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OBLIGATIONS & CONTRACTS REVIEWER l PRE-MIDTERMS l Tanya de la Cruz Ibanez l JD1 408

CHAPTER 1. GENERAL PROVISIONS

2.

As to parties a. Unilateral and Bilateral b. Individual and Collective (Collective – Joint and Solidary)

3.

As to object a. Determinate and Generic b. Simple and Multiple (Multiple – Conjunctive and Distributive) (Distributive – Alternative and Facultative)

Articles 1156 – 1162 OBLIGATION OBLIGATION An obligation is a juridical necessity to give, to do or not to do. Obligation may either be civil or natural: a. Civil obligation – one which has a binding force in law, and which gives the creditor the right of enforcing it against the obligor in the courts. b. Natural obligation – cannot be enforced by action but which is binding on the party who makes it in conscience and according to natural law. Civil Obligation Based on positive law Enforceable in the courts

Natural Obligation Based on equity & natural law Not enforceable in the courts

Requisites of Obligations: 1. Juridical or legal tie – binds the parties to the obligation 2. Active subject (creditor) – can demand the fulfillment of the obligation 3. Passive subject (debtor) – against whom the obligation is juridically demandable. 4. Prestation – object of the obligation Requisites of prestation:  It must be licit  It must be possible, physically or juridically  It must be determinate or at least determinable  It must be of pecuniary value CLASSIFICATIONS OF OBLIGATIONS Primary classifications under the Civil Code 1. Pure and Conditional 2. With a period 3. Alternative and facultative 4. Joint and solidary 5. Divisible and indivisible 6. With a penal clause Classifications of a secondary character 1. Legal, conventional and penal 2. Real and personal 3. Determinate and generic 4. Positive and negative 5. Unilateral and bilateral 6. Individual and collective 7. Accessory and principle

c. d. e. f. g. 4.

Positive and Negative Real and Personal Possible and Impossible Divisible and Indivisible Principal and Accessory

As to perfection and extinguishment a. Pure b. Conditional (Suspensive or resolutory) c. With a term of period SOURCES OBLIGATION

1. 2. 3. 4. 5.

Law Contracts Quasi-contracts Delicts (Acts or omissions punished by law0 Quasi-delicts OBLIGATIONS DERIVED FROM LAW

Obligations derived from law are not presumed. Only those expressly determined in the Civil Code or in special laws are demandable. How to determine whether an obligation arises from law or from other sources 1.

Law – when the law establishes the obligation and the act or condition upon which it is based is nothing more than a factor for determining when it becomes demandable Examples: Obligation to pay taxes (Internal Revenue Code) Obligation to support (Family Code)

2.

Other sources – when the law merely recognizes or acknowledges the existence of an obligation generated by an act which may constitute a contract, quasi-contract, delict or quasi-delict and its only purpose is to regulate such obligation. OBLIGATIONS DERIVED FROM CONTRACTS

Classifications according to Sanchez Roman 1.

As to juridical quality a. Natural b. Civil c. Mixed

Obligations arising from contracts have the force of law between the contracting parties and should be complied with in good faith. CONTRACT Meeting of minds between two persons whereby one binds himself with respect to the other, to give something or render some service. UNIVERSITY OF SAN CARLOS COLLEGE OF LAW 1 | P a g e

OBLIGATIONS & CONTRACTS REVIEWER l PRE-MIDTERMS l Tanya de la Cruz Ibanez l JD1 408 Two kinds of contract: 1. Consensual contract – perfected by mere consent. Once the contract is perfected, the valid contract has the force of law binding the parties to comply therewith in good faith, where neither one may renege therefrom without the consent of the other. 2.

Real contract - not perfected until the delivery of the object of the obligation. (pledge, commodatum, deposit)

Rule Whether the contract is consensual or real, the rule is that from the moment it is perfected, obligations which may be either reciprocal or unilateral arise.  Reciprocal obligations - Those where the parties are mutually or reciprocally obliged to do or give something.  Unilateral obligations - Those where only one of the parties, the debtor, is obliged to do or give something Compliance in good faith Means performance in accordance with the stipulations, clauses, terms and conditions of the contract. It must be observed to prevent one party from taking unfair advantage over the other. OBLIGATIONS DERIVED FROM QUASI-CONTRACTS QUASI-CONTRACT A juridical relation arising from lawful, voluntary and unilateral acts, by virtue of which the parties become bound to each other, based on the principle that no one shall be unjustly enriched or benefited at the expense of another.

 Criminal aspect – affects social order and the purpose is to punish the offender  Civil aspect – affects private rights and the purpose is to repair the damages suffered by the injured party However, there are offenses and special crimes without civil liability (treason, rebellion, illegal possession of firearm, gambling – they do not affect private rights) ENFORCEMENT OF CIVIL LIABILITY General rule: The civil action is deemed impliedly instituted in the criminal action. (Rule 111, Sec 1 Revised Rules on Crimpro) Except when the offended party: 1. Expressly waives the civil action 2. Reserves his right to institute it separately 3. Institutes the civil action prior to the criminal action INDEPENDENT CIVIL ACTIONS (Articles 31, 32, 33, 34, 2176) A civil action entirely separate and distinct from the criminal action may be brought by the injured party during the pendency of the criminal case. Such shall proceed independently of the criminal prosecution and shall require only a preponderance of evidence. Rule 111 Sec 3 Revised Rules of Criminal Procedure 2000 There is no need to reserve the right to file an independent civil action. (Removal of the reservation requirement)

Two kinds of independent civil actions 1. Civil action based on an obligation NOT arising from an act or omission complained of as a felony (law, contract, quasi-contract or quasi-delict) 2. Civil action entirely separate and distinct from the criminal action. (Articles 31, 32, 33, 34, 2176)

Principal kinds of quasi-contracts 1.

2.

Negotiorum gestio – a juridical relation which arises whenever a person voluntarily takes charge of the agency or management of the business or property of another without any power or authority from the latter.

Other civil actions arising from offenses Rules to observe: 1.

Criminal and civil actions arising from the same offense may be instituted separately. (Art 100 – Dependent CA) BUT, after the criminal action has been commenced, the civil action cannot be instituted until final judgment has been rendered in the criminal action.

2.

If the civil action has been filed ahead of the criminal action, and the criminal action is subsequently commenced: Effects:  The civil action shall be suspended in whatever stage, until final judgment in the criminal action has been rendered.  The civil action may be consolidated with the criminal action upon application with the court trying the criminal action. In which case, both the criminal and civil action shall be tried jointly

3.

Extinction of the criminal action does not carry with it extinction of the civil (Dependent CA) UNLESS the extinction proceeds from an acquittal based on pure innocence

Solutio indebiti – a juridical relation which arises whenever a person unduly delivers a thing through mistake to another who has no right to demand it.

Perez v. Palomar In a quasi-contract where no express consent is given by the other party, the consent needed in a contract is provided by law through presumption. (presumptive consent)

OBLIGATIONS DERIVED FROM DELICTS Civil obligations arising from offenses shall be governed by the penal laws, subject to the provisions of Art 2177, Chapter 2 on Human Relations and Title 18 of the Civil Code on damages. OBLIGATIONS ARISING FROM CRIMINAL OFFENSES Article 100 RPC Every person criminally liable is civilly liable. A crime has a dual aspect – criminal and civil aspect.

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OBLIGATIONS & CONTRACTS REVIEWER l PRE-MIDTERMS l Tanya de la Cruz Ibanez l JD1 408 PERIOD OF PRESCRIPTION 1.

2.

Dependent civil actions – during the pendency of the criminal action, the period of prescription of the civil action shall NOT run because it has to wait for the final judgment of the criminal case Independent civil actions – the period of prescription shall run because it can be instituted separately.

JUDGMENT IN CIVIL ACTION NOT A BAR A final judgment rendered in a civil action absolving the defendant from civil liability is not a bar to a criminal action because the quantum of evidence for both actions are different. SUSPENSION BY REASON OF PREJUDICIAL QUESTION Elements of a prejudicial question: 1. The previously instituted civil action which involves an issue similar or intimately relation to the issue raised in the subsequent criminal action 2. The resolution of such issue determines whether or not the criminal action may proceed. EFFECT OF ACQUITTAL IN DEPENDENT CIVIL ACTIONS If acquittal is based on: 1. Guilt has NOT been proved beyond reasonable doubt – a civil action may still be instituted (Reason: different quantum of evidence) 2.

