ObliCon Mid Term Notes

 
Usurious Transactions and interests
 
Usury Law -  provided a ceiling for allowable interest for certain transactions
Usurious  -  when the interest stipulated in the contract exceeds the ceiling set by the Usury Law
 
Bank Circular 905
–      supended or rendered the Usury Law inoperative
-      parties can now agree on any interest rate (Jan. 1, 1983; security bank vs. RTC)
 
What laws currently govern interest rates?
Art. 1159. Obligations arising from contracts have the force of law between the contracting parties and should
be complied with in good faith.
 
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.
(Liberality principle/freedom to stipulate provisions)
 
Since the usury law is no longer in effect, and a contract can no longer be usurious, how can excessive and unconscionable
interest rates be set aside?
The right legal strategy would be to declare the contract as “contra bonos mores” or against public morals ( Art. 1306),
which will render the contract null and void.
 
Even though the parties signed the agreement knowing that the interests were excessive, the right to declare a void document
null and void cannot be waived.
 
Kinds of interest
 
 1. Moratory interest - in form of consideration for the use of money
                                           - accrues on the date stipulated in the contract
 
 2. Compensatory - given by way of damages to compensate for the breach of obligation (Art.1170)
                                    - presupposes default
                                    - a component of actual damages
                                    - accrues on extrajudicial or on judicial demand(if no demand letter was sent)
                                    - see Siga-an
 
Cauton vs CA
Parties to the loan have been given wide latitude to agree on any interest rate. However, nothing in the said circular grants
lenders carte blanch authority to raise interest rates to levels which will either enslave their borrowers or lead to a
haemorrhaging of their assets. The stipulated interest rates are illegal if they are unconscionable.
 
Ex. of unconscionable interest rates
*What is “unconscionable” is for the court to determine .

Mendel vs Ca : 5.5% per month

Solangon vs. Slazar: 6% per month
According to SC the above rates are excessive, unconscionable, iniquitous, exorbitant, and morally shocking
*Only the rate is nullified, not the agreement to pay interest . The excessive interest rate will be void and will be
replaced with an interest specified by law.
 
*Stipulations authorizing iniquitous or unconscionable interest are contrary to morals, if not against the law.
 
*Because the contract is null and void, it is inexistent from the beginning, and it cannot be ratified.
 
Eastern Shipping
 
With regard particularly to an award of interest in the concept of actual and compensatory damages, the rate of interest, as well
as the accrual thereof, is imposed, as follows:
 
1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or forbearance of money,
the interest due should be that which may have been stipulated in writing. Furthermore, the interest due shall itself earn
legal interest from the time it is judicially demanded. In the absence of stipulation, the rate of interest shall be
12%  per annum to be computed from default, i.e., from judicial or extrajudicial demand under and subject to the
provisions of Article 1169 of the Civil Code.
 
2. When an obligation, not constituting a loan or forbearance of money, is breached, an interest on the amount of
damages awarded may be imposed at the discretion of the court at the rate of 6%  per annum. No interest, however, shall be
adjudged on unliquidated claims or damages except when or until the demand can be established with reasonable
certainty. Accordingly, where thedemand is established with reasonable certainty, the interest shall begin to run
from the time the claim is made judicially or extrajudicially (Art. 1169, Civil Code) but when such certainty cannot
be so reasonably established at the time the demand is made, the interest shall begin to run only from the date the
judgment of the court is made (at which time the quantification of damages may be deemed to have been reasonably
ascertained). The actual base for the computation of legal interest shall, in any case, be on the amount finally adjudged.
 
3. When the judgment of the court awarding a sum of money becomes final and executory, the rate of legal
interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be 12% per annum from such finality until its
satisfaction, this interim period being deemed to be by then an equivalent to a forbearance of credit.
Computation for the award of interest in the concept of actual and compensatory damages
 
 
Ex.
Dec. 30, 2004 - x owed y 200,000 due date dec. 30, 2005
Dec. 30, 2005 - x failed to pay a single cent
Dec. 30, 2006 - demand letter
Dec. 30, 2007 - complaint for collection of sum of money
Dec. 30, 2010 - judge rendered decision
 
*There was no stipulation on interest in the promissory note.
The rate used would be 12%, since the contract concerns a forbearance of money, to be computed from default (Dec. 30,
2006). There would be no legal interest upon judicial demand. After the judgement becomes final and executor y (lapse of 15
days from court decision without appeal), the applicable rate will be 12% of the total judgement, until its satisfaction.
 
