ATENEO DE DAVAO UNIVERSITY

School of Business and Governance

BUSINESS LAW REVIEW
REVIEW ON LAW ON OBLIGATIONS
(Articles 1156-1304 of the Civil Code)
I. Obligations General Provisions
1. Meaning of Law on Obligations and Contracts?
The law on obligations and contracts is the body of rules which deals with the
nature and resources of obligations and rights and duties arising from agreements
and contracts.
2. Source of the Law on Obligations and Contracts is the Civil Code of the
Philippines (Republic Act No. 388)
which took effect August 30, 1950. The Civil Code is derived from the Civil Code
of Spain of 1889.
3. Meaning of obligation:
Code basis Article 1158 obligation is juridical necessity to give to do
or not to do.
4. Criticism as to the definition of the Civil Code by Justice J.B.L. Reyes.
It views obligation from the debit side. There is no debt with credit and the credit
is an asset in the patrimony of the creditor just as the debt is the liability of the
obligor.
Better definition: the one given by Arias Ramos, one of the commentators of the
Civil Code:
An obligation is a juridical relation whereby a person (called
creditor) may demand from another (called debtor) the observance of a
determinative conduct (the giving, doing or not doing) and in case of
breach, may demand satisfaction from assets of the latter.
5. Kinds of obligations based on its definition:
Real obligation obligation to give
Personal obligation obligation to do or not to do
Two kinds of personal obligation
a) Positive personal obligation to do
b) Negative personal obligation not to do
6.

Essential Requisites of obligation

1. Active Subject the obligee or creditor one who has the right and power to
demand
the performance of the obligation.
2. Passive Subject the obligor or debtor one who is obliged to perform the
obligation.
3. Object or Prestation subject matter of the obligation that consists of the
prestation to give, to or not to do. The objects of contract are things, right or
services.
4. Juridical or Legal Tie It is also known as efficient cause, which binds the
parties to the obligation. Another name is VINCULUM JURIS.
7. Meaning of Juridical Necessity:

Obligation is a juridical necessity because in case of non-compliance, the courts

of justice may be called upon to enforce its fulfillment or in default thereof, the
economic value that it represents. In a proper case, the debtor may be made liable
for damages for the injury or harm suffered by the creditor for the violation of the
latters right.
8. Other Significant terms:
a) Obligation the act or performance that the law will enforce.
b) Right The power which a person has under the law to demand from
another any prestation.
c) Wrong (cause of action) an act or omission of one party in violation of the
legal right
(a right recognized by law) of another. It is also known as
INJURY
Operative Illustrations of an obligation:
I.

By virtue of a contract, D obliged himself to ship the goods of C from Manila to

Cebu for P10, 000. D is the passive subject while C is the active subject. The
shipping of goods to Cebu is the prestation; the contract between D and C is
the efficient cause or vinculum juris.

II.

(Obligation to give)
Isaac Rimando and Moises Reyes signed a contract whereby Isaac Rimando
obliged himself to
deliver to Moises Reyes a Toyota Corolla 2008 model on
November 12, 2008.

III. (Obligation to do)

Robert Gonzales and Angel Filamor entered into a contract whereby, Robert
Gonzales obliged himself to paint the car of Angel Filamor.
IV. (Obligation not to do)
Nicanor Castro insured himself with the Manila surety and Insurance Co. The
parties agreed that Nicanor would not commit suicide during the existence of
the insurance.
9. Kinds of Obligations:
1. Viewpoint of sanctions:
a. Civil obligations give a right of action to compel their performance.
b. Natural obligations not based on positive law but on equity and natural
law. It does
not grant a right of action to
enforce their performance but after voluntary fulfillment by the obligor they
authorize the retention of what has been delivered or rendered by reason
thereof.
c. Moral obligations those that cannot be enforced by action but which is
binding on The party who makes it in conscience and natural law. Under
our law, moral obligations are not merged with natural obligations.
2. Viewpoint of performance
a. Positive to give or to do
b. Negative not to do
3. Viewpoint of subject matter
a. Real obligation to give
b. Personal obligation to do or not to do

10 . Sources of obligations: ( Article 1157 of the Civil Code)

A - 1. Law
2. Contracts
3. Quasi-contracts
4. Act or omission punishable by law
5. Quasi-delicts
B. Law as source of obligations
Obligations derived from law are presumed.
Only those expressly
determined in this code or by special laws are demandable and shall be
regulated by the precepts of the law which established them; and as to that
has not been foreseen, by the provisions of this book. (Art.1158)
a) Obligation ex-lege (arising from law) not presumed.
b) Obligations arising from law are not presumed. To be demandable and
enforceable, the obligation must be stayed by the law, which created the
obligation. Such being the case the agreement of the parties under this
obligation is no longer necessary because it is the law, which governs their
obligation.
c) Law governing obligations derived from law. Obligations derived from law shall
be governed by the law, which establishes 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 obligation of the legitimate ascendants and descendants to support each
other.(Art 195, Civil Code)
ILLUSTRATIVE CASE.
SG, while employed as a guard of a movie house by O, shot and killed a
gatecrasher, X who attacked SG with a knife after having been refused
entrance without first providing himself with a ticket. SG was criminally
charged with homicide but the trial court dismissed the case. For the expense
incurred in his defense, SG demanded reimbursement from the owner. When
the owner refused, he filed his action for the recovery of the amount paid to his
lawyer plus moral damages.
Held: The owner O is not liable because the giving legal assistance to the
employee is not a legal obligation.
While is may be true it may be considered as a moral obligation. It does not
at present, count with the legal sanction of any man-made law. If the owner
with is not legally obliged to give legal assistance to the employee, then the
latter cannot recover the amount paid cannot be presumed, it must be stated
before it become obligatory.
C. Contract as a source of obligation:
Obligations arising from contracts have full force of law between the
contracting parties and should be complied with in good faith. (Art.1159)
a) 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)
b) Effect if part of the contact is void.
If part of the contract is void but the contract is susceptible of division, the
part, which is not affected, may be enforced disregarding the part, which is
void. Such that if the contract is falsified by the unauthorized insertion of
additional stipulation, this falsified insertion shall be considered inexistent and
part unaffected shall be enforced.
D. Quasi-Contracts as source of contract.
It is judicial relation, which arises from certain lawful, voluntary, and unilateral
acts, to the end that no one may be unjustly enriched or benefited at the
expense of another. (Art. 2142 of the Civil Code)
Two principal kinds of Quasi-contracts.
1. Negotiorum Gestio (unauthorized management) voluntary administration of
the property, business or affairs of a third person without the consent or
authority of its owner.
2. Solutio Indebiti (undue payment) payment by mistake of an obligation that
was not due when paid.
Distinction between contract and quasi-contract:
The distinction of a quasi-contract from contract is that in contract, there is
consent of the parties while in quasi-contract, the obligation arises without a
contract.
What law governs Quasi-Contracts?
Chapter 1, Title XVII of the Civil Code ( Arts. 2142-2175) as provided under
Article 1160, CC.
Some examples of Quasi-Contract.
1) Art 2144, whoever voluntarily takes charge of the agency or management of
the business or property of another, without any power from the latter is obliged
to continue the same until the termination of the affair and its incidents or to
require the person concerned to substitute him. If the owner is in a position to do
so.
Examples of Quasi-Contracts:
1. A merchant-farmer and owner of a ten-hectare agricultural land left for USA on
a pleasure trip. While enroute to USA typhoon dading devastated the entire
Philippines including the land owned by D. Before the typhoon reached our area
of responsibility C, a neighbor of D employed six (6) farmers to harvest the palay
planted on the obligation of D upon arrival is to reimburse C P600 because he
must not be enriched at the expense of another.
2) Art.2154. If something is received when there is no right to demand it and it
was unduly delivered through mistake he obligation to return it arises.
3) Art. 2164. When, without the knowledge of the person obliged to give
support, it is given by a stranger, the latter shall have a right to claim the same
from the former, unless it appears that he gave it out of piety and without
intention of being repaid.
4) Art. 2167. When, through an accident or other cause, a person is injured or
become seriously ill, and he is treated or helped while he is not in a condition to
give consent to a contract he shall be liable to pay for the services of the