Pure innocence – Bars the institution of a civil action

ARE TWO CIVIL ACTIONS ALLOWED? Though the objective is the same which is to recover damages but pursued differently in two distinct civil actions, the rule does not prohibit simultaneous OBLIGATIONS DERIVED FROM QUASI-DELICT QUASI-DELICT - Obligations which do not arise from law, contracts, quasi-contracts or criminal offenses. Fault or negligence which causes damage to another, there being no pre-existing contractual relations between the parties. (Article 2176) Obligations derived from quasi-delicts shall be governed by the provisions of Chapter 2, Title 17 of the Civil Code and by special laws. (Article 1162) PERSONS LIABLE 1. Father/mother – minor children 2. Guardians – minor or incapacitated persons 3. Owners and managers – employees on the occasion of their functions 4. Employers – employees within the scope of their assigned tasks 5. State – special agent acting outside the bounds of their authority

2. 3.

Damage suffered by the plaintiff Relation of cause and effect

CRIME AND QUASI-DELICT DISTINGUISHED Delict

Quasi-delict

Affects public interest

Only of private concern

Punished by the RPC

Civil Code repairs the damages through indemnification

Criminal and civil liability

Only civil liability

Only punished if there is a law

So broad includes all acts in which any kind of fault or negligence intervenes

SCOPE OF QUASI-DELICTS Quasi delicts include acts which are criminal in character or in violation of the penal law, whether voluntary or negligence. The fault or negligence referred to in Article 2176 covers not only acts not punishable by law but also acts criminal in character, whether intentional, voluntary or negligent. (Elcano v. Hill) Take Note: This pronouncement expands the coverage of quasidelicts beyond what was originally contemplated by the lawmakers. Coverage of quasi-delicts which DO NOT overlap with delicts 1. Negligent acts or omissions not punishable as criminal offenses 2. Intentional quasi-delicts (Articles 19, 21, 22, 26, 27, 28 and 1314) 3. Strict liability torts where there is neither negligence nor intent to cause damage or injury (Articles 23, 696 and 705) Coverage of quasi-delicts which overlap with delicts 1. Criminal negligence 2. Acts or omissions punishable as crimes under the RPC but the Civil Code expressly declares that the civil action arising therefrom is separate and independent from the criminal action. (Articles 31, 32, 33, 34) CHARACTER OF REMEDY A negligent act may give rise to at least 2 separate and independent liabilities 1. Civil liability arising from crime (culpa criminal) 2. Civil liability arising from negligence (culpa aquiliana) Take Note: These two concepts of faults are so distinct from each other that exoneration from one does not result in exoneration from the other. Hence, they can be prosecuted separately and independently from each other. However: The Civil Code precludes recovery of damages twice for the same negligent act or omission. (Article 2177) In essence: Simultaneous remedies are allowed, but not double recovery.

Take Note: Responsibility shall cease if they can prove that they observed the diligence of a good father of a family

Contradicting jurisprudence anent selection of remedies

Requisites of liability 1. Fault or negligence of the defendant

Elcano v. Hill The extinction of civil liability founded on Article 100 of the RPC does not extinguish the civil liability for the same act considered as a UNIVERSITY OF SAN CARLOS COLLEGE OF LAW 3 | P a g e

OBLIGATIONS & CONTRACTS REVIEWER l PRE-MIDTERMS l Tanya de la Cruz Ibanez l JD1 408 quasi-delict, even by a declaration in the criminal case that the accused was innocent. Mendoza v. Arrieta There was a return to the old doctrine of selection of remedies. Acquittal in the criminal action due to pure innocence where the civil action is impliedly instituted bars the injured party from commencing the civil action anchored on quasi-delict, for the end result would be the same. JURISPRUDENCE WHICH HIGHLIGHT THE NATURE OF QUASI-DELICT Barredo v. Garcia Fault or negligence as a source of obligation has a dual character, the criminal and the civil. Despite the overlapping coverage of quasi-delicts and delicts, a concurrence of scope in regard to negligent acts does not destroy the distinction between the civil liability arising from a crime and the responsibility for quasi-delicts. The same negligent act causing damages may produce civil liability arising from a crime under Article 100 of the RPC, or create an action for quasi-delict under Articles 1902-1019 of the Civil Code. A quasi-delict is a separate legal institution under the Civil Code, with a substantivity of its own and individuality that is entirely apart and independent from a delict or crime. LIABILITY OF EMPLOYER FOR QUASI-DELICT IN CRIMINAL ACTION NO, since quasi-delict is not deemed instituted with the criminal action. If at all, the only civil liability of the employer in the criminal action is subsidiary liability. EFFECT OF DEATH OF ACCUSED ON CIVIL ACTIONS Death after arraignment or during the pendency of the criminal action – shall extinguish civil liability arising from the crime. However, the independent civil action instituted may be continued. Death before arraignment- the case shall be dismissed without prejudice to any civil action the offended party may file against the estate of the deceased.

CHAPTER 2. NATURE AND EFFECT OF OBLIGATIONS ARTICLES 1163-1178 OBLIGATIONS TO GIVE An obligation to give may be either: 1. Determinate – when the object is particularly designated or physically segregated from all others of the same class 2. Generic – when the object is designated merely by its class or genus without any particular designation. STANDARD OF CARE Every person obliged to give something is also obliged to take of it with the proper diligence of a good father or family, unless the law or the stipulation of the parties requires another standard of care.

1.

2.

From the time designated by the provisions of the Civil Code or of special laws creating them (If obligation arises from law, quasi-contracts, quasi-delicts and delicts) From the moment of the perfection of the contract (If obligation arises from a contract) Exception: when the obligation is subject to a suspensive condition (obligation to deliver only arises from the moment the condition is fulfilled)

Article 1164 The creditor has a right to the fruits of the thing from the time the obligation to deliver it arises. However, he shall acquire no real right over it until the same has been delivered to him. NATURE OF RIGHT The creditor has a right to the thing as well as the fruits thereof from the time the obligation to deliver it arise. 1. Personal right – A right pertaining to a person to demand from another; enforceable only against a definitive person (jus ad rem) 2. Real right – A right pertaining to a person over a specific thing; enforceable against the whole world (jus in re) Therefore, before delivery, the creditor in obligations to give, has merely a personal right against the debtor (to ask for delivery of the thing and the fruits thereof). Once the thing and the fruits are delivered, he then acquires a real right over them, a right enforceable against the whole world. RIGHTS OF CREDITOR In determinate obligations 1. To compel specific performance 2. To recover damages for breach of obligations In generic obligations 1. To ask for performance of the obligation 2. To ask that the obligation be complied with at the expense of the debtor 3. To recover damages for breach of the obligation OBLIGATIONS OF DEBTOR In determinate obligations 1. To perform the obligation specifically 2. To take care of the thing with the proper diligence of a good father of a family 3. To deliver all accessions and accessories of the things, even though they may not have been mentioned 4. To be liable for damages in case of breach of obligation by reason of delay, fraud, negligence of contravention of the tenor thereof. In generic obligations 1. To deliver a thing which is neither of superior nor inferior quality. 2. To be liable for damages for damages in case of breach of the obligation by reason of delay, fraud, negligence of contravention of the tenor thereof.

WHEN DOES THE OBLIGATION TO DELIVER THE THING ARISE? Depends upon the nature of the obligation itself. UNIVERSITY OF SAN CARLOS COLLEGE OF LAW 4 | P a g e

OBLIGATIONS & CONTRACTS REVIEWER l PRE-MIDTERMS l Tanya de la Cruz Ibanez l JD1 408 because of a provision of the law or because of conflicting rights of third persons.