 
 
* If the stipulation is 10% interest per annum
The interest due should be 10%. From judicial demand, Dec. 30, 2007, the interest due shall itself earn legal interest (12% of
the stipulated interest). After the judgement becomes final and executor y, the applicable rate will be 12% of the total
judgement, until its satisfaction.
 
David vs CA
In cases where no interest had been stipulated by the parties, no accrued conventional interest could further
earn interest (compound interest) upon judicial demand.
Art. 2212. Interest due shall earn legal interest from the time it is judicially demanded, although the obligation
may be silent upon this point.
 
If there is no stipulation if the payment is for the principal or the interest.
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. (Interest Payment)
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. (Instalment Payment)
 
Payment of interest precedes payment of principal.
Payment of a prior instalment precedes payment of a later instalment
 
Manila trading & Supply Co
*Receipt issued must also indicate the specific month of instalment covered by the payment and the date f the receipt is not
controlling.
 
Can be rebutted by contrary evidence.
 
Remedies of Unpaid Creditor For Breach of Obligations
 
Extra-judicial Remedies
Examples:
1.       Rights of unpaid seller of personal property such as “lien” over the goods or right to retain the goods while still in
possession of the seller.
2.       “Right of stoppage in transitu” after seller parted with goods and buyer became insolvent.
3.       Resell perishable goods or as agreed upon, etc.;
4.       Cancel or rescind sale;
5.       Withhold delivery if ownership is still with the seller
 
Extrajudicial Remedies
(In sale transactions)
-      applies if the property is still with the seller
-      rights of unpaid seller of personal property such as “lien over the goods for right to retain the goods while still in
possession of the seller (goods will not be returned to supplier if it has not been paid for yet)
-      if the seller is the supplier, and the buyer refuses to pay, then the seller/supplier finds another buyer
-      If the property is with the buyer who did not pay, resort to judicial remedies to recover items
-      Right of stoppage in transito - After seller parted with goods
Goods are in transit from the seller to the buyer, and the buyer becomes insolvent.
Seller can prevent delivery as long as it can be established that the buyer became insolvent before the delivery.
-      Resell perishable goods or as agreed upon, etc.;
-      Cancel or rescind sale;
-       Withhold delivery if ownership is still with the seller
 
*Real property –  delivered through deed of absolute sale
 
Judicial Remedies
 
A
.      Principal remedies:
1.       Specific Performance, Substitute Performance, Equivalent Performance;
2.       Rescission (Resolution) (1191)
B.      Subsidiary Remedies (can only be availed in the absence of principal remedies)
1.       Accion Subrogatoria
2.       Accion Pauliana
C.      Ancillary Remedies (replevin, attachment, garnishment, etc.)
 
Principal remedies – have to be exhausted first before subsidiary remedies can be availed of
 
Subsidiary remedies - can be availed of only in the absence of principal remedies, can be a ground for dismissal if principal
remedies aren’t exhausted first
 
 Ancillary remedies – can be filed simultaneously with any principal remedies
Specific Remedies
 
Specific performance – to compel an obligor to do the obligation in the contract
-applicable to real obligations but not to personal obligations
 
Substitute performance – the performance of the obligation is done by another, other than the obligor, at the obligor’s
expense
-      Applies in personal obligations
 
Equivalent Performance – presupposes that the obligation can no longer be performed
-      Comes in the form of a demand for damages
 
Rescission – cancelation or termination of a contract
 2 kinds
a.       Art. 1191 -  based on breach of the obligation/ faith
For reciprocal obligations where one of the obligors does not comply with what is incumbent upon him (unless there is just
cause to fix a period);
-      Also called resolution
-      Contemplates judicial action – court determines if there are grounds to terminate the contract. 
Exceptions:
*extra judicial rescission is stipulated in the contract/ agreed upon by the parties AND
* there is no delivery (transfer of ownership) yet
 
!!!Gen. rule: if property has been delivered, rescission needs judicial action
If seller forces defaulting obligor to give up property, Grave coercion would be committed.(?)
 
 
b.      Art. 1380 – based on economic injury – somebody considered by the law as incapacitated to enter into a contract, minors
or wards,  is capacitated by somebody else  (ex. Guardian).
Ex. Guardian sells his ward’s property for a price 50% lower than the market value.
Ward suffers a Lecion (nalugi)  – if > than 25%
Can be rescinded by guardian if guardianship has been terminated
Can be rescinded by ward if he is of age
 
 
Important rules

 Non cumulative but alternative

-      Injured party can ask for/ choose between specific performance (+damages) or rescission (+damages), not both.
-      However, if fulfillment becomes impossible or prohibited by lawful authority, rescission may still be availed of even if
fulfillment had already been chosen
 

 Rescission in 1191 can only be availed if the breach is substantial. If the breach is slight, the contract can’t be
cancelled.