physician or other person aiding him, unless the service has been rendered out of
pure generosity.
5) Art. 2168. When, during a fire, flood, storm, or other calamity, property is
saved from destruction by another person without knowledge of the owner, the
latter is bound to pay the former just compensation.
6) Art. 2174. When, in a small community a majority of the inhabitants of age
decided upon a measure for protection against lawlessness, fire, flood, storm or
other calamity, anyone who objects to the plan and refuses to contribute to the
expenses shall be liable to pay his share of said expenses.
Difference between Quasi-contract and Natural Obligation:
Quasi-contracts are certain lawful, voluntary and unilateral acts which give
rise to the juridical relations of the party to the end that no person shall be
unjustly enriched or benefited at the expense of another while natural obligations
are those not based on positive law but on equity and natural law. They are not
demandable in the courts of justice however when they are voluntarily performed
or fulfilled, they can already be retained and the debtor cannot recover what has
been paid or performed.
Example: If the debtor pays by mistake or not knowing that the condition or
period has not yet arrived, he can recover based on undue payment (quasicontract). A debtor paid his creditor knowing that his obligation to pay has
already expired cannot anymore recover what he paid by reason of natural
obligation.
E. Delict as a source of obligation
This is an act or omission punishable by law. The principle is that if a person
committed an act or omitted to do an act and the act or omission is punishable
by law he is civilly-liable. (Art. 1161)
a) 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.
b) Rules governing Delicts:
1) Philippine revised Penal code and other penal laws subject to the provisions of
Article 2177 of the Civil Code.
2) Chapter II, Preliminary Title, on Human Relations of the Civil Code.
3) Civil Code on damages, Title 18 of Book IV
c) Civil Liability Arising from Delicts or Acts or Omissions Punishable by
Law:
a. Restitution The thing itself shall be restored.
b. Reparation of the damage caused- The court determines the amount of
damage taking into consideration the value of the thing, improvements
and fruits and reparation shall be made accordingly.
c. Indemnification for Consequential Damages- It shall include not only
those suffered by the injured party but also those suffered by his family
and third person by reason of the crime.
d) Commission of a crime as a source of an obligation.
Every person who is criminally liable is also civilly liable under Art. 100 of the
Revised Penal Code. If a person therefore is guilty of the crime charged he
must not only be imprisoned but he shall also answer for damages as a civil
obligation. Such civil obligation is a necessary consequence of a criminal
responsibility and it to be declared and enforced in the same criminal

proceeding except when the injured party reserved his right to file the civil
action independently from the criminal action. (Sec. I, Rule III, Revised Rules of
Court)
e) Enforcement of Civil liability arising from crimes or delicts:
Ordinarily, when the offended party files the criminal action, he is deemed to
have filed simultaneously the civil action for the civil liability of the offender
unless he reserves his right to institute a separate civil action of the civil
liability of the offender. Meaning the civil liability shall be heard separately
from the criminal action.
F.

Quasi-delict or culpa aquiliana or tort as a source of obligation

One which causes damage to another, there being fault or negligence, but there
is no pre-existing contractual relation between the parties. (Art. 1162)
A) Meaning of Culpa Negligence (Culpa Aqulliana, torts) omission of that
diligence required by the circumstances of person, place and time. Negligence
is a question of FACT.
The failure of a person to exercise or observe for the protection of the
interests of another person the degree of care, precaution & vigilance which
circumstances justify demand whereby such person suffers injury.
B.) Requisites of Quasi-Delicts
a)
b)
c)
d)
and
e)

There must be act or omission;

There must be fault or negligence;
There must be damage caused
There must be direct relation of cause and effect: between act or omission
the damage.
There is no pre-existing contractual relation between the parties.

C.) Meaning of Proximate Cause: Adequate and efficient cause which in the
natural order of events necessarily produces the damage or injury complained
of
D.) What are the different kinds of Culpa (Negligence)?
a) Culpa contractual (Contractual negligence)- negligence in the
performance of the contract.
Example: A passenger in a taxi who was not able to bring the passenger
to his destination due to the malicious act of the driver which caused the
delay or damage to the vehicle. This is culpa contractual because of the
existence of contract of carriage between the owner of the taxi and the
passenger.
b) Culpa Aquiliana (Civil Negligence) wrong or negligence committed
independent of a contract and without criminal intent.
Example: A pedestrian was hit by an over speeding taxi and suffered
physical injuries. This is an example of culpa aquiliana because of the
absence of any contractual relation between the pedestrian and owner of
the taxi.
c) Culpa Criminal (Criminal negligence) Those resulting to the commission
of the crime punishable under Article 365 of the Revised Penal Code)
II. NATURE AND EFFECT OBLIGATIONS (ARTS. 1163-1178)
1. Duty to preserve the thing.