OBLIGATIONS TO DO If a person obliged to do something fails to do it, the same shall be executed at his cost. The same rule shall be observed if he does it in contravention of the tenor of the obligations. Furthermore, what has been poorly done be undone. EFFECTS OF BREACH: If the obligor fails to do that which he has obligated himself to do, the obligee can have the obligation performed or executed at the expense of the former, and demand for damages by reason of breach. WHAT IS PROHIBITED The creditor cannot compel the obligor for specific performance because the law recognizes the individual’s freedom to choose between doing that which he promised and not doing it, otherwise it would result to involuntary servitude. REMEDIES AVAILABLE FOR CREDITOR IN OBLIGATIONS TO DO 1. Have the obligation executed at the expense of the debtor 2. Ask for damages Where the first remedy is not available When the prestation consists of an act where the personal and special qualification of the obligor is the principal motive for the establishment of the obligation. Only the remedy of damages can be availed of. Example: Talent and prestige of an artist When there is performance of the obligation but in contravention of the tenor thereof: (Case in point: Chavez v. Gonzales) Rights of the creditor: 1. To have the obligation performed or executed at the expense of the obligor 2. To ask what has been poorly done be undone (Case in point: Tanguilig v. CA)

3.

To recover damages because of breach of obligation OBLIGATIONS NOT TO DO

When the obligation consists in not doing, and the obligor does what has been forbidden him, it shall be undone at his expense. The object of the obligation is fulfilled so long as that which is forbidden is not done by the obligor. EFFECTS OF BREACH: If the obligor does what has been forbidden him, two remedies are available to the obligee: 1. To have it undone at the expense of the obligor(Art 1168) 2. Ask for damages (Art 1170) Delay or mora is not possible In obligations not to do, delay is not possible because in negative obligations, the obligation is either fulfilled or not fulfilled. Instances where 1st remedy is not available 1. Where the effects of the act which is forbidden is definite in character 2. Where it would be physically or legally impossible to undo what has been done because of the nature of the act itself,

Take Note: Here, the only remedy is damages. BREACH OF OBLIGATIONS Two kinds of breach of obligation: 1. Voluntary (default, fraud, negligence, contravention) 2. Involuntary (fortuitous event) VOLUNTARY BREACH THROUGH DEFAULT DEFAULT – Signifies the idea of delay in the performance of an obligation with respect to time. Three kinds of default: 1. Mora solvendi – delay of the debtor to perform his obligation. (Mora solvendi ex re – obligation to give; Mora solvendi ex persona – obligation to do) 2. Mora accipiendi – delay of the creditor to accept the delivery of the thing which is the object of the obligation 3. Compensation morae – delay of the parties in reciprocal obligations. Requisites of default: 1. The obligation is demandable and already liquidated 2. The obligor delays performance 3. The creditor requires the performance judicially or extrajudicially Default in positive obligations In obligations to give or to do, the debtor incurs in delay from the time the creditor demands from him the fulfillment of the obligation. Demand may either be: 1. 2.

Judicial – creditor files a complaint against the debtor in court for the fulfillment of the obligation Extrajudicial – creditor demands from the debtor either orally or in writing.

Take Note: Whether demand is judicial or extrajudicial, if the debtor fails to performs his obligation, he is in mora solvendi and therefore liable for damages. When demand is not necessary Demand by the creditor is not necessary in order that delay may exist in the following cases: 1. When the obligation or the law expressly so declares 2. When it appears that the designation of time was the controlling motive for the establishment of the contract 3. When demand would be useless as when the debtor has rendered it beyond his power to perform. Default in negative obligations The debtor can not incur delay in negative obligations. Fulfillment and violation are possible, but never delay. Default in reciprocal obligations Reciprocal obligations – those which are created or established at the same time, out of the same cause and which result in mutual relationships of creditor ad debtor between the parties.

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OBLIGATIONS & CONTRACTS REVIEWER l PRE-MIDTERMS l Tanya de la Cruz Ibanez l JD1 408 Conditional character These obligations are condition in the sense that fulfillment of an obligation by one party depends upon the fulfillment of the obligation by the other. General rule: Fulfillment by both parties should be simultaneous. Exception: When different dates for performance for each party are fixed by the parties. When delay is incurred One party incurs in delay from the moment the other party fulfils his obligation while he himself does not comply or is not ready to comply. Take Note: If neither party complies, the default of one compensates the default of the other. In which case, there can be no legal delay.

Fraud is synonymous to bad faith. (As a ground for damages, malice or dishonesty is implied. It cannot cover mistake and errors of judgment made in good faith) Rule on waiver: Liability cannot be waived or renounced. What is prohibited is the waiver made in advance or in anticipation of fraud. Thus, waiver for past fraud is allowed.  Waiver for future fraud – contrary to law and public policy. Hence, such waiver is void.  Waiver for past fraud – valid since such waiver can be deemed as an act of generosity. Further, what is renounced is the effect of fraud or the right of the party to indemnity. VOLUNTARY BREACH THROUGH NEGLIGENCE OR CULPA

Effects of default Once the debtor incurred in delay, he can be held liable by the creditor for damages. This liability subsists even if the thing may have been lost through a fortuitous event

NEGLIGENCE – omission of that diligence which is required by the nature of the obligation and corresponds with the circumstances of the persons, of the time and the place; absence of due care required by the nature of the obligation.

When obligation consists in the payment of money The indemnity for damages shall be the payment of interest agreed upon, and in the absence of stipulation, the legal interest. Interest due shall earn legal interest from the time it is judicially demanded.

Take note: If the law or contract does not state the degree of diligence, that which is expected of a good father of the family shall be required.

VOLUNTARY BREACH THROUGH FRAUD FRAUD – consists in the conscious and intentional proposition to evade the normal fulfillment of an obligation. Take Note: This type of fraud is present during the performance of the obligation, and must NOT be confused with causal or incidental fraud which is present at the time of the birth of the obligation Two kinds of fraud: 1. Criminal fraud 2. Civil fraud a. Fraud in the performance of an obligation b. Fraud in the constitution of an obligation FRAUD A

FRAUD B

Present only during the performance of a pre-existing obligation

Present only at the time of the birth of the obligation

Purpose is to evade the normal fulfillment of an obligation Results in the nonfulfillment or breach of the obligation Gives rise to a right of the creditor to recover damages

Kinds of negligence 1. Criminal negligence 2. Civil negligence a. Culpa contractual – fault or negligence of the debtor by virtue of which he is unable to perform his obligation arising from a pre-existing contract because of the omission of the diligence which is required of the obligation. b. Culpa aquiliana (quasi-delict) – fault or negligence of a person who, because of the omission of the diligence which is required by the nature of the obligation, causes damage to another. Culpa contractual and culpa aquiliana distinguished Culpa contractual

Culpa aquiliana

As to relationship of the parties

There is always a preexisting contractual relation

There may or may not be a pre-existing contractual relation

As to source of obligation

Breach or nonfulfillment of the contract

Defendant’s negligent act or omission itself

As to proof required for recovery

Existence of the contract and its breach is sufficient prima facie evidence to warrant recovery

Negligence of the defendant must be proved

As to availability of due diligence as a defense

Proof of diligence in the selection and supervision of employees is not available as a defense

Purpose is to secure the consent of the other party to enter into a contract

Results in the vitiation of consent Gives rise to the right of the innocent party to ask for annulment of the contract (causal), or recover damages (incidental)

Effect of Fraud: If there is breach or non-fulfillment of the obligation by reason of fraud on the part of the debtor, he can be held liable for damages.

It is available as a defense.

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OBLIGATIONS & CONTRACTS REVIEWER l PRE-MIDTERMS l Tanya de la Cruz Ibanez l JD1 408 Negligence distinguished from Fraud

CONCEPT OF FORTUITOUS EVENT

Negligence

Fraud

Act or omission is voluntary in character

Conscious or intentional proposition to evade the normal fulfillment of the obligation

There is merely abandonment, carelessness or lack of diligence TN: Where negligence shows bad faith, the rules on fraud shall govern

There is intent to cause damage or injury

Test of negligence Did the defendant in doing the alleged negligent act use the reasonable care and caution which an ordinarily prudent person would have used in the same situation? Regulatory power of the courts Liability arising from negligence in the performance of every kind of obligation may be regulated by the courts. Consequently, the court may increase or decrease the liability of the party at fault depending upon the circumstances of each case. The court, then, make take into consideration the good or bad faith of the debtor or the conduct of the creditor when the damage was incurred.

