BA 160 – Business Law

Atty. Cyndy P. dela Cruz-de los Santos

THZ/WFZ – 5:30-7:00 p.m.
Some facts about me
• BS Economics in UP Diliman, 2012
• Juris Doctor, Ateneo Law, 2016
• Admitted to the Bar in 2017
• Currently the Government Affairs Lead and Legal Business Partner for
National Sales, Distribution and Trade Marketing of Pepsi-Cola
Products Ph
Coverage of the Course
• Book IV – Civil Code
• Some important provisions in the Data Privacy Act
• Some important provisions in the New Corporation Code

All provisions are available online. Main case material is OBLICON Case
Notes dela Cruz 1-3.
Housekeeping
• Beadle
• Facebook Group
Synchronous Sessions
• All schedules indicated in Syllabus
• Preferably cameras on
• Use zoom link sent for now, will eventually migrate to UP zoom once
account has been made for me.
• Recitations during synchronous sessions are graded
• Spin the wheel for recitations so everyone should always be prepared
every session
Synchronous Sessions
• Recitation and exam questions are based on codal provisions and case
doctrines
• Questions may be identification or problem solving
Examinations
• Midterms and Finals
• As of now, plan is to conduct synchronous examinations via google
forms which is answerable in a span of 1 hour and 30 minutes
• Those who are unable to take the exams will have a different set of
questions
• Section THZ and WFZ will have different sets of questions in the exam
Class Goals for the Semester
• Knowledge on basic obligations and contracts, data privacy, and
corporation code laws useful for everyday lives
• Develop analytical skills in the field of business law
• Productive learning sessions
• UNO!
Introduction to Civil Code
• Civil Code consists of a body of laws which govern the way we live
• Birth to Death
• What is a person?
• What is a juridical person?
• Who are minors?
• What is marriage?
• Who are capacitated to enter into marriage?
• Is marriage perpetual?
• Can spouses terminate the contract of marriage?
• At what age does legal capacity begin?
• What are the sources of obligations?
• What are contracts?
• How do we terminate contracts?
• At what point do we lose our legal capacity?
• Who takes charge of us when we lose our legal capacity?
• What happens in the event of death?
• Who deserves a share in your estate when you die?
Before we discuss Obligations and
Contracts….
• Tips in reading the codals
• Read it not per provision but per Chapter so you’ll get the story
• Take note of the general rule and its exceptions
• Tips in reading cases
• Moral lesson of the case is the “doctrine” of the case.
• This “doctrine” is based on the codal provisions. It provides for the “why” of
the law
• Take note of the facts of the case and the corresponding “doctrine” ruled by
the Supreme Court
Before we discuss Obligations and
Contracts….
• Natural Persons v. Juridical Persons
• Capacity to contract
• 18 years of age
• Has the mental capacity to understand the terms and conditions of the
contract
• Not insane
• Not an imbecile
• Not retarded
• Not inebriated
Sources of Obligation
• Law
• Contracts
• Quasi-Contracts
• Acts or omissions punishable by law
• Quasi-delicts
Contracts v. Quasi-Contracts
Contracts – entered into by parties; mutual agreements with stipulations

Quasi-contracts – voluntary obligations

a. Negotiorum Gestio – Art. 2144; When a person voluntary takes charge or
manages the affairs/business/property of another without any power to
continue the same; Presupposes that the affairs/business/property was
neglected; Person who voluntarily takes charge must exercise diligence of
a good father of a family.
b. Solutio Indebiti – Art. 2154; When a person receives something when
there is no right to demand it and it was delivered by mistake, there is an
obligation to return.
Delicts v. Quasi-Delicts
Delicts – Revised Penal Code; Special Penal Laws

Quasi-delicts – whoever by act or omission causes damage to another; there being either
fault of negligence; is obliged to pay for the damage done. No pre-existing contractual
relation between the parties
• Guardians are liable for damages caused by minors or incapacitated minors
• Parents for their children
• Owners of establishments; Employers; for their employees (provided within the scope
of their assigned tasks)
• State over a special agent (foreign relations)
• Teachers/school heads for students or apprentices so long as they remain in their
custody

Defense: Observed the diligence of a good father of a family to prevent the damage
Diligence of a good father of a family
The basic standard of care under our civil laws unless a different
standard of care is stipulated in the contract.

