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ATENEO DE DAVAO UNIVERSITY School of Business and Governance CPA Review Center BUSINESS LAW REVIEW ON LAW ON OBLIGATIONS (Articles 1156-1304 of the Civil Code) City Prosecutor Janet Grace B. Dalisay-Fabrero I. Obligations General Provisions 1. What is the law on Obligations and Contracts? The law on obligations and contracts is the body of rules which deals with the nature and resources of obligations and rights and duties arising from agreements and contracts. 2. Source of the Law on Obligations and Contracts is the Civil Code of the Philippines (Republic Act No. 388) which took effect August 30, 1950. The Civil Code is derived from the Civil Code of Spain of 1889. 3. Meaning of obligation: Code basis Article 1158 obligation is juridical necessity to give to do or not to do. 4. Criticism as to the codal definition by Justice J.B.L. Reyes. It views obligation from the debit side. There is no debt with credit and the credit is an asset in the patrimony of the creditor just as the debt is the liability of the obligor. Better definition: the one given by Arias Ramos, one of the commentators of the Civil Code: An obligation is a juridical relation whereby a person (called creditor) may demand from another (called debtor) the observance of a determinative conduct (the giving, doing or not doing) and in case of breach, may demand satisfaction from assets of the latter. 5. Kinds of obligations based on its codal definition: Real obligation obligation to give Personal obligation obligation to do or not to do 2 kinds of personal obligation a) Positive personal obligation to do b) Negative personal obligation not to do 6. Essential Requisites of obligation 1. Active Subject the obligee or creditor one who has the right and power to demand the performance of the obligation. 2. Passive Subject the obligor or debtor one who is obliged to perform the obligation. 3. Object or Prestation subject matter of the obligation that consists of the prestation to give, to or not to do. The objects of contract are things, right or services. 4. Juridical or Legal Tie It is also known as efficient cause, which binds the parties to the obligation. Another name is VINCULUM JURIS. 7. Meaning of Juridical Necessity: Obligation is a juridical necessity because in case of non-compliance, the courts of justice may be called upon to enforce its fulfillment or in default thereof, the economic value that it represents. In a proper case, the debtor may be made liable for damages for the injury or harm suffered by the creditor for the violation of the latters right. 8. Significant terms: a) Obligation the act or performance that the law will enforce. b) Right The power which a person has under the law to demand from another any prestation. c) Wrong (cause of action) an act or omission of one party in violation of the legal right (a right recognized by law) of another. It is also known as INJURY Operative Illustrations of an obligation: I. By virtue of a contract, D obliged himself to ship the goods of C from Manila to Cebu for P10, 000. D is the passive subject while C is the active subject. The shipping of goods to Cebu is the prestation; the contract between D and C is the efficient cause or vinculum juris. (Obligation to give) Isaac Rimando and Moises Reyes signed a contract whereby Isaac Rimando obliged himself to to Moises Reyes a Toyota Corolla 2003 model on November 12, 2003. deliver

II.

III. (Obligation to do)

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Robert Gonzales and Angel Filamor entered into a contract whereby, Robert Gonzales obliged himself to paint the car of Angel Filamor. IV. (Obligation not to do) Nicanor Castro insured himself with the Manila surety and Insurance Co. The parties agreed that Nicanor would not commit suicide during the existence of the insurance. 9. Kinds of Obligations: 1. Viewpoint of sanctions: a. Civil obligations give a right of action to compel their performance. b. Natural obligations not based on positive law but on equity and natural law. It does not grant a right of action to enforce their performance but after voluntary fulfillment by the obligor they authorize the retention of what has been delivered or rendered by reason thereof. c. Moral obligations those that cannot be enforced by action but which is binding on The party who makes it in conscience and natural law. Under our law, moral obligations are not merged with natural obligations. 2. Viewpoint of performance a. Positive to give or to do b. Negative not to do 3. Viewpoint of subject matter a. Real obligation to give b. Personal obligation to do or not to do 10 . Sources of obligations: ( Art. 1157 of the Civil Code) A - 1. Law 2. Contracts 3. Quasi-contracts 4. Act or omission punishable by law 5. Quasi-delicts B. Law as source of obligations Obligations derived from law are presumed . Only those expressly determined in this code or by special laws are demandable and shall be regulated by the precepts of the law which established them; and as to that has not been foreseen, by the provisions of this book. (Art.1158) Obligation ex-lege (arising from law) not presumed. Obligations arising from law are not presumed. To be demandable and enforceable, the obligation must be stayed by the law, which created the obligation. Such being the case the agreement of the parties under this obligation is no longer necessary because it is the law, which governs their obligation. Law governing obligations derived from law. Obligations derived from law shall be governed by the law, which establishes them. insufficiency, the provisions of the Civil Code shall supplement the same. In case of

Examples: a. The obligation of husband and wife to support each other. (Art.195, Civil Code) b. The obligation of a taxpayer to file his income tax return. (Title VI. Section 44, NLRC) c. The obligation of the legitimate ascendants and descendants to support each other.(Art 195, Civil Code) ILLUSTRATIVE CASE. SG, while employed as a guard of a movie house by O, shot and killed a gatecrasher, X who attacked SG with a knife after having been refused entrance without first providing himself with a ticket. SG was criminally charged with homicide but the trial court dismissed the case. For the expense incurred in his defense, SG demanded reimbursement from the owner. When the owner refused, he filed his action for the recovery of the amount paid to his lawyer plus moral damages. Held: The owner O is not liable because the giving legal assistance to the employee is not a legal obligation. While is may be true it may be considered as a moral obligation. It does not at present, count with the legal sanction of any man-made law. If the owner with is not legally obliged to give legal assistance to the employee, then the latter cannot recover the amount paid cannot be presumed, it must be stated before it become obligatory. C. Contract as a source of obligation: Obligations arising from contracts have full force of law between the contracting parties and should be complied with in good faith. (Art.1159)

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Validity of Contract. In contract as to their general formation this is what we call freedom to contract or autonomy of will, the contract entered into between the parties shall have the force of law between the parties. Any violation by either party shall produce a cause of action against the violator. However, in order for a contract to be valid and enforceable it must not be contrary to law, morals, good customs, public order or public policy, otherwise the contract is void. (Art.1306, 1409, Civil Code) Effect if part of the contact is void. If part of the contract is void but the contract is susceptible of division, the part, which is not affected, may be enforced disregarding the part, which is void. Such that if the contract is falsified by the unauthorized insertion of additional stipulation, this falsified insertion shall be considered inexistent and part unaffected shall be enforced. D. Quasi-Contracts as source of contract. It is judicial relation, which arises from certain lawful, voluntary, and unilateral acts, to the end that no one may be unjustly enriched or benefited at the expense of another. (Art. 2142 of the Civil Code) Two principal kinds of Quasi-contracts. 1. Negotiorum Gestio voluntary administration of the property, business or affairs of a third person without the consent or authority of its owner. 2. Solutio Indebiti payment by mistake of an obligation that was not due when paid. The distinction of a quasi-contract from contract is that in contract, there is consent of the parties while in quasi-contract, the obligation arises without a contract. What law governs Quasi-Contracts? Chapter 1, Title XVII of the Civil Code ( Arts. 2142-2175) as provided under Article 1160, CC. Some examples of Quasi-Contract. 1) Art 2144, whoever voluntarily takes charge of the agency or management of the business or property of another, without any power from the latter is obliged to continue the same until the termination of the affair and its incidents or to require the person concerned to substitute him. If the owner is in a position to do so. ExampleS OF Quasi-Contracts: 1. A merchant-farmer and owner of a ten-hectare agricultural land left for USA on a pleasure trip. While enroute to USA typhoon dading devastated the entire Philippines including the land owned by D. Before the typhoon reached our area of responsibility C, a neighbor of D employed six (6) farmers to harvest the palay planted on the obligation of D upon arrival is to reimburse C P600 because he must not be enriched at the expense of another. 2) Art.2154. If something is received when there is no right to demand it and it was unduly delivered through mistake he obligation to return it arises. 3) Art. 2164. When, without the knowledge of the person obliged to give support, it is given by a stranger, the latter shall have a right to claim the same from the former, unless it appears that he gave it out of piety and without intention of being repaid. 4) Art. 2167. When, through an accident or other cause, a person is injured or become seriously ill, and he is treated or helped while he is not in a condition to give consent to a contract he shall be liable to pay for the services of the physician or other person aiding him, unless the service has been rendered out of pure generosity. 5) Art. 2168. When, during a fire, flood, storm, or other calamity, property is saved from destruction by another person without knowledge of the owner, the latter is bound to pay the former just compensation. 6) Art. 2174. When, in a small community a majority of the inhabitants of age decided upon a measure for protection against lawlessness, fire, flood, storm or other calamity, anyone who objects to the plan and refuses to contribute to the expenses shall be liable to pay his share of said expenses. Difference between Quasi-contract and Natural Obligation: Quasi-contracts are certain lawful, voluntary and unilateral acts which give rise to the juridical relations of the party to the end that no person shall be unjustly enriched or benefited at the expense of another while natural obligations are those not based on positive law but on equity and natural law. They are not demandable in the courts of justice however when they are voluntarily performed or fulfilled, they can already be retained and the debtor cannot recover what has been paid or performed. Example: If the debtor pays by mistake or not knowing that the condition or period has not yet arrived, he can recover based on undue payment (quasi-contract). A debtor paid his creditor knowing that his obligation to pay has already expired cannot anymore recover what he paid by reason of natural obligation. E. Delict as a source of obligation This is an act or omission punishable by law. The principle is that if a person committed an act or omitted to do an act and the act or omission is punishable by law he is civilly-liable. (Art. 1161)