 
DBP vs CA
Regular and substantial payments were made. Late payments were accepted without protest. Rescission will not be permitted
for slight breach or casual breach, but ONLY SUCH SUBSTANTIAL AND FUNDAMENTAL BREACH as would defeat the very object
of the parties in making the agreement.
 
 Central Bank vs. Bichara
Non-payment of purchase price at the stipulated date without a valid and good reason then there is substantial breach.
 

 Rescission can only be demanded if the injured party is ready and able to comply with his obligation
 Rescission abrogates the contract from its inception and requires restitution of benefits received

What has been delivered must be returned

As if no contract has been entered into

 Rescission can be carried out only when the one demanding can return whatever he may be obliged to restore

 
Liam vs CA
: The right of resolution of a party to an obligation under Article 1191 of the Civil Code is predicated on a breach of faith by the
other party that violates the reciprocity between them. The proper party therefore to invoke 1191 should be the
“injured party” and not the “non-complying party”
Ex. The seller who is unable to deliver the car to buyer cannot rescind the contract.
Campo Assets vs Club XO:
parties to a contract expressly reserve an option to terminate or rescind a contract upon the violation of a resolutory
condition, notice of resolution must be given to the other party when such right is exercised.
 
Phil. Nat’l Construction Corp. Vs Mars Construction:
The act of treating a contract as cancelled pr rescinded is always PROVISIONAL, that is, it is CONTESTABLE AND SUBJECT TO
JUDICIAL DETERMINATION. Judicial action is necessary for its rescission in order to afford the other party opportunity to
determine the propriety of the rescission. (see also Goldenroad Inc. Vs CA)
 
 
!!!Rescission can be purely extrajudicial provided that it is agreed upon by both parties and there is no transfer of ownership
yet.
 
Hrs. Of Justice JBL Reyes vs CA:
While rescission requires judicial intervention, the law on obligations and contracts doesn’t however,  prohibit any party from
entering into a contract that dispenses with judicial intervention. Ex. Contract to sell
 
Pangilinan vs CA:
Where ownership of the property with the seller, as in a Contract to Sell (vs. Contract of Sale or Absolute Sale) with reserved
title, and subjects it merely to a positive suspensive condition (payment). EXTRAJUDICIAL RESCISSION may be validly agreed
upon in the contract and this has been the practice many years already.(?)
 
 
 
Contract to sell – no transfer of ownership
-      Conditioned on the payment of the buyer
-      Deed of Conditional Sale.. )for and in consideration of the sum 000, of X conditionally sells the property subjects to the
following conditions: ......)
-      Parties  can agree on extrajudicial rescission (?)
 
Contract of Sale – with transfer of ownership
-      Presupposes that payment has been accomplished
-      Deed of Absolute Sale
-      Rescission needs judicial action
 
 
Golden Road vs CA
WON an ernest money should be returned when a contract is rescinded.
 
Article 1385 of the Civil Code requires the parties to a rescinded contract to return the things which were the object of
the contract with fruits and interests. Since an earnest money forms part of the purchase price if contract is
consummated, it must be returned to the prospective buyer upon rescission of the contract.
 
Ernest money -   a deposit paid at the time of entering a contract to indicate the intention and ability of the buyer to carry out
the contract, with the remainder due at a particular time. 
-  The buyer is not yet committed to buy the property
-  the property is not offered to any other buyer until the stipulated time
-  Forms part of the purchase price
-      should be returned, unless, there is a forfeiture provision in the contract. (In case of.... by reason of fault of the buyer...
the [ernest money amount] the will be forfeited in favor of the seller)
 
Option money – same as ernest money except that it will not be subtracted from the purchase price.
 