FORTUITOUS EVENT – An event which could not be foreseen, or which, though foreseen, was inevitable. (Covers acts of God and force majeure) Acts of God - Those which are absolutely independent of human intervention, such as rains, typhoons, floods, cyclones, earthquakes or any other similar calamity brought about by natural forces. Force majeure – Events which arise from legitimate or illegitimate acts of persons other than the obligor, such as commotions, riots, wars, robbery and similar acts. CLASSIFICATIONS OF FORTUITOUS EVENT As to human intervention 1. 2.

As to forseeability 1. 2.

Effect of good faith Debtor shall only be liable for natural and probable consequences of the breach of obligation and which the parties have foreseen or could have reasonably foreseen at the time of the obligation. Effect of bad faith The rules on fraud shall govern. Thus the debtor can be held responsible for all damages which may be reasonably attributed to the non-performance of the obligation. Furthermore, any waiver which is made in the anticipation of such liability is null and void. Effect of contributory negligence If there is negligence on the part of the creditor, the effect depends whether the negligence is the: 1. Proximate cause of the accident – creditor cannot recover 2. Merely contributory – the damages which the creditor can recover from the debtor is reduced or mitigated Other circumstances where the courts can equitably mitigate the damages 1. Where the plaintiff himself has contravened the terms of the contract 2. Where the plaintiff has derived some benefit as a result of the contract 3. In cases where exemplary damages are to be awarded, where the defendant acted upon the advice of counsel 4. Where the loss would have resulted in any event 5. Where upon the filing of the action, the defendant has done his best to lessen the plaintiff’s loss or injury. VOLUNTARY BREACH THOUGH CONTRAVENTION OF TENOR Debtor is bound to indemnify the creditor for the damages caused thereby. Contravention of the tenor of the obligation includes every kind of defective performance.

Fortuitous event proper (act of God) – event absolutely independent of human intervention Force majeure – event which arises from legitimate or illegitimate acts of persons other than the obligor.

Ordinary – Event which usually happens or which could be reasonably foreseen Extraordinary – Event which does not usually happen and which could not have been reasonably foreseen, such as war, pestilence, earthquake, etc.

EFFECT UPON OBLIGATION If the obligor is unable to comply with his obligation by reason of fortuitous event: General rule: Obligation is extinguished. Obligor is exempted from any liability. Exceptions 1. When the obligation is generic (the genus of a thing can never perish) 2. Where such liability is expressly specified by law 3. Where it is declared by stipulation of the parties 4. Where the nature of the obligation requires the assumption of risk (no wrong is done to one who consents) Examples: Insurance contracts, workmen’s compensation acts, common carriers 5. When the object of the obligation is lost and the loss is due partly to the fault of the debtor 6. When the object of the obligation is lost and the loss occurs after the debtor has incurred in delay 7. When the debtor promised to deliver the same thing to two or more persons who do not have the same interest 8. When the obligation to deliver arises from a criminal offense ESSENTIAL CONDITIONS These conditions must concur before general rule can be applied. 1. 2.

The event must be independent of the will of the obligor The event must be either unforeseeable or inevitable UNIVERSITY OF SAN CARLOS COLLEGE OF LAW 7 | P a g e

OBLIGATIONS & CONTRACTS REVIEWER l PRE-MIDTERMS l Tanya de la Cruz Ibanez l JD1 408 3.

4.

The event must be of such character as to render it impossible for the obligor to fulfil his obligation in a normal manner The obligor must be free from any participation in the aggravation of the injury resulting to the obligee.

In short, there must be an entire exclusion of human agency from the cause of injury or loss. The fortuitous event must not only be the proximate cause of the loss or destruction, but must be the sole cause. USURIOUS TRANSACTIONS Usurious transactions shall be governed by special laws (Act No. 1655 Usury Law) USURY – Contracting for or receiving something in excess of the amount allowed by law for the loan or forbearance of money, goods KINDS OF INTEREST 1. 2. 3.

4. 5.

Simple interest – When the rate of interest is stipulated by the parties Compound interest – When the interest earned is upon interest due Legal interest – When the rate of interest intended by the parties is presumed by law, as when the loan mentions interest but does not specify the rate thereof. Lawful interest – when the rate of interest is within the maximum allowed by law. Unlawful interest – when the rate of interest is beyond the maximum fixed by law

USURY LAW Legal rate – 12% per annum if the transaction is a loan or forbearance of money, goods, or credits, otherwise it is only 6%. (to be counted from the filing of the complaint until fully paid)

Maximum rate a. 12% per annum – secured loans b. 14% per annum – unsecured loans Requisites for Recovery of Interest In order that interest may be recovered, the following requisites must be present: 1. 2. 3.

The payment of interest must be expressly stipulated The agreement must be in writing The interest must be lawful

interest can be charged as lender and borrower may agree upon. CB No. 905 suspended the effectivity of the Usury law. Before January 1, 1983 under the Treasury Laws No person shall receive a rate of interest higher than 12% per annum or the maximum rate prescribed by the Monetary Board for a loan secured by a mortgage upon real estate the title to which is duly registered. After January 1, 1983 under CB Circular No. 905 The Central Bank Monetary Board is authorized to fix interest rates. The ceiling rates under the Usury law have been abolished. Take Note CB Circular 905 did not repeal nor amend the Usury Law but simply suspended its effectivity. LIABILITY FOR LEGAL INTEREST Loan or forbearance of money When the obligation consists in the payment of money (loan or forbearance of money), the interest due should be that which may have been stipulated in writing. a.

Central Bank Circular No. 905 12% per annum REMEDIES OF CREDITOR TO PROTECT CREDIT

1. 2. 3. 4.

Exact payment To exhaust the property in possession of the debtor To be subrogated to all of the rights and actions of the debtor, save those which are inherent in his person To impugn all of the acts which the debtor may have done to defraud him (Article 1177)

Take Note The second and the third are subsidiary to the first. EXHAUSTION OF DEBTOR’S PROPERTY The principal remedy of the creditor to protect and enforce his credit, generally by attachment. Basis Article 2236 of the Civil Code – debtor is liable with all his property, present and future, for the fulfillment of his obligations subject to the exemptions provided by law.) Exemptions: 1. Sec 12, Rule 39 of the New Rules of Court 2. Sec 118 of the Public Land Law 3. Articles 223, 232, 243, 302, 1708

A stipulation for the payment of usurious interest is void, that is, as if there is no stipulation as to interest.

ACCION SUBROGATORIA (SUBROGATORY ACTION) Right of the creditor to exercise all of the rights and bring all of the actions which the debtor may have against third persons.

Take Note: By virtue of CB No. 905 issued by the Monetary Board, the rate of interest and other charges on loan or forbearance of money, goods or credit, whether secured or unsecured, shall not be subject to any ceiling prescribed under the Usury Law. Hence,

Exception Rights which are purely personal in the sense that they are inherent in the person of the debtor. Examples: UNIVERSITY OF SAN CARLOS COLLEGE OF LAW 8 | P a g e

OBLIGATIONS & CONTRACTS REVIEWER l PRE-MIDTERMS l Tanya de la Cruz Ibanez l JD1 408 1. 2. 3. 4.

Parental authority Right to revoke donations on ground of ingratitude Public or honorary in character (Position in the government, doctor’s degree) Right to appear in court proceedings (settlement of estate)

Conditions/Requisites 1. The debtor to whom the right or action properly pertains must be indebted to the creditor 2. The creditor must be prejudiced by the inaction or failure of the debtor to proceed against the third person 3. The creditor must have first pursued or exhausted all of the properties of the debtor which are not exempted from execution ACCION PAULIANA Right of the creditor to impugn or directly attack acts or contracts done by the debtor to third persons to defraud the former. Example: Regalado v. Luchasingco and Co. Facts: A was a defendant in a civil case. He lost, and attachment was issued against his property. B, the winner, could not collect his claim because it was discovered that A had sold his warehouse to his son, C, after attachment had been issued on such property. B, who could not collect in any other way because A had no money, brought an action to rescind the contract allegedly made to defraud him. It was proved that: 1. 2.