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Felony or crime: It is an act or omission punishable by law. A violation of the Revised Penal Code is called a felony while violation of any penal statutes including the Revised Penal Code is called a crime. Rule governing Delicts: 1) Philippine revised Penal code and other penal laws subject to the provisions of Article 2177 of the Civil Code. 2) Chapter II, Preliminary Title, on Human Relations of the Civil Code. 3) Civil Code on damages, Title 18 of Book IV Civil Liability Arising from Delicts or Acts or Omissions Punishable by Law: a) Restitution The thing itself shall be restored. b) Reparation of the damage caused- The court determines the amount of damage taking into consideration the value of the thing, improvements and fruits and reparation shall be made accordingly. c) Indemnification for Consequential Damages- It shall include not only those suffered by the injured party but also those suffered by his family and third person by reason of the crime. Commission of a crime as a source of an obligation. Every person who is criminally liable is also civilly liable under Art. 100 of the Revised Penal Code. If a person therefore is guilty of the crime charged he must not only be imprisoned but he shall also answer for damages as a civil obligation. Such civil obligation is a necessary consequence of a criminal responsibility and it to be declared and enforced in the same criminal proceeding except when the injured party reserved his right to file the civil action independently from the criminal action. (Sec. I, Rule III, Revised Rules of Court) Enforcement of Civil liability arising from crimes or delicts: Ordinarily, when the offended party files the criminal action, he is deemed to have filed simultaneously the civil action for the civil liability of the offender unless he reserves his right to institute a separate civil action of the civil liability of the offender. Meaning the civil liability shall be heard separately from the criminal action. F. Quasi-delict or culpa aquiliana or tort as a source of obligation One which causes damage to another, there being fault or negligence, but there is no pre-existing contractual relation between the parties. (Art. 1162) A) Meaning of Culpa Negligence (Culpa Aqulliana, torts) omission of that diligence required by the circumstances of person, place and time. Negligence is a question of FACT. The failure of a person to exercise or observe for the protection of the interests of another person the degree of care, precaution & vigilance which circumstances justify demand whereby such person suffers injury. Requisites of Quasi-Delicts a) b) c) d) There must be act or omission; There must be fault or negligence; There must be damage caused There must be direct relation of cause and effect: between act or omission and the damage. e) There is no pre-existing contractual relation between the parties. Meaning of Proximate Cause: Adequate and efficient cause which in the natural order of events necessarily produces the damage or injury complained of What are the different kinds of Culpa (Negligence)? a) Culpa contractual (Contractual negligence)- negligence in the performance of the contract. Example: A passenger in a taxi who was not able to bring the passenger to his destination due to the malicious act of the driver which caused the delay or damage to the vehicle. This is culpa contractual because of the existence of contract of carriage between the owner of the taxi and the passenger. b) Culpa Aquiliana (Civil Negligence) wrong or negligence committed independent of a contract and without criminal intent. Example: A pedestrian was hit by an over speeding taxi and suffered physical injuries. This is an example of culpa aquiliana because of the absence of any contractual relation between the pedestrian and owner of the taxi. c) Culpa Criminal (Criminal negligence) Those resulting to the commission of the crime punishable under Article 365 of the Revised Penal Code) II. NATURE AND EFFECT OBLIGATIONS (ARTS. 1163-1178) 1. Duty to preserve the thing. (Article 1163, CC)

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Duty to exercise diligence in obligation to deliver specific or determinate thing. Diligence required: a. b. NOTE: Thus, the diligence required is the diligence stipulated by the parties or the diligence required by law in such circumstance. Otherwise, the diligence of a good father of the family as provided in Article 1163). Other names for Diligence of a Good Father of the Family a) Ordinary Diligence b) Diligence of a Prudent Man Example of a case where the law requires extraordinary care (not merely that of a prudent man): A common carrier is bound to carry the passengers safely as far as human care and foresight can provide, using the utmost diligence of a very cautious persons, with due regard for all the circumstances. Art. 1755 of the Civil Code. Duty of a person obliged to give generic thing: a) To deliver a thing which is of the quality intended by the parties taking into consideration the purpose of the obligation and other circumstances (Art. 1246) Liability: To be liable for damages in case of fraud, negligence or delay, in the performance of his obligation or contravention of the tenor thereof (Art. 1170) 2. Duty to deliver the thing and the fruits of the said thing to be delivered . (Article 1164) a. When creditor is entitled to the fruits? The creditor has a right to the fruits from the time the obligation to deliver arises. Meaning the creditor is entitled to the fruits of the thing to be delivered from the time the obligation to make delivery arises. The intention of the law is to protect the interest of the creditor should the debtor commits delay purposely or otherwise, in the fulfillment of the obligation. When does the obligation to deliver arise? if there is no term or condition then from the perfection of the contract. If there is a term or condition, Then from the moment the term arrives or the condition happens. Personal right (jus in personam) power demandable by one [person to another to give, to do or not to do. Real right (jus in re) power over a specific thing. That which is required by the nature of the obligation and corresponds with the circumstances of person, time and place (Art. 1173, Civil Code). This is also what we call Diligence of a Good Father of the family. Ordinary diligence or Diligence of a Prudent Man. However, if the law or contract provides for a different standard of care, said law or stipulation must prevail (Art. 1163)

b.

c. d.

Kinds of fruits: a. Natural fruits spontaneous product of nature without human intervention. b. Civil fruits (like rents) a result of civilization arising from juridical transactions. c. Industrial fruit products of nature bolstered with human intervention. 3. Duty to deliver the accessories and accessions (Art. 1166) The obligation to give a determine thing includes: a. Accessories- Those joined to or included with the principal for the latters better use, perfection, or enjoyment. b. Accessions additions to or improvements upon a thing. As a rule, accessories and accessions are included in the delivery of the thing even if they are not mentioned. Effect of stipulation: If there is a stipulation and accessories are not included, such stipulations are valid and binding upon the parties. 4. Deliver of the thing itself (Article 1165): Kinds of Delivery: Delivery may be either actual or constructive. I. Actual delivery (tradition) where physically the property changes hands.

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Example: If A sells to B a fountain pen, the giving of the fountain pen by A to B is actual tradition. II. Constructive Delivery That where the physical transfer is implied. This may be done by: a. Traditio symbolica (symbolic tradition) as when the keys of a bodega are given. b. Traditio longa manu (delivery by mere consent or the pointing of the object. c. Traditio brevi manu (delivery by short hand; that kind of delivery whereby a possessor of a thing not as an owner becomes the possessor as an owner. Example: when a tenant already in possession of the house buys the house from the owner. d. Traditio Constitutom Possessorium the opposite of brevi manu; thus the delivery whereby a possessor of a thing as an owner retains possession no longer as an owner, but in some other capacity (like a house owner who sells a house but remains in possession as tenant of the same house) e. Tradition by the execution of legal forms and solemnities. 5. Answer for damages in case of non-fulfillment of the obligation :

Under the Civil Code, what are the different acts or omissions of the obligor or debtor that will result in the breach of the obligation for he can be held liable for damages? a. b. Default (Mora) delay on the part of the debtor ( See discussions of mora below) Fraud (Dolo) in the performance of the obligation: Kind of Dolo: a) Incidental Fraud (dolo incidente) referred to under Article 1170. b) Causal Fraud ( dolo causante) fraud employed in the execution of the contract under Article 1338 which vitiate consent. Under Article 1171- Responsibility arising from fraud is demandable with respect to all kinds of obligations. WAIVER OF ACTION FOR FUTURE FRAUD IS VOID. c. Negligence (Culpa)- NEGLIGENCE in the performance of an obligation will give rise liability of damages. Under Article 1172 - In the performance of every kind of obligation, the debtor is also liable for damages resulting from his negligence. Waiver of action arising from future negligence is valid except in the following cases: 1. When the nature of the obligations requires the exercise of extra-ordinary diligence as in the case of common carrier ( Article 1755 of the Civil Code) and; 2. Where the negligence shows bad faith, it is considered equivalent to fraud. Hence, Article 1171 which provides waiver of future fraud is void applies. What is the effect of negligence on the part of the injure party? Article 2179 provides that When the plaintiffs (victims) own negligence was the immediate and proximate cause of his injury, he cannot recover damages. But if his negligence was only contributory, the immediate and proximate cause of the injury being the defendants (offenders) lack of due care, the victim or plaintiff may recover damages, but the courts shall mitigate the damages awarded. (Arts. 2214,2215) d. Contravention of the tenor of the obligation (Art. 1170) This is the violation of the terms and conditions stipulated in the obligation.

