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BUSINESS LAW
3. Meaning of obligation:
Code basis Article 1158 – obligation is juridical necessity to give to do or not to do.
It views obligat
obligation
ion from the debit
debit side. There
There is no debt with credit
credit and the credit
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
commentator s of the Civil Code:
An obligation is a juridical relation whereby a person (called creditor) may demand from
another
another (called
(called debtor) the observance
observance of a determinat
determinative
ive conduct (the giving,
giving, doing
doing or not
doing) and in case of breach, may demand satisfaction from assets of the latter.
6. Essential Requisites
Requisites of obligation
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
contract are things, right
right or services.
4. Juridical or Legal Tie – It is alsoalso known
known as “effic
“efficien
ientt cause”
cause”,, whic
which
h bind
binds
s the
the parti
parties
es to the
obligation. Another name is VINCULUM JURIS.
JURIS .
7. Meaning of Juridical
Juridical Necessity:
Necessity:
Obligation is a juridical necessity because in case of non-compliance, the courts of justice may be called
upon to enforce its fulfillment
fulfillment or in default thereof,
thereof, the economic value that it represents.
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 latter’s 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
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
subject while C is the active subject. The shipping
shipping of goods to Cebu is the prestation; the
contract between D and C is the efficient cause or vinculum juris.
9. Kinds of Obligations:
Obligations :
1. Viewpoint of sanctions:
2. Viewpoint of performance
a. Positive – to give or to do
b. Negative – not to do
do
3. Viewpoint of subject
subject matter
a. Real obligation – to give
b. Personal obligation
obligation – to do
do or not to do
10 . Sources of obligations:
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
Obligations
Obligations arising from law
law are not presumed. To be demandable
demandable and enforceable,
enforceable, the obligation
must be stayed by the law, which created
created the obligation. Such being the case the agreement
agreement of the
parties
parties under
under this obligation
obligation is no longer necessar
necessaryy because
because it is the law, which
which governs
governs their
obligation.
Obligat
Obligations
ions derived
derived from law shall be governed
governed by the law, which establis
establishes
hes them. In case of
insufficiency, the provisions of the Civil Code shall supplement the same.
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 obligati
obligation
on of the legitimate
legitimate ascendant
ascendantss and descenda
descendantsnts to support
support each other.(Ar
other.(Artt 195,
195, Civil
Civil
Code)
ILLUSTRATIVE
ILLUSTRATIVE CASE. SG, while employed as a guard of a movie house by O, shot and killed a gatecrasher,
gatecrasher,
X who attacked SG with a knife after having been refused entrance without first providing
providing himself with
a ticket.
ticket. SG was crimina
criminally
lly charged
charged with
with homicide
homicide but the trial
trial court dismiss
dismissed
ed the case. For the
expense
expense incurre
incurred
d in his defense,
defense, SG demanded
demanded reimbur
reimbursemen
sementt from the owner. When the owner 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
liable because the giving
giving legal assistance
assistance to the employee is not a legal
obligation.
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)
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.
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.
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.
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.
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
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)
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.
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
Meaning of Proximate Cause: Adequate and efficient cause which in the natural order of events
necessarily produces the damage or injury complained of
Diligence required:
a. 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.
b. However, if the law or contract provides for a different standard of care, said law or stipulation
must prevail (Art. 1163)
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).
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.
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)
c. Personal right (jus in personam) – power demandable by one [person to another – to give, to do
or not to do.
d. Real right (jus in re) – power over a specific thing.
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 latter’s 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.
Kinds of Delivery:
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. Default (Mora) – delay on the part of the debtor ( See discussions of mora below)
Kind of Dolo:
Under Article 1171- Responsibility arising from fraud is demandable with respect to
all kinds of obligations. WAIVER OF ACTION FOR FUTURE FRAUD IS VOID.
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
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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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?
Under Article 1169 of the Civil Code, demand (judicial or extra-judicial) is required before a debtor is
considered in legal delay or 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.
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?
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)
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
8
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
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.”
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 debtor’s 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:
9
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:
“I’ll pay you P20,000 on demand.”
“I’ll pay you P20,000.”
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:
CLASSIFICATION OF CONDITIONS
As to effect:
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: I’ll 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:
2. Indivisible – not capable of partial performance because of the nature of the thing
or because of the intention of parties.
As to mode:
As to form:
As to possibility:
As to numbers:
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)
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.
- 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 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.
11
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) “I’ll pay you P20,000 on the 25 th of December next year.”
2) “I’ll pay you P20,000 if Imelda Marcos dies”. Death is certain even if we cannot
really ascertain when it will come.
“I’ll 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)
Kinds of Period-
1) 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.
Period Condition
As to fulfillment
Fixes the time of efficaciousness of an obligation. Causes the obligation to arise or to cease.
As to time:
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 debtor’s 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.
Right of Choice:
Generally belongs to the DEBTOR. (Art. 1200) This is the presumption of law. Acceptance by the
creditor of the debtor’s choice may, by expressed agreement be granted to the creditor (Art.1200)
- 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)
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 debtor’s 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 debtor’s 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.
Loss of things
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.
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:
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
Sgd. A, B and C
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:
Kinds of Solidarity
Example:
Solidary obligation
Sgd. A, B & C
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
3. Mixed Solidarity
(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.
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.
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.
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).
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 creditor’s 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.
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.
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. Penalty is not a substitute for performance except only when this right has been expressly reserved
for him.
b. 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.
According to source:
a) Legal- penalty imposed by law
b) Conventional – penalty agreed upon by parties
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:
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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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:
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 creditor’s rights (Subrogation of the
payer in the creditor’s right).
b) If the creditor ratifies the payment to the third person (Ratification by the creditor).
c) If by the creditor’s 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)
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.
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)
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)
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:
2. It does not presuppose the insolvency of the 2. Debtor is insolvent at the time of assignment
debtor
3. It does not involve all the properties of the 3. Involves all the properties of the debtor
debtor
4. The creditor becomes owner of the thing given 4. The creditors only acquire the right to sell the
by the debtor thing and apply to their credits proportionately
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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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)
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.
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.
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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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
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)
• 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.
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)
a. When one of the debts arises from depositum or from the obligation of a depositary or of a bailee in
commodatum.
b. Where one of the debts arises from a claim for support due by gratuitous title.
c. Where on of the debts consists in civil liability from a penal offense.
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 depositary’s credit. Here, only one party can set
up compensation.
AS TO EFFECT:
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)
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:
1. Real or objective- when the object (or cause) or the principal conditions of the obligation are
changed.
2. 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.
3. 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 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 latter’s
obligation with the consent of the creditor.
Effect – the new debtor’s 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
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)
Conventional Subrogation requires consent of all of the parties, to wit, the debtor, the old creditor
and the new creditor.
Legal Subrogation– when it takes place without agreement but by operation by law
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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