A was vitiated by force. Being the heirs of A will the action for annulment prosper? No. Because while it may be true that they are successors in interest, the vice that was employed upon A is personal upon A and moreover, they merely have an inchoate right over the thing that was delivered to D as a legacy at the time of the delivery. So the action is true with A but not with Y and R. Natural obligations will only produce a binding effect if the performance is coupled with voluntariness. If there is no voluntarines on the performance, then the person who performed it can demand for the return of whatever he has delivered or payment for the service he has rendered. Otherwise, in the absence of voluntariness, it ceases to be a natural obligation. Title IV. - ESTOPPEL (n)  A bar w/c precludes a person from asserting or denying anything contrary to that w/c has been, in contemplation of law, established as the truth, either by acts of judicial/legislative officers, by his own deed…

Art. 1431. Through estoppel an admission or representation is rendered conclusive upon the person making it, and cannot be denied or disproved as against the person relying thereon. Art. 1432. The principles of estoppel are hereby adopted insofar as they are not in conflict with the provisions of this Code, the Code of Commerce, the Rules of Court and special laws. Art. 1433. Estoppel may in pais or by deed. (1) Estoppel in Pais (Equitable estoppel) a. By conduct or by acceptance of benefits; b. By representation or concealment; c. By silence;

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d. e.

By omission; By laches (unreasonable delay in suing)

(2) Estoppel by Deed ( Technical estoppel) a. Proper (written instrument may also be in the form of a bond/mortgage) b. Estoppel by judgment as a Court record – when court is in res judicata.  Prevents the parties from raising questions that could have been put in issue and decided in previous case. Estoppel in Pais  Arises when one, by his acts, representations or admissions or by his silence when he ought to speak out, intentionally or thru culpable negligence, induces another to believe certain facts to exist, and such the other rightfully relies and acts on such belief, so that he will be prejudiced if the former is permitted to deny the existence of such facts. 4 Elements of Laches a. Conduct on the part of defendant, or of one under whom he claims, giving rise to the situation of w/c the complaint is made and for w/c the complaint seeks a remedy. b. Delay in asserting the complainant’s rights, the complainant having had knowledge or notice of defendant’s conduct and having been afforded an opportunity to institute a suit. c. Lack of knowledge or notice on the part of the defendant that complainant would assert the right on w/c he bases his suit. d. Injury/ prejudice to defendant in the event relief is accorded to complainant, or the suit is not held to be barred. Estoppel by Deed  A bar w/c precludes a party to a deed and his privies from asserting as against the other and his privies any right or title in derogation of deed, or from denying the truth of any material fact asserted in it.  There must be a written contract;  If deed/instrument is null and void, estoppel will not apply.  If a person notarizes (and is not a party to), the instrument, estoppel does not apply. ESTOPPEL Estoppel is a bar that precludes a person from denying or asserting anything contrary to what he has ascertained earlier. A very common example of estoppel would be one that came out of a bar exam. This guy was walking a dog around the neighborhood. Now a neighbor asked the person whose dog he was walking. And he said, mine. A week later the same dog bit the neighbor. The neighbor went to the person and asked for reimbursement and the person said it is not my dog but a friend of mine's. I just walked the dog. Well, that is estoppel. He cannot assert something different from what he has represented earlier. Estoppel by silence or inaction. This is sometimes referred to as estopple by standing by or laches. The principle behind that is one who is silent when he ought to speak cannot be heard later on to speak when he ought to be silent. If there is a need to rebutt or affirm, then rebutt or affirm it otherwise you will be estopped later on from denying or affirming it. 1431: So estoppel works against the person representing that he is this type of person and later on he would say that it was just a joke if the other person has relied on your statement or representation. Now there is also what we call as estoppel by acquiesence. But estoppel is different from laches which is the failure to institute the action within the reasonable period of time. It is not based on positive law unlike prescription. Estoppel cannot be also predicated on an illegal act. Meaning the person who has acted on a particular illegal act, cannot be estopped. For example a person who is in need of money because a loved one is hospitalized and he goes to a money lender, and the money lender says my rate of interest is 20% per month. Despite that, he borrows. And later on when payment is to be made, he would now question the interest. The creditor cannot say that you are estopped from questionning the interest, because that is predicated in an illegal act. So estoppel will not lie against the debtor. Now other kinds of estoppel we have, corporation by estoppel. Like two or more persons would represent themselves to a person(stranger) that they are officers of a corporation and by reason of that misrepresentation, the third person would enter into a transaction with these people who are in fact not a corporation, then those who misrepresented themselves are already estopped from denying that actually no corporation existed. Then we have judgment by estoppel, (Tijam vs. Sibunghanoy): One of the parties knew that the court trying the case has no jurisdiction but despite knowledge he entered into trial. Unfortunately the ruling of the court was not favorable to the person who knew. So later he invoked the fact that the lower court had no jurisdiction, SC said he was estopped. We also have estopple in pais and estoppel by deed. Estoppel in pais is what we call as equitable estoppel. In cases of contracts, we know that a check is not a legal tender. But if the creditor accepts the check without any objection, he cannot be heard later on to say that the check is not a legal tender because of his acceptance of the check. Estoppel by deed or technical estoppel. Now a house made of strong material is an immovable. But the parties in an agreement may treat the house as a chattel, meaning movable. If the question arises later on about the contract, the parties cannot be heard later on to say that the contract is void because the object is not actually a movable but an immovable property. Yan, technical estoppel.