Concept of Damages: Damages mean the indemnity or compensation in money which the law gives to the injured party for the breach of a contract or duty. KINDS OF DAMAGES M Moral damages referring to mental and physical anguish; E - Exemplary corrective or to set example N Nominal -to vindicate a right -when no other kind of damages may be recovered. T Temperate when the exact amount of damage cannot be determined A Actual losses as well as unrealized profit L Liquidated (predetermined beforehand by agreement) Measure of liability of Damages: In contracts and quasi contracts, the damages for which the debtor who acted in good faith is liable shall be those that are natural and probable consequences of the breach of obligation, and which the parties have foreseen or could have reasonably foreseen at the time the obligation was constituted. In case of fraud, bad faith, malice, wanton attitude, the obligor shall be responsible for the damages which may be reasonably attributed to the non-performance of the obligation. ( Article 2201 of the Civil Code)

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6. RULES ON THE EFFECTS OF OBLIGATIONS: In obligations, what are the different duties or obligations, which are imposed upon the debtor or obligor? If the obligation is determinate, the duties that are imposed upon the debtor are: To deliver the thing which he has obligated himself to give. To take care of the thing with proper diligence of a good father of a family unless a different standard of care is required. (Art. 1163) To deliver all the accessories and accessions (Art 1166). To pay damages in case of breach of obligation. If the obligation is indeterminate or generic, the duties imposed upon the debtor; To deliver a thing which must be neither of superior nor interior quality unless another standard is required (Art. 1246) To pay damages in case of breach of the obligation. In obligations to give what are the different rights, which are available to the creditor? If the obligation is an obligation that is determinate, the creditor may: 1. Compel specific performance (Art. 1165) 2. To recover damages in case of breach of the obligation (Art 1170) If the obligation is indeterminate or generic, the creditor may: a. b. c. Ask for the performance of the obligation (Art. 1246) To ask that the obligation be complied with at the expense of the debtor (Art. 1165, par. 2 CC) To recover damages in case of breach of obligations. (Art. 1170)

7. Delay or MORA under Article 1169 Under Article 1169 of the Civil Code, demand (judicial or extra-judicial) is required before a debtor is considered in legal delay or mora. What is the meaning of Mora? Default or mora signifies the idea of delay in the fulfillment of an obligation. In other words, it is the non-fulfillment of an obligation with respect to time. The different kinds of default or mora: A. Mora solvendi or delay of the obligator or debtor to perform his obligation. This delay is called mora solvendi ex re when the obligation is an obligation to give or mora solvendi ex persons when the obligation is an obligation to do. B. Mora Accipiendi or delay of the obligee or creditor to accept the delivery of the thing, which is the object of the obligation. C. Compensatio Morae, or delay of the parties or obligors or debtor incur in delay. In obligations to give or to do, when does the obligor or debtor incur in delay? The debtor incurs in delay from the ti9me the creditor judicially or extra judicially demands from him the fulfillment of the obligation. And in spite of demand, he is unable to comply the obligation. (Art. 1189 par. 1, CC) When is demand by the creditor not necessary in order that delay may exist? a. b. c. When the obligation or the law expressly so declares; When from the nature and the circumstances of the obligation it appears that the designation of the time when the thing to be delivered or the service is to be rendered was a controlling motive for the establishment of the contract. When demand was be useless, as when the obligor has rendered it beyond his power to perform (Art 1169 par. 2)

In reciprocal obligations when does one of the parties incur in delay? In reciprocal obligations, neither party incurs in delay if the other does not comply or is not ready to comply in a proper manner with what is incumbent upon him. From the time one of the parties fulfills his obligation, delay by the other begins. (Art 1169, par 3) 8. What is fortuitous event? A fortuitous event is an event, which cannot be foreseen, or which though foreseen, is inevitable (Art 1174 CC). Ordinarily, the terms fortuitous event and force majeure are used interchangeably. There is however a technical difference. Force majeure is a term that is applicable only to those

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fortuitous events which are dependent upon human intervention, such as wars, strikes, riots, etc., while fortuitous event is the general term that is applicable regardless of whether the event is independent of or dependent upon human intervention. GENERAL RULE: No liability for FORTUITOUS EVENT (CASO FORTUITO, ACT OF GOD, FORCE MAJEURE & UNAVIODABLE ACCIDENT) Exceptions: When expressly declared by the law (such as when the possessor is in bad faith) or is in default; When expressly declared by stipulation or contract; When the nature of the obligation requires the assumption of risk (the doctrine of Created Risk) When the object of the obligation is lost and the loss is due to the fault of the debtor; When the object of the obligation is lost and the loss occurs after the debtor has incurred in delay. When the debtor promises to deliver the same thing to two or more persons at the same time who do not have common interest; When the obligation to deliver arises from a criminal offense and When the obligation is generic Essential Characteristics of a Fortuitous Event: The cause must be independent of the will of the debtor; Impossibility of foreseeing or impossibility of avoiding it, even if foreseen; The occurrence must be such as to render it impossible for the debtor to fulfill his obligation in a normal manner. 9. Usury Law governed by special law. The law governing usurious transactions is Act No. 2655 otherwise known as the Usury Law as amended by Act Nos. 3291, 3998, 4070, Commonwealth Act No. 339. However, the Monetary Board of the Central Bank is empowered to change the rates of interest from time to time whenever economic and social conditions warrant or may eliminate, exempt or suspend the same. The ceiling of interest may not be uniform. Rules on interest payments: the rule is no interest shall be due in a contract of loan unless it has been expressly stipulated in writing. (Art. 1956) There being a stipulation as to interest but the rate is not fixed, then the creditor may only recover the legal rate. Meaning of legal Rate: Legal rate of interest is that rate which will prevail in the absence of any special agreement as to the rate of interest between the parties to a contract. Central Bank Circular on Interest Rates. The Monetary Board of the Central Bank issued December 3, 1982, Circular No. 905, fixing the rates of interest on loans or forbearance of money goods or credit. Section 1 of the circular provides as follows: The rate of interest, including commissions, premiums, fees and other charges on a loan or forbearance of any money, goods or credits, regardless of maturity and whether secured or unsecured that may be charged or collected by any person, whether natural or juridical shall not be subject to any ceiling prescribed under or pursuant to the Usury Law as amended. 10. Meaning of Presumption By presumption is meant the inference as to the existence of certain facts which if not contradicted is considered true. Two kinds of Presumption a) Conclusive one which cannot be contradicted b) Disputable (Rebuttable) one which may be contradicted by presenting satisfactory proof to the contrary. Disputable Presumptions under Article 1176: A. Receipt of the Principal without Reservation would give rise to a presumption that interest has been paid. B. Receipt of the later installment without reservation as to prior installment shall likewise raise the presumption that the prior installments have been paid. 11. Remedies which are available to the creditors in order to protect his rights against the debtor act defrauding the former: a) Exact payment b) Exhaust debtors properties generally by attachment (except properties exempted by law) c) To be subrogated by all the rights and actions of the debtor save those that are inherent his person (accion subrogatoria) d) To impugn all acts which the debtor may have done to defraud the creditor (accion pauliana) General Rule:

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12. Rights are transmissible. (Art. 1178) (Principle of Transmissibility of Rights to be read togetherwith Article 1311 on the Principle of Relativity of Contracts. (Contracts bind only the contracting parties, their heirs and assigns) INSTANCES WHERE PRINCIPLE OF TRANSMISSIBILITY WILL NOT APPLY (Exceptions): a.) If the law provides otherwise In contract of partnership, agency & commodatum, there is no transmissibility of rights. b) If the contract provides otherwise c) If the obligation is purely personal III. DIFFERENT KINDS OF OBLIGATIONS (Arts. 1179-1230) 1. Primary Classes of Obligations: a) Pure b) Condition c) With a term or a period d) Alternative e) Facultative f) Joint g) Solidary h) Divisible i) Indivisible j) With a Penal Clause 2. Pure Obligation is defined as one whose performance does not depend on a future or uncertain event, or upon a past event unknown to the parties, hence demandable at once. (Art.1179) In other words, this is one, which contains neither period nor a condition; hence the obligation is effective immediately. Examples: Ill pay you P20,000 on demand. Ill pay you P20,000. 3. Conditional obligation is one where there is a condition imposed. Meaning of condition It is an uncertain event, which wields an influence on a legal relationship. Characteristics of condition: A. It refers to future and uncertain event. B. It may also refer to past event but unknown to the parties. A condition is either: a) Suspensive the happening of the condition give rise to an obligation. Example : Ill buy you a land for P 1M if you pass the CPA Board Exam in May 2000. (This is suspensive for the result has to be awaited) b) Resolutory the happening of the condition extinguishes the obligation. Example : Ill give you my land now, but should you fall in the CPA Board this coming May 2000, your ownership will cease and it shall revert back to me. Therefore, there are two (2) instances when an obligation and demandable at once thus: a) When it is a pure obligation and b) When the obligation has a resolutory condition. CLASSIFICATION OF CONDITIONS As to effect: 1. Suspensive the happening of the condition give rise to the obligation. 2. Resolutory the happening of the condition extinguishes the obligation. As to cause or origin: 1. Potestative depends upon the will of the one of the contracting parties. If it is suspensive and dependent on the will of the debtor ( Example: Ill sell you my car if I like), the obligation is VOID. 2. Casual depends on chance or hazard or the will of third person VALID 3. Mixed depends party on the will of one of the parties and party on chance or will of the 3rd person (If I pass the bar) VALID As to divisibility: 1. Divisible capable of partial performance

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2. Indivisible not capable of partial performance because of the nature of the thing or because of the intention of parties. As to mode: 1. Positive an act is to be performed 2. Negative something will be omitted As to form: 1. Express the condition is stated. 2. Implied - the condition is merely inferred. As to possibility: 1. Possible capable of fulfillment in nature and in law 2. Impossible not capable of fulfillment due to nature or due to the operation of the law or morals or public policy; or due to a contradiction in its terms. As to numbers: 1. Conjunctive if all the conditions must be performed 2. Alternative if only a few of the conditions have to be performed. Note: If the debtor prevents voluntarily the fulfillment of the condition the said act would result to CONSTRUCTIVE FULFILLMENT SAID CONDITION UNDER Art. 1186. Hence, it is as if the condition was actually fulfilled and the obligation becomes demandable.

RECIPROCAL OBLIGATIONS: The power to rescind obligations implied in reciprocal ones, in case one of the obligors should not comply what is incumbent upon him. (Art. 1181, par. 1) Remedies of the injured party in reciprocal obligations: f. Action for specific performance of the obligation with damages; or g. Action for rescission of the obligation also with damages. The above remedies are alternative. He may however choose rescission if after he has chosen fulfillment, the latter become impossible. Further, the court in some instance may instead grant the party a term for performance instead of ordering rescission. When it is the court that rescinds the obligation, this is known as JUDICIAL RESCISSION, which is initiated upon the filing of complaint in court by the injured party. 4. LOSS DETERIORATION AND IMPROVEMENT DURING THE PENDENCY OF CONDITION. Artilce 1189. Notably, the same rule applies for both obligations with suspensive and resolutory conditions including obligation with a period) For conditional obligation, if suspensive, it is required that condition is fulfilled and the object is specific. For resolutory condition, the happening of the condition extinguishes the obligation, hence mutual restitution follows. The above rules also apply to suspensive and resolutory period except that in a period, it will necessarily come.

a) The object may be lost: without the fault of he debtor - extinguishes obligation with the fault of the debtor require debtor payment of damages. b) The object deteriorates without the fault of the debtor, the impairment is borne by the creditor. If it deteriorates thru the fault of the debtor, creditor may choose either rescission of the contract or of the fulfillment, with claim for damages either of the selected remedies. c) If the object improves by nature, the improvement inures to the benefit of the creditor and if the debtor at his expense improve it, the debtors right is merely of a usufructuary. 5. Obligation with a Term or Period

A space of time which has an influence on obligations as a consequence of a juridical act and either suspends their demandability or produces their extinguishment. It is one that arises upon the arrival of the term or period agreed upon, hence demandable only on that instance.

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Term or Period is that time or event which necessarily must come, whether the parties know when it would happen/come or not Day certain means one, which must necessarily come although it may not be known when. Examples: 1) Ill pay you P20,000 on the 25th of December next year. 2) Ill pay you P20,000 if Imelda Marcos dies. Death is certain even if we cannot really ascertain when it will come.

But this one is conditional: Ill pay you P20,000 if Imelda Marcos dies of malaria Reason: She could die of bangungot. Under Article 1180 - When the debtor binds himself to pay when his means permit him to do so, the obligation is deemed to be one with a Term or Period. If this takes place, it shall be the court that will fix the period of the obligation as provided under Article 1197 *judicial period) Example : Ill pay you P10,000 when my means permit me to do so. Ill pay you P10,000 little by little Ill pay you P10,000 as soon as possible. Ill pay you as soon as I have the money. Kinds of Period1) Legal period fixed by law 2) Voluntary Fixed by the parties 3) Judicial period imposed or fixed by the court Other classifications 1) Ex die (suspensive) a period which must lapse before the obligation can be demanded 2) In diem (resolutory)- a period when it arrives extinguishes the obligation. Distinction between Period and Condition: Period As to fulfillment It is sure to happen or the necessarily happen As to influence on the obligation: event would It is uncertain event Condition

Fixes the time of efficaciousness of an obligation. As to time: Refers to the future.

Causes the obligation to arise or to cease.

Refers future or a past event unknown tot he parties.

Period is generally for the benefit of both parties, unless otherwise stipulated (Art.1196) Meaning: The debtor cannot pay prematurely and the creditor cannot demand prematurely. If term is for the benefit of the debtor alone. He may only be required to pay only at the end of the term, but he may pay even before the period. If term is for the benefit of the creditor. Creditor can demand anytime even before the expiration of the period and he cannot be compelled by the debtor to accept payment before the term. Instances wherein the debtor losses his right to make use of the period. Art 1198 Meaning the term is extinguished and obligation is demandable at once. a) Insolvency, unless a guaranty or security is given b) Failure to furnish the promised guaranty or security c) Impairment of the guaranty or security by debtors act or its loss due to fortuitous event, unless a satisfactory guaranty or security is given. d) Violation of any undertaking in consideration of which the creditor agreed to the period e) Attempt to abscond. 6. ALTERNATIVE OBLIGATION OBLIGATION WHEREIN VARIOUS THINGS ARE DUE, BUT

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THE PAYMENT OF ONE OF THEM IS SUFFICIENT, DETERMINED BY THE CHOICE, WHICH AS A GENERAL RULE BELONGS TO THE DEBTOR (Art.1199). Right of Choice: Generally belongs to the DEBTOR. (Art. 1200) This is the presumption of law. Acceptance by the creditor of the debtors choice may, by expressed agreement be granted to the creditor (Art.1200) When choice of the debtor becomes effective: It becomes effective from the time selection was communicated to the creditor the said time is the reckoning date of determining when legal effects are produced. If debtor has no choice as there is only one choice left, the obligation is converted to simple obligation. (Art. 1202) If the debtor cannot choose through the acts of the creditor, he may rescind the contract with damages. (Art.1203)

If the choice is given to the debtor, the loss of the thing is governed as follows: a) Loss of all obligation is extinguished provided debtor is without fault b) Loss of some the debtor may deliver any of the remainder or that which remains if only one subsists, without obligation to pay damages. (If debtor is without fault) If loss was due to debtors fault: a) Loss of all debtor shall pay the value of the last thing lost, plus damages. However if all of them were lost at the same time, the debtor may Choose the value of any of them, plus damages. b) ) Loss of some debtor may, without incurring any liability to pay damages, deliver any of the remainder, or that which remains if only one subjects. c) Loss of some due to debtors fault and the last thing due to fortuitous event. From and after the lost except one of the various things, whether due to fortuitous event or the debtors fault, the debtor shall loss the right of choice. (Art.1202) and the obligation shall be converted to a simple obligation. Hence, the loss of the last subsisting prestation due to fortuitous event extinguishes the obligation. If Right of Choice is given to the CREDITOR: Loss of things Due to fortuitous event a) Loss of all obligation is extinguished b) Loss of some the debtor shall deliver that which the creditor should choose any of those subsisting or the price of any of those that have been lost through the fault of the debtor plus payment of damages. 7. FACULTATIVE OBLIGATION obligation where only one prestation has been agreed upon but the debtor may render another substitution. Example : D obliged himself to give C a specific Rolex watch with the understanding that D could give a diamond ring as a substitute. Loss of the principal things: a) Due to fortuitous event the obligation is extinguished and the debtor is not obliged to give the substitute. b) Due to debtors fault the debtor shall answer for the loss of the thing due to his fault. Loss of the substitute: a) Before substitution The loss of the substitute before the substitution is made does not affect the obligation as the principal can still delivered b) After substitution Due to fortuitous event obligation is extinguished Due to debtors fault debtor is liable for damages 8. Joint obligation each of the debtors is liable only for a proportionate part of the debt and creditor is entitled to a proportionate part of the credit. (Arts. 1207-1208)

