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OBLIGATION

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CHAPTER 2 Obligation to take care of the thing due:
NATURE AND EFFECT OF OBLIGATIONS 1. “Diligence of a good father of a family”
(Arts. 1163 to 1178) • It equates with “ordinary care” or that diligence
which an average (a reasonably prudent person
Two Kinds of things in Obligation exercises over his own property)
Specific or Determinate Generic or Indeterminate 2. “Another standard of care” – Exception to
thing thing “Diligence of a good father of a family” care:
It is identified by its It is identified only by its a. Common Carriers – a person or company
individuality. specie or class. engaged in the transportation of persons
It is particularly designated It refers only to a class of and/or cargoes is bound to carry the
or physically segregated genus it pertains and passengers safely as far as human care and
from all others of the same cannot be pointed out with foresight can provide, using extraordinary
class. (Art. 1459) particularity. diligence of very cautious persons, with a due
The debtor cannot The debtor can give regard for all circumstances (Art. 1755, NCC).
substitute it with another anything of the same class In case of accident, the common carrier will be
without the consent of the as long as it is of the same liable if it exercised only ordinary diligence.
creditor. (Art. 1244) kind. b. Banks – banks are duty bound to treat the
Examples: Examples: deposit accounts of their depositors with the
1. The Rolex watch 1. A Rolex Watch; highest degree of care. However, such degree
that I’m wearing; 2. A 2006 Toyota of diligence is not expected to be exerted by
2. The car sold by X; Camry; banks in commercial transactions that do not
3. The dog name 3. Money; involve their fiduciary relationship with their
Terror 4. A dog depositors. (Reyes vs. CA, 363 SCRA 51)
4. The house at the 5. A cavan of rice c. Stipulated by the Parties – Parties may
corner of Rizal and stipulate degree of diligence other than a good
Cavite street; father (ordinary) for as long as it is not contrary
5. The BMW X3 with to public policy. (see Art. 1306)
plate no. ABR 314 • While parties may agree upon diligence
which is more or less than that of a
Duties of debtor in obligation to give a determinate good father or a family, it is contrary to
thing: public policy to stipulate for absolute
1. To preserve or take care of the thing due; exemption from liability for any fault or
2. To deliver the fruits of the things; negligence.
3. To deliver its accessions and accessories; • A stipulation exempting a carrier from
4. To deliver the thing itself; and liability for gross negligence is against
5. To answer for damages in case of nonfulfillment public policy. (Heacock vs. Macondray,
or breach. 32 Phil. 205)
3. Factors to be considered – the diligence required
Duties of debtor in Obligation to deliver a generic depends on the nature of the obligation and the
thing: circumstances of the person, of the time, and of
1. To deliver a thing of the quality intended by the the place (Art. 1173). General Rule: The debtor is
parties taking into consideration the purpose of not liable if his failure to preserve the thing is not
the obligation and other circumstances (Art. due to his fault or negligence but to a fortuitous
1246) ; and event or force majeure. (Art. 1174).
2. To be liable for the damages in case of fraud, 4. Reason for debtor’s obligation – to insure that the
negligence, or delay, in the performance of his thing to be delivered would subsist in the same
obligations, or contravention of the tenor condition as it was when the obligation was
thereof. (Art. 1170) contracted.

Obligation to take care of the thing due: Obligation to deliver the Fruits of the things:
(Art. 1163) (Art. 1164)

Art. 1163 – Every person obliged to give something Art. 1164 – The creditor has a right to the fruits of
is also obliges to take care of it with the proper diligence the thing from the time the obligation to deliver it
of a good father of a family, unless the law or the arises. However, he shall acquire no real right over it
stipulation of the parties requires another standard of until the same has been delivered to him
care.

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Different kinds of fruits: is subject to a suspensive condition or period if B has paid the
purchase price.
Natural Fruits Industrial Fruits Civil Fruits
These are These are good Those derived by On the other hand, S has the right ot the colt if it was born before
spontaneous produced through virtue of a juridical the obligation to deliver the horse has arisen and if B has not yet
products of the soil, human labor relation. paid the purchase price.
and the young and intervention.
à In this case, On the fulfillment of the condition or the arrival of
other products of
the period, S does not have to give the colt and B is not obliged
animals.
to pay legal interests on the price since the colt and the interests
Examples: Example: Examples: are deemed to have been mutually compensated.
1. Grass; 1. Sugar cane 1. Rents of
2. All trees and 2. Vegetables; buildings;
plants on the 3. Rice; and Real Right vs. Personal Right:
2. Price of leases
lands produced 4. All products of Real Right Personal Right
lands brought by lands; and
without human
reason of human 3. Other similar Right of a person over Right of the creditor to
labor intervention.
labor. income a specific thing (like demand from the
ownership, obligor the fulfillment of
possession, the obligor’s obligation
Right of the creditor to the fruits:
mortgage, lease to give, to do or not to
• The creditor is entitled to the fruits of the thing to be Definition
record) without a do.
delivered from the time the obligation to make the definite creditor
delivery if the thing arises. against whom the
o The intention of the law is to protect the interest right may be
of the creditor should the debtor commit delay, personally enforced.
purposely or not, in the fulfillment of his There is only a definite There is a definite
obligation. Parties
creditor without any debtor and creditor
• In case of rescission, the parties are under definite debtor.
“obligation to return the things which were the
It is binding or It is binding or
object of the contract, together with their fruits and enforceable against enforceable only
the price with its interest.” (Art. 1385) Enforceability
the whole world. against a particular
person
When obligation to deliver arises: X is the owner of a If the land is claimed by
• The obligation to deliver the thing due and the fruits parcel of land under Y who takes
thereof (if any) arises from the time of the perfection Torrens title possession, X has a
Examples
of the contract. registered in his name personal right to
o Perfection in this case refers to the birth of the in the Registry of recover from Y, the
Property. property
contract or the meeting of the minds between
the parties.
• If the obligation is subject into a suspensive Ownership acquired by delivery:
condition or period, the obligation to deliver the • Ownership and other real rights over property are
thing due arises upon fulfillment of the condition or acquired and transmitted by the following:
arrival of the period. However, the parties may o By law;
stipulate to the contrary as regards to the right of o By donation;
the creditor to the fruits of the thing. o By testate & intestate succession;
• In a contract of sale à the obligation arises from the o By tradition; or
perfection of the contract even if the obligation is o By Delivery
subject to a suspensive condition or period where • Delivery à delivery in sale may be actual or real,
the price has been paid. constructive or legal, or in any other manner
• In obligations to give arising from law, quasi- signifying an agreement that the possession of
contracts, delicts, and quasi-delicts à the time of the thing soldis transferred from the vendor to the
performance is determined by the specific vendee (Arts. 1496-1501)
provisions of law applicable.
Contracts only constitute titles or rights to the
transfer or acquisition of ownership, while delivery or
Example:
S sold his horse to B for 15K. No date or condition was stipulated
tradition is the mode of accomplishing the same. Thus,
for the delivery of the horse. While still in the possession of S, the sale by itself does not transfer or effect ownership.
horse gave birth to a colt. The most that sale does is to create the obligation
to transfer ownership. It is delivery, as a consequence
Who has the right to the colt? of sale, that actually transfers ownership. (SLDC vs.
CA, 449 SCRA 99)
In a contract of sale, “All the fruits shall pertain to the vendee (buyer)
from the day on which the contract was perfected” (Art. 1537,
par.2). Therefore, B (buyer) is entitled to the colt even if the delivery

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“He shall acquire no real right over it until the same Where debtor delays or has promised delivery to
has been delivered to him” Meaning: separate creditors:
• The creditor does not become the owner until the • Art. 1165, par. 3 à gives 2 instances when a
determinate thing has been delivered to him. fortuitous event does not exempt the debtor from
• When there has been no delivery yet, the proper responsibility (It refers to a determinate thing).
action of the creditor is not one for recovery of • An indeterminate thing cannot be object of
possession and ownership but one for specific destruction by a fortuitous event because “genus
performance or rescission of the obligation. never perishes” (Art. 1174, 1263)
(Art.1165) • Delay (see Art. 1169); Fortuitous Event (Art. 1174)