Classification of the thing ( subject matter) in a real obligation.

a) Specific or determinate thing when the thing is particularly
designated or segregated from all others of the same class.
b) Generic or indeterminate thing when it is not particularly
designated or segregated. Hence, it still belongs to the class or
genus.
A) Duty to exercise diligence in obligation to deliver specific or
determinate thing.
Article 1163 provides, every person obliged to give something is
obliged to take care of it with the proper diligence of a good father of a
family, unless the law or the stipulation of the parties requires another
standard of care.
2nd paragraph of Article 1173 also provides, if the law or contract
does not state the diligence which is to be observed in the performance,
that which is expected of a good father of family shall be required.
In other words Diligence required is:
a. The one stipulated by the parties or required by law and in the absence
thereof,
b. Diligence of a good father of the family.
Meaning of Diligence of a Good father of the Family
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 called as Ordinary Diligence or
Diligence of a Good Father of the family 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)
Other names for Diligence of a Good Father of the Family a) Ordinary Diligence
b) Diligence of a Prudent Man
c) Diligence that depends on the nature of the obligation and corresponds
with the circumstances of person, of time and of the place.
When EXTRAORDINARY DILIGENCE IS REQUIRED? If it is stipulated or required
by law
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.
B) Duty of a person obliged to give generic thing:
a) To deliver a thing which is of the quality intended by the parties taking
into consideration the
purpose of the obligation and other circumstances (Art. 1246) Rule on
Medium Quality
Liability:

To be liable for damages in case of fraud, negligence or delay, in the

performance of his obligation or contravention of the tenor thereof (Art.
1170)
2. Duty to deliver the thing and the fruits of the said thing to be delivered.
(Article 1164)
a. When creditor is entitled to the fruits?
The rule is the creditor has a right to the fruits from the time the
obligation to deliver arises. Meaning the creditor is entitled to the fruits of
the thing to be delivered from the time the obligation to make delivery
arises. The intention of the law is to protect the interest of the creditor
should the debtor commits delay purposely or otherwise, in the fulfillment
of the obligation.
In Article 1537 specifically in a contract of law, the right to the fruits
begins from the day on which the contract was perfected. It clearly
defined the meaning of obligation to deliver arises as far as the contract of
sale is involved.
The vendor is bound to deliver the thing sold and its
accessions and accessories in the condition in which they were
upon the perfection of the contract.
All the fruits shall pertain to the vendee from the day on which
the contract was perfected.
b. When does the obligation to deliver arises?
- if there is no term or condition, from the perfection of the contract.
- If there is a term or condition, from the moment the term arrives or
the condition happens.
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
latters better use, perfection, or enjoyment.
b) Accessions additions to or improvements upon a thing.
As a rule, accessories and accessions are included in the delivery of the thing
even if they are not mentioned.
Effect of stipulation: If there is a stipulation and accessories are not included,
such stipulations are valid and binding upon the parties.
4. Deliver of the thing itself (Article 1165):
Kinds of Delivery:
Delivery may be either actual or constructive.

I. Actual delivery (tradition) where physically the property changes hands.

Example: If A sells to B a fountain pen, the giving of the fountain pen by A to
B is
actual tradition.
II. Constructive Delivery That where the physical transfer is implied. This may
be done by:
a. Traditio symbolica (symbolic tradition) as when the keys of a bodega
are given.
b. Traditio longa manu (delivery by mere consent or the pointing of the
object.
c. Traditio brevi manu (delivery by short hand; that kind of delivery
whereby a possessor of a thing not as an owner becomes the
possessor as an owner. Example: when a tenant already in possession
of the house buys the house from the owner.
d. Traditio Constitutom Possessorium the opposite of brevi manu; thus
the delivery whereby a possessor of a thing as an owner retains
possession no longer as an owner, but in some other capacity (like a
house owner who sells a house but remains in possession as tenant of
the same house)
e. Tradition by the execution of legal forms and solemnities.
5. Answer for damages in case of non-fulfillment of the obligation:
Under the Civil Code, what are the different acts or omissions of the obligor or
debtor that will result in the breach of the obligation for he can be held liable for
damages?
a. Default (Mora) delay on the part of the debtor ( See
discussions of mora below)
b. Fraud (Dolo) in the performance of the obligation.
Kind of Dolo:
a) Incidental Fraud (dolo incidente) referred to under
Article 1170.
b) Causal Fraud ( dolo causante) fraud employed in the
execution of the contract under Article 1338 which
vitiate consent.
Note: The law refers to incidental fraud only as reiterated
in Article 1344, 2nd paragraph, incidental fraud obliges the
person employing it to pay damages.

Illustration
D is obliged to deliver 5 bags of powder soap to C 7 days from their agreement. On
due date, D delivered 5 bags of powder soap mixed with chalk. What is the status of
the agreement between D and C?
* The agreement is valid. The fraud was committed during the performance
of the obligation and not during the agreement of the parties. This is a case of
incidental fraud (dolo incidente) not causal fraud (dolo causante).
c. Negligence (Culpa)
d. Contravention of the tenor of the obligation (Art. 1170)
Concept of Damage and Damages:

Damages Monetary equivalent of the legal wrong or injury sustained.

Damage, wrong of Injury the result of the violation of a right recognized by law.
KINDS OF DAMAGES
M Moral damages referring to mental and physical anguish;
E - Exemplary corrective or to set example
N - Nominal -to vindicate a right -when no other kind of damages may
be recovered.
T Temperate when the exact amount of damage cannot be
determined
A Actual losses as well as unrealized profit
L Liquidated (predetermined beforehand by agreement)
Measure of liability for damages.
Article 2201 of the Civil Code states:
In contracts and quasi-contracts, the damages fir which the obligor who acted
in good faith is liable shall be those that are the natural and probable consequences
of the breach of obligation and which the parties have foreseen or could have
reasonably foreseen at the time obligation was constituted.
In case of fraud, bad faith, malice or wanton attitude, the obligor shall be
responsible for all damages which may be reasonably attributed to the nonperformance of the obligation.
REMEDIES OF THE CREDITOR AGAINST DEBTOR:
In obligations to give what are the different rights, which are available to the
creditor?
If the obligation is an obligation that is determinate, the creditor may:
1. Compel specific performance (Art. 1165)
2. To recover damages in case of breach of the obligation (Art
1170)
If the obligation is indeterminate or generic, the creditor may:
a. Ask for the performance of the obligation (Art. 1246)
b. To ask that the obligation be complied with at the expense of the debtor
(Art. 1165, par. 2 CC)
c. To recover damages in case of breach of obligations. (Art. 1170)
If obligation is to do and debtor fails to perform it, the creditor may
a. Ask another person to perform the obligation at the expense of the debtor
( Art. 1167) unless act is personal in character and/or
b. He may also demand damages from the debtor. Damages only when
obligation is personal in character.
If debtor performs it but in contravention of the tenor of the obligation or done in
a poor manner, creditor may:
a. Have the same be undone at the debtors expense (Art. 1167) and
b. Demand damages from the debtor (Art. 1170)
If debtor does what has been forbidden, creditor may
a. Demand what has been done be undone.