Although the warehouse was worth P25,000, the son allegedly paid only P15,000 for it; The son probably did not have the P15, 000 or any other sum of importance with which to buy the said warehouse.

Held: The transaction is fraudulent and since B, the creditor, cannot recover in any other way, the contract ought to be rescinded.

TRANSMISSIBILITY OF RIGHTS General Rule: Rights of obligations or those rights which are acquired by virtue of an obligation are transmissible in character. Hence, can be alienated or assigned to third persons. Exceptions: 1. Where they are not transmissible by their very nature (purely personal right) 2. Where there is a stipulation of the parties that they are not transmissible (not implied; must be clearly established) 3. Where they are not transmissible by operation of law

CHAPTER 3. DIFFERENT KINDS OF OBLIGATIONS Section 1. PURE AND CONDITIONAL OBLIGATIONS Articles 1179 – 1192

Immediate demandability The distinctive characteristic of a pure obligation. However, the quality of immediate demandability should not violate or infringe the right of the debtor for a reasonable period for performance. Examples: 1. I’ll pay you P1 million on demand. 2. I will give you my watch. CONDITIONAL OBLIGATION An obligation whose effectivity is subordinate to the fulfillment or nonfulfillment of a condition. Examples 1. I’ll buy your land for P10 million if you pass the last bar examinations. (This is suspensive for the results will be awaited). 2. I’ll give you my land now, but should you fail in the last bar examinations, your ownership will cease and it will be mine again. (This is resolutory because it ends upon failure.). Condition A future and uncertain fact or event upon which an obligation is subordinate or made to depend. Requisites of a condition 1. The fact or event must be future 2. The fact of event must be uncertain Past event unknown to the parties not a condition The event can never constitute a condition because in order that it can be classified as such, the requisites of futurity and uncertainty must be present. Term or Period That which necessarily must come (like 2005) whether the parties know when it will happen or not (like death, since this is sure) Example: “I’ll pay you P1 Million on Jun. 1, 2005.” Take note: Death because of S.A.R.S. is a condition, since death may be due to other causes. CLASSIFICATIONS OF CONDITIONS A. 1. 2. B. 1.

PURE AND CONDITIONAL OBLIGATIONS 2. PURE OBLIGATION An obligation that is demandable at once; whose effectivity or extinguishment does not depend upon the fulfillment of a condition or upon the expiration of a term or period.

3.

Suspensive - the happening of the condition gives rise to the obligation. Resolutory – the happening of the condition extinguishes the obligation Potestative – the fulfillment of the obligations depend upon the will of the debtor. (Ex. I’ll sell you my car if I like) Casual – depends on chance or hazard or the will of a third person (Ex. If I win in the lotto) Mixed – depends partly on the will of one of the parties and partly on chance or the will of a third person. (Ex. If I pass the bar examinations) UNIVERSITY OF SAN CARLOS COLLEGE OF LAW 9 | P a g e

OBLIGATIONS & CONTRACTS REVIEWER l PRE-MIDTERMS l Tanya de la Cruz Ibanez l JD1 408 C. 1. 2.

D. 1. 2.

E. 1. 2. F. 1. 2. G. 1. 2.

Divisible – when the condition is susceptible of partial realization or performance Indivisible – not susceptible of partial realization or performance because of the nature of the thing or because of the nature of the parties Possible – when the condition is capable of fulfillment according to nature, law public policy or good customs. Impossible – not capable of fulfillment according to nature or due to the operation of law, or morals, public policy or due to a contradiction in its terms.

SUSPENSIVE POTESTATIVE 1.

Rationale: Because the creditor is naturally interested in the fulfillment of the suspensive condition, since it is only by such fulfillment that the obligation can become effective. 2.

Express – when the condition is stated expressly Implied – when the condition is tacit or merely inferred. SUSPENSIVE AND RESOLUTORY CONDITIONS

SUSPENSIVE CONDITION Effectivity of obligation is suspended until the happening or fulfillment of the condition. Effect: The acquisition of rights shall depend upon the happening of the condition. What is acquired by the creditor upon the constitution of the obligation is only a mere hope or expectancy. Example: I will give you my car if you pass the Bar examinations. RESOLUTORY CONDITION Effectivity of obligation is extinguished upon the happening or fulfillment of the obligation. Effect: Although rights are immediately vested in the creditor upon the constitution of the obligation, such rights are always subject to the threat or danger of extinction. Example: I will give my car now, but should you not pass the Bar examinations, this shall be returned to me. POTESTATIVE, CASUAL, AND MIXED CONDITIONS POTESTATIVE CONDITION One whose fulfillment depends exclusively upon the will of either of the parties to the obligation.

Depends exclusively upon the will of the debtor Condition and obligation is void. Rationale: It would sanction obligations which are illusory, in direct contravention of the principle that validity and fulfillment of contracts cannot be left to the will of one of the contracting parties.

Positive – when the condition involves the performance of an act Negative – when the condition involves the omission of an act. Conjunctive – when there are several conditions and all of which must be performed Alternative – when there are several conditions but only one must be performed.

Depends exclusively upon the will of the creditor Condition and obligation is valid

Exception: pre-existing obligation (condition is void, but obligation is valid) Example of a pre-existing obligation: I will pay my P20,000 indebtedness when I am in the mood. (Condition is void, but obligation is still valid) RESOLUTORY POTESTATIVE 1.

Condition and obligation is valid even if fulfillment exclusively depends upon the will of the debtor Rationale: It is but natural that the debtor is interested in the fulfillment of the resolutory condition since it is only by such fulfilment that he can reacquire the rights.

CASUAL CONDITION One whose fulfillment depends exclusively upon chance and/or the will of a third person. Effect: The obligation including such condition shall take effect. Example: I will give you my car if Aquino gets elected as President MIXED CONDITION One whose fulfillment depends jointly upon the will of either of the parties and upon chance/will of a third person. Effect: The obligation including such condition shall take effect. Example: I promise to pay my debt as soon as I receive funds derived from the sale of my house POSSIBLE AND IMPOSSIBLE CONDITIONS POSSIBLE CONDITION Capable of realization, not only according to its nature, but also according to law, good customs and public policy. IMPOSSIBLE CONDITION Not capable of realization either according to its nature or according to law, good customs or public policy.

Effects: UNIVERSITY OF SAN CARLOS COLLEGE OF LAW 10 | P a g e

OBLIGATIONS & CONTRACTS REVIEWER l PRE-MIDTERMS l Tanya de la Cruz Ibanez l JD1 408 Examples: 1. I’ll pay you P10,000 if you can contract the inhabitants of Mars (impossible) 2. I’ll give you my land if you secure a divorce from your wife (contrary to law, good customs and public policy) Effects 1. 2. 3.

The obligation which depends upon the condition shall be annulled. Divisible obligation - The part which is not affected by the impossible or unlawful condition shall be valid. Condition is not to do an impossible thing – Shall be considered as not having been agreed upon. Hence, obligation becomes pure, and immediately demandable.

Take Note: 1. Impossible condition attached to an obligation – OBLIGATION IS VOID 2. Impossible condition attached to a simple or remuneratory donation – CONDITION IS NOT IMPOSED, BUT DONATION IS VALID POSITIVE AND NEGATIVE CONDITIONS POSITIVE CONDITION Involves the performance of an act or fulfillment of an event Effect: The condition that some event happen at a determinate time shall extinguish the obligation as soon as the time expires or if it becomes indubitable that the event will not take place. Example: I will give you P2,000 if you pass the bar exam in your first attempt. (If he flunks the exam, the obligation is extinguished) NEGATIVE CONDITION Involves the non-performance or an act or nonfulfillment of an event. Effect: The condition that some event will not happen at a determinate time shall render the obligation effective from the moment the time indicated has elapsed or if it becomes evident that the event cannot occur. Example: I will give you P2,000 provided that you should not get married before reaching 25. (If he is still not married at 25, the obligation becomes effective)

RETROACTIVE APLICATION OF CONDITIONAL OBLIGATIONS OBLIGATIONS TO GIVE The effects of a conditional obligation to give, once the condition has been fulfilled, shall retroact to the day of the constitution of the obligation. If reciprocal obligation The fruits and interests during the pendency of the condition shall be deemed to have been mutually compensated If unilateral obligation The debtor shall appropriate the fruits and obligations received, unless from the nature and circumstances of the obligation, it should be inferred that the intention of the person constituting the same was different. OBLIGATIONS TO DO AND NOT TO DO The courts shall determine in each case, the retroactive effect or the condition that has been complied with. EFFECT OF SUSPENSIVE CONDITIONS BEFORE FULFILLMENT Effect on creditor The demandability as well as the acquisition or effectivity of rights arising from the obligation is suspended pending the happening of the condition. Thus, the creditor has only a mere hope or expectancy. Right of creditor to preserve such right This hope or expectancy is protected by law. Thus, if the obligor promises to sell a parcel of land to the obligee upon the happening of a condition, and subsequently, before the fulfillment of the condition, he changes his mind and decides to sell the land to another person, the obligee can bring an appropriate action, such as a petition for the issuance of a writ of injunction to prevent the sale in order to preserve his right. Effect on debtor During the pendency of the condition, the debtor’s obligation to comply with the prestation is suspended until the fulfillment of the condition.