Remedies of creditor in Accessions and Accessories:


Real Obligation (Obligation to Give) (Art. 1166)
(Art. 1165)
Accessions:
Remedies of creditor in real obligation when the • These are the fruits of, or additions to, or
thing to be delivered is a determinate or specific improvements upon, a thing (principal).
thing: • Examples:
1. Demand specific performance or fulfillment (if it o House or trees on a land;
is still possible) of the obligation with a right to o Rents of a building;
indemnity for damages to the debtor; or o Air-conditioner in a car;
2. Demand rescission or cancellation of the o Profits or dividends accruing from
obligation with a right to recover damages to shares of stocks
the debtor; or Accessories:
3. Demand the payment of damages to the debtor • These are the things joined to, or included with,
only where it is the only feasible remedy. the principal thing for the latter’s embellishment,
better use, or completion.
Notes: • Examples:
• In an obligation to deliver a determinate thing, the very o Key of a house;
things itself must be delivered, and only the debtor can o Frame of a picture;
comply with the obligation. o Bracelet of a watch;
• It should be made clear that the law does not mean the
o Machinery in a factory;
creditor can use force or violence upon the debtor
o Bow of a violin.
• The creditor must bring the matter to the court first and
the court will be the one to order the delivery.
Note: Accessions are not necessary to the principal thing. On
the other hand, the accessory and the principal thing must go
Remedies of creditor in real obligation when the together. However, both accessions and accessories can exits
thing to be delivered is a generic or indeterminate only in relation to the principal.
thing:
• The creditor can demand the debtor to perform Right of the creditor to accessions and accessories;
the obligation, and damages in case of breach General Rule: “All accessions & accessories are
of obligation considered included in the obligation to deliver a
• If the quality and circumstance of the thing to determinate thing although they may not have been
be delivered is not have been stated, the mention.
creditor cannot demand a thing of superior - This is based on the principle that “ Accessory
quality, and the debtor cannot deliver a things follows the principal”.
of inferior quality. (Art. 1246) - In order to for it to be excluded, there must be a
stipulation to that effect.
Notes:
• Obligation to deliver a generic thing can be performed by
Exception: Unless otherwise stipulated that an
a third person
obligation to deliver the accessions or accessories
• It is not necessary for the creditor to compel the debtor to
make the delivery although he may ask for the of a thing does not include the latter.
performance of the obligation.
Examples:
• The creditor has a right to recover damages under Art.
• A sale of the improvements (house) upon a thing (land) is not
1170 in case of breach of the obligation. sufficient to convey title or any right to the thing. (Pornellosa vs.
LTA, 1 SCRA 375)
• However, the lease of a building or house naturally includes the

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lease of a lot, and the rentals includes those of the lot for the • However, if the obligation can still be performed at
occupancy of a building or house not only suggests but also
the expense of the debtor notwithstanding his failure
implies the tenancy or possession in fact of the land on which it is
constructed. (Caleon vs. ADC, 207 SCRA 748) or refusal to do so, the court isnot authorized to
merely grant damages to the creditor.
Accession as a right:
• It may be defined as the right pertaining to the
owner of a thing over its products and whatever Remedies of Creditor in Negative
is incorporated or attached thereto, either Personal Obligation (Obligation Not to do)
naturally or artificially. (Art. 1168)
• It also includes the right to the fruits and the
right to the accessory. Art. 1168 – When the obligation consists in not doing,
o It is one of the rights which go to make and the obligor (debtor) does what has been forbidden
up dominion or ownership. But it is not, to him, it shall also be undone at his expense.
under the law, a mode of acquiring
ownership. Remedies of creditor in Negative Personal
Obligation:
Remedies of Creditor in Positive General Rule: The remedy of the creditor is the
Personal Obligations (Obligation to do) undoing of the forbidden thing plus damages.
(Art. 1167)
Exception: If it is not possible to undo what was done
Situations contemplated in Art. 1167: (physically or legally), or because of the rights
1. Debtor fails to perform an obligation to do; or acquired by third persons who aced in good faith,
2. Debtor performs an obligation to do, but or for some other reasons àHis (creditor) remedy is
contrary to the terms thereof; or an action for damages for violation of the obligation.
3. Debtor performs an obligation to do but in a
Example:
poor manner
S sold a land to B. it was stipulated that S would not construct a
fence on a certain portion of his land adjoining that sold to B.
Remedies of creditor in Obligation to do: should S construct a fence in violation of the agreement, B can
1. If the debtor fails to comply with his obligation to have the fence removed at the expense of S.
do, the creditor has the right:
a. To have the obligation performed by
himself, or by another person unless Mora or Delay
personal considerations are involved, at the (Art. 1169)
debtor’s expense; and
b. To recover damages. (Art. 1170) What is Delay?
2. In case the obligation is done in contravention of Ordinary Delay Legal Delay (Mora)
the terms of the same or is poorly done à it may Merely the failure to The failure toperform an
be ordered by the court upon a complaint that it be perform an obligation on obligation on time which
undone if it is still possible to undo what was done. time failure which constitutes a
breach of the obligation
Performance by a third person: No judicial or extrajudicial There is extrajudicial &
• A personal obligation not to do can be perform by a demand; and no liability judicial demand be the
third person. for damages creditor; and the debtor is
• While the debtor can be compelled to make the liable for damages
delivery of a specific thing, a specific performance
cannot be ordered in a personal obligation to do Note: There is no delay in obligation not to do (Negative
because this may amount to involuntary servitude Personal Obligation)
which prohibited by the Constitution.
• However, where the personal qualifications of the Requisites of delay by the debtor:
debtor are the determining motive for the obligation 1. Failure of the debtor to perform his (positive)
contracted (ex. To sing in a night club), or the obligation on the date agreed upon;
performance of the same by another would be 2. Demand (not mere reminder or notice) made by the
impossible or would result to be so different that the creditor on the debtor to fulfill, perform, or comply
obligation could not be considered performed. with his legal obligation which demand (may be
o Therefore, the only feasible remedy of the either extrajudicial or judicial); and
creditor is indemnification for damages. 3. Failure of the debtor to comply with such demand