For obligations involving healthcare or medicine, the standard of care is

the highest form of diligence that a person must observe –
extraordinary diligence. This diligence is usually expected from doctors
and other medical practitioners
Types of Obligation
• To give
• To do
• Not to do
Types of Obligation
TO GIVE

Question: A sold the bananas from her banana plantation to B. B

demands that the title to the banana plantation be transferred to his
name as a consequence of the sale. Is B correct in demanding for the
transfer of the title?
Types of Obligation
TO GIVE

Answer: No. The sale of the accessory does not carry with it the sale of
the principal.
Types of Obligation
TO GIVE

Question: A sold the banana plantation to B. After B paid in full on

September 27, 2021, A handed over the title to B. While still in
possession of the farm that day, A harvested all bananas and sold the
same to the market. B now demands that A hand over to him all the
proceeds of the sale. Is B’s demand correct?
Types of Obligation
TO GIVE

Question: In the same problem, A defends herself by saying that the

Deed of Sale of the banana plantation has no express provision that
says that the banana harvests at the time of the sale are included. Is A
correct?
Types of Obligation
TO GIVE

Answer: Yes. The sale of the banana plantation carried with it the sale
of its accessories/fruits. At the exact moment of payment, the sale was
consummated and from that moment, all accessions to the plantation
are owned by B. Article 1166 of the Civil Code provides that the
obligation to give a determinate thing includes delivering all its
accessions and accessories, even though they may not have been
mentioned.
Types of Obligation
TO GIVE

What is the difference between accessories and accessions?

Accessories are introduced to the thing while accessions are built-in to
the thing.
Types of Obligation
TO GIVE

Question: In the same problem, prior to delivery of the land (handing

over of the title and notarization of the Deed of Absolute Sale) how
would you characterize the right of B to the land and the fruits thereof?
Types of Obligation
TO GIVE

Answer: B’s right is personal prior to the delivery.

Personal v. Real Right:

• Both are enforceable and demandable rights.
• Difference lies on who can you enforce such right.
• Personal – between you and the other party
• Real – between you and the whole world
Types of Obligation
TO GIVE

• So in the same problem, A sold B her banana plantation. C then

comes to B saying that A offered to them the banana plantation prior
to B and they gave an earnest money to A.
• Can B enforce her rights:
• After payment has been made and a deed of sale has been executed by the
parties, notarized and registered with the registry of deeds?
• After payment has been made and prior to notarization?
Types of Obligation
TO GIVE

Question: A commissioned a self-portrait to B who is an artist. A already

paid the downpayment to B and has already sent the picture which B is to
draw. Per their agreement, B must deliver the painting on or before Sept.
27.
a. On September 27, no self-portrait was delivered by B but A is ready
with the balance of the full payment. Is B in delay? ALimorong
b. B hands over to A a self-portrait of another person, can A compel B to
deliver based on the specifications set? Lacson
Types of Obligation
TO GIVE

Answer:
• On September 27, no self-portrait was delivered by B but A is ready with
the balance of the full payment. Is B in delay?
• Yes. From the moment A is ready to fulfill her obligation, B is considered to be in
delay. The obligation is reciprocal – A will pay; B will draw
• B hands over to A a self-portrait of another person, can A compel B to
deliver based on the specifications set?
• Yes. The obligation is to deliver a determinate thing and not a generic thing. B
cannot hand over a random self-portrait. A can compel B to deliver.

• Follow up question: What happens if B says, “Sorry but I cannot do it anymore”?

Types of Obligation
TO GIVE

Answer:
• On September 27, no self-portrait was delivered by B but A is ready with
the balance of the full payment. Is B in delay?
• Yes. From the moment A is ready to fulfill her obligation, B is considered to be in
delay. The obligation is reciprocal – A will pay; B will draw
• B hands over to A a self-portrait of another person, can A compel B to
deliver based on the specifications set?
• Yes. The obligation is to deliver a determinate thing and not a generic thing. B
cannot hand over a random self-portrait. A can compel B to deliver.

• Follow up question: What happens if B says, “Sorry but I cannot do it anymore”?

Types of Obligation
TO GIVE

Question: A owes B a sum of money in the amount of Php 5,000

with an interest of 1% of the principal applied monthly until fully
paid.
On December 25, 2021, B accepts the payment of Php 5,000
from A, writes an acknowledgment receipt and signs the same.
On December 26, 2021, B tells A that he forgot to claim for the
interest payments prior to December 25. A ignores B.
Does B have a strong case of collection against A?
Types of Obligation
TO GIVE

Answer: No. When B filed a claim to collect for interest, he has

the burden to prove that A did not pay such interests. Article
1176 of the Civil Code provides a presumption in favor of A that
he has paid the interests because B accepted the payment of
principal without reservation as to the interest.

Follow up question: Does A have to do anything?

Types of Obligation
• To give
• To do
• Not to do
Types of Obligation
TO DO:

Question: A contracted B to construct a bungalow style Japanese home with middle pocket
garden surrounded by small bamboo trees and may be accessed by a glass sliding door
located at the middle portion of the floor. B committed to complete the construction one
year from September 27 2021. Payments have been religiously paid by A to B per project
phase.