NOTE: In the absence of stipulation, when there are multiplicity of parties in a obligation, said obligation is presumed JOINT. Consequences of Joint Obligation:

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a) There are as many debts as there are debtors. b) There are a many credits as there are creditors; c)The debts and/or credits are considered distinct and separate from one another. d) Each debtor is liable only for a proportionate part of the debt; e) Each creditor is entitled only to a proportionate part of the credit. Example: A and B obliged themselves to pay X and Y P 4,000. Here, there are four obligations; A to X P 1,000; A to Y P 1,000; B to X P 1,000 and B to Y P 1,000. If A and B do not pay, only one action should be filed by Y and X as plaintiffs against A and B as defendants for the payment of P 4,000 to void multiplicity of suits as referred to in the Rules of Court. (See Article 1208) Example: Joint obligation A, B and C jointly executed a promissory note worded as follows: We promise to pay to the order of X P9,000.00 Sgd. A, B and C Other terms for joint obligation: a) mancomunada b) mancomunada simple c) proportionately d) pro-rata 9. Solidary obligation each debtor is liable for the entire obligation and each creditor is entitled to demand the whole obligation. When solidarity exists: As a general rule, the mere concurrence of two or more creditors or two or more debtors in one and the same obligation does not imply solidarity. By presumption of the law, the obligation is joint, unless: a) Solidarity is expressly agreed upon (Conventional Solidarity) b) Solidarity is declared by law (Legal Solidarity) c) Solidarity is required by the nature of the obligation (Real Solidarity) Kinds of Solidarity a) Active - solidarity among creditors b) Passive solidarity among debtors c) Mixed solidarity on the part of the creditors and debtors Example: Solidary obligation A, B, & C jointly executed a promissory note worded as follows: I promise to pay to the order of X P9,000.000 Sgd. A, B & C Other terms for solidary obligation: a) In solidum b) Jointly and severally c) Juntos o separadamente d) Solidarias e) Mancomumanda o in solidum f) Mancomunada soldarias g) Individually and collectively 1. Active Solidarity A obliged himself to pay P30,000 to solidary creditors B, C and D. each of the creditors is entitled to demand payment of the whole P30,000. Thus, B, C, or D can demand payment of P30,000 from A. 2. Passive Solidarity A, B and C executed a promissory note worded as follows: I promise to pay to X or order the sum of P30,000.

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(Sgd.) A,B and C X is entitled to demand payment of P30,000 from A or from B, or from C. 3. Mixed Solidarity A, B and C executed a promissory note worded as follows: We do hereby solidarily promise to pay to the order of solidary creditors L, M and N the sum of P 30,000. (Sgd.) A, B and C L, or M, or N shall be entitled to demand payment of the whole P 30,000 from A, or from B or from C. 4. Joint debtors-solidary creditors. A and B executed a promissory note worded as follows: We promise to pay to solidary creditors C and D P 10,000. (Sgd.) A, B C or D as solidary creditors shall be entitled to demand payment of the whole P 10,000. But since the debtors are bound jointly, C or D shall be entitled to demand payment of no more than P 5,000 from A and another P 5,000 from B. 5. Solidary debtors-joint creditors A and B executed a promissory note worded as follows: We do hereby solidarily promise to pay to the order of C and D P 10,000. Sgd. A, B As solidary debtors, A or B may be compelled to pay the whole P 10,000. But since the creditors are bound jointly, C is entitled to demand payment of P 5,000 from A or B and D is entitled to demand payment of the other P 5,000 either from A or B. Effects if obligation is JOINT and INDIVISIBLE. Art 1209 and Art.1224 A JOINT INDIVISIBLE OBLIGATION IS AN OBLIGATION WHERE THERE ARE SEVERAL DEBTORS OR CREDITORS WHO ARE JOINTLY BOUND BUT THE PRESTATION IS INDIVISIBLE. The debt can be enforced by the collective acts of the debtors or creditors in view of the indivisibility of the object. Like in the case of the joint debtors the creditor has to proceed against all of them, otherwise, failure of the other debtors to comply the obligation would call for the conversion of the obligation to its monetary value plus payment of damages as to defaulting debtors. The same rule applies to joint creditors they have to proceed to the debtor jointly to ensure the fulfillment of the obligation. Principles applicable to solidary obligations: 1. Solidarity does not imply indivisibility. An obligation may be divisible even if it is solidary. Indivisibility does not imply solidarity. It is the intention of the parties that provides for the nature of obligation. ( Art. 1210) 2. Solidarity may exist although the creditor and debtor may not be bound in the same manner same period and conditions. ( Art. 1211) 3. Each one of the solidary creditors may do whatever may be useful to others but not anything that is prejudicial to the others. ( Art. 1212) Moreover, a solidary creditor cannot assign his rights without the consent of the others. (Art. 1213). These are essential features of Mutual Agency. 4. The debtor may pay any one of the solidary creditors; but if any demand, judicially or extra-judicially has been made by one of them, payment should be made to him. ( Art. 1214). Solidary creditors can collect from some or all of the debtors at one given time. If the creditor fails to collect from one debtor, he can go against the other or others, until the whole obligation is paid. It was held that the creditor may sue any of the solidary debtors or all of them simultaneously. An action instituted against one shall not a bar to those, which may be subsequently brought against others, as long as the debt has not been entirely satisfied. ( Art. 1216) 5. Novation, compensation, confusion or remission of debts made by one of the solidary creditors extinguishes the obligation but the creditor who executed the same should be liable to the others for their corresponding shares considering that such act is prejudicial to them. (Art. 1215) 6. Payment made by a solidary debtor extinguishes the obligation. If two or more offer to pay, the creditor may choose which offer to accept. After payment of the debt by one of the solidary debtors, he can demand reimbursement from his co-debtor for their proportionate shares with interest only from the time of payment provided obligation is already due and demandable. However, in case of insolvency of any the solidary debtors, the others assume the share of the insolvent one pro-rata. (Art. 1217)

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7. Payment made by a solidary debtor after the obligation has already prescribed or has become illegal shall not entitle him of reimbursement from his co-debtors. (Art. 1218) A right is acquired or lost by reason of PRESCRIPTION. After the lapse of the period prescribed by law where rights are to be enforced and there is unreasonable inaction on the part of the creditor, such rights are lost by prescription (extinctive prescription) as far as the debtor, he acquires a right also by reason of prescription (Acquisitive). Actions that must be brought within 10 years: a.Upon written contract b.Upon obligation created by law c. Upon a judgment ( Art. 1144) Actions must be commenced within 6 years: a.Upon oral contract b.Upon quasi-contract ( Art. 1145) Actions must be instituted within in 4 years a.Upon an injury to the rights of the plaintiff b.Upon quasi-delict (Art. 1146) 8. If payment is made first b the sikidary debtors, the remission or waiver is of no effect. There is no more obligation to remit if the obligation has already been paid. For this reason, the solidary debtor to whom said remission is addressed shall still reimburse the paying solidary debtor. (Art. 1219) A solidary debtor has obtained remission of the obligation is likewise not entitled of reimbursement as he did not pay anything to the creditor. Rules in case of loss of prestation or if the said prestation has become impossible: a) Without fault on the part of the solidary debtors, obligation is extinguished. b) With fault of one, some or all of them, they will all liable. The creditor can make any of them pay the price and payment of damages and interest without prejudice to the their right against the guilty or negligent debtor. They will also be liable if the prestation due to fortuitous event if they are guilty of delay. Their liability is the same as when the object is lost with fault of one, some or all of them. (Art. 1222) 9. In action filed by the creditors, a solidary debtor may avail of the following defenses: a. Defenses derived from the nature of the obligation which constitute total defenses, such as a. absolute simulated contract b. illegal cause or consideration c. illegal object or subject matter d. non-fulfillment of the suspensive conditions e. other defenses which will nullify the contract which is the basis of creditors action. b. Defenses personal in nature which may constitute a total or partial defense a. factor which vitiate consent such as minority, insanity, fraud, violence, intimidation, etc. b. Defenses personal to the other co-debtors which will constitute a partial defense for the solidary debtor being sued, thus exempting him from paying the proportionate share of the co-debtor whose personal defense he is invoking. He is exempted to pay the proportionate share of the invoking co-debtor but is still liable of his share and of those co-debtors whose shares are not in question. 15. DIVISIBLE AND INDIVISIBLE OBLIGATION: Divisible obligation one which capable of partial performance Kinds of Division: a) Quantitative based on quantity or number of the things which is subject of the obligation b) Qualitative- based on quality of the object. c) Ideal or intellectual- one which exists only in the minds of the parties. Indivisible obligation one which is not capable of partial performance a) Legal indivisibility imposed by specific provision of law b) Conventional indivisibility- agreed by the parties. c)Natural indivisibility- where the nature of the object or prestation does not admit of division. When obligation is presumed indivisible?. a) Obligation to give definite things, such as an obligation to give a specific car b) Those which are not susceptible of partial performance. When obligation is presumed divisible a) Execution of a certain number of days of work, such as an obligation to work for 30 days b) Accomplishment of work by metrical unit, such as when five debtors are obliged to deliver five tons of sand and gravel. The debtors are obliged to deliver one ton each. c) Analogous thing which by their nature are susceptible of division. What determined divisibility or indivisibility: a) Intention b) Law c) Character of the prestation