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Notes: b. Creditor is liable for damages suffered (if any)
• The above presupposes that the obligation is by the debtor;
already due and demandable or liquidated. c. Creditor bears the risk of loss of the thing due
• No delay if the obligation is not yet due or (Art. 1162);
demandable d. If the obligation is to pay money – the debtor
• A debt is liquidated when the amount is known or is not liable for the interest from the time of
determinable by inspection of the terms and the creditor’s delay; and
conditions of relevant documents. e. Debtor may release himself from the
• Failure to furnish to a debtor a detailed statement of obligation by the consignation of the thing or
account does not ipso facto result in an sum due. (Art. 1256)
unliquidated obligation. (Slegma Mngt. vs. UCPB, C. Compensatio Morae:
489 SCRA 125) a. Delay of the debtor cancels out the effects
• Demand is only necessary in order to put an obligor of the delay of the creditor and vice versa.
in a due and demandable obligation in delay. In • There is no actionable default on the
obligations to pay money (loans and interests), the part of both parties, such hat as if
amount demanded from the debtor or borrower neither one is guilty of delay.
have to be definite, clear, and without ambiguity. b. If the delay of one party is followed by that
• “Grace Period” à it is a right, not an obligation, of of the other, the liability of the first infractor
the debtor. (Bricktown vs. Amor tierra, 239 SCRA shall be inequitably tempered or balanced
126) by the courts.
• If it cannot be determined which of the
Judicial and Extra-judicial Demand: parties is guilty of delay, the contract
1. Judicial Demand – when demand is made through shall be deemed extinguished and each
a complaint filed in court shall bear his own damages. (Art. 1192)
2. Extra-judicial Demand – when demand is made
outside of court, whether orally or in writing) When demand not necessary to put debtor in delay
(Exception to Art. 1169, par. 1):
Kinds of Delay (Mora): General Rule: “Delay begins only from the moment the
Mora Mora Compensatio creditor demands (judicially or extra-judicially) the
Solvendi Accipendi Morae fulfillment of the obligation”
Delay on the Delay on the part Delay of the debtors - The demand for performance marks the time
part of the of the creditor in reciprocal when the debtor incus delay (mora) and is
debtor to fulfill without justifiable obligations (like in deemed to have violated his obligation.
sales).
his obligation by reason to accept
Examples: delay of
reason of a the performance the debtor cancels Exceptions: However, the demand by the creditor shall
cause imputable of the obligation the delay of the not be necessary in order that delay may exits:
to him creditor & vice-versa 1. When he obligation so provides
Example:
Effects of Delay (Mora): D promised to pay C 20K on or before Nov. 30 without
A. Mora Solvendi: any demand. Therefore, if D fails to pay on November 30,
he is automatically in default or delay. In this case, the
a. Debtor is guilty of breach of the obligation parties stipulate to dispense with the demand.
b. Debtor is liable for: - Mere fixing of the period is not enough
• Interest – in case of obligation to pay because the arrival of the period merely
money (Art. 2209); or makes the obligation demandable. Before its
• Damages – in other obliations (Art. arrival, the creditor cannot demand
1170) performance.
• In the absence of extrajudicial demand o The obligation must expressly declare
– the interest shall commence from the that demand is not necessary or must use
filing of the complaint. word to that effect (eg. “The debtor will be
c. Debtor is liable even for a fortuitous event in default” or “I will be liable for
when the obligation to deliver a determinate damages.”)
thing (Art. 1165,1170). However, if the debtor
can prove that the loss would have resulted 2. When the law so provides
just the same even if he had not been in Examples:
default à the court may mitigate the a. Taxes should be paid on or before a specific date,
damages (Art. 2215(4)). otherwise, penalties and surcharges are imposed
B. Mora Accipendi: without the need of demand for payment by the
a. Creditor is guilty of breach of the obligation; government.

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b. A partner is liable for the fruits of the thing he may Examples:
have promised to contribute to the partnership 1. Compensatio Morae – neither party incurs in delay
from the time they should have been delivered if the other does not comply or is not ready to
without the need of any demand (Art. 1786) comply in a proper manner with what is incumbent
upon him. (Art. 1169, last par.)
3. When time is of the essence • Where the contract of sale imposes on the
Examples: seller the obligation to deliver to the buyer a
g. Delivery of balloons on a particular date when a
children’s party will be held; reasonable habitable dwelling in return for hi
h. The making of a wedding dress where the wedding is undertaking to pay the stipulated price in
scheduled at a certain time; monthly amortizations, the seller cannot
i. Payment of money at a particular time so that the invoke the buyer’s suspension of the payment
creditor could pay off certain debts due on the same
date; of amortizations as cause to cancel the
j. Delivery of a car to be used in a trip at a particular time; contract where the seller did not fulfill its
etc obligation and is not willing to put the house
in habitable state. (Agcaoili vs. GSIS, 165
- The debtor is fully aware that the performance SCRA 1)
of the obligation after the designated time 2. Where the parties fixed a period for the
would no longer benefit the creditor. performance of their reciprocal obligation, neither
- When the time of the delivery is not fixed or party can demand performance nor incur in delay
stated in general and definite terms, time is not before the expiration of the period. (Abesamis vs.
of the essence of the contract. Woodcraft, 30 SCRA 372)
o The delivery must be made within a • The parties may provide different dates for
reasonable time, in the absence of performance of their respective obligations.
anything to show that an immediate 3. Obligations under an option to buy are reciprocal
delivery was intended. obligations
- Even where time is of the essence, a breach of • The payment of the purchase price by the
contract in that respect may be waived by the would-be buyer is contingent upon the
other party’s subsequently treating the contract execution of the deed of sale by the owner
as still in force. (Lorenzo Shipping vs. BJ of the property; hence, notice to the owner
Marthel, 443 SCRA 163) of the would-be buyer’s decision to
o Mere lapse of time cannot make the exercise his option to buy and readiness to
debtor in delay or default, there must be pay the price need not to be coupled with
a demand (judicial or extra-judicial). actual payment thereof and since the
obligation is not yet due, consignation in
4. When demand would be useless court of the purchase price is not required.
Example: (Heirs of Luis Bacus vs. CA, 371 scra 295)
S obliged himself to deliver a specific horse to B on Dec.
5. Through S’s negligence or deliberate act, or due to
fortuitous event for which S has expressly bound himself
When time is of the essence even without express
responsible, the Horse died on Dec. 2 (3 days before the stipulation:
time of the delivery date) 1. In agreements which are executed in the form of
options,
Under this situation, any demand for the delivery of the
horse on Dec. 5 would be useless as S had made it o As such, acceptance of the option and
impossible for him to perform his obligation. payment of the purchase price
constitute conditions precedent to
Demand is also unnecessary where it is apparent that it specific performance.
would be unavailing, as where there has been a prior
absolute refusal by S, or S has manifested an intention
2. In all unilateral contracts;
not to comply with his obligation 3. In mercantile contracts for the manufacture and
sale of goods;
5. When there is performance by a party is 4. Where the subject matter of a contract is of
reciprocal obligation speculative or fluctuating value;
• From the moment a party in reciprocal 5. Where the contract relates to mining property or
obligations fulfills or is ready to fulfill his a contract for the sale thereof.
obligation, delay by the other begins.
o In reciprocal obligation under Art. Cases under Delay or Mora:
1192, the performance of one is • Santos Ventura vs. Santos (GR no. 153004, Nov. 4, 2004)
conditioned on the simultaneous • Vazquez vs. Ayala Corp. (GR no. 149734, Nov. 19, 2004)
• Vda de. Villaruel vs. Manila Motor Co (104 Phil. 926)
fulfillment on the part of the other.
• Tengco vs. CA GR. 49852, Oct. 19, 1999

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Modes of Breach of Obligations Recovery of damages for breach of contract or
(Art. 1170) obligation:
1. Measure of Recoverable damages:
What is a “Breach of Contract” • Title VIII (“Damages”) of the Civil Code governs
- It is the failure without justifiable excuse or the determination for the measurements of
reason to comply with the terms of a contract. recoverable damages.
- It is the failure without legal excuse to perform • Fundamental principle: “One injured by a breach
any promise which forms the whole or part of of a contract shall have a fair and just
the contract. compensation commensurate to the loss
sustained as a consequence of the defendant’s
Substantial and Casual Breach: act. (Llorente vs. SB, 287 SCRA 382)
Substantial Breach Casual Breach
Total non-performance of Partial performance of the 2. Remedies serves to preserve the Contractual
the obligation obligation Interests of the Creditor or Promisee:
Basis for rescission and Give rise to liability for a. Expectation interest – Creditor’s interest in
payment of damages damages having the benefit of his bargain by being put in
as good a position as he would have been had
Grounds for liability for damages or modes of the contract been performed; or
breach of obligations: b. Reliance interest – Creditor’s interest in being
1. Fraud – Article 1171 reimbursed for loss caused by reliance on the
• It refers to incidental fraud (dolo incidente) contract by being put in as good a position as
committed in the performance of an he would have been had the contract not been
obligation already existing because of a made; or
contract. c. Restitution interest – Creditor’s interest in
• Fraud is employed for the purpose of having restored to him any benefit that he has
evading the normal fulfillment of an conferred on the other party.
obligation and its existence merely results in
breach thereof which give rise to a right by 3. Excuse from ensuing liability:
the innocent party to recover damages • Mere proof of the existence of the contract and
• Bad faith is present the failure of its compliance justify a
2. Negligence – Art. 1172 & 1173 corresponding right or relief to the creditor unless
• Any voluntary act or omission, (no bad the debtor can show extenuating circumstance
faith exist) which prevents the normal (like proof of his exercise of due diligence, or of
fulfillment of an obligation. the attendance of fortuitous event) to excuse him
• It is the failure to exercise the degree of from his ensuing liability. (FGU Insurance vs.
care required by the circumstances. GPSTC, 386 SCRA 312)
3. Delay (Mora) – Art. 1169
• Delay must be either malicious or negligent Damages recoverable where obligation to pay
• Example: money:
o When the omission of the buyer to sign a 1. Penalty interest for delay or non-performance:
check. One of 24 post dated checks a. If the obligation consists in the payment of a
which were delivered to the seller who did sum of money, and the debtor incurs in delay,
not bother to call the buyer to ask him to the indemnity for damages
sign the check, was mere “inadvertence • If no stipulation to the contrary à it shall
on the part of the buyer, the buyer was be the payment of the interest agreed
held not liable for damages resulting from upon, and
the delay in the payment of the value of • In the absence of stipulation à it shall be
the unsigned check (RCBC vs. CA 305 the legal interest (6% per annum)
SCRA 449) b. The penalty interest do not include and are
4. Contravention of the tenor: not included in the computation of interest as
• This is the violation of the terms and conditions the two are distinct claims which may be
stipulated in the conditions demanded separately.
• It must not be due to a fortuitous event or force • While interest agreed upon forms part of
majeure. the consideration of the contract itself,
• The unilateral act or terminating a contract • Damages due are usually made payable
without legal justification by a party makes him only in case of default or non-
liable for damages suffered by the other party.
performance of the contract.
(Pacmac vs. IAC, 150 SCRA 555)