On September 27, 2022, A visited the site only to find out that the house is Mediterranean
with dates trees and rock formations.

Can A compel B to construct what she wants at B’s expense?

Can A compel B to destroy the constructed home?
Can B claim from A the cost to destroy then rebuild?
Types of Obligation
TO DO:

Answer:

Can A compel B to construct what she wants at B’s expense?

• Yes. If B does his obligation in contravention of the agreement, then A can
compel him to construct the initially agreed upon design at B’s own expense.
Can A compel B to destroy the constructed home?
• Yes.
Can B claim from A the cost to destroy then rebuild?
No. All costs should be borne by B
Who may be liable for damages?
Those who in the performance of their obligation are guilty of:
1. Fraud;
2. Negligence;
3. Delay; or
4. In any manner contravene the obligation
Who may be liable for damages?
DELAY/DEFAULT:
• Counted from the time the obligee judicially or extrajudicially
demands from obligor the fulfillment of the obligation
• Ex. Loans – demand letter: “Formal demand to pay xxx within 15 days
from receipt of this letter”

• No need for demand when:

• The obligation or law expressly so declares
• Time is of the essence
• Demand is useless as when obligor rendered it beyond his power to perform
Who may be liable for damages?
DELAY/DEFAULT:
• No need for demand when:
• The obligation or law expressly so declares
• Not enough to say that obligation is due on a certain date
• Stipulation must contain “without need of demand”
• Time is of the essence
• Use common sense in this one
• For example, nature of obligation is preparation of burial site
• Demand is useless as when obligor rendered it beyond his power to perform
• When beyond the power to perform what will be our remedy?
Who may be liable for damages?
FRAUD
• Two types of fraud:
• One that you employ before the obligation (Dolo Causante)
• One that you employ during the obligation (Dolo Incidente)

• Which one renders the whole obligation void?

DAMAGES:
• Fraud, negligence, delay, contravention of obligation
• Question:
A and B entered into a pre-nuptial agreement. In the agreement,
there is a provision that the parties agree to pay the other a sum
of Php 5,000,000 as settlement for future marital infidelity and
that as the amount is stipulated, it bars any party from pursuing
actions for fraud or other remedies available under the law.
Is the provision valid?
DAMAGES:
• Answer:
• No. Article 1171 of the Civil Code provides that “Any waiver of
an action for future fraud is void”
DAMAGES:
• Fraud, negligence, delay, contravention of obligation

Test of negligence:
Would a prudent man, in the position of the person to whom the
negligence is attributed, foresee harm to the person injured as a
reasonable consequence of the course about to be pursued? If so, the
law imposes a duty on the actor to refrain from that course or to take
precaution against its mischievous results, and the failure to do so
constitutes negligence.
DAMAGES:
• Fraud, negligence, delay, contravention of obligation

Question:
A is driving along EDSA Aurora Underpass in a rainy evening. He
notices that the cars in front of him are slowing down to a stop so he
slowed down to a stop too. Meanwhile, B driving a motorcycle,
switched to the lane of A and as A stopped, B hit A and B sustained
injuries as his motorcycle toppled.

Can B claim damages from A?

DAMAGES:
• Fraud, negligence, delay, contravention of obligation

Answer:
No. B should have noticed that the cars around him are slowing
down to a stop. The fact that it was too late for him to control his
motorcycle meant that despite the rainy weather and the
circumstances around him, he continued driving at a fast pace
causing his own injuries.
FORCE MAJEURE
• Acts of God or Acts of Man
• Unforeseeable
• Unavoidable
• Foreseeable but unavoidable
• Parties are not responsible for unforeseen events as these were not
contemplated when the contracts were entered into exc:
• Specified by law
• Stipulated by the parties
• Nature of obligation requires the assumption of risk
FORCE MAJEURE
• Event must be independent of human will
• Occurrence must render it impossible for the debtor to fulfill
the obligation in a normal manner
• Obligor is free from participation in, or aggravation of, the
injury to the creditor
FORCE MAJEURE
• Practical note: Stipulate these in the contract and have other party
assume risk. Or have a provision which states that once these
unforeseen incidents happen, parties will agree on each of their
responsibilities.
• While events may be considered as unforeseen, and one of the parties
failed to inform the other of such event when timely informing would
have lessened the injury/damage caused, the former party is liable for
damages as the same is a negligent act which caused to aggravate the
injury or damage to the renter. (Remember that for force majeure, the
event must be completely beyond the control of the obligor)
 Chapter 3:
Different Kinds of Obligations
Pure and Conditional
Obligations
Pure and Conditional Obligations
• Pure obligation – not subject to any condition and no specific date is
mentioned for its fulfillment
• Conditional obligation – consequences are subject in one way or
another to the fulfillment of a condition
• Condition – future and uncertain event or based from a past event unknown
to the parties
• Must not be impossible (Art. 1183)
Pure and Conditional Obligations
• What happened in the case of HSBC v. Spouses Broqueza?
Pure and Conditional Obligations
• What happened in the case of HSBC v. Spouses Broqueza?
• Employee takes out a loan from the employer payable through salary
deduction
• There is no date indicated in the promissory notes for the payment of the
loans
• Employees were laid off from the company.
• Obligation then becomes demandable at once.
• Article 1179
Pure and Conditional Obligations
• Suspensive – happening of an event gives rise to an obligation
• I will marry you once you’ve watched all Lord of the Rings movies
• Resolutory – demandable at once, but the happening of an event
extinguished the obligation
• Payment of installments until fully paid
Pure and Conditional Obligations
• Explain the difference between a contract to sell and a contract of
sale
Pure and Conditional Obligations
• Contract to sell – seller reserves ownership of the property until full
payment by the buyer
• Contract of sale – must be executed once the condition to of full
payment is satisfied