CONSTRUCTIVE FULFILLMENT OF SUSPENSIVE CONDITIONS

Right of debtor If he has paid anything by mistake during the pendency of the condition, he can recover what he has been paid.

Doctrine of constructive fulfillment of suspensive conditions The condition shall be deemed fulfilled when the obligor voluntarily prevents its fulfillment. The debtor must have actually voluntarily and willfully prevented the creditor from complying with the condition

EFFECT OF SUSPENSIVE CONDITIONS AFTER FULFILLMENT Once the event which constitutes the condition is fulfilled, the obligation arises or becomes effective.

Example: Where the conditions imposed by the company so its employees would be entitled to retirement benefits can no longer be complied because of the retirement plan was willfully abrogated by a unilateral act of the Board of Directors, the conditions are deemed complied with. Thus, the employees are now entitled to retirement benefits.

Effect on creditor The right of the creditor, which, before the fulfillment of the condition, was a mere hope or expectancy, is perfected. It becomes effective and demandable. Effect on debtor The debtor can be compelled to comply with what is incumbent upon him. UNIVERSITY OF SAN CARLOS COLLEGE OF LAW 11 | P a g e

OBLIGATIONS & CONTRACTS REVIEWER l PRE-MIDTERMS l Tanya de la Cruz Ibanez l JD1 408 RETROACTIVITY OF EFFECT OF SUSPENSIVE CONDITIONS Take Note: The principle of retroactivity can only apply to consensual contracts, and never to real contracts (i.e. pledge, commodatum, deposit) or contracts which can be realized within successive periods or intervals (lease, hire of service life annuity)

2.

constitution of the obligation or only to a specified date before fulfillment Power to determine whether or not there will be any retroactivity of effects

LOSS, DETERIORATION OR IMPROVEMENT IN SUSPENSIVE General rule: Once the event which constitutes the condition is fulfilled thus resulting in the effectivity of the obligation, its effects must logically retroact to the time of the establishment of the obligation. LIMITATIONS ON THE APPLICABILITY OF RETROACTIVE EFFECT

“I will give you my car if you pass the Bar examinations.” What is the effect of the loss, deterioration or improvement of the thing which constitutes the object of the obligation during the pendency of the condition?

Obligations to give

Take Note: The rules in Art 1189 refer only to conditional obligations to give a determinate thing.

Reciprocal obligation The fruits and interests during the pendency of the condition shall be deemed to have been mutually compensated.

LOSS

Example: A obligated to sell a parcel of land to B for P100, 000 if B finishes law school. Two years later, B finished law school. Effects: 1. A is compelled to deliver not only the land but also the fruits which he gathered during the period from the time the contract was perfected until the fulfillment of the obligation. (2 years) 2.

Loss is either: 1.

Without the fault of the debtor Effect: The obligation is extingusihed

2.

Through the fault of the debtor Effect: The obligation is converted into one of indemnity for damages

B is compelled to pay A not only P100, 000, but also the interest during the same period.

However, because of the reciprocal character of the obligation, the law, as a matter of convenience and justice, considers the fruits and the interest as the equivalent of each other. Thus, they compensate each other mutually. Unilateral obligation Debtor shall appropriate the fruits and obligations received, unless from the nature and circumstances of the obligation, it should be inferred that the intention of the person constituting the same was different. This rule is based on justice since the debtor does not receive any equivalent or valuable consideration from the creditor in cases of unilateral obligations. Thus, he shall be entitled to all of the fruits or interests of the thing pending the fulfillment of the obligation. Example: A obligation himself to give to B a parcel of land if B gets married to C. Two years later, B married C. Effect: A is obligated to deliver only the land and not the fruits which he may have gathered during the pendency of the condition. Obligations to do or not to do The courts will have to determine in each case the retroactive effect of the condition that has been complied with. 1.

The thing is lost when: 1. It perishes 2. It goes out of commerce 3. It disappears in such a way that its existence is unknown or cannot be recovered

Power to determine whether the effects of the fulfillment of the condition shall retroact to the very moment of the

DETERIORATION 

Without the fault of the debtor Effect: Impairment is to be borne by the creditor



Through the fault of the debtor Effect: Creditor may choose between rescission of the obligation with damages and bringing an action for specific performance

IMPROVEMENTS 

By its nature or by time Effect: The improvement shall inure to the benefit of the creditor



At the expense of the debtor Effect: Debtor cannot have any other right than granted to a usurfructuary. He cannot ask for reimbursement for the expenses incurred for useful improvements or for improvements for mere pleasure. (Except: Reimbursement for necessary expenses) However, he has the right to: a. Remove such improvements, provided there is no damage to the thing or property. b. Set off the improvements he may have made on the property against any damage to the same.

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OBLIGATIONS & CONTRACTS REVIEWER l PRE-MIDTERMS l Tanya de la Cruz Ibanez l JD1 408 Take Note: Question: Do the rules also apply to resolutory conditions? Answer: YES, provided that the debtor is the person obliged to return the object of the obligation in case of fulfillment of the condition, while the creditor is the person to whom the thing or object must be returned. EFFECTS OF RESOLUTORY CONDITIONS ANENT ITS FULFILLMENT EFFECT OF RESOLUTORY CONDITIONS BEFORE FULFILLMENT Effect on creditor The right which the creditor has acquired by virtue of the obligation is always subject to the threat of extinction during the pendency of the condition. Effect on debtor Debtor is placed in a position which is very similar to that of the creditor in suspensive conditions. He also has hope or expectancy during the pendency of the condition because when the resolutory condition is fulfilled, he will reacquire whatever he may have delivered to the creditor.

debtor is the person obliged to return, while the creditor is the person to whom the thing must be returned. RESCISSION OF OBLIGATIONS The power to rescind obligations is implied in reciprocal ones, in case one of the obligor should not comply with what is incumbent upon him. CONCEPT OF RECIPROCAL OBLIGATIONS Reciprocal obligations are those which are created or established at the same time, out of the same cause and which result in mutual relationships of creditor and debtor between the parties. Example: In a contract of sale, the obligation of the vendee to pay the price is a correlative of the obligation of the vendor to deliver the thing sold. Take Note: Although reciprocal obligations are bilateral in character, they must not be confused with those obligations in which the parties are mutually, but not reciprocally obligated. (ex. As when a person is the debtor of another by virtue of a contract of loan)

EFFECT OF RESOLUTORY CONDITIONS AFTER FULFILLMENT If the resolutory condition is not fulfilled Such rights are consolidated and become absolute in character. If resolutory condition is fulfilled Such rights are extinguished altogether and whatever may have been delivered upon the constitution of the obligation shall be returned upon the fulfillment of the condition. Thus, there is return to the status quo. RETROACTIVITY OF EFFECT OF RESOLUTORY CONDITIONS There are no exceptions or limitations to the principle of retroactivity. Reason: In obligations with a resolutory condition, the fulfillment of the condition and its retroactivity have the effect of signifying the nonexistence of the obligation and what is nonexistent must not give rise t any effect whatsoever. Obligations to give Upon the fulfillment of the resolutory condition, the parties shall return to each other what they have received. This rule is applicable whether the obligation is reciprocal or unilateral. Obligations to do or not to do The retroactivity of effects of the resolutory condition shall depend upon the discretion of the courts as in the case of suspensive conditions. LOSS, DETERIORATION OR IMPROVEMENT IN RESOLUTORY “I will give my car now, but should you not pass the Bar examinations, this shall be returned to me” Effects: The rules with regards to loss, deterioration and improvement in suspensive conditions equally apply. Only that, the