b. Demand damages from the debtor

What is the requirement before a debtor is liable of delay?
Under Article 1169 of the Civil Code, demand (judicial or extra-judicial) is
required before a debtor is considered in legal delay or mora.
Judicial demand is when a complaint is filed in court.
Extrajudicial demand when oral or written demand was conveyed or sent to
the debtor.
What is the meaning of Mora?
Default or mora signifies the idea of delay in the fulfillment of an obligation.
In other words, it is the non-fulfillment of an obligation with respect to time.
The different kinds of default or mora:
A. Mora solvendi or delay of the obligator or debtor to perform his obligation.
This delay is called mora solvendi ex re when the obligation is an obligation
to give or mora solvendi ex persons when the obligation is an obligation to
do.
B. Mora Accipiendi or delay of the obligee or creditor to accept the delivery
of the thing, which is the object of the obligation.
C. Compensatio Morae, or delay of the parties or obligors or debtor incur in
delay.
In obligations to give or to do, when does the obligor or debtor incur
in delay?
The debtor incurs in delay from the time the creditor judicially or extra
judicially demands from him the fulfillment of the obligation. And in spite of
demand, he is unable to observe the obligation. (Art. 1189 par. 1, CC)
When is demand by the creditor not necessary in order that delay
may exist?
a. When the obligation or the law expressly so declares;
b. When from the nature and the circumstances of the obligation it appears
that the designation of the time when the thing to be delivered or the
service is to be rendered was a controlling motive for the establishment of
the contract.
c. When demand was be useless, as when the obligor has rendered it
beyond his power to perform (Art 1169 par. 2)
In reciprocal obligations when does one of the parties incur in delay?
In reciprocal obligations, neither party incurs in delay if the other does
not comply or is not ready to comply in a proper manner with what is
incumbent upon him. From the time one of the parties fulfills his obligation,
delay by the other begins. (Art 1169, par 3)
Effect of waiver of fraud or negligence in an obligation:
a) If fraud is present in the obligation, the same is immediately
demandable. WAIVER OF FUTURE FRAUD IS VOID. Waiver of past
fraud is allowed. (Art. 1171) Reason: Fraud is absolutely not
encouraged by the law because of its evil effects. Past fraud because
the act was already done. Such waiver is an act of liberality on the
part of the creditor.

b) If negligence is present in the obligation, it is likewise demandable.

Waiver of future negligence may be allowed except where the nature
of the obligation requires exercise of extraordinary diligence as in the
case of common carriers and also where negligence shows bad faith.
(Art. 1172)
What is fortuitous event?
A fortuitous event is an event, which cannot be foreseen, or which
though foreseen, is inevitable (Art 1174 CC). Ordinarily, the terms fortuitous
event and force majeure are used interchangeably.
There is however a technical difference. Force majeure is a term that
is applicable only to those 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) if obligation refers
to give a determinate thing and debtor acted without fault.
Exceptions:
- 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 law expressly provides:
a. When the object of the obligation is lost and the loss occurs after
the debtor has incurred in delay. (Art. 1165)
b. When the debtor promises to deliver the same thing to two or more
persons at the same time who do not have common interest; (Art.
1165)
c. When debtor is guilty of fraud, negligence, delay and contravention
of the tenor of the obligation ( Article 1170)
d. When the obligation to deliver arises from a criminal offense
( Article 1268); and
e. When the obligation is generic (Art. 1263)
Essential Characteristics of a Fortuitous Event:
a) The cause must be independent of the will of the debtor;
b)
Impossibility of foreseeing or impossibility of avoiding
it, even if foreseen;
c) The occurrence must be such as to render it impossible
for the debtor to fulfill
his obligation in a normal manner.
Usury Law governed by special law.
The law governing usurious transactions is Act No. 2655 otherwise
known as the Usury Law as amended by Act Nos. 3291, 3998, 4070,
Commonwealth Act No. 339. However, the Monetary Board of the Central
Bank is empowered to change the rates of interest from time to time
whenever economic and social conditions warrant or may eliminate, exempt
or suspend the same. The ceiling of interest may not be uniform.
Central Bank circular 905-A dated December 10, 1982, suspended
application of the Usury law when it provided that rate of interest and other
charges in loan or forbearance of money, goods or credits, regardless of maturity
and whether secured or unsecured, that may be charged or collected shall not
be subject to any ceiling prescribed under the Usury law.

Note: Usury law has not been repealed but merely suspended. Only Congress
can repeal laws.
Rules on interest payments:
The rule is no interest shall be due unless it has been expressly stipulated
in writing.
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.
Previously 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.
New Rule on Legal Interest:
The Bangko Sentral Issued Circular No. 799
Series of 2013 dated July 1, 2013. It provides:
The Monetary Board in its Resolution No. 796
dated May 16, 2013 approved the following
revisions governing the rate of interest in the
absence of stipulation in loan contracts,
thereby amending Section 2of Circular No. 905,
Series of 1982:
Section 1. The Rate of interest for the loan or
forebearance of any money, goods or credit
and the rate allowed in judgments, in the
absence of an express contract as to such rate
of interest, shall be six percent (6%) per
annum
Section 2. In view of the above, Subsection
X305.1 of the Manual of Regulations for Banks
and Sections 4305Q.1, 4305S.3, and 4303P.1 of
the Manual of Regulations for Non-Bank
Financial Institutions are hereby amended
accordingly.
This Circular shall take effect on July 1,
2013
Applicable Presumptions:
Meaning of Presumption By presumption is meant the inference as to the
existence of certain facts which if not contradicted is considered true.