• What is the nature of the condition of full payment?

• Suspensive? Resolutory?
Pure and Conditional Obligations
• In a contract to sell, if the buyer fails to pay the installments, does
that constitute a breach?
Pure and Conditional Obligations
• No. It is merely a non-fulfillment of the condition that does not give
rise to any obligation on the part of the seller to execute a contract of
sale and convey (transfer) the title in the buyer’s name.
Pure and Conditional Obligations
Question:
A loans money from B. A tells B, I will pay you in installments when
Michael Jackson returns from the dead.

Is the obligation valid? Why or why not?

What is the type of condition? Suspensive or Resolutory?
Pure and Conditional Obligations
Question:
A is 10 years old and is the grand daughter of B. B, while still alive,
executes a Deed of Donation where she donates her house and lot in
Tagaytay to A.

Is the donation valid?

Can A demand at once that the title of the house and lot be transferred
to her name ?
Pure and Conditional Obligations
Question:
What if B kills A before A turns 18. What happens to the obligation?

Who is the owner of the house and lot?

Pure and Conditional Obligations
What happened in the case of Osmena v. Rama?
Pure and Conditional Obligations
Rama took out a loan and executed a promissory noted with the
condition that Rama will pay her indebtedness if her house is sold.

The condition is not void per se. But the moment that Rama voluntarily
prevents the happening of the event, the obligation becomes
immediately due and demandable in accordance with Art. 1186.
Pure and Conditional Obligations
Question:
A loaned money from B. A tells B: “I shall pay you once I graduate from
college”

Is there a condition? Is the obligation valid?

When shall the obligation be fulfilled?
Pure and Conditional Obligations
Question:
A loaned money from B. A tells B: “I shall pay you once a new President
is elected”

IS the obligation valid?

What type of condition is this?
Pure and Conditional Obligations
Article 1188:
Creditor may, before the fulfillment of the condition, bring the
appropriate action for the preservation of his right.

• What is a good example for this?

Pure and Conditional Obligations
Restitution – return to status quo. This is the essence of Art. 1190. Once the
obligation is extinguished, parties shall return to each other what they have
received.
• Lease contracts – once extinguished, lessee is to return the leased premises
while lessor is to return the security deposit.
Pure and Conditional Obligations
RESOLUTION

The power to terminate obligations.

If one of the parties does not do what is incumbent upon him, the injured party
may ask for:
1. Specific performance (fulfillment of obligation); or
2. Termination of agreement
3. Both 1 and 2 with payment of damages
Pure and Conditional Obligations
Is there a difference between rescission and resolution? (Case of Rivera v. del
Rosario)
Pure and Conditional Obligations
Yes. Resolution in Art. 1191 pertains to breaches of obligations in agreements
while Rescission in Art. 1291 pertains to breach of faith.
Pure and Conditional Obligations
In pari delicto