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TEST FOR DISTINCTION: In determining whether an obligation is divisible or not, the controlling circumstance is not the possibility or impossibility of partial prestation but the purpose of the obligation or the intention of the parties. 16. Obligation with Penal Clause Penal clause An accessory undertaking to assume greater liability in case of breach. General Purpose: a. To ensure performance of the obligation by creating an effective deterrent against breach, making the consequences of such breach as onerous as it may be possible. Specific Purpose a. To substitute a penalty for indemnity for damages and the payment of interests in case of non-compliance (art. 1226); b. or to punish the debtor for non-fulfillment or violation of his obligation. In the first case, the purpose is reparation; in the second, punishment. Rules: a. b. Penalty is not a substitute for performance except only when this right has been expressly reserved for him. Penalty clause is presumed subsidiary. Penal clause is joint or the debtor has the right to pay penalty in lieu of performance only when this right has been expressly reserved for him.

Kinds of penal clause: According to source: a) Legal- penalty imposed by law b) Conventional penalty agreed upon by parties According to extent of liability a) Subsidiary when only the penalty can be recovered in case of non-performance of the obligation b) Joint when in case of non-performance of the obligation both the principal obligation and the penalty can be recovered. Right to recover damages and interest in addition to the penalty The penalty shall substitute the indemnity for damages, and interest in case the obligation is not fulfilled. Hence as a general rule, the creditor cannot demand damages and interests in addition to the penalty except: a) When the parties so agreed; b) When the debtor refuses to pay the penalty; c) When the debtor is guilty if fraud in the fulfillment of the obligation. - Nullity of the principal carries with it the nullity of the accessory. - Penalty may be reduced by the court when there is partial or irregular performance of the obligation or when the penalty agreed upon is iniquitous or unconscionable. MODES OF EXTINGUISHMENT OF OBLIGATIONS (Arts. 1231 to1304) Obligations are extinguished by: (Enumeration under Article 1231 of the Civil Code) a) Payment or performance b) Loss of the thing due c) Condonation or remission d) Confusion or merger of rights of the creditor and debtor e) Compensation f) Novation Other causes of extinguishment of obligations are (h) annulment, (I) rescission, (j) fulfillment of a resolutory condition and (k) prescription. The following are found in other chapters of the Civil Code. Other Causes: a) Death of a party in cases of personal obligations b) Compromise c) Mutual dissent or withdrawal of obligation d) Impossibility of fulfillment 1. Payment (ART.1232-1261) means not only the delivery of money but also the performance, in any other manner, of an obligation. (Art.1232)

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A. General Rule: Completeness of Payment. Payment should be complete. (Art. 1233) Exceptions: a.Recovery allowed in case of substantial performance in good faith. (Art. 1234) b.Recovery allowed when incomplete or irregular performance is waived. (Art.1235) c. Instances when partial performances are allowed. (art. 1248) i. when there is an express stipulation to that effect. ii. When the debt is part liquidated (definitely and determined or computed) and in part liquidated. iii. When the prestations in which the obligation consists are subject to different terms or conditions which affect some of them. B. Third person cannot compel the creditor to accept payment or performance of an obligation except: a) When it is made by a third person who has interest in the fulfillment of the obligation; b) When there is a stipulation to the contrary (Art.1236, CC). In this case, the creditor waives his right to refuse to deal with strangers to the obligations C. If a third person pays an obligation with the knowledge and consent of the debtor he can recover from the debtor the entire amount, which he has paid (reimbursement) and he is subrogated of all the rights of the creditor. Subrogation of the rights, such as those arising from a mortgage, guaranty or penalty (Art. 1237). If payment was made without the consent of the debtor, he can recover only insofar as the payment has been beneficial to the debtor. Notes: As a rule, in obligations to give, payment should be made by a) One who has free disposition of the thing due and b) One who has capacity to alienate. (Art. 1239) D. Payment made to third person shall be valid insofar as it redounded to the benefit of the creditor. It is presumed in the following: a) If after the payment, the third person acquires the creditors rights (Subrogation of the payer in the creditors right). b) If the creditor ratifies the payment to the third person (Ratification by the creditor). c) If by the creditors conduct, the debtor has been led to believe that the third person had authority to receive payment. (Estoppel on the part of the creditor) (Art.1241 par.2) E. Payment shall be made as a general rule to (1) the person in whose favor the obligation has been constituted, or (2) his successor in interest, or (3) any person authorized to receive. (Art. 1240); F. Payment made in good faith to any person in possession of the credit shall release the debtor. ( Art. 1242) The law refers to person in possession of the credit and NOT MERELY THE PERSON IN POSSESSION OF THE DOCUMENT OR INSTRUMENT EVIDENCING THE CREDIT. G. Payment made to the creditor by a debtor who has been judicially ordered to retain shall not be valid. (Art, 1243) H. Prestations must be duly complied with. Substitution is not allowed unless the parties agree or stipulate such in the case of facultative obligations. ( Art. 1244) I. Payment of debts in money shall be made in the currency stipulated, and if not possible to deliver such currency then in the currency which is legal tender in the Philippines pursuant to Art. 1249 of the Civil Code. Subsequently this was repealed by Republic Act No. 529 and Republic Act No. 4100. - Any stipulation made by parties stating that obligation shall be made in currency other than the legal tender of the Philippines is void. Only the stipulation is void. The obligation subsists but the foreign currency shall be converted to Philippine currency. However, under the prevailing law, the rule is All monetary obligations shall be settled in the Philippine currency which is legal tender in the Philippines. However, the parties may agree that the obligation or transaction shall be settled in any other currency at the time of payment. ( Sec. 1 of R.A. No. 8183) REPUBLIC ACT NO. 8183 AN ACT REPEALING REPUBLIC ACT NUMBERED FIVE HUNDRED TWENTY-NINE AS AMENDED, ENTITLED "AN ACT TO ASSURE THE UNIFORM VALUE OF PHILIPPINE COIN AND CURRENCY" SECTION 1. All monetary obligations shall be settled in the Philippine currency which is legal tender in the Philippines. However, the parties may agree that the obligation or transaction shall be settled in any other currency at the time of payment. SECTION 2. Republic Act Numbered Five Hundred TwentyNine (R.A. No. 529), as amended entitled "An Act to Assume the Uniform Value of Philippine Coin and Currency," is hereby repealed.