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2. Rate of the penalty interest: • Contrary rule to it would encourage the
• The rate of the penalty interest payable shall be perpetration of fraud because the debtor knows
that agreed upon. that even if he should commit fraud he would
• In the absence of the stipulation of a particular not be liable for it
rate of penalty interest, then the additional interest
shall be at a rate equal to the regular monetary Waiver of action for past fraud is valid:
interests; and • The waiver can be considered as an act of
• If no regular interest had been agreed upon, then generosity and magnanimity on the part of the
the legal interest rate (6% per annum) shall be party who is the victim of the fraud.
paid. • What is renounced is the effects of the fraud
which is the right to indemnity of the party
Fraud or Deceit entitled thereto.
(Art. 1171) • The waiver must be couched in clear and
unequivocal terms which leave no doubt as to
Fraud (deceit or dolo) – It is the deliberate or the intention of the creditor to give up his right
intentional evasion of the normal fulfillment of an of action against the debtor.
obligation.
Fault or Negligence
Incidental Fraud vs. Causal Fraud: (Art. 1172 and Art. 1173)
Incidental Fraud Causal Fraud
(Dolo Incidente) (Dolo Causante) Definition of fault or negligence:
Fraud committed in the Fraud employed in the • It is the omission of diligence that is required by the
performance of an execution of a contract nature of the obligation and corresponds with the
obligation already existing which vitiates consent and circumstances of the persons, of the time and of the
because of contract. makes the contract place. (Art. 1173, par. 1)
voidable. • It is the lack of care required by the circumstances
Give rise to an action for Give rise to an action for to prevent an unreasonable risk of harm to another
rescission of contract rescission under Art. 1380 person or his property.
under 1191 and damages. and Annulment of
contract. Test for determining whether a person is negligent:
1. Test of Foreseeability:
Fraud under Art. 1170 and 1171 pertains only to a. Did the defendant in doing the alleged
Incidental Fraud: negligent act use the reasonable care and
- As a ground for damages, it must be any act, caution which an ordinary prudent person
omission or concealment involving some kind of would have used in the same situation. If
malice or dishonesty, or, in other words, bad faith. not, then he is guilty of negligence.
- Bad faith à it implies a design to mislead or deceive b. Reasonable foresight of harm followed by
another by which an undue advantage is taken of the the ignoring of the admonition born of this
latter. provision, is the constitutive fact of
- Moral damages may be recovered in addition to to negligence. (Achevara vs. Ramos, 601
her damages. SCRA 270)
- Fraud is employed for the purpose of evading the 2. No hard and fast Rule:
normal fulfillment of an obligation and its existence a. No hard and fast rule whereby the degree of
merely results in breach thereof giving ris to a right care and vigilance required is measured à
by the innocent party to recover damages. it is dependent on the circumstances in
which a person finds himself situated.
Responsibility arising from fraud: b. The law requires that it is always incumbent
• It is demandable in all obligations. upon a person to use that care and
• The court does not have the authority to mitigate or diligence expected of prudent and
reduce the damages to be awarded because fraud reasonable men under similar
is deemed serious and evil that its employment to circumstances.
avoid the fulfillment of one’s obligation should be
discouraged. Circumstances of Negligence (Examples):
1. Nature of the obligation
Waiver of action for future fraud is void: - ex: smoking while carrying materials known
• It is against the law and public policy to be inflammable constitutes negligence.

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2. Circumstances of the person Responsibility arising from negligence is
- ex. A guard, a man in the prime of life, robust demandable (Art. 1172):
and healthy, sleeping while on duty is guilty or 1. Discretion of court to fix measure of damages
negligence. - The courts are given wide discretion in fixing
3. Circumstances of time the measure of damages.
- ex. Driving a car without headlights at night is - Rationale: Negligence is a question which
gross negligence but it does not by itself must necessarily depend upon the
constitute negligence when driving during the circumstances of each particular case.
day; 2. Damages where both mutually negligent
4. Circumstance of the place - The fault of one cancels or neutralizes the
- ex. Driving at 60 kph on the highway is negligence of the other.
permissible but driving at the same rate of o Therefore, their rights and obligations
speed in Quezon Blvd., Manila when traffic is may be determined equitably under the
always heavy is gross negligence. law prescribing unjust enrichment.

Proof/Presumption of negligence: Waiver of action for future negligence:


• General Rule: Negligence is never presumed 1. It may be renounced except where the nature of
because it must be proven by the party who the obligation requires the exercise of
alleges it. extraordinary diligence as in the case of
• Exception: When the source of an obligation is common carriers.
derived from a contract. 2. If the negligence is gross or shows bad faith à
o The mere breach or nonfulfillment of the it is equivalent to fraud, therefore, any waiver of
prestation (or object) gives rise to the action for future negligence of this kind is void.
presumption of fault on the part of the
debtor. (Sabena Airlines vs. CA, 255 Kinds of negligence according to source of
SCRA 38) obligation (or Three Senses of Negligence):
Contractual Civil Negligence Criminal
Illustrative cases: Negligence (Culpa Aquiliana) Negligence
1. Negligence in the care of goods (Culpa (Culpa Criminal)
Haskim vs. Rocha, 18 Phil. 315: Contractual)
Facts:
Negligence in Negligence which is Negligence
S discharged a large shipment of potatoes belonging to B
into a lorcha which was then left for 2 days in the sun contracts the source of an resulting in the
tightly closed and without ventilation. As a result, the resulting to obligation between commission of a
potatoes rotted and became useless. the parties not
breach crime.
Issue: formally bound
Is S liable for the said loss? before any pre-
Ruling: existing contract.
Yes, S was guilty of negligence with respect to the care (Quasi-delicts)
the potatoes, a perishable property.
It merely makes Note that a pre- The same
the debtor existing contractual megligent act
2. Negligence in not giving previous warning relation between the
liable for causing
against a dangerous machine parties does not
damages in damages may
Tamayo vs. Gsell, 35 Phil. 953: preclude the
view of his produce civil
Facts: existence of culpa-
R employed a young ignorant boy to do ordinary negligence in acquilana. Culpa- liability arising
chores in the performance of which he did not the fulfillment acquiliana governs from a crime
come in contact with machinery. Without giving any of a pre- only the act or under Art. 100,
previous warning, and over the objections of the existing omission itself RPC, or create
boy, the latter was ordered to assist in the cleaning obligation complained of that an action for
of a dangerous machine. His fingers were cut in the resulting in its would constitute an quasi-delict
machine breah or non- actionable tort under Art. 2176,
Issue: independently of the
fulfillment. Civil Code
Is R liable for damages? contract
Ruling:
Yes, It was negligence on his part not to warn the Examples or Illustrations:
boy and give him instructions to avoid accidents in 1. Culpa Contractual: If S entered into a contract
the cleaning of a machine with which the boy was of sale with B to deliver a specific horse on a
unfamiliar.
certain day and the horse died through the
negligence of S before delivery, S is liable for
damages to B for having failed to fulfill a pre-