• Both parties at fault

• Courts will determine the liabilities of both parties
• If it cannot be determined which of the parties first violated the contract, the
same shall be deemed extinguished.
Obligations with a Period
Obligations with a Period
• When a date is fixed, obligation is demandable when that day comes
• Period is resolutory, it takes effect at once but is terminated once the
resolutory period comes
• Day certain – necessarily comes
• Conditional – will the day come or not (governed by conditional
obligations)
Obligations with a Period
• Benefit of a period
• Art. 1195: Anything paid or delivered before the arrival of the period, the
obligor being unaware of the period believing that the obligation has become
due and demandable, may be recovered, with the fruits and interests.
• Art. 1196: Period is for the benefit of both parties, unless otherwise stipulated
• Art. 1197: courts may fix the duration
• If nature of obligation is one where it can be inferred that a period was intended,
• When obligation depends upon the will of the debtor
Obligations with a Period
• What did the Supreme Court say in the case of Ponce de leon v.
Syjuco as to the practical explanation why creditors will choose to
benefit from the period in a loan contract?
Obligations with a Period
• Creditors may validly refuse to accept the payment before the
maturity date because they may want to keep their money invested
safely and fixing a period protects the creditor from sudden declines
in the purchasing power of the currency.
Obligations with a Period
• Loss of the Benefit of a Period
• Insolvency unless he gives a guaranty or security for the debt
• Does not furnish the guaranties or securities which he has promised to the
creditor
• Through own acts, he has impaired such guaranties or securities after their
establishment and when through a fortuitous event they disappear unless he
gives new ones satisfactorily
• Debtor violates any undertaking in consideration of which, the creditor
agreed to a period
• Debtor attempts to abscond (tumakas)
Alternative Obligations
Alternative Obligations
• Either or – perform one
• Right of choice to the debtor
• Choice must be communicated in order to take effect
• If among choices, only one is realistically possible, obligation is a simple
obligation to do or to give
• If creditor makes it impossible for debtor to choose, debtor may rescind
contract with damages (doctrine of good faith in dealings)
• If debtor is the reason why the alternatives are impossible because he has
lost the same, debtor must pay creditor damages
• Damages to be computed according to the value of the last thing that disappeared
• But courts may also order debtor to pay other damages or service
Alternative Obligations
• Choice given to the creditor
• One of the things lost without fault of debtor, creditor will choose among the
remaining
• One of the things lost with the fault of debtor, creditor may choose from
remaining or demand the value of that which was lost plus damages
• If all things are lost with the fault of the debtor, creditor may choose any of
the values of the things lost plus damages

• SAME with obligations to do or not to do.

Alternative Obligations
• Facultative
• This or if not, this
• The other option is in substitution of the other
• If the substitute is lost through negligence of the obligor – no liability
• Once substitution has been made, it becomes obligor’s responsibility to make
sure that the thing is not lost. Otherwise, he is liable for damages arising from
delay, negligence or fraud.
Joint and Solidary
Obligations
Joint and Solidary Obligations
• Several creditors or several debtors
• Solidary is not presumed
• Joint is presumed when there is concurrence of several debtors or
several creditors
• How do we expressly provide for solidary obligation?
• “We bind ourselves jointly and severally”
• “The nature of the obligation is solidary”
Joint and Solidary Obligations
Joint and Solidary Obligations
• Problem: (One creditor – several debtors)

• A, B, and C borrowed money from X in the amount of P3,000,000

obligating themselves to pay on June 30, 1991. The promissory note
states: “We bind ourselves jointly and severally to pay X the amount
of P3,000,000”
1. What happens when one of the debtors, B, becomes insolvent?
Joint and Solidary Obligations
• Problem: (One creditor – several debtors)

• A, B, and C borrowed money from X in the amount of P3,000,000

obligating themselves to pay on June 30, 1991. The promissory note
states: “We bind ourselves jointly and severally to pay X the amount
of P3,000,000”
2. If X demands payment from A, B, and C, how much will each pay?
Joint and Solidary Obligations
• Problem: (One creditor – several debtors)

• A, B, and C borrowed money from X in the amount of P3,000,000

obligating themselves to pay on June 30, 1991. The promissory note
states: “We bind ourselves jointly and severally to pay X the amount
of P3,000,000”
3. If X demands payment from A, and B, only, how much will each pay?
4. How much should A and B demand from C?
Joint and Solidary Obligations
• Problem: (One creditor – several debtors)

• A, B, and C borrowed money from X in the amount of P3,000,000

obligating themselves to pay on June 30, 1991. The promissory note
states: “We bind ourselves jointly and severally to pay X the amount
of P3,000,000”
5. Can A assign her rights to D?
6. If X demands payment of 1,500,000 from C, is A and B still liable to
pay?
Joint and Solidary Obligations
• Problem: (Several creditors – several debtors)
• Spouses A and B loaned money to X who convinced his brothers Y and Z to
be his co-makers. The total amount loaned is Php 4,000,000. The
promissory note states: “The payment of the obligation shall be solidary”
• 1. Who has the right to demand payment? A or B?
• 2. What happens when A enters into a compromise agreement with X (for
the whole obligation)? Can B go after Y and Z instead?
• 3. Last Monday, A waives the debt in favor of X (for the whole amount). The
day before that, Y came to B to pay the Php 4,000,000 in full. Does X
remain to have an obligation?
Joint and Solidary Obligations x Divisible and
Indivisible
• Problem: (One creditor – several debtors)
A, B, C are liable to give X a Toyota Innova. On the date of delivery, A
and B are willing to deliver but C is not.
1. Is the obligation joint or solidary?
2. Is the obligation divisible or indivisible?
3. How much is the share of A,B, and C? Can X go after one of them
only and claim the share of one debtor only?
Joint and Solidary Obligations
• Loss or Impossibility of obligation – without fault of solidary debtors, obligation is
extinguished.