Pure and Conditional Obligations
 
Pure Obligation – does not have a condition or a term
-     Demandable at once
 
Conditional Obligation    – one whose effectivity is subordinated to the fulfillment or non-fulfillment of a condition
-      Is also demandable at once if conditions are met
 
Condition – that which is future and uncertain
-      may also refer to past events that are unknown to parties and the public;
*if it refers to past events that are unknown to parties, but known to public – period
 
Classification
 1.Suspensive condition – happening of condition gives rise to the obligation
2.resolutory condition – happening of condition extinguishes obligation
 
 Smith, Bell vs. Sotelo
The obligation to “deliver the object to the creditor when they are delivered in Manila from another country (New York, etc.) is
subject to a “condition” that the object will actually arrive in Manila
 
Condition vs Term Period
-“condition” is different from “term” or “period” in that the former the uncertainty consists in whether the day will come
or not, while in the latter the uncertainty is the
Period - “date or time when the event will come (event necessarily comes)(?)
 
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.
 
-  Ex. I will pay if I can already afford to.
-  The commitment to pay is not related to any event, except that he is waiting for the arrival of the money.
-  Not protestative (“I will pay if I wan’t to”)
-  No fixed period
 
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)
-  If the parties contemplate of a period but the period is not stated, the remedy is to go to court and ask that a period be fixed.
Until a court fixes a period, the debtor can’t be placed in default.
 
Kinds of Conditional Obligations
-Suspensive vs Resolutory (1181)
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
-Potestative, Casual, Mixed (1182)
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.
-Possible, Impossible, Postive ( 1184, 1185)
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)
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)
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.
 
 
Suspensive and resolutory
 
                In contracts to sell, where ownership is retained by the seller until the full payment of the price, is a positive
suspensive condition, the failure of payment is not a breach (casual or serious) but simply an event that prevented the
obligation of the vendor to convey title from acquiring binding force. To argue that there was only a casual breach is to proceed
from the assumption that the contract is one of absolute sale, where non-payment is a resolutory condition.
 
Effects of fulfillment of suspensive condition to give: (1187)
                The effects of a conditional obligation to give once the condition has been fulfilled, shall RETROACT TO THE DAY
THE OBLIGATION WAS CONSTITUTED, except as to:
(1)    fruits and interests in reciprocal obligations [as they are deemed to have been mutually compensated] and
*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
 - all the fruits and interests are considered as having been compensated
(2) period of prescription [which runs only upon the happening of the condition]
- in right to file suit for criminal action, prescription starts from occurrence of crime
- in a pure obligation, prescriptive period runs at once
*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
 
 
 
Art. 1186 - Doctrine of “Constructive Fulfillment”
                The condition shall be deemed fulfilled when the obligor voluntarily prevents its fulfillment
See: Phil. Long Distance Company vs. Jeturian
 
! Potestative and Suspensive conditions are invalid
 
-“Action to Preserve Rights”;
                - May be brought by the creditor BEFORE THE FULFILLMENT OF THE CONDITION.
                - to make sure that the obligor will perform the obligation when the condition occurs
 
PLDT vs Jeturian
Policy that employees who serve 20 years and reaching 60 yrs old. shall get a retirement benefit was abolished. Employees who
waited to be retired will not receive the benefit. The trial court said it is a form of Constructive fulfilment. PLDT said that the
right was only an expectancy. According to the SC there is an action to preserve the right in a suspensive condition situation.
 
-The debtor may recover what, during the pendency of the suspensive condition, he has paid “by mistake”. (Basis: solutio
indebiti)
-During the pendency of the condition in an obligation to give a specific object, the object may be lost (goes out of commerce
or illegal, or literally lost, perishes, damaged beyond repair) may deteriorate, or may improve.
The same rule applies under 1190
Art. 1189 (Suspensive) & Art. 1190 (Resolutory; provisions with respect to the debtor, shall be applied to the
party who is bound to return).
in case of the improvement, loss or deterioration of the thing during the pendency of the condition: 
(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 when it perishes, or goes out of commerce, or disappears in such a way that its existence is
unknown or it cannot be recovered;
(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. 
 
Potestative, Causual, Mixed
-If the obligation is subject to a condition
 
Berd vs Magdalena Estate
Obligation to pay "Until defendant shall obtain a loan fom the bank" – subject to a condition; no certainty that bank will lend
you money.
 