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existing obligation (contract may be either Distinction between Fraud and Negligence:
express or implied) because of his negligence. Fraud Negligence
2. Culpa Acquiliana: Assume now, that that horse Intent to cause There is intent No Intent
belongs to and is in the possession of B. the damage or
negligence if S which results in the death of the injury
horse is culpa acquiliana because, in this case, Waiver For future fraud = It may be
there is no pre-existing contractual relation Void allowed
between S and B. the negligence itself is the Presumption Must be proved It is presumed
source of liability. by mere from the breach
3. Culpa Criminal: A crime can be committed by preponderance of of contractual
negligence. If B wants, he can bring an action evidence obligation
for culpa criminal (damage to property through Mitigation of Cannot be It may be
obligation of S to pay damages. However, B liability mitigated reduced
cannot recover damages twice for the same act according to the
or omission of S. circumstances.

Important Distinctions between Culpa Contractual When negligence equivalent to fraud:


and Culpa Aquiliana: - When the negligence shows bad faith or is so
• When liability from Culpa Aquiliana (tort or gross that it amounts to malice on the part of
quasi-delict), not involving a breach of positive the defendant.
obligation, an employer or master may excuse
himself from liability by proving that he had Gross Negligence – refers to negligence characterized
exercised “All the diligence of a good father of a by the failure to exercise even slight care or diligence, or
family to prevent the damage”. the entire absence of care, acting or omitting to act on a
o This defense is not available if the situation where there is a duty to act, not inadvertently,
liability of the employer or master arises but willfully and intentionally, with complete disregard
from a breach of contractual duty for the harmful consequences of his conduct to others.
(Culpa Contractual) through this may
mitigate damages. (Del Prado vs. Effect of negligence on the part of the injured party:
Manila Electric Co., 38 Phil. 769) - When the plaintiff’s own negligence was the
• Where the injury is due to the concurrent immediate and proximate cause of his injury, he
negligence of the drivers of the colliding cannot recover damages.
vehicles, the drivers and owners of the said - But if his negligence was only contributory, the
vehicles shall be primarily, directly and solidarily immediate and proximate cause of the injury
liable for damages and it is immaterial that one being the defendant’s lack of due care, the
action is based on quasi-delict and the other on plaintiff may recover damages but the courts
culpa contractual as the solidarity of the shall mitigate the damages to be awarded.
obligation is justified by the very nature thereof.
(MMTC vs.CA, 223 SCRA 521) Question: If the creditor is also guilty of negligence, can he
• In Culpa Contractual à the mere proof of the recover damages?
existence of the contract and the failure of its Answer: No, he is not liable if his negligence was the
immediate and proximate cause of his injury.
compliance justify a corresponding right of
relief.
Presumption of contractual negligence:
o In a contract of carriage, the driver who is
• In an action for quasi-delict or tort à the
not a party to the contract, may not be held
negligence or fault should be clearly established
liable under the agreement. The action
because it is the basis of the action. On the
against him can only be based on Culpa
other hand, In a breach of contract à the action
Acquiliana which unlike Culpa Contractual,
can be pursued by proving the existence of the
would require the claimant for damages to
contract, and the fact that the debtor failed to
prove negligence or fault on the part of the
comply with the same.
defendant. (FGU Insurance vs. GP
Sarmiento, 386 SCRA 312)
San Pedro Bus Lines vs. Navarro, 94 Phil 846:
• In Culpa Aquiliana, the laintiff has the burden of • When the action is based on a contract of carriage, and the
proving that the defendant was at fault or debtor (in this case is the carrier) failed to transport the
negligent while in Culpa Contractual, once the passenger to his destination, the fault or negligence of the
carrier is presumed.
plaintiff proves a breach of contract, there is a
• There is even no need for the court to make an express
presumption that the defendant was at fault or finding of fault or negligence on the part of the carrier
negligence.
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because it is sufficient for the plaintiff to prove the existence 2. Contractual breach committed in good/bad
of the contract of carriage and the damages or injuries faith:
suffered by him.
• Where in breaching the contract, the
• It is the obligation of the carrier to transport its passengers
or goods safely. defendant is not shown to have acted in
bad faith à liability for damages is limited
When the driver’s negligence is the carrier’s to the natural and probable consequences
negligence: of the breach of the obligation
• In culpa contractual – the moment a passenger dies • When in breaching, the parties had foreseen
or injured, the common carrier is presumed to have or could have reasonably foreseen à the
been at fault or acted negligently, and the liability would not includes liability for moral
disputable presumption may only be overcome by and exemplary damages
evidence that he had exercised extraordinary
diligence prescribed in Arts. 1733, 1755, and 1756 Stronghold Insurance vs. CA (208 SCRA 336):
FACTS:
of the Civil Code or that death or injury of the
L, a sister company of M (another company), which
passenger was due on fortuitous event. was indebted to the defendant-creditor, filed a replevin
• However, the presumption of fault or negligence will suit for the recovery of certain office furnitures and
not arise if the loss is due under any causes equipment owned by M which the defendant sold at
enumerated in Art. 1734, Civil Code. an auction sale for unpaid rentals of M.
RULING:
Art. 1734. Common carriers are responsible for the loss, destruction, It was held that the act of L of filing a replevin suit
or deterioration of the goods, unless the same is due to any of the without the intention of prosecuting the same but for
following causes only: the mere purpose of disappearing with the
1. Flood, storm, earthquake, lightning, or other natural disaster
provisionally recovered property in order to evade
or calamity;
2. Act of the public enemy in war, whether international or civil;
lawfully contracted obligations constituted a wanton,
3. Act or omission of the shipper or owner of the goods; fraudulent, reckless, oppressive and malevolent breach
4. The character of the goods or defects in the packing or in of contract which justified award of exemplary
the containers; damages under Art. 2232, NCC.
5. Order or act of competent public authority
Maersk Line vs. CA (223 SCRA 108)
When the driver is not solidarily liable with the FACTS:
carrier The unexplained misshipment of the subject goods
- The driver is not solidarily liable with the carrier destined for Manila but was inexplicably shipped to the
US, committed by the common carrier resulting in the
if it falls under the description mention in Arts.
unreasonable delay in the delivery of the same for
1207 and 1208 of the Civil Code. more than 2 months.
RULING:
Art. 1207. The concurrence if 2 or more creditors or 2 or more It was held as constituting gross carelessness or
debtors in one and the same obligation does not imply that negligence amounting to bad faith and wanton
each one of the former has the right to demand, or that each misconduct; hence, moral and exemplary damages
one of the latter is bound to render, entire compliance with the were awarded to the aggrieved party.
prestations. There is a solidary liability only when the obligation
expressly so states, or when the law or the nature of the
3. With respect to moral damages
obligation requires solidarity.
• Moral damages are not punitive in
Art. 1208. If from the law, or the nature or the wording of the
nature;
obligations to which the preceding article (Art. 1207) refers the • Although it is incapable of pecuniary
contrary does not appear, the credit or debt shall be presumed estimation, moral damages must
to be divided into as many equal shares as there are creditors somehow be proportional to and in
or debtors, the credits or debts being considered distinct from approximation of the suffering inflicted
one another, subject to the Rules of Court governing the • The factual basis for which must be
multiplicity of suits. satisfactorily established by the
aggrieved party.
Measure of liability for damages:
1. Civil code provisions Example:
• Art. 2201 FACTS:
• Art. 2220 S agreed to sell and deliver certain goods to B on a
• Art. 2232 certain date for 300k. Then B, agreed to sell the goods
• Art. 21 to be received from S to C for 325k. This contract with
C was known to S. on the date designated, S did not
deliver the goods so that C bought the goods from
another. The breach of the obligation by S, resulting in