• Loss or Impossibility of obligation (through fortuitous event, or delay or fault) – with

fault from any one of the debtors, obligation not extinguished, all are still liable solidarily
but other debtors may file an action against the debtor at fault

• Defenses of solidary debtor:

• -Nature of obligation (may bring an action in behalf of his co-debtors)
• -personal defenses (as against his solidary co-debtors)
• -defenses pertaining to his own share
• -may only bring up defenses for others but only as regards that part of the debt for which
the latter are responsible.
Divisible and Indivisible
Obligations
Divisible and Indivisible Obligations
• The Work Commission Contract provides:
“The COMPANY commissions the CONTRIBUTOR to create, produce
and deliver the Work as described in the corresponding Statement of
Work (“SOW”) to be agreed upon by the Parties from time to time
pursuant to this Contract, and to be used in a Publication as
commercial content for either the brand/s owned by the COMPANY
(the “Media Brand”) and/or for Branded Content of the brand/s owned
by the clients of the COMPANY (the “Client Brand”).”
Divisible and Indivisible Obligations
• “Statement of Work” (or “SOW”) shall pertain to the document containing
the specific required work product commissioned by the COMPANY from
the CONTRIBUTOR, containing, among others, the details and specifications
of the required work product, the commission fees, timetables, deadlines
and general instructions of the COMPANY. The SOW shall be attached to
this Contract and shall form an integral part hereof. Any SOW executed by
the Parties in accordance herewith, shall be governed by the terms of this
Contract and any additional terms set out in the SOW. In the event of any
inconsistency between this Contract and a SOW, the provisions of this
Contract shall govern and control, except when any provision in a SOW is
expressly stated to vary or amend this Contract (in which case the variation
in a SOW to this Contract shall operate only in relation to such SOW).

Question: Is this a divisible obligation by nature? Why?

Divisible and Indivisible Obligations
• Even when capable of partial performance, intent of the parties to
the contract will govern.
• Like the work commission contract, parties can stipulate that the
obligation is indivisible
• Payment made to the contractor is for the whole engagement and not per
each part
Obligations with a Penal
Clause
Obligations with a Penal Clause
• The Contract of Loan states:
“The Loan shall be payable in accordance with the Payment Terms and/or schedules indicated in
this Agreement. Delay in payment of the amounts due shall entitle the Creditor to two (2%) percent
interest on the unpaid amounts due, without prejudice to its other rights under the Agreement, law
or equity. “

Is this an obligation with a penal clause? Why?

Obligations with a Penal Clause
• The Contract of Employment states:
“Accordingly, you give your consent for the Company to withhold and deduct from your
compensation any and all amounts necessary to pay for all the costs and/or damages suffered by
the Company resulting from your negligence, misconduct or any violation of the provisions of this
contract, subject of course to due process. This shall be understood to be without prejudice to any
other remedy which the Company may pursue against you. However, no liability shall attach to the
Company should the latter fail to exercise such option.”

Is this an obligation with a penal clause? Why?

Obligations with a Penal Clause
• The Contract of Advertising Works states:
“Prior to the expiration of this Contract, should the CONTRACTOR abandon his work to the
prejudice of PCPPI, the CONTRACTOR shall be liable to PCPPI for damages of not less
than ____________________________________ PESOS (Ph____________________ ”

Is this an obligation with a penal clause? Why?