TACIT RESOLUTORY CONDITION If one of the parties fails to comply with what is incumbent upon him, there is a right on the part of the other to rescind. Since it has the effect of extinguishing rights which are already acquired or vested, it is resolutory in character. NECESSITY OF JUDICIAL ACTION The right to rescind the obligation is a right which belongs to the injured party alone. However, it is essential that it must be invoked judicially. The court shall decree the rescission, unless there be a just cause authorizing the fixing of a period. General rule Rescission of the obligation shall be invoked judicially. It is the judgment of the court which produces the rescission. Exception Where the contract itself contains a resolutory provision by virtue of which the obligation may be cancelled or extinguished by the injured party in case of breach. Thus, judicial permission to cancel or rescind the contract is no longer necessary. Limitation: The rescission must not be contrary to law, morals, good customs, public order or public policy. Limitations on the application of the article 1. Article 1191 can be applied only to reciprocal contracts which contain no resolutory conditions. The right to rescind is “implied” only if not expressly granted. No right can be said to be implied if expressly granted. 2. Cannot be applied to sales of real property (Recto law) or sales of personal property by installments (Maceda Law) NATURE OF BREACH

UNIVERSITY OF SAN CARLOS COLLEGE OF LAW 13 | P a g e

OBLIGATIONS & CONTRACTS REVIEWER l PRE-MIDTERMS l Tanya de la Cruz Ibanez l JD1 408 What must be the nature of the breach which will entitle the injured party to file an action for the rescission of the obligation? Cases in point: Song Fo v. Hawaiian Philippine Co. and Delta Motor Corp v. Gentino Rescission will not be permitted for a slight or causal breach of the contract, but only for such breaches which are substantial and fundamental as to defeat the object of the parties in making the agreement.

EFFECT OF BREACH OF BOTH PARTIES In case both parties have committed a breach of the obligation, the liability of the first infractor shall be equitably tempered by the courts. If it cannot be determined which of the parties first violated the contract, the same shall be deemed extinguished, and each shall bear his own damages. This article contemplates of two situations:

ALTERNATIVE REMEDIES OF INJURED PARTY In case one of the parties should not comply with what is incumbent upon him, the injured party may choose between: 1. 2.

1.

Fulfillment of obligation with damages Rescission of the obligation with damages

Case in point: Central Bank v. CA The bank failed to release the entire approved loan (P80,000) but the borrower also failed to pay the partial loan release (P17,000) he received after it fell due. Both are in default and their respective liability for damages shall be offset equitably, exclusive of the interest due on the overdue loan portion (P17,000) since the borrower derived benefit for its use.

Take Note: The remedies are alternative, not cumulative. Hence, the injured party cannot seek both. However, even after the injured party has chosen fulfillment and such should become impossible, he can still seek rescission of the obligation. DAMAGES TO BE AWARDED In estimating the damages to be awarded, only those elements of damages can be admitted which are compatible with the idea of the remedy chosen. Example: In case of a rescission of contract of sale for failure of the buyer to pay the stipulated price, the seller is only entitled to be restored to the possession of the thing sold. He cannot have both the thing sold and the price agreed upon. JUDICIAL DISCRETION TO DECREE RESCISSION The right of the injured party in reciprocal obligations to rescind is not absolute in character. The court is given the discretionary power to fix a period within which the debtor in default may be permitted to comply with what is incumbent upon him. However, this cannot be applied to reciprocal obligations arising from a contract of lease. (Art 1659 – no discretionary power is granted to the courts) EFFECT OF RESCISSION When an obligation is rescinded, it is the duty of the court to require the parties to surrender whatever they may have received from the other. Hence, the parties are placed in their original situation. However, this is without prejudice to the liability for damages of the party who was unable to comply with what was incumbent upon him. EFFECT UPON THIRD PERSONS The decree of rescission shall be without prejudice to the rights of third persons who have acquired the thing, in accordance with: 1. Article 1385 – Rescission cannot take place when the things which are the object of the contract are legally in the possession of third persons who did not act in bad faith. 2. Article 1388 3. Mortgage Law

First infractor known – One party violated his obligation, subsequently, the other also violated his part of the obligation. In this case, the liability of the first infractor should be equitably reduced.

Take Note: This is fair to both parties because the second infractor also derived, or thought he would derive some advantage by his own act or neglect.

2.

First infractor cannot be determined – One party violated his obligation followed by the other, but it cannot be determined which of them was the first infractor. In which case, the contract shall be deemed extinguished and each shall bear his own damages. Take Note: This rule is likewise just because it is presumed that both at about the same tried to reap some benefit.

SECTION 2. OBLIGATIONS WITH A PERIOD Articles 1193 – 1198 OBLIGATIONS WITH A PERIOD OBLIGATION WITH A PERIOD One whose demandability or extinguishment is subject to the expiration of a term or period. CONCEPT OF TERM OR PERIOD An interval of time, which, exerting an influence on an obligation as a consequence of juridical act, either suspends its demandability or produces its extinguishment. Period – A future and certain event upon the arrival of which, the obligation subject to it either arises or is terminated. It is a day certain which must necessarily come (ex. Year 2019, next Christmas), although it may not be known when (ex. Death of a person) Condition – A future and uncertain event upon which an obligation is made to depend.

UNIVERSITY OF SAN CARLOS COLLEGE OF LAW 14 | P a g e

OBLIGATIONS & CONTRACTS REVIEWER l PRE-MIDTERMS l Tanya de la Cruz Ibanez l JD1 408

PERIOD AND CONDITION DISTINGUISHED

As to requisites

As to time

As to fulfillment

According to source

Term or Period

Condition

Refers to an interval of time which is future and certain

Refers to a fact or event which is future and uncertain

Refers only to the future

An interval of time which must necessarily come, although it may not be known when

May also refer to a past event unknown to the parties A future and uncertain fact or event which may or may not happen

As to influence on obligation

Merely exerts an influence upon the time of the demandability or extinguishment of an obligation

Exerts an influence upon the very existence of the obligation itself

As to retroactivity of effects

Arrival of the period does not have any retroactive effect unless there is an agreement

Happening of the condition has retroactive effects

1.

Legal period – When it is granted by law (ex. Arts. 1606, 1623, 1682, 1687)

2.

Conventional period – When it is stipulated by the parties (ex. Art. 1196)

3.

Judicial period – When it is fixed by the courts. (ex. Art. 1197)

According to definiteness 1.

Definite period – When the date or time is known beforehand and is known when it will come

2.

Indefinite period – When it can only be determined by an event which must necessarily come to pass, although it may not be known when.

Take Note: Question: If the happening of a future event is fixed by the parties for the fulfillment or extinguishment of an obligation what is the nature of the obligation – is it with a term or is it conditional? Answer: If the event will necessarily happen, although it may not be known when, the obligation is with a term. If the uncertainty consists in whether the event will happen or come to pass, such event constitutes a condition. EFFECTS OF TERM OR PERIOD

As to effect, when left to debtor’s will

The court is empowered to fix the duration thereof

Invalidates the obligation

Take Note: Like a condition, a period or term must be possible. Otherwise, the obligation is void. (ex. February 30) CLASSIFICATIONS OF TERM OR PERIOD According to effect 1.

Suspensive period (ex die) – when the obligation becomes demandable only upon the arrival of a day certain. Examples: a. I will pay you on January 1 next year b. I will support you from the time your father dies. c. I will pay you when my means permit me to do so

2.