Two kinds of Presumption

a) Conclusive one which cannot be contradicted
b) Disputable (Rebuttable) one which may be contradicted by presenting
satisfactory proof to
the contrary.
Presumptions:
A. Receipt of the Principal without Reservation would give rise to
a presumption that interest has been paid. (Art. 1176)
B. Receipt of the later installment without reservation as to prior
installment shall likewise raise the presumption that the prior
installments have been paid. (1176)
Remedies which are available to the creditors in order to protect his
rights against the debtor act defrauding the former: (Art. 1177)
a) Exact payment (specific performance) with right of damages
b) Exhaust or pursue debtors properties generally by attachment (except
properties exempted by law)
c) after having pursued the property in possession, exercise all rights and be
subrogated by all the rights and actions of the debtor save those that are
inherent his person (accion subrogatoria)
What are the requisites of Accion Subrogatoria?
1. The debtors assets must be insufficient to satisfy claims against him
2. The creditor must have pursued all properties of the debtor subject to execution
3. The right of action must not be purely personal
4. The debtor whose right of action is exercised must be indebted to the creditor .
d) To ask the court to rescind or impugn all acts which the debtor may have done
to defraud the creditor (accion pauliana)
What are the requisites of Accion Pauliana?
1. Defendant must be indebted to plaintiff
2. The fraudulent act performed by the debtor subsequent to the contract gives
advantage to another
3. The creditor is prejudiced by such act.
4. The creditor must have pursued all properties of the debtor subject to execution
5. The creditor has no other legal remedy.
Principle of Transmissibility of Rights (Article 1178)
General Rule:
Subject to the laws, all rights acquired in virtue of an obligation are
transmissible if there has been no stipulation to the contrary.
Principle of Transmissibility of Rights to be read together with Article 1311
on the Principle of Relativity of Contracts. (Contracts bind only the contracting
parties, their heirs and assigns)
INTANCES WHERE PRINCIPLE OF TRANSMISSIBILITY WILL NOT APPLY (Exceptions):
a) If the law provides otherwise
In contract of partnership, agency & commodatum, there is no
transmissibility of rights.
b) If the contract provides otherwise
c) If the obligation is purely personal
III. DIFFERENT KINDS OF OBLIGATIONS (Arts. 1179-1230)

1. A. Primary Classes of Obligations:

a) Pure
b) Condition
c) With a term or a period
d) Alternative
e) Facultative
f) Joint
g) Solidary
h) Divisible
i) Indivisible
j) With a Penal Clause

PURE OBLIGATION
Pure Obligation is defined as one whose performance does not depend on a
future or
uncertain event, or upon a past event unknown to the parties, hence
demandable at once. (Art.1179) In other words, this is one, which contains
neither period nor a condition; hence the obligation is effective immediately.
Examples:
Ill pay you P20,000 on demand.
Ill pay you P20,000.

CONDITIONAL OBLIGATION
Conditional obligation is one where there is a condition imposed.
Meaning of condition It is an uncertain event, which wields an influence on
a legal
relationship.
Characteristics of condition:
A. It refers to future and uncertain event.
B. It may also refer to past event but unknown to the parties.
A condition is either:
a)) Suspensive the happening of the condition give rise to an
obligation.
Example : Ill buy you a land for P 1M if you pass the CPA Board
Exam in October 2009.
(This is suspensive for the result has to be awaited) See Article
1181
b) Resolutory the happening of the condition extinguishes the
obligation.
Example : Ill give you my land now, but should you fall in the CPA
Board this coming October
2009, your ownership will cease and it shall revert back
to me. (Article 1181)
Therefore, there are three (3) instances when an obligation and demandable
at once thus:
a) When it is a pure obligation and
b) When the obligation has a resolutory condition.
c) When the obligation is subject to a resolutory period.
CLASSIFICATION OF CONDITIONS

As to effect:
1. Suspensive the happening of the condition give rise to the
obligation.
2. Resolutory the happening of the condition extinguishes the
obligation.

As to cause or origin:
1. Potestative depends upon the will of the one of the contracting
parties.
a) If it is suspensive and dependent on the will of the debtor
(Example: Ill sell you my car if I like), both the condition and
obligation are VOID. (Article
1182)
b) Where the condition depends upon will of creditor, obligation is
valid.
Example: I will pay you upon your demand.
c) Where resolutory condition depends upon the will of the debtor, the
obligation is valid.
Example is pacto de retro sale. The position of the debtor
when the condition is
resolutory is exactly the same as of the creditor when the
condition is suspensive.
2. Casual depends on chance or hazard or the will of third person
VALID
Example; Ill give you P 10,000 if I win 1st prize in the
lotto.
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
Example: I will give you P 10,000 if you marry Miss Black or if I
win the lotto.
As to divisibility:
1. Divisible capable of partial performance
2. Indivisible not capable of partial performance because of the nature of
the thing or
because of the intention of parties.
As to mode:
1. Positive an act is to be performed.
The condition that some event happen at a determinate time shall
extinguish the obligation as soon
as the time expires or it has become indubitable that he event will not
take place. (Art. 1184)
2. Negative something will be omitted.
If condition is negative which means the event will not happen at a
determinate time. The obligation shall become effective and binding from
the moment the time indicated has lapsed without the event taking place; or
from the moment it has become evident that the event cannot occur,
although the time indicated has not yet elapsed. (art. 1185)
As to form:
1. Express the condition is stated.
2. Implied - the condition is merely inferred.

As to possibility:
1. Possible capable of fulfillment in nature and in law
2. Impossible not capable of fulfillment due to nature or due to the
operation of the
law or morals or public policy; or due to a contradiction in its
terms.
Note is condition is impossible, legally or physically obligation is also void.
If condition is negative, that is not to do an impossible thing, the condition is
disregarded and the
obligation is rendered pure and valid.
As to numbers:
1. Conjunctive if all the conditions must be performed
2. Alternative if only a few of the conditions have to be performed.
Constructive Fulfillment of a Condition
If the debtor prevents voluntarily the fulfillment of the condition the said act
would result to
CONSTRUCTIVE FULFILLMENT SAID CONDITION UNDER Art. 1186.
Note: It is not even required that debtor is in bad faith. It is sufficient that he
prevented the
happening of the condition.

Effect if suspensive condition takes place:

Rule is retroactive effects of fulfillment of suspensive condition. In an
obligation to give subject to a suspensive condition becomes demandable only
upon the fulfillment of the condition. However, once the condition is fulfilled, its
effects shall retroact to the day when the obligation is constituted. Reason:
condition is mere accidental element of the contract.
If obligation is reciprocal, there is no retroactivity because the fruits and
interests received during the pendency of the condition are deemed to have
been mutually compensated.
In unilateral obligation, there is usually no retroactive effect because they are
gratuitous. The debtor receives nothing from the creditor unless from the nature
and other circumstances it can be inferred that the intention is to apply
retroactivity.
In obligation to do or not to do, the courts shall determine, in each case, the
retroactive effect of the condition that has been complied with. (Article 1187)
Rights of creditor /debtor pending fulfillment of suspensive condition:
Creditor may bring appropriate actions of preservation of his right.
Debtor may recover what has been paid by mistake in case of a suspensive
condition. (Article 1188)