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SECTION 3. This Act shall take effect fifteen (15) days after its publication in the Official Gazette or in two (2) national newspapers of general circulation. The Bangko Sentral ng Pilipinas and the Department of Finance shall conduct an intensive information campaign on the effect of this Act. Approved: June 11, 1996 J. In case of extraordinary inflation and deflation of the Philippine currency should supervene the basis of the value of the currency for payment shall be the value of the currency at the time of the establishment of the obligation. Unless there is a stipulation to the contrary (Art. 1250) K. In an obligation to give a generic or indeterminate thing, the rule on medium quality applies. In case the obligation does not provide the quality or circumstances, the creditor cannot demand a thing of superior quality while the debtor cannot deliver a thing of inferior quality. The circumstances and intention of the parties shall be ascertained, the rule on medium quality is given effect (Art. 1246) L. Debtor pays for extrajudicial expenses. Judicial cost is normally paid by the losing party unless the court orders the same be borne by both or one of them. ( Art, 1247) M. Place of Payment (Art. 1251) a) If there is a stipulation, the payment shall be made in the place designated. b) If there is no stipulation and the thing to be delivered is specific, the payment shall be made at the place where the thing was at the perfection of the contract. c) If there is no stipulation and the obligation is to deliver a generic thing, the place of payment shall be the domicile of the debtor. In this case, the creditor bears the expenses in going to the debtors place to accept payment except when the debtor changes his domicile in bad faith. As such, he shall be liable for the additional expenses borne by the creditor. N. What are the different special forms of payment? a) Application of Payment; (Arts. 1252-1254) b) Dation in Payment or dacion en pago (Art. 1245) c) Payment by Cession (Art.1255) d) Tender of Payment and Consignation Arts. 1256-1261) Meaning of Dation in Payment a special form of payment whereby property is alienated by the debtor to the creditor or in satisfaction of debt in money. It is a transmission of the ownership of a thing by the debtor to the creditor as an accepted equivalent of performance of an obligation. The law that governs Dation in Payment is the Law on Sales (Art. 1245) Payment by Cession or Assignment it is a special form of payment whereby the debtor abandons all of his property for the benefit of his creditor in order that from the proceeds thereof the latter may obtain payment of their credits. Also known as voluntary cession or insolvency. There is no transfer of ownership but merely grants the creditors of a debtor to sell properties of said insolvent debtor and apply the proceeds to their respective credit. Debtor is released only up to the net proceeds of the sale. He remains liable to the creditor as to the remaining balance unless otherwise agreed to release him to his entire obligation. DISTINCTIONS: Dation in Payment 1. There is usually only one creditor 2. It does not presuppose the insolvency of the debtor 3. It does not involve all the properties of the debtor 4. The creditor becomes owner of the thing given by the debtor 5. Dation is really an act of novation Payment by Cession 1. There are several creditors 2. Debtor is insolvent at the time of assignment 3. Involves all the properties of the debtor 4. The creditors only acquire the right to sell the thing and apply to their credits proportionately 5. Cession is not novation

What is Application of Payment? Application of payment may be defined as the designation of debt to which payment must be applied when the debtor has several obligations of the same kind in favor of the same creditor. Requisites: a) There must be only one debtor and only one creditor; b) There must be two or more debts of the same kind;

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c) All debts must be due; d) The amount paid by the debtor must not be sufficient to cover the total amount of all the debts. The right to make an application of payment belongs to the debtor. However if he does not avail himself of this right, the creditor may wrest the initiative from him by giving to him a receipt designating the debt to which the payment shall applied. But even this does not really constitute an exception because the debtor may either accept or reject the application. (See Art. 1252) Application of payment cannot be made unless debts are already due except: a) There is stipulation that debtor may so apply; b) It is made by the debtor or creditor, as the case may be, for whose benefit the period has been constituted. (Art. 1196) * Strictly speaking, it is not a form of payment but more of a mode of payment. What is meant by legal application of payment? Legal application of payment refers to the following the rules, both of which are enunciated in Art. 1254 of the Civil Code; a) When neither the debtor nor the creditor makes any application of payment or if it cannot be inferred from other circumstances, the debt which is most onerous to the debtor among those which are due shall be deemed to have been satisfied. The following may be given Examples. Where there are various debts, which are due and they were incurred at different dates the oldest are more onerous. Where there are various debts, which are due and they were incurred at different dates the oldest are more onerous. Where one bears interest and the other does not, the former is more onerous Where one s secured the other is not, the former is more onerous Where the debtor is bound as principal in one and as guarantor or surety in another, the former is more onerous Where the debtor is bound as solidary debtor in one and as a sole debtor in another, the former is more onerous. If the debts due are of the same nature and burden, the payment shall be applied to all of them proportionately Meaning of Tender of payment consists in the manifestation made by the debtor to the creditor of his decision to comply immediately with the obligation. Meaning of Consignation: refers to the deposit of the object of the obligation in a competent court in accordance with the rules prescribed by law after refusal or inability of the creditor to accept tender of payment. As a rule, there must be tender of payment first before consignation can be effected. Distinguish Tender of Payment from Consignation: Tender of payment is antecedent of consignation; in order words, while the first is preparatory act, the second is the principal act, which will produce the effects of payment. Tender of payment is by its very nature extra judicial in character, wile consignation is judicial. Requisites for Consignation: a) That there is a debt that is due: b) That the consignation has been made either because the creditor to whom tender of payment was made refused to accept the payment without just cause or because any of the stated by law for effective consignation without previous tender of payment exists. (Art.1256) c) That previous notice of the consignation has been given to the persons interested in the fulfillment if the obligation. (Art.1256) d) That the thing or amount due had been placed at the disposal or judicial authority (Art.1258 par. 1) e) That after the consignation has been made the person interested in the fulfillment of the obligation had been notified thereof. (Art. 1258 par. 2) Even without Tender of Payment, Consignation may be validly pursued in the following: a) When the creditor is absent or unknown or does not appear at the place of payment; b) When he is incapacitated to receive the payment at the time it is due; c) When without just cause he refuses to give a receipt; d) When two or more persons claim the right to collect and; e) When the title of the obligation has been lost. (Art.1256) 2. LOSS OF THE THING DUE (Arts. 1262-1269) means that the thing which constitutes the object of the obligation perishes, or goes out of the commerce of man or disappears in such a way that its existence is unknown or it cannot be recovered. (Art. 1189. NO. 2) IN its broad sense, it means impossibility of compliance or performance with the obligation through any cause. Kinds of loss:

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a) Physical loss- when the thing perishes b) Legal loss- when the thing goes out of commerce c) Civil loss- When the thing disappears in such a way that its exixtence is unknown or it cannot be recovered. d) Impossibility of Performance e) Difficulty of Performance In order that an obligation shall be extinguished by the loss or destruction of the thing if is essential that the following requisites must concur: a) The thing, which is lost, is specific or determinate b) The thing is loss without any fault of the debtor if that thing is lost through the fault of the debtor the obligation is transformed into an obligation to indemnify the obligee or creditor for damages. c) The debtor is not guilty of delay Exceptions to the above rule are as follows: a) When by law the obligor is liable for fortuitous events (Arts. 1174 and 1262 par 2) b) When by stipulation the obligor is liable even for fortuitous events. (Arts 1174 and 1262 par 2) c) When the nature of the obligation requires the assumption of risk. (Arts. 1174 and 1262 par 2) d) When the loss of the thing is due party to the fault of the debtor (Art 1262 par 1 CC) e) When the loss of the thing occurs after the debtor has incurred in delay. (Art 1262 par.1 and Art 1135 par. 3) f) When debtor promised to deliver the same thing to two or more persons who do not have the same interest (Art. 1165 par 3) g) When the obligation is generic (Art.1263) h) When the debt of a certain and determinate thing proceeds from a criminal offense (Art 1268) 3. CONDONATION AND REMISSION (Arts. 1270 1274) Is an act of liberality by virtue of which the obligee, without receiving any price or equivalent, renounces the enforcement of the obligation as a result of which it is extinguished in its entirely or in that part or aspect of the same to which the remission refers. It is gratuitous abandonment by the creditor of his right. Requisites: a) It must be gratuitous b) It must be accepted by the obligor c) The parties must have capacity. d) It must not be Inofficious; and e) If made expressly, it must comply with the forms of donations. Otherwise, remission or condonation is not valid. i.e. Donation involving real property must be in public instrument together with the acceptance of donee. Donation of personal property amounting to P 5,000 above must be in writing together with the acceptance of donee. Meaning of Inofficious It must not impair the Legitimes of the compulsory heirs of the donor. While a person may make donations, no one can give more than which he can give by will, otherwise, the excess shall be Inofficious and shall be reduced by the court accordingly. Kinds of Remission a) As to extent : complete or partial b) As to form- express or implied c)As to effectivity- inter vivos ( takes effect during lifetime of the donor) or mortis cause ( to take effect upon death of the donor) Important principles on Remission: While a person may make donations, no one can give more than which he can give by will; otherwise, the excess shall be Inofficious and shall be reduced by the Court as it may impair the legitime of the compulsory heirs of the donor. The delivery of a private document evidencing credit made voluntarily by the creditor gives a disputable presumption that there is a renunciation of the action which the creditor has against the debtor. (Art. 1271) Whenever the private document is found in possession of the debtor, it is presumed that the creditor delivered the document voluntarily. (Art. 1272). If the thing pledged is found in the possession of the debtor, there is a disputable presumption that the contract of pledge has been renounced. This however does not extend to the principal contract.