Obligations with a Penal Clause
• Substitute/Accessory to payment of damages and payment of
interests
• Two kinds of penalty clauses:
• Imposed as a penalty in cases of breach (loan contract example)
• To ensure additional burden to the obligor in cases of breach/delay
• Imposed as indemnity for damages (employment contract and contract for
advertising works example)
• To ensure automatic indemnity for damages incurred by oblige through the fault,
negligence, breach of obligor
Extinguishment of
Obligations
Is the list in the Civil Code exclusive?
• Death
• Want of Interest
• Mutual Agreement
• Insolvency
1. Payment or Performance
• Payment must be complete
• Doctrine of Substantial Performance
• Obligor must be paid for the work done substantially. The law grants this right even when the obligation
is not complete.
• Concept of Irregularity of Performance accepted by the creditor (Waiver)
• Payment must be made by one who has the capacity to dispose the thing/object
to be paid/delivered
• Payment must be acceptable to the creditor; Debtor cannot substitute payment
for another
• Payment must be made to the obligee, his/her heirs, or authorized
representatives (SPA)
• Payment made to incapacitated persons will be valid if he has kept the thing/benefitted him
• Payment by third party is valid if rights of creditor is acquired, ratification, debtor has been
led to believe that authority is valid
1. Payment or Performance
Payment by a third party (not a solidary/joint debtor)
• If a third party who is not an original party to the Agreement pays in
behalf of the debtor, the creditor has the right to refuse payment.
• Payment by a third party is like a donation, it needs to be accepted by
the debtor. But as to the creditor, obligation is extinguished.
• If such third party pays the creditor, and the latter accepts it, third
party may ask for reimbursement from the debtor if the third party
paid with the consent of the debtor
• If the third party pays the creditor, and the latter accepts it, third
party may only ask for recovery insofar as it has benefitted debtor
1. Payment or Performance
What does 1242 mean? Who is a person in possession of a credit?

• Heir to an estate who collects the credits of the estate but is later on deprived
of the hereditary share
• Assignee of a credit but later on assignor annuls it

What does 1243 mean? What is the possible scenario?

• When there is pending litigation against the creditor by another debtor
1. Payment or Performance
What is dacion en pago or dation in payment?

Remember that the general rule is that debtor cannot substitute his debt for
another. An exception is when creditor agrees such as in dation in payment.

Here, debtor may assign to creditor his rights to his inheritance (only a part
thereof) or the proceeds of his investment, etc. which is equivalent to the value
of his debt.
1. Payment or Performance
In 1249, what is legal tender?

Currency accepted in the jurisdiction. All notes and coins issued by the Central
Bank.
2. Loss of the Thing Due
• Loss does not connote a strict legal meaning of “loss” but also pertains to
“impossibility of performance”
• Without fault – obligation extinguished
• With fault, stipulations, nature of obligation requires assumption of risk –
damages
• Generic things – no loss, can be replaced by another generic thing
• Partial loss – courts will decide if partial loss is so important as to extinguish
the obligation
• Presumption: When thing is lost in the possession of the debtor, presumption
that loss is due to his fault. Presumption does not apply in cases of
earthquake, flood, storm and other natural calamity
2. Loss of the Thing Due
• Substantial Change in Circumstances – service becomes so difficult as to be
manifestly beyond the contemplation of the parties
• Can courts modify the obligation so as to alleviate the difficulty?
2. Loss of the Thing Due
• Substantial Change in Circumstances – service becomes so difficult as to be
manifestly beyond the contemplation of the parties
• Can courts modify the obligation so as to alleviate the difficulty?
• No. It defeats the very foundation of agreements (mutual agreement and will of the
parties)

• What are the requisites?

• Event or change in circumstances could not have been foreseen at the time of the execution
of the contract;
• Makes the performance of the contract extremely difficult but not impossible
• Event must not be due to the act of any of the parties
• Contract must be for a future prestation
3. Condonation or Remission of Debt
• Gratuitous
• Just like the concept of donations, there must be acceptance by the donee
• Obligation may be renounced in full or in part
• It is essential that in condonation or remission, there is no exchange of the
extinguishment of obligation, otherwise, the arrangement becomes different.
• Requisites:
• Debt must be existing and demandable at the time the remission is made
• Renunciation of the debt must be gratuitous or without equivalent or consideration
• Debtor must accept the remission
3. Condonation or Remission of Debt
• Follows the same formalities as a donation
• Art. 748 for movable properties
• Art. 749 for immovable properties
• Donor/Creditor may unilaterally condone/forgive a debt but the rules on
condonation will not apply.
• It will be as if the donor/creditor has abandoned his interest over the credit
• What is the effect of abandonment of interest of creditor?
3. Condonation or Remission of Debt
• Implied Remission: when creditor delivers the document evidencing
credit (promissory note) or destroys, or cancels
• Since this is implied, if creditor suddenly denies his intent to condone/forgive
the debt, he has the burden of proving that he has no intent or the
destruction of the document was made through inadvertence or mistake
• Document pertains to private documents only
• Not public documents
4. Confusion or merger of rights
• Character of creditors and debtors are merged in the same person
• Between creditor and debtor
• Same obligation must be involved
• Confusion must be total and not partial
• Example:
• If debtor is an heir of the creditor and debtor inherits credit from the creditor
5. Compensation
• Two persons are creditors and debtors of each other
• Offsetting of two obligations
• Difference with merger: In merger, the personalities of the creditor
and debtor must be merged in the same obligation. In compensation,
there can be two obligations: debtor to creditor; creditor to debtor
• May be total or partial (note that in confusion/merger, it must be for
the total obligation)
• Take note of the differences between confusion/merger and
compensation
5. Compensation
• Requisites:
• Each one of the debtors be bound principally and that he be at the same time
a principal creditor of the other
• Both debts consist in a sum of money, or if the things due are consumable,
they be of the same kind, and also, of the same quality if the latter has been
stated
• Two debts be due
• Both debts are liquidated and demandable
• No controversy commenced by third persons and communicated in due time
to the debtor
5. Compensation
• May be total or partial
• For debts which are not yet due, parties may agree on voluntary
compensation
• When claim for damages for both parties are proved, damages may
be compensated also
• Assignment of credit to third parties must be made before
compensation
6. Novation
• Obligations may be modified by:
• Changing their object or principal conditions
• Substituting the person of the debtor
• Subrogating a third person in the rights of the creditor
• Novation extinguishes the original obligation
• It creates a new obligation
• Requisites:
• There must be a previous valid obligation
• The agreement of all the parties
• Extinguishment of the old contract
• Validity of the new contract
6. Novation
• The extinguishment of the original obligation must be express (Express
Novation) or the obligations in the old and new contracts must be
incompatible with one another (Implied Novation)
• Note that novation is never presumed
• Examples of implied novation:
• Original Obligation: Payment of sum of money
• Modified Obligation: Delivery of property or rendition of service
• No novation in the following:
• Execution of a public instrument to supplement the private instrument in a loan
arrangement
• Acceptance of partial payment
• Requirement of additional security
• New agreement is meant to supplement the old
• Mere extension of the terms of payment does not result in novation (period affects
the performance but not the obligation)
6. Novation
• Substitution of new debtor
• Expromision – third person and creditor agree that former assumes the
obligation of the debtor; can be done with or without the consent of the
original debtor