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the loss of the amount of 25k as expected profit, so • When the speaks of extraordinary diligence à
angered B that he suffered a heart attack for which he it is that extreme measure of care and caution
was hospitalized for 5 days. which persons of unusual prudence and
ANSWERS: circumspection observe for securing or
1. In this case, if S acted in good faith, the damage
preserving their own property or rights.
which ought B to receive should be the amount of
25k, the profit which B failed to realize. (Art. 2200,
(Loadmasters Services vs. Glodel Brokerage,
par. 1, NCC) 639 SCRA 69)
2. But if S acted in bad faith, he is also liable to pay for 3. If both the contract and law are silent à then
the hospitalization expenses incurred by B which the diligence expected of a good father of a
clearly originated from the breach although they family (Art. 1173, par. 2). It is the same as
might not have been reasonably contemplated by ordinary diligence or that of a reasonably
the parties at the time they entered into the contract. prudent person.
a. Whether or not the negligence of the debtor
4. Code of Commerce provisions: - limited liability is excusable will depend on the degree of
only in maritime law. diligence required if him.
a. Art. 587 (Code of Commerce) b. Example: The debtor is not liable for
- “The ship agent shall be civilly liable for the damages where his negligence is one which
indemnities in favor of third persons which is ordinary diligence and prudence could
may arise from the conduct of the captain not have guarded against.
in the care of goods which he loaded from i. There is no specific law that imposes a
the vessel; but he may exempt himself higher degree of diligence than ordinary
therefrom by abandoning the vessel with all diligence for stevedoring company or
the equipments and the freight it may have one who is charged only with the
earned during the voyage.” loading and stowing of cargoes in the
b. Art. 590: vessel. It is not a common carrier or a
- “The co-owners of a vessel shall be civilly warehouseman. (MTBSI vs. PAC, 587
liable in the proportion of their interests in SCRA 429).
the common fund for the results of the acts ii. The nature of the business of a hospital
of the captain referred to in Art. 587.” requires a higher degree of caution and
c. Art. 837: exacting standard of diligence in patient
- “The civil liability incurred by shipowners in management and health care as what is
the case prescribed in this section, shall be involved are lives of patient who seek
understood as limited to the value with all medical assistance. (HMSI vs. MMC
the appurtenances and the freightage Employees, 641 SCRA 59).
served during the voyage.”

NOTES: Fortuitous Event


• Art. 837 applies the principle of limited liability in cases of collision. (Art. 1174)
• Art. 587 & 590 embody the universal principle of limited liability in
all cases.
• “No vessel, No Liability”: Meaning of Fortuitous Event:
o The liability of the owner or agent arising from the operation • Any extraordinary event which cannot be foreseen,
of the ship is confined to the vessel, equipment, and freight,
or which, if it can be foreseen, it is inevitable.
or insurance (if any).
• It is an event which is either impossible to foresee or
• When the shipowner fails to overcome the presumption of
negligence, the doctrine of limited liability cannot be applied. impossible to avoid.
(Aboitiz Shipping vs. New India Assurance, 531 SCRA 134)
Requisites of Fortuitous Event
Diligence à This is the attention and care required of a 1. The event must be independent from the human
person in a given situation and is the opposite of will or at the debtor’s will;
negligence. (Sambijon vs. Suing, 503 SCRA 1) 2. The event is unforeseeable, or unavoidable;
3. The character of the event must render it
Kinds of Diligence required under Art.1173: impossible for the debtor to comply with his
1. Diligence that agreed upon by the parties (orally obligation is a normal manner; and
or in writing); 4. The debtor must be free from any participation
2. In the absence of stipulation à that required by in, or the aggravation of the injury to the
law in the particular case (like extraordinary creditor.
diligence required of common carriers); and

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Kinds of Fortuitous Events: may have been authorized to use the same.
Art. 2001 The act of a thief or robber, who has entered the hotel is
Ordinary Extraordinary
not demmed force majeure, unless it is done with the use
Those fortuitous events Those fortuitous events of arms or through an irresistible force.
which are common and which are uncommon and Art. 2147 The officious manager shall be liable for any fortuitous
which the contracting which the contracting event:
1. If he undertakes risky operations which the owner
parties could reasonably parties could not have
was not accustomed to embark upon;
foresee. reasonably foreseen. 2. If he has preferred his own interest to that of the
Examples: Rain and Traffic Examples: Earthquake, owner;
fire, war, pestilence, 3. If he fails to return the property or business after
demand by the owner;
unusual floods
4. If he assumed the management in bad faith.

Fortuitous Event vs. Force Majeure: Effect where risk not one impossible to foresee:
Fortuitous Event Force Majeure 1. If the risk is quite evident:
Acts of Man Acts of God • If such risk involves possible danger to it that
Fortuitous event is an Those event s which are is not only foreseeable but also foreseen à
event independent of the totally independent of the then it could be said that the nature of the
will of the Debtor but not will of every human being. obligation is such that a party could rightfully
of other human will. be deemed to have assumed it.
Ex: War, fire, robbery, Ex. Earthquake, flood, • Under Art. 1174, the event must be one
murder, insurrection, etc. rain, shipwreck, lightning, impossible to foresee or to avoid in order that
eruption of volcano, etc. a party may not be said to have assumed the
Note: In our law, fortuitous event and force majeure are risk resulting from the nature of the obligation
identical in so far as they exempt a debtor from liability. itself. (Dioquino vs. Laureano, 33 SCRA 65)
2. Mere difficulty to foresee the risk:
Exceptions to the Rule of Fortuitous Event: • 1997 financial crisis that ensued I Asia did not
General Rule: A person is not responsible for loss or constitute a valid justification to renege on
damage resulting from the non-performance of his obligations. It cannot be generalized to be
obligation due to a fortuitous event. unforeseeable and beyond the control of a
business corporation; it is not among the
Exceptions: fortuitous events contemplated under Art.
Art. If the debtor delays or has promised to deliver the same 1174 (MLRC vs. CA, 460 SCRA 279)
1165(3) thing to 2 or more persons who do not have the same • A real estate enterprise engaged in the pre-
interest, he shall be responsible for fortuitous event until
he has effected the delivery. selling of condominium units is concededly a
Art. 552 A possessor in good faith shall not be liable for the master in projections on commodities and
deterioration or loss of the thing possessed, except in currency movements and business risks. The
cases which it is proved that he has acted with fraudulent fluctuating movements of the Phil. Peso in the
intent or negligence, after the judicial summons.
foreign exchange market is an everyday
A possessor in bad faith shall be liable for deterioration or occurrence, and fluctuations in currency
loss in every case, even if caused by a fortuitous event. exchange rates happens everyday; hence, not
Art. 1942 The bailee is liable for the loss of the thing, even if it an instance of fortuitous event. (Fil-Estate
should be through a fortuitous event:
Properties vs. Go, 530 SCRA 624)
1. If he devotes the thing to any purpose difference
from that for which it has been loaned;
2. If he keeps it longer than the period stipulated, or Impossibility of performance must result from
after the accomplishment of the use for which the occurrence of fortuitous event:
commodatum has been constituted;
• For the purpose of releasing the debtor from his
3. If the thing loaned has been delivered with appraisal
of its value, unless there is a stipulation exempting obligation, the occurrence of the fortuitous event is
the bailee from responsibility in case of a fortuitous not enough, the impossibility of fulfilling the
event; obligation must be the direct consequence of the
4. If he lends or leases the thing to a third person, who
event.
is not a member of his household;
5. If, being able to save either the thing borrowed or his o If notwithstanding its occurrence, the obligation
own thing, he chose to have the latter. can be fulfilled, it will subsist even if only in part.
Art. 1979 The depository is liable for the loss of the thing through a • In order to see whether or not the fortuitous event
fortuitous event;
produces the impossibility of fulfilling the obligation
1. If it is so stipulated;
2. If he uses the thing without the depositor’s à the nature of the obligation must be considered,
permission;
3. If he delays its return;
4. If he allows others to use it, even though he himself