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Obligations and Contracts: Sources 2006 Lectures of Atty. Lydia Galas (Hann Sevilla), 2007 Case Digests (from Erwin Vicente), Book of Tolentino, RAM Notes Compiled by: Hanniyah Sevilla, Christ May Andolana, Ferlyn Ong for 4th year Batch 2009

Art. 1434. When a person who is not the owner of a thing sells or alienates and delivers it, and later the seller or grantor acquires title thereto, such title passes by operation of law to the buyer or grantee.  In this kind of estoppel, prejudice is not essential. Art. 1435. If a person in representation of another sells or alienates a thing, the former cannot subsequently set up his own title as against the buyer or grantee.  Prejudice is not essential Art. 1436. bailor.  A lessee or a bailee is estopped from asserting title to the thing leased or received, as against the lessor or Presumption does not apply if alleged tenant does not admit expressly or impliedly the existence of lease contract (such as when landlord did not, attach or plead in his complaint the contract of lease.)

1434: Here, the person is nt the owner of the thing alienated but he sold it. Later on however he acquired ownership of the thing. he cannot be heard later on that at the time of the alienation, he was not actually the owner but merely a representative. 1435 is the exact opposite of 1434. But a tenant will not be heard to dispute the title of the landlord. And the presumption is conclusive. It is not a disputable presumption. Neither can a bailee dispute the title of the bailor. Art. 1437. When in a contract between third persons concerning immovable property, one of them is misled by a person with respect to the ownership or real right over the real estate, the latter is precluded from asserting his legal title or interest therein, provided all these requisites are present: (1) There must be fraudulent representation or wrongful concealment of facts known to the party estopped; (2) The party precluded must intend that the other should act upon the facts as misrepresented; (3) The party misled must have been unaware of the true facts; and (4) The party defrauded must have acted in accordance with the misrepresentation. 1437 applies to an immovable property and a third person is misled by a person with respect to the ownership or real right over the immovable. The latter is precluded from asserting his legal title or interest provided all the requisites are present. 1. There must be fraudulent representation or wrongful concealment of facts known to the party estopped; 2. the part precluded must intend that the other should act upon the facts as misrepresented; 3. the party misled must have been unaware of the true facts; 4. The party defrauded must have acted in accordance with the misrepresentation. This applies to an immovable. If it were a movable, you apply 1435 and 1436. Art. 1438. One who has allowed another to assume apparent ownership of personal property for the purpose of making any transfer of it, cannot, if he received the sum for which a pledge has been constituted, set up his own title to defeat the pledge of the property, made by the other to a pledgee who received the same in good faith and for value.  Estoppel resulting from acceptance of benefits (knowledge of true facts) 1438 applies to a situation wherein you allow your friend to borrow your jewelry and pawn. And later on also made use of the portion of the proceeds of the loan. And later on you had a change of heart and tells the owner of the pawnshop that you are the owner. that is estoppel. Because there is estoppel in the acceptance of benefits. Art. 1439. Estoppel is effective only as between the parties thereto or their successors in interest.

1439: Estoppel is effective only as between the parties thereto or their successors in interest. But not to third persons. Third persons can invoke the principle of estoppel. Now estoppel does not lie against the state. Neither does prescription lie against the state. That is the general rule.

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