If subject to a period and there is payment by mistake Article 1195 provides

that aside from recovery of what was paid by mistake, debtor can also
recover fruits and interests, if any.
LOSS DETERIORATION AND IMPROVEMENT DURING THE PENDENCY OF
CONDITION.
(The same rule applies for both obligations with suspensive and resolutory
condition and obligation with a period) Article 1189
a. 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.
b. The above rules also apply to suspensive and resolutory period
except that in a period, it will necessarily come.
a) The object may be lost:
1. without the fault of the debtor - extinguishes obligation
2. with the fault of the debtor require debtor payment of
damages.
b) The object deteriorates without the fault of the debtor, the impairment is
borne by the
creditor. If it deteriorates thru the fault of the debtor, creditor may choose
either
rescission of the contract or of the fulfillment, with claim for damages
either of the
selected remedy.
c) If the object improves by nature, the improvement inures to the benefit of
the creditor and
if the debtor at his expense improve it, the debtors right is merely of a
usufructuary.
RECIPROCAL OBLIGATIONS:
The power to rescind obligations implied in reciprocal ones, in case one of the
obligors should
not comply what is incumbent upon him. (Art. 1181, par. 1)
Remedies of the injured party in reciprocal obligations:
f. Action for specific performance of the obligation with damages; or
g. Action for rescission of the obligation also with damages.
The above remedies are alternative. He may however choose rescission if
after he has chosen fulfillment, the latter become impossible.
RESCISSION contemplated by the law is JUDICIAL RESCISSION.
Further, the court in some instance may instead grant the party a term
for performance instead of ordering rescission such as in case when the
breach is slight or when right of third person is affected. Hence court may
deny rescission.
When it is the court rescinds the obligation, this is known as JUDICIAL
RESCISSION, which is initiated upon the filing of complaint in court by the
injured party.
Rescission under Article 1381 vs Rescission under Article 1191
(Resolution)

An action for rescission can proceed from either Article 1191 or Article
1381. It has been held that Article 1191 speaks of rescission in reciprocal
obligations within the context of Article 1124 of the Old Civil Code which uses the
term resolution. Resolution applies only to reciprocal obligations such that a
breach on the part of one party constitutes an implied resolutory condition which
entitles the other party to rescission. Resolution grants the injured party the option
to pursue, as principal actions, either a rescission or specific performance of the
obligation, with payment of damages in either case.
Rescission under Article 1381, on the other hand, was taken from Article
1291 of the Old Civil Code, which is a subsidiary action, not based on a partys
breach of obligation.[4]The four-year prescriptive period provided in Article 1389
applies to rescissions under Article 1381.
Rule when both parties are guilty of breach
Art. 1192. 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.
Application of the pari delicto rule

Obligation with a Term or Period

A space of time which has an influence on obligations as a consequence of a
juridical act and either suspends their demandability or produces their
extinguishment.
It is one that arises upon the arrival of the term or period agreed upon, hence
demandable only on that instance.
Term or Period is that time or event which necessarily must come, whether
the parties know when it would happen/come or not
Day certain means one, which must necessarily come although it may not
be known when.
Examples:
1) Ill pay you P20,000 on the 25th of December next year.
2) Ill pay you P20,000 if Imelda Marcos dies. Death is certain even if
we cannot
really ascertain when it will come.
But this one is conditional:
Ill pay you P20,000 if Imelda Marcos dies of malaria Reason: She
might die of bangungot.
NOTE: 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 (Article 1180).
Example : Ill pay you P10,000 when my means permit me to do so.
Ill pay you P10,000 little by little
Ill pay you P10,000 as soon as possible.
Ill pay you as soon as I have the money.
Kinds of Period1) Legal period fixed by law

2) Voluntary Fixed by the parties

3) Judicial period imposed or fixed by the court
Other classifications
1) Ex die (suspensive) a period which must lapse before the
obligation can be
demanded
2) In diem (resolutory)- a period when it arrives extinguishes the
obligation.
Distinction between Period and Condition:
Period

Condition

As to fulfillment
It is sure to happen or the event would
necessarily happen
As to influence on the obligation:

It is uncertain event

Fixes the time of efficaciousness of an

obligation.

Causes the obligation to arise or to

cease.

As to time:
Refers to the future.

Refers future or a past event unknown

tot he parties.

Period is generally for the benefit of both parties, unless otherwise

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

ALTERNATIVE & FACULTATIVE OBLIGATIONS

ALTERNATIVE OBLIGATION OBLIGATION WHEREIN VARIOUS THINGS ARE
DUE, BUT
THE PAYMENT OF ONE OF THEM IS SUFFICIENT,
DETERMINED BY THE CHOICE, WHICH AS A

GENERAL RULE BELONGS TO THE DEBTOR

(Art.1199).
Right of Choice:
Generally belongs to the DEBTOR. (Art. 1200) UNLESS expressly agreement
granted to the creditor (Art.1200)
Debtor cannot choose those prestations which are impossible, unlawful or
which cannot be an object of obligation.
When choice of the debtor becomes effective:
It becomes effective from the time selection was communicated to the
creditor the said
time is the reckoning date of determining when legal effects are
produced.
If debtor has no choice as there is only one choice left, the obligation is
converted to simple
obligation. (Art. 1202)
- If the debtor cannot choose through the acts of the creditor, he may
rescind the contract
with damages. (Art.1203)
If the choice is given to the debtor, the loss of the thing is governed as
follows:
a) Loss of all obligation is extinguished provided debtor is without
fault
b) Loss of some the debtor may deliver any of the remainder or that
which remains if
only one subsists, without obligation to pay
damages. (If debtor is
without fault)
If loss was due to debtors fault:
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.
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.
Loss of some due to debtors fault and the last thing due to fortuitous
event.
From and after the lost except one of the various things, whether due
to fortuitous
event or the debtors fault, the debtor shall loss the right of choice.
(Art.1202) and
the obligation is converted to a simple obligation. Hence, the loss
of the last
subsisting prestation due to fortuitous event extinguishes the
obligation.

If Right of Choice is given to the CREDITOR:

Loss of things
Due to fortuitous event
a) Loss of all obligation is extinguished IF DEBTOR IS NOT AT FAULT.
b) Loss of some the debtor shall deliver that which the creditor
should choose any
of those subsisting IF DEBTOR IS NOT AT FAULT.
Otherwise, he shall any of those
subsisting or the price of any of those that have been lost
through the fault of the debtor plus payment of damages.