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Effect of the debtor’s negligence upon his liability: Interest Rate Rule provided under the Usury Law
Negligence contributed Negligence not contributory (Act. No. 2655):
to the loss or damage to the loss or damage 1. Legal rate is 6% per annum:
When the negligence of a Where both fortuitous event and • It is the default legal interest rate if there
lack of due diligence are present is no express rate stipulated
person concurs with a
under conditions that the loss
fortuitous event in would have happened with or • In case of delay or default, it will also
producing a loss, he is not without the negligence of the serve as the legal interest rate for the
exempted from liability by debtor à it cannot be said that indemnity of damages in the absence of
showing that the responsibility arises therefrom. stipulation.
The courts are not bound to
immediate cause of the discharge the debtor from his 2. Maximum Rate:
damage was the fortuitous liability but may equitably a. 12% per annum
event. mitigate his damages. b. 14 % per annum
“One who negligently To avail of the exemption c. The rate prescribed by the Monetary
creates a dangerous granted in Art. 1174, it is not Board
condition cannot escape necessary that there be a 3. Sec. 2 (secured loan) of the Usury Law à the
liability for the natural and prior finding of guilt of the taking or receiving (and not mere agreeing) of
person responsible for the
probable consequences usurious interest is the act penalized.
robbery. It would only be
thereof, although the act sufficient to establish that the 4. Sec. 3 (unsecured loan) of the Usury Law à
of a third person, or an act unforeseeable event such as the mere demanding or agreeing to charge
of God for which he is not robbery did take place excessive interest rate is also punishable.
responsible, intervenes to without any current fault on Notes:
precipitate the loss” the debtor’s part, and this • In either case (Sec. 2 or Sec. 3), the creditor is the
(Nakpil & Sons vs. CA, 144 can be done by preponderant only party liable.
SCRA 596) evidence. (Austria vs. CA, 39 • To conceal usury à various devices (ex. Sale with
SCRA 527)
right of repurchase under Art. 1602, CC) have
been resorted to whereby the true nature of the
transaction is concealed from what may be
Usurious Transactions viewed from the written agreement.
(Art. 1175)
IMPORTANT NOTES!!
What is the meaning of “Usury”? 1. The Usury Law is now legally Non-existent or Suspended
- It is contracting or receiving interest in excess of 2. BSP Circular No. 799 (Series of 2013): The rate of
the amount allowed by law for the loan or use of interest for the loan or forbearance of money, goods oe
money, goods, chattels, or credits. (Tolentino credits, and the rate allowed in judgments, in the absence
vs. Gonzales, 50 Phil. 558) of an express contract as to such rate of interest shall be
6% per annum.
Kinds of Interests
1. Simple interest – when the rate of interests is Monetary Interest vs. Compensatory Interest:
stipulated by the parties. (Siga-an vs. Villanueva, 576 SCRA 696)
2. Compound interest – when the interest earned Monetary Interest Compensatory Interest
is upon interest due. Interest fixed by Interest imposed by law or by
3. Unlawful interest – when the rate of interest is parties to a courts as penalty or indemnity for
beyond the maximum fixed by law contract for the use damages and it is payable only if
4. Lawful interest – when the rate of interest is or forbearance of the debtor is proved to have
within the maximum allowed by the Usury Law money. defaulted or delayed in the
(Act no. 2655); and performance of his obligation
5. Legal interest – when the rate of interest
intended by the parties is presumed by law. Requisites for recovery of monetary interest:
a. Like when the loan mentions interest 1. Payment of interest must be expressly stipulated
but does not specify the rate thereof (Art. 1956);
(Art. 2209) 2. The agreement must be in writing; and
b. The same rate is allowed in judgments 3. Interest must be lawful.
where there is no express contract Notes:
• If there is not stipulation of interest, a stipulation for usurious
between the parties in anticipation of interest is void.
the same. • Nullity of the stipulation does not affect the right of the lender to
c. Its use is not justified where there is a recover the principal of the loan or other terms of the contract
stipulated rate of interest in the loan otherwise valid.
contract. • Usury law is now legally suspended.

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Suspension of the Usury Law: Rules on Liability for legal interests:
• Central Bank Circular no. 905 (Dec. 10, 1982, (Please see the cases of Eastern Shipping Lines vs. CA (234
effective January 1, 1983) à the rate of the interest SCRA 781), and Nacar vs. Gallery Frames (GR no. 189871,
and other charges on a loan or forbearance of Aug. 13, 2013)
money, goods, or credit, regardless of maturity and
whether secured and unsecured, that may be 1. Loan or forbearance of money
charged or collected shall not be subject to any - When the obligation breached consists in the
ceiling prescribed under the Usury Law. Interest can payment in the payment of money (i.e., loan or
charged as lender and borrower may agree upon. forbearance of money, goods or credits), the
(Liam Law vs. Olympic Sawmill, 129 SCRA 439) interest due should be that which may have been
• CB Circular no. 905 did not repeal or in any way stipulated in writing.
amend the amend the Usury Law but simply - Legal interest (6% per annum) in the nature of
suspended the latter’s effectivity because only a law (actual or compensatory) damages for non-
can amend or repeal another law. (Security Bank vs. compliance with an obligation to pay a sum of
RTC Makati, 263 SCRA 483) money is recoverable even if such rate is not
expressly stipulated in writing.
Rule where interest stipulated is excessive:
• While the Usury Law is suspended by CB Circular a. The debtor in delay is liable to pay interest which is 6%
no. 905, nothing in the said circular grants lenders per annum, as indemnity for damages even in the
absence of the stipulation for the payment of interest
carte blanche (or freedom) authority to raise interest
computed from default or delay (from judicial or
rates to levels which will either enslave their extrajudicial demand)
borrowers or lead to a hemorrhaging of their assets. - The claim for legal interest and increase in the indemnity
(Almeda vs. CA, 256 SCRA 292) may be entertained by the appellate court where the appeal
• The stipulated interest (excessive interest) may be of the defendant was obviously dilatory and oppressive of
the rights of the claimant.
declared illegal.
o A borrower, however, cannot go to court to b. Interest due shall earn legal interest from the time it is
have the interest rate annulled on the ground judicially demanded although the obligation may be silent
that is excessive or unconscionable after years upon this point. (Cortes vs. Villanueva, 79 SCRA 709)
of benefiting from the proceeds of the loan - Where no interest had been stipulated in writing by the
(using the money to make advance payments parties, the debtor is not liable to pay compound interest
even after judicial demand for in such case, there can be no
for her prospective clients so that her sale accrued (conventional) interest which can further earn
production would increase for which she was interest upon judicial demand.
getting a 50% rebate on her sales and she did
not mind the 6% to 7% interest per month). c. A debtor cannot be considered delinquent and liable to
o A party to a contract cannot deny the validity pay interest where he offered checks backed by sufficient
thereof after enjoying the benefits without deposit or is ready to pay cash if the creditor chose that
outrage to one’s sense of justice and fairness. means of payment.
(Toledo vs. hyden, 637 SCRA 540)
2. Other than loan or forbearance of money
Escalation Clauses à refers to stipulations allowing an • The legal interest applies only to loan or
increase in the interest agreed upon by the contracting forbearance of money, goods or credit, or to
parties. cases where money is transferred from one
person to another and the obligation to return the
Rules on Escalation Clauses stipulated: same or a portion thereof is adjudged.
1. They are not void per se. • When an obligation, not constituting a loan or
2. However, a clause which grants the creditor forbearance of money (ex. Obligation arises from
unbridled right to unilaterally increase the rate of a contract of purchase and sale) is breach, an
interest without the express conformity of the interest on the amount of damages awarded may
debtor is void as it violates the principle of be imposed at the discretion of the court (Art.
mutuality of contracts. (Juico vs. CBC, 695 2210), at the rate of 6% per annum as provided in
SCRA 520) Art. 2209, Civil Code).