4. CONFUSION OR MERGER (Arts. 1275-1277) - Merger of the characters of creditor and debtor in the same person by virtue of which the obligation is extinguished. Meeting in the same person of the qualities of the creditor and the debtor with respect to one and the same obligation. Requisites: a) That the merger of the characters of the creditor and debtor must be in the same person. (Art.1275)

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b) That it must take place in the person of either the principal creditor or principal debtor ( Art. 1276); c) That it must be complete and definite. Notes: Merger in the person of the guarantor does not extinguish the obligation. Only the contract of guaranty is extinguished. There is novation that takes place as the guarantor becomes the new creditor of the debtor. Merger in the person of one of the solidary debtor shall extinguish the entire obligation because it is also merger in the other solidary debtors. Merger in joint obligation pertains only to the share of the debtor to which merger takes place. Only the share corresponding to the creditor or debtor in whom the characters concur. The creditor or debtor whose share was subject to confusion actually becomes the new creditor of the other joint debtors pertaining to their share in the original obligation. 5. COMPENSATION Compensation may be defined as a mode of extinguishing in their concurrent amount those obligations persons who in their own right are creditors and debtors of each other. ( Art. 1278) Requisites: a) There must be two parties, who in their own right, are principal creditors and principal debtors of each other. (Arts. 1278, 1279. No. 1) b) Both debts must consist in money, or if the things due are fungibles (consumables), they must be of the same kind and quality (Art. 1279. NO.2) c) Both debts must be due (Art. 1279. NO. 3) d) Both debts must be liquidated and demandable ( Art 1279 NO. 4) e) There must be no retention or controversy commenced by third persons over either of the debts and communicated in due time to the debtor (Art.1279 NO. 5 CC) Meaning of retention when the credit of one of the parties is subject to the satisfaction of the claims of third person. Meaning of controversy- it exists when a third person claims he is the creditor of one of the parties. f) The compensation must not be prohibited by law (Arts 1278, 1288) If the above requisites are all present, LEGAL COMPENSATION will take place. In other words, compensation takes effect by operation of law and extinguishes both debts to the concurrent amount, even though the creditors and debtors are not aware of the compensation. (Art. 1290) Instances when legal compensation is not allowed by law: a. b. c. When one of the debts arises from depositum or from the obligation of a depositary or of a bailee in commodatum. Where one of the debts arises from a claim for support due by gratuitous title. Where on of the debts consists in civil liability from a penal offense.

Different classification of Compensation: a) Legal when it takes place by operation of law from the moment all of the requisites prescribed by law are present (Arts 1278 & 1279) b) Voluntary when the parties who are mutuality creditors and debtors agree to compensate their respective obligations even if the requisites of compensation be present. c) Judicial when it takes effect by judicial decree. d) Facultative when it can only be set up by one of the parties.

may not

Example: In contract of deposit, the depositary cannot set up compensation against the depositor if he fails to return the object of deposit as against any amount which the depositor owes the depositary. This is because it would violate the fiduciary character of the contract of deposit. But the depositor can set up his deposit by way of compensation against the depositarys credit. Here, only one party can set up compensation. AS TO EFFECT: Total when the debts to be compensated are equal in amount: Partial when the debts to be compensated are not equal in amount. Assignment of credit and compensation: In case there are several debts, when the debtor cannot set up compensation against the assignee if he knows that assignment was made by the creditor/assignor and he did not notify the assignor that he reserves his right to set up compensation. He can however collect from the creditor what he could have set off against the creditor had there been no assignment made by the latter. If the debtor knows about the assignment but did not consent, he can set up compensation against the assignee to obligations previous to the assignment. But he has no knowledge of the assignment, he can set up compensation of all credits prior, subsequent to the assignment until he obtains knowledge of the assignment. (Art. 1285) The rule on application of payment is also applicable in compensation. (Art. 1289) 6. NOVATION (Arts. 1291 1304)

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Novation is the substitution or change of an obligation by another, resulting in its extinguishment or modification, either by changing its object or principal conditions or by substituting another in place of the debtor, or by subrogating a third person in the rights of the creditor Requisites of Novation: a) A previous valid obligation; b) Agreement of the parties to the new obligation; c) Extinguishment of the old obligation and d) Validity of a new obligation NOVATION is not presumed. If must be clearly and unmistakably established either by the express agreement of the parties or acts of equivalent import. Test of incompatibility in order an obligation may be impliedly extinguished by another, which substitutes the same, it is imperative that the old and new obligation must be incompatible with each other on every point. It is then imperative to determine whether or not both can stand together, each having its own independent existence. If they can stand together, there is no incompatibility consequently there could be no novation. Test of incompatibility in order an obligation may be impliedly extinguished by another, which substitutes the same, it is imperative that the old and new obligation must be incompatible with each other on every point. It is then imperative to determine whether or not both can stand together, each having its own independent existence. If they can stand together, there is no incompatibility consequently there could be no novation. Kinds of Novation: According to origin: 2. 3. Legal that which takes place by operation of law. Conventional that which takes place by agreement of the parties.

According to how it is constituted: 1. 2. Express- when it is so declared in unequivocal terms. Implied - when the old and the new obligations are essentially incompatible with each other.

According to extent or effect: 1. 2. Total or extinctive - when the old obligation is completely extinguished. Partial or modificatory-when the old obligation is merely modified.

According to the subject: 1. 2. 3. Real or objective- when the object (or cause) or the principal conditions of the obligation are changed. Personal or subjective- when the person of the debtor is substituted and/or when a third person is subrogated in the rights of the creditor. Mixed when the object and/or principal conditions of the obligation and the debtor or the creditor, or both the parties, are changed. It is a combination of real and personal novations.

Kinds of personal novation: a) Substitution- when the person of the debtor is substituted or replace. b) Subrogation- when a third person is subrogated in the rights of the creditors. Kinds of substitution: c) Expromission or that which takes place when a third person of his own initiative and without the knowledge or against the will of the original debtor assumes the latters obligation with the consent of the creditor. Effect the new debtors insolvency or non-fulfillment of the obligation will not revive the action of the creditor against the old debtor whose obligation is extinguished by the assumption of the debt by the new debtor. If the new debtor pays the creditor, he is not subrogated with the rights of the creditor; he is only entitled to be beneficial reimbursement.

d) Delegation one which takes place when the creditor accepts a third person to take place of the debtor at the instance of the latter. The creditor may withhold approval. (art. 1295) In delegacion, all the parties the old debtor, the new debtor and the creditor must agree. If the payment was made with the consent of the original debtor or on his own initiative (delegacion), the new debtor is entitled to reimbursement and subrogation under Art.1237 Effect of new debtors insolvency or non-fulfillment of the obligation in delegacion:

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General Rule: Original debtor is not liable to the creditor in case of insolvency of the new debtor. The exceptions are: a) The said insolvency was already existing and of public knowledge (although it was not known to the old debtor) at the time of the delegacion; or b) The insolvency was already existing and known to the debtor (although it was not of public knowledge) at the time of the delegacion. The exceptions are intended to prevent fraud on the part of the old debtor. Important Provisions: a) When the principal obligation is extinguished in consequence of a novation, accessory obligations may subsists in so far as they may benefit third persons who did not give their consent. (Art. 1296) referring to stipulation pour autrui b) There is no novation if the new obligation is void and therefore the original one shall subsists unless the parties intended that the old obligation should be extinguished in any event. (Art. 1297) c) A void obligation cannot be novated because there is nothing to novate. However, if the original is voidable, the novation is valid considering voidable obligations are valid until judicially annulled. (Art. 1298) d) If the first obligation is subject to a suspensive or resolutory condition, the second obligation is deemed subject to the same condition unless the contrary is stipulated by the parties in their contract. (Art. 1299) KINDS OF SUBROGATION (Art. 1300) Conventional Subrogation when it takes place by express agreement of the original parties. (The debtor, the original creditor and the third person) Consent of all parties required. Conventional Subrogation requires consent of all of the parties, to wit, the debtor, the old creditor and the new creditor. Difference between Conventional Subrogation and Assignment of Credit CONVENTIONAL SUBROGATION ASSIGNMENT OF CREDIT 1. It extinguishes the obligation and creates a new 1. Here, there is a mere transfer of the same right or one. credit. 2. It requires the debtors consent. 2. This does not require the debtors consent. Mere notice is sufficient. 3. The defect of the old obligation may be cured in 3. The defect in the credit or right is not cured such a way that the new obligation becomes entirely simply by assigning the same. The assignee acquires valid. only the rights of the assignor. Legal Subrogation when it takes place without agreement but by operation by law Cases of Legal Subrogation: a) When a creditor pays another creditor who is preferred (see arts. 2236, 2251) b) When a third person without interest in the obligation pays with the approval of the debtor; c) When a third person with interest in the obligation pays with the approval of the debtor.

Effect of Total Subrogation: It transfer to the new creditor the credit and all of the rights and actions that could have been exercised by the former creditor either against the debtor or against third persons, be they guarantors or mortgagors. (Art. 1303) Effect of Partial Subrogation: The creditor to whom partial the new creditor has made payment remains a creditor to the extent of the balance of the debt. In case of insolvency of the debtor, old creditor is given preferential right to recover the remainder as against the new creditor. (Art, 1304)

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