Resolutory period (in diem) – when the obligation is demandable at once; although it is terminated upon the arrival of a day certain. Examples: a. I will give you P1,000/month until the end of the year b. I will support you until you die

If term or period is suspensive The fulfillment or performance of the obligation is demandable only upon the arrival of the day certain or the expiration of the term. What is therefore suspended by the term is not the acquisition of the right or the effectivity of the obligation, but merely its demandability. In other words, the obligation itself becomes effective upon its constitution, but once term or period expires, it becomes demandable. If the term or period is resolutory The fulfillment or performance of the obligation is demandable at once, but once it is extinguished or terminated upon the arrival of the day certain or the expiration of the term. EFFECT OF FORTUITOUS EVENT In obligations with a term or period, any stipulation in the contract to the effect that in case of a fortuitous event the contract shall be deemed suspended during the term or period, does not mean that the happening of the fortuitous event shall stop the running of the term or period agreed upon. Effect: Only to relieve the contracting parties from the fulfillment of their respective obligations during the term or period.

Day certain – that which must necessarily come, although it may not be known when. UNIVERSITY OF SAN CARLOS COLLEGE OF LAW 15 | P a g e

OBLIGATIONS & CONTRACTS REVIEWER l PRE-MIDTERMS l Tanya de la Cruz Ibanez l JD1 408 LOSS, DETERIORATION OR IMPROVEMENT BEFORE PERIOD PERIOD As to the effects of loss, deterioration or improvement before the arrival of the day certain, the rules of Art. 1189 shall be observed LOSS  

Without the fault of the debtor Effect: The obligation is extinguished Through the fault of the debtor Effect: The obligation is converted into one of indemnity for damages

DETERIORATION  Without the fault of the debtor Effect: Impairment is to be borne by the creditor 

Through the fault of the debtor Effect: Creditor may choose between rescission of the obligation with damages and bringing an action for specific performance

IMPROVEMENTS  By its nature or by time Effect: The improvement shall inure to the benefit of the creditor 

At the expense of the debtor Effect: Debtor cannot have any other right than granted to a usurfructuary. He cannot ask for reimbursement for the expenses incurred for useful improvements or for improvements for mere pleasure. (Except: Reimbursement for necessary expenses) However, he has the right to: c. Remove such improvements, provided there is no damage to the thing or property. d. Set off the improvements he may have made on the property against any damage to the same. EFFECT OF ADVANCED PAYMENT OR DELIVERY

If the obligor, being unaware of the period or believing that the obligation has become due and demandable, paid or delivered something before the arrival or expiration of the period

BENEFIT OF TERM OR PERIOD GENERAL RULE When a person is designated for the performance or fulfillment of an obligation, it is presumed to have been established for the benefit of both the creditor and the debtor. Hence, the creditor cannot demand performance nor can the debtor perform the obligation before the expiration of the designated period. Example: On January 1, D borrowed from E P100, 000 payable on December 31 at 15% interest. (D cannot pay before December 31 without the consent of E and neither can E compel D to pay before the expiration of the term. Mutual benefit: Both are benefited here because D can use the money for one year, and E can benefit from the interest the money would earn for one year. EXCEPTION If it can be established either from the tenor of the obligation or from other circumstances that the period or term has been established in favour of the creditor or the debtor, the general rule on presumption shall not apply. Term is for the benefit of the debtor alone He cannot be compelled to pay prematurely, but he can, if he desires, to do so. Examples: 1. B borrowed from C P100, 000 to be paid within 1 year without interest. 2. B promised to pay his debt on or before December 31, 2000. 3.

B promised to pay his debt within five years.

Term is for the benefit of the creditor He may demand fulfillment even before the arrival of the term but the debtor cannot compel him to accept payment before the expiration of the stipulated period.

Remedy: He may recover what he has paid or delivered with fruits and interests.

Example: 1. B borrowed from C P100, 000 payable on December 31, with a stipulation that B cannot make payment before the lapse of the period but C may demand fulfillment even before said date.

Conditions 1. Only applies to obligations to give 2. Payment or delivery must have been made by the debtor because he was unaware of the period or believed that the obligation had become due and demandable.

ACCELERATION BY DEBTOR OF TIME OF PAYMENT Three reasons why a creditor may not be bound to receive payment before maturity:

Otherwise, if made voluntarily, there can be no right of recovery.

1. 2. 3.

Payment of interest Creditor may want to keep his money invested safely instead of having it in his hands Creditor, by fixing a period, protects himself against sudden decline of purchasing power of the currency loaned. UNIVERSITY OF SAN CARLOS COLLEGE OF LAW 16 | P a g e

OBLIGATIONS & CONTRACTS REVIEWER l PRE-MIDTERMS l Tanya de la Cruz Ibanez l JD1 408 Unless the creditor consents, debtor has no right to accelerate the time of payment even if the premature tender included an offer to pay principal and interest in full. EFFECT OF ACCEPTANCE BY CREDITOR OF PARTIAL PAYMENT Amounts to a waiver of the period agreed upon during which payment should be made. If no explanation is given as to why the creditor received such partial payment before maturity of the obligation, it may be presumed that his relinquishment was intentional and his choice to dispense with the term, voluntary. ` JUDICIAL TERM OR PERIOD JUDICIAL TERM OR PERIOD A term or period is judicial when the duration thereof is fixed by a competent court in accordance with cause expressly recognized by law. Once fixed, the period can no longer be judicially changed. Restrictions: 1. Cannot be applied to contracts for services 2. Cannot be applied to pure obligations Two instances where the courts can fix the duration of the period: 1.

EFFECT OF JUDICIAL PERIOD Once fixed by the courts, the period can no longer be judicially changed. This is because the moment the parties have their consent to the period fixed by the court, said period acquires the nature of a covenant – it becomes a law governing their contract. EXTINGUISHMENT OF DEBTOR’S RIGHT TO PERIOD WHEN OBLIGATION CAN BE DEMANDED BEFORE LAPSE OF PERIOD General Rule Obligation is not demandable before the lapse of the period. Exceptions The debtor shall lose every right to make use of the period, that is, the period is disregarded and the obligation becomes pure and demandable. 1.

If the obligation does not fix a period, but from its nature, and the circumstances, it can be inferred that a period was intended. Examples: a. Donation of a parcel of land to the City of Manila subject to the condition that it shall be converted into a public square, but silent with regard to the period for fulfillment of the condition. b. Failure to fix a definite period within which the debtor was to complete the construction of a house.

2.

Prescriptive period of the action The action may also prescribe like an ordinary civil action – 10 years.

Take Note: Insolvency here need not be judicially declared. It is sufficient that the assets of the debtor are less than his liabilities or is unable to pay his debts as they mature. 2.

When the debtor does not furnish guaranties or securities promised Example: D promised to mortgage his house to secure the debt. If he fails to furnish said security as promised, he shall lose his right to the period.

3.

When the guaranties or securities given have been impaired through debtor’s fault or disappeared through a fortuitous event Except: If he immediately gives a new guaranty or security which is equally satisfactory

When the period depends upon the will of the debtor. Examples: a. I will pay my indebtedness when my means permit me to do so. b. I will pay as soon as possible. c. I will pay as soon as I have the money.

Take Note: There is a difference between the effect of impairment and disappearance. a. If the security is impaired through the fault of the debtor – he shall lose his right to period b. If impaired without his fault – he shall retain his right c. If disappears through any cause even without fault of debtor – he shall lose his right to period

Take Note: Once fixed by the courts, the period cannot anymore be changed. NATURE OF ACTION The only action that can be maintained under Art. 1197 is an action to ask the court to fix the duration of the term or period. It is only after the duration has been fixed by a proper court that any other action involving the fulfillment of the obligation can be maintained. Take Note: As long as such period has not yet been fixed by the court, there can be no possibility of any breach of contract or failure to perform the obligation. Express request in complaint not necessary It is not necessary that the creditor should expressly ask the court, in his complaint, to fix the duration of the period. Where the essential allegations of the pleadings describe an obligation with an indefinite period, the court can fix the duration of the period.

When debtor becomes insolvent after the obligation has been contracted Except: If there is a guaranty or security for the debt

4.

When the debtor violates an undertaking Example: The promise to repair the piano free of charge.

5.

When debtor attempts to abscond Example: Debtor changed his address before the due date of the obligation, without informing the creditor, with the intention to escape from his obligation. TN, mere attempt or intent to abscond is sufficient.

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