3. Final and executory judgment awarding a sum of


money
• When the judgment of the court awarding sum of
money becomes final and executory, the rate of
legal interest (where the case falls under Nos. (1)
and (2) above) shall be 6% per annum from such

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finality until its satisfaction, the judgment or award Two kinds of presumption:
shall be considered a loan or forbearance of Conclusive Disputable (Rebuttable)
money or credit. One which cannot be One which can be contradicted or
contradicted rebutted by presenting proof to
4. Summary – The above ruling o the award of interest the contrary.
in the concept of actual or compensatory damages
based on CB Circular no. 416, are accordingly Examples:
modified to embody BSP Circular no. 799 and are 1. B owes C the amount of 10k with an interest at 14%
summarized as follows: a year. C issued a receipt for the principal. The
interest was not referred to in the payment whether
a. For loan or forbearance of money: or not it has been paid.
• The rate of interest due is that stipulated in - It is presumed that the interest has been
writing, otherwise it is the legal interest rate previously paid by B because normally the
(6% per annum) computed from judicial or payment of interests precedes of the principal.
extrajudicial demand until fully paid. - This, however, is only a disputable presumption
• In addition, interest due shall earn legal and be overcome by sufficient evidence that
interest (compound interest) from the time it is such interest had not really been paid. (Hill vs.
judicially demanded. Veloso, 31 Phil. 160)
• Even when the rate of interest is stipulated, 2. E is a lessee in the apartment of R, paying 5k rental
but the same is found to be excessive or fee a month, E failed to pay the rent for the months of
unwarranted, the court may reduce the same February and March. In April, E paid 5k and R issued
as reason and equity demand. a receipt that the payment is for the month of April.
b. For other than loan or forbearance of money: - The presumption is that the rents for the months
• The interest shall also be 6% per annum as of February and March had been already paid.
indemnity at the discretion of the court. - This is also in accordance with the usual
• When the amount of the obligation is business practice whereby prior installments are
reasonably established, the interest shall begin first liquidated before payments are applied to
to run from judicial or extrajudicial demand; the later installments. Again, this presumption is
otherwise, from the date the judgment of the disputable. (Rubert vs.Smith, 11 Phil. 138)
court is made.
Art. 1176. The receipt of the principal by the creditor,
• The actual base for the computation of legal without reservation with respect to the interest, shall give
interest shall, in any case, be on the amount rise to the presumption that said interest has been paid.
finally adjudged.
c. When a judgment awarding a sum of money: The receipt of a later installment of a debt without
reservation as to prior installments, shall likewise raise the
• Where the case falls under (a) or (b) above has presumption that such installments have been paid.
become final and executory à the rate of legal
interest shall be 6% per annum from such Exceptions to the applicability of Art. 1176:
finality, based on the adjudged principal and 1. With reservation as to interest:
unpaid interest, until its satisfaction, this • Where there is a reservation as to interest or
interim period beng deemed to be by then an prior installments, the presumption in Art. 1176
equivalent to a forbearance of credit.
does not apply.
• The reservation may be in writing or orally.
2. Receipt for a part of principal
Presumptions • Art. 1176, par. 1 applies only to the receipt of
(Art. 1176) the last installment of the entire capital, not to a
mere fraction thereof.
Presumption à the inference of a fact not actually • A receipt for a part of the principal (without
known arising from its usual connection with another mentioning the interest) merely implies that the
which is known or proved. creditor waives his right to apply the payment
first to the interest and then to the principal, as
Example: permitted by Art. 1253
D borrowed 10k from C. Later, D shows a receipt signed by
• Only when the principal is fully receipted for,
C. The fact not actually known is the payment by D. The fact
known is possession by D of a receipt signed by C. may failure to reserve the claim for interest give
rise to the presumption that said interest has
The presumption is that the obligation has been paid unless been paid. (Jocson vs. Capital Subdivision, CA
proved otherwise by C as, for example, that D forced C to no. 7635-R, Jan. 6, 1953)
sign the receipt.

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3. Receipt without indication of particular Accion Subrogatoria: (“I will step on your shoes”)
installment paid: • The creditor, after having pursued the property in
• The presumption in Art. 1176, par. 2 does not possession of the debtor, may exercise all the
apply if the receipt does not recite that it was rights (like the right to redeem) and bring all the
issued for a particular installment due as when actions of the debtor (like the right to collect from
the receipt is only dated. the debtor of his debtor).
• It must be stipulated in the receipt that he or she • Exception: Those inherent in or personal to the
have received all the installments person of the latter (such as the right to vote, to
4. Payment of taxes: hold office, to receive legal support, to revoke a
• Taxes are payable by the year are not donation on the ground of ingratitude)
installments of the same obligation.
5. Non-payment proven: Accion Pauliana: (“I will ask the court”)
• Art. 1176 does not apply where the non-payment • An action when the debtor is defrauding the
of the prior obligation has been proven. creditor
• Between a proven fact and a presumption, the • The creditor may ask the court to rescind or
proven fact stands, and the presumption falls. impugn acts or contracts which the debtor may
(Ledesma vs. Realubin, 8 SCRA 608) have done to defraud him when he cannot in any
other manner recover his claim. (Arts. 1380-1389)
• It is essential that the creditor has no other legal
Subsidiary remedies of the creditor: remedy to satisfy his claim against the debtor.
(Art. 1177)
Other remedies:
Subsidiary Remedies of the Creditor: • Art. 1652
- The creditors, after having pursued the property • Art. 1729
in possession of the debtor to satisfy their • Art. 1608
claims, may exercise all the rights and bring all • Art. 1893
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 Transmissibility of rights:
may have done to defraud them (Art. 1177) (Art.1178)

Remedies available to creditors in case the debtor General Rule: All rights acquired in virtue of an
does not comply with his obligation: obligation are transmissible, if there has been no
1. Specific performance with the right to damages; stipulation to the contrary.
2. Pursue the leviable (not exempt from
attachment under the law) property of the Exceptions:
debtor; 1. If it is prohibited by law
3. Accion Subrogatoria, or Accion Pauliana; and a. Contract of Partnership – 2 or more persons
4. Ask the court for rescission of the contracts binds themselves to contribute money, property,
(see Arts. 1191-1192 and 1380-1389) or industry to a common fund, with the intention
of dividing the profits among themselves. (Art.
Example: 1767)
On the due date, D could not pay C his obligation in the amount of
300k. however, D owns a car worth about 160k and X is indebted to
b. Contract of Agency – a person binds himself to
him for 40k. before the due date of the obligation, D sold his land render some service or to do something in
worth 200k to Y. representation or on behalf of another, with the
Under the circumstances, the right granted to C under the law are as consent or authority of the latter. (Art. 1868)
follows:
a. C may bring an action for the collection of the amount of 300k
c. Contract of Commodatum – one of the parties
with right to damages; delivers to another something not consumable
b. If, inspite of the judgment rendered, D fails to pay the amount so that the latter may use the same for a certain
due, C can ask for the attachment of D’s car so that the car may time and return it. Commodatum is essentially
be sold and payment made from the proceeds of the sale.
c. C may ask the court to order X not to pay D so that payment may
gratuitous. (Art. 1933)
be made to him (C). 2. If the parties stipulated the prohibition:
d. C may ask the court to rescind or cancel the sale made by D to Y • Like the stipulation that upon the death of the
on the ground that the transaction is fraudulent in case C cannot creditor, the obligation shall be extinguished or that
recover in any other manner his credit. (Note: this remedy can
the creditor cannot assign his credit to another.
only be resorted if C could not collect in full his credit. He must
first exhaust the properties of the debtor or subrogate himself in • The stipulation against transmission must not be
the latter’s transmissible rights and actions.) contrary to law or public policy.

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