Illustration:

D is obliged to give C a specific watch, a specific ring or a specific bracelet. The

parties agreed that C will have the right to choose the thing which will be given to
him. Before C could make his choice, the watch and the ring are lost through Ds
fault, successively. What is the right of C?
* C may choose the delivery to him of the bracelet, or the price of the watch
or the price of the ring plus damages.
FACULTATIVE OBLIGATION obligation where only one prestation has been
agreed upon but the debtor may ender another substitution.
Example : D obliged himself to give C a specific Rolex watch with the
understanding that D
could give a diamond ring as a substitute
Loss of the principal things:
a) Due to fortuitous event the obligation is extinguished and the
debtor is not
obliged to give the substitute.
b) Due to debtors fault the debtor shall answer for the loss of the
thing due to his
fault.
Loss of the substitute:
a) Before substitution
The loss of the substitute before the substitution is made does
not affect the
obligation as the principal can still delivered
b) After substitution
Due to fortuitous event obligation is extinguished
Due to debtors fault debtor is liable for damages

JOINT AND SOLIDARY OBLIGATIONS

Kinds of Obligation according to number of parties:
1. Individual obligation one where there is only one
obligor an one oblige; and
2. Collective obligation one where there are two or
more debtors and/or two or more creditors.
Joint obligation
Solidary obligation
Joint obligation each of the debtors is liable only for a proportionate part
of the debt and

each creditor is entitled to a proportionate part of the

credit.

NOTE:
In the absence of stipulation, when there are multiplicity of parties or
collective obligation, said obligation is presumed JOINT. Meaning, the share in
the obligation is specified, the correlative rights and obligation of the parties are
known.
Implications:
a) There are as many debts as there are debtors;
b) There are as many credits as there are creditors;
c) The debts/credits are considered distinct and separate from one another.
d) Each creditor is entitled only for a proportionate part of the credit.
e) Each debtor is liable only for his proportionate part of the debt.
Presumption established under Article 1208 is only disputable.
Other terms for joint obligation:
a) mancomunada
b) mancomunada simple
c) proportionately
d) pro-rata
Examples:
Joint obligation
A, B and C jointly executed a promissory note worded as
follows:
We promise to pay to the order of X P9,000.00
Sgd. A, B and C

Solidary obligation each debtor is liable for the entire obligation and each
creditor is
entitled to demand the whole obligation.

When solidarity exists:

As a general rule, the mere concurrence of two or more creditors or
two or more debtors in one and the same obligation does not imply solidarity.
By presumption of the law, the obligation is joint, unless:
a) Solidarity is expressly agreed upon (Conventional Solidarity)
b) Solidarity is declared by law (Legal Solidarity)
c) Solidarity is required by the nature of the obligation (Real
Solidarity)
Kinds of Solidarity
a) Active - solidarity among creditors
b) Passive solidarity among debtors
c) Mixed solidarity on the part of the creditors and debtors

Example:
1.
A, B, & C jointly executed a promissory note worded as
follows:
I promise to pay to the order of X P9,000.000
Sgd. A, B & C
X can collect the entire P 9,000 from any of A, B or C.
2. A, B and C joint debtors are obliged to give x, Y and Z, solidary creditors of P
18,000. How much can X collect and from whom?
X being a solidary creditor
can entirely collect P 18,000. But since A, B and c are joint debtors, X may
collect only P 6,000 from each of them. After collecting the sum of P 18,000, X
must give Y and Zs share of P 6,000.
3. A, B and C solidary debtor are obliged to give X,Y and Z joint creditors of P
18,000. How much may A be made liable? A being a solidary debtor may be
held liable for P 18,000. But since the creditors are merely joint ones, each one
of them can collect from A up to P 6,000.
Rules in case of Dual Nature of Obligation
If the obligation of the debtors is joint and the right of the creditors is solidary, or if
the obligation of the debtors is solidary and right of creditors is joint, the rules on
joint and solidary obligation shall be applied in determining the liabilities and rights
of the debtors and creditors as the case maybe.
A. Joints debtors and solidary creditors (Active solidarity)
A, B, C and D, joint debtors are liable to X, Y and Z, solidary creditors, in the amount
of P 36,000. Any one of the creditors can collect the entire amount of P 36,000 but
each one of debtors can be held liable for not more than P 9,000. Thus X can collect
P 36,000 but he can collect not more than 9,000 from A, 9,000 from B, 9,000 from C
and 9,000 from D. After X has collected the P 36,000, he must give P 12,000 each
to Y and Z.
B. Solidary debtors and Joint Creditors (Passive Solidarity)
A, B, C and D, solidary debtors are liable to X, Y and Z, joint creditors in the amount
of P 36,000. Anyone of the debtor can be held liable for the entire amount of P
36,000, but each of the creditors can collect only up to 12,000. Thus X, Y and Z can
collect 12,000 from A alone. After A has made the payment of P 36,000, he can
demand reimbursement of P 9,000 each from B, C and D
Illustrations:
1. A, B, C and D are obliged to give X, Y and Z P12,000. X may collect from A how
much?
* P1,000. When the obligation is silent, it is presumed joint.
2. A, B, C and D, joint debtors are obliged to give X, Y, and Z, solidary creditors,
P12,000. How much may X collect from A?
* P 3,000. As a solidary creditor, X may collect the whole amount owed by the
joint debtor A.

3. A, B, C and D, solidary debtors, are obliged to give X, Y and Z, joint creditors,

P12,000. How much may X collect from A?
* P4,000. As a joint debtor X is entitled only to his proportionate share, and A
being a solidary debtor may be required to pay the said amount.
4. A, B, C and D, solidary debtors, are obliged to give X, Y and Z, solidary creditors,
P12,000. How much may X collect from A?
* P12,000. X being a solidarity creditor may ask for the payment of the whole
amount in behalf of his co-creditors subject to a responsibility of X to give the latter
their corresponding shares. Similarly, A as a solidary debtor may be required to pay
the whole amount of the obligation subject to reimbursement from his co-debtors.
5. A and B are indebted to X and Y for P10,000. A and B share in the debt in the
ratio of 1:3 while X and Y share in the credit in the ratio of 2:3.
a. How much may X collect from A if the debtors are joint debtors, while the
creditors are joint creditors?
* P1,000. The obligation is joint on both the debtor and creditor,
therefore there are as many debts (credits) as debtors (creditors).
COMPUTATION:
Proportionate Share of A:
x P10,000 =
P 2,500
Proportionate Share of B on As Proportionate Debt:
2/5 X P2,500=
P 1,000
b. How much may X collect from A if there is active solidarity?
* P2,500(see computation above). The whole amount of the
proportionate share of A could be collected by X. As a solidary creditor, X may
collect the whole amount of the obligation corresponding against one or more
debtors.
c. How much may X collect from A if there is passive solidarity?
* P4,000. Being a joint creditor, X can collect only his corresponding
share in the credit. The full amount could be collected to A, being a solidary debtor.
COMPUTATION:
Proportionate Share of X in the credit:
2/5 x P10,000 =
P 4,000
d. How much may X collect from A if there is mixed solidarity?
P10,000. Since there is mixed solidarity the whole amount of obligation
may be collected by any of the solidary creditors against any of the solidary
debtors.
Problem 2 Unequal shares
A and B owe X and Y P 20,000.00. The share of A in the debt is one-fourth
(1/4), while that of B is three-fourths (3/4). The share of X in the credit is twofifths (2/5), while that of Y is three-fifths,
a. Joint debtors and creditors
A can be held liable for not more than P 5,000.00 (1/4 of P
20,000) while B not more than P 15,000 (3/4 of P 20,000). X can
collect not more than P 8,000 (2/5 of P 20,000) while & not more
than P 12,000 (3/5 of P 20,000)
1. How much may X collect from A? from B?
From A, X may recover P 2,000 (1/4 of P 8,000).
From B, X may collect P 6,000 (3/4 of P 8,000)