Conventional period
 - period agreed upon by the parties
- presumed to be for the benefit of both parties; debtor is given enough time to look for resources to pay; lender is benefited
through interest
Significance:
* the creditor cannot prematurely demand fulfilment from the debtor and vice-versa (Nepomoceno vs.Narciso)
* no one will be in default and be liable for legal consequences before the arrival of the period.
 
Court required to fix period if (see 1197)
1.       no period was fixed by the parties but it can be infered that a period was intended by the parties    
ex. Construction contracts
2.       when the duration of the period depends upon the will of the debtor  (! What is invalid is when performance of
obligation depend upon the sole will of the debhtor)
3.       when debtor's means permit him to do so (1180)
 
Important Rules:
-      action to fix the period must be filed within 10 yrs from perfection of contract
-      once the court has fixed the period, the courts cannot change them.
Art. 1198. The debtor shall lose every right to make use of the period: (and obligation becomes demandable at once)
(1) When AFTER the obligation has been contracted, he becomes insolvent, unless he gives a guaranty or
security for the debt;
         - does not apply if after the obligation have been contracted, the lender found out that the debtor has been insolvent
since before the contract was signed.
(2) When he does not furnish to the creditor the guaranties or securities which he has promised;
        - ex. no real estate mortgage in favour of bank
(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;
- mortgaged property caught fire- fortuitous event
* accessory obligation – ex. real estate mortgage to secure the principal contract of loan
* fortuitous event of the accessory does not extinguish the principal obligation
(4) When the debtor violates any undertaking, in consideration of which the creditor agreed to the period;
        - undertaking that was the bases for agreeing with the obligation
(5) When the debtor attempts to abscond
 
 
Alternative and Facultative Obligations
 
Alternative
Object due - Delivery of one will extinguish the obligation
Compliance -  Comply with any of the alternative obligation
Right of choice of creditor, debtor, 3rd person
Fortuitous event or loss -  If no choice has been made yet, does not extinguish obligation
 Effect of culpable loss  - No effect
   * except if creditor is given right of choice and debtor destroys that object intentionally
 
Facultative
 Object due -  There is only one object but debtor given the choice of a substitute
COmpliance - Only one
Right of choice only for obligor
Fortuitous event - Obligation is extinguished if specific
 
Joint and Solidary Obligation 
 
Joint obligation
-      presumed
-      There is a solidary liability only when the obligation expressly so states, or when the law or the nature of
the obligation requires solidarity (1207)
-      each credit and debt is separate and distinct
-      Creditor can demand for the payment of his proportionate share of the credit and debtor can be compelled only to pay for
the proprtionate share of the debt
-      To be in default, x and y must jointly demand; if subject is indivisible, demand must be made upon all and by all
 
Solidary obligation
-      Not presumed
-      Only when stipulated or law requires, or nature of obligation requires
-      Each of the creditor have the right to demand, while each of the debtors is bound to render entire compliance ( principle of
mutual agency)
-      One who shoulders have the right to demand
 
Debtor A, B, C owes 120 k to Creditor X, Y
 
Joint
 
Determine debts and credits:                     A,B,C debt is  40 k each                  X,Y credit is 60 k each

 X is only entitled to demand 40 k from A

 What b is insolvent?

 A or C can't shoulder B’s debt

Solidary
-      X is entitled to demand 120 from A
-      X can be considered as an agent of Y and can therefore collect his share (mutual agency)
 
* If Insolvent
J - other obligors can't be made to pay
S- other obligors can shoulder
 
Obligation with penal clause
Penal clause - an accessory undertaking, dies upon extinguishment of principal obligation
 
Functions:
1.        provide for liquidated damages
2.       2. Strengthen the coercive force of the obligation by threat of greater responsibility in the event of breach
 
* Liquidated - pre-determined, fixed, no need of proof
 
Art. 1228. Proof of actual damages suffered by the creditor is not necessary in order that the penalty may be
demanded.
-      Just present the contract
 
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 fulfilment of the obligation.
-      If there is stipulation, damages and interests may still be demanded
-      the debtor will still be held for damages if he refuses to pay the penalty or he be guilty of fraud
 
Reduction of penalty by the courts
1. Principal obligation has been partly complied with
2. Penalty is iniquitous or unconscionable, even if there is no compliance at all
 
*Debtor can't be exempt performance by just paying for the penalty
*Creditor can't demand both the penalty and the performance of obligation
 
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.