• Delegacion- debtor offers to creditor a substitute debtor to assume the

obligation; creditor must agree to the substitution
• Note that in both arrangements, it is necessary that the old debtor be
released from the obligation. Without the release, there is no
novation.
6. Novation
• Substitution of new debtor
• Expromision - If done without the knowledge/consent of the debtor, the new
debtor’s insolvency does not create a new obligation on the part of the old
debtor. Note that old debtor has already been released from the obligation.

(When you do not consent to something, the law does not give you an extra
burden when the initiative in making the change was made by others; On the
other hand, even without your knowledge, when you will be benefitted by the
acts of others, the law gives you that benefit)
6. Novation
• Substitution of new debtor (1294)
• Expromision - If done without the knowledge/consent of the debtor, the new
debtor’s insolvency does not create a new obligation on the part of the old
debtor. Note that old debtor has already been released from the obligation.

Art. 1294 seems to imply that when debtor consents, he will be liable for the
insolvency of the new debtor (note than when one is insolvent, the obligation
consists of the principal, interests, plus damages for delay) so in effect, old
debtor becomes liable for more than his obligation previously.

This is not the intent of the law. The more consistent interpretation is that when
the old debtor did not propose the substitution, has no knowledge of it or did
not consent to it, then he cannot be made liable for any insolvencies, etc, of the
new debtor.
6. Novation
• Substitution of new debtor (1295)
• Delegacion – if old debtor proposes a new debtor who later on becomes
insolvent, creditor cannot go against old debtor IF the insolvency was not
existing or of public knowledge at the time of proposal.
6. Novation
• Principal obligation is extinguished in a novation.
• Note that in contracts, the terms and conditions are only as between
the parties who consented to it. It must not affect third persons who
did not consent to be affected by any changes to the accessory
obligation that benefits them.
• Example:
• Contract 1: Lease between Lessor A and Lessee B.
• Contract 2: Lessee B offers the unit for sublease in favor of Sublessee C.
• If contract 2 is novated, Lessor A must not be affected by any terms in the
novation
6. Novation
• Old obligation valid; New obligation void; Original one subsists unless
parties intend for the same to be extinguished
• Old obligation void = novation is void
• Old obligation subject to suspensive or resolutory condition; New
obligation will be under the same terms unless otherwise stipulated
6. Novation
• Legal Subrogation – transfer of all rights of a creditor to a third
person, who substitutes him in all his rights; Happens by operation of
law
• Conventional Subrogation – transfer of all rights of a creditor to a
third person through the agreement of the parties
• Note that subrogation extinguishes the old obligation in place of a
new one because there is a new creditor
6. Novation
• Art. 1302: Legal subrogation is presumed when:
• A creditor pays another creditor who is preferred even without the debtor’s
knowledge
• A third person, not interested in the obligation, pays with the express/tacit
approval of the debtor
• Even without the knowledge of the debtor, a person interested in the
fulfillment of the obligation pays without prejudice to the effects of confusion
as to the latter’s share