Alternate computations A, (P 5,000 x 2/5 P 2,000);

B, (P 15,000 x 2/5 P 6,000)
2. How much may Y collect from A> form B?
From A, Y may collect P 3,000 (1/4 of P 12,000).
From B, Y may collect P 9,000 (3/4 of P 12,000).
Alternate computations: A, (P 15,000 x 3/5 P 3,000) B, (P 15,000 x 3/5
9000)
b. Joint debtors and solidary creditors (active solidarity)
1. How much may X collect from A? From B?
X may collect the total amount of debt amounting
to P 20,000 he being a solidary creditor. However
since the debtors are jointly bound, he can collect
not more than P 5,000 from A and not more than P
15,000 from B. After collecting the amount of P
20,000, X must give the share to Y amounting to P
12,000.
Other terms for solidary obligation:
a) In solidum
b) Jointly and severally
c) Juntos o separadamente
d) Solidarias
e) Mancomumanda o in solidum
f) Mancomunada soldarias
g) Individually and collectively
Effects if obligation is JOINT and INDIVISIBLE. Art 1209 and Art.1224
A JOINT INDIVISIBLE OBLIGATION IS AN OBLIGATION WHERE THERE ARE
SEVERAL DEBTORS OR CREDITORS WHO ARE JOINTLY BOUND BUT THE
PRESTATION IS INDIVISIBLE.
The debt can be enforced by the collective acts of the debtors or
creditors in view of the indivisibility of the object. Like in the case of the joint
debtors the creditor has to proceed against all of them, otherwise, failure of
the other debtors to comply the obligation would call for the conversion of
the obligation to its monetary value or indemnity for damages 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.
Illustration:
A, B and C are obliged to deliver a specific horse to X, Y and Z. What would be the
legal effect when C cannot comply with his obligation?
*This is a case of a jointly-indivisible obligation. Assuming there was a valid
demand made against all the debtors and since C could not comply with his part of
the obligation, the obligation is converted into a monetary obligation to pay the
value of the horse plus damages. (1224)
Rules Governing Solidary Obligations:
Solidarity does not imply indivisibility. An obligation may be divisible even if it
is solidary.
Indivisibility does not imply solidarity. It is the intention of the parties that
provides for the
nature of obligation (Art. 1210)

Solidarity may exist although the creditor and debtor may not be bound in the
same manner
same period and conditions. ( Art. 1211)
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). A solidary creditor
cannot assign his rights without the consent of the others (Art. 1213)
Essential feature is Mutual Agency.
The debtor may pay any one of the solidary creditors; but if any demand, judicial or
extrajudicial, has been made by one of them, payment should be made to him.
(Article 1214)
Novation, compensation, confusion or remission of the debt, made by any of the
solidary creditors or with any of the solidary debtors, shall extinguish the obligation,
without prejudice to the provisions of Article 1219. The creditor who may have
executed any of these acts, as well as he who collects the debt, shall be liable to the
others for the share in the obligation corresponding to them. ( Article 1215)

Illustrations: Renunciation
1. A, B and C are solidary debtors of X, Y and Z, solidary creditors, in the amount of
P2,700. X renounces the whole obligation without the consent of Y and Z. The
debtors accepted the renunciation. What is the legal effect of the renunciation?
* The whole obligation is extinguished, however X shall be liable to the
corresponding shares of the other co-creditors as they have agreed upon.
2. A, B and C are solidary debtors of X in the amount of P3,000. X renounces the
share of A and A accepts the renunciation. Thereafter B becomes insolvent. What is
the legal effect of the renunciation?
* A will be liable for P500, while C will be liable for P1,500 (P1,000 + P500).
Since the remaining obligation is P2,000 after the renunciation of As share, and
thereafter B becomes insolvent, A and C would have to absorb the debt
corresponding to B in the amount of P1,000. This shall be divided equally by A and
C.
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 (Article 1216)
Payment made by one of the solidary debtors extinguishes the obligation. If two or
more solidary debtors offer to pay, the creditor may choose which offer to accept.
He who made the payment may claim from his co-debtors only the share which
corresponds to each, with the interest for the payment already made. If the
payment is made before the debt is due, no interest for the intervening period may
be demanded.
When one of the solidary debtors cannot, because of his insolvency, reimburse his
share to the debtor paying the obligation, such share shall be borne by all his codebtors, in proportion to the debt of each. ( Article 1217)
Note:

In action filed by the creditors, a solidary debtor may avail of the following
defenses:
Defenses derived from the nature of the obligation which
constitute total defenses, such as
- absolute simulated contract
- illegal cause or consideration
- illegal object or subject matter
- non-fulfillment of the suspensive conditions
- other defenses which will nullify the contract which is the basis of
creditors action.
Defenses personal in nature which may constitute a total or
partial defense
- factor which vitiate consent such as minority, insanity, fraud,
violence, intimidation, etc.
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.
Illustration:
A, B and C are solidary debtors of X in the amount of P30,000. C was insane at the
time the obligation was constituted. What is the legal effect?
* X may collect from either A or C P20,000. Art. 1222 provides that a solidary
debtor may avail himself of the partial defense of the insanity of C. Such defense is
personal to C and would therefore affect only the part of the debt to which C may be
responsible.

DIVISIBLE AND INDIVISIBLE OBLIGATION:

Divisible obligation one which capable of partial performance
Indivisible obligation one which is not capable of partial performance
Test for the distinction:
In determining whether an obligation is divisible or indivisible, the controlling
circumstance is not the possibility or impossibility of partial prestation but the
purpose of the obligation or the intention of the parties.
What determined divisibility or indivisibility:
a) Intention
b) Law
c) Character of the prestation
When obligation is presumed indivisible.
a) Obligation to give definite things, such as an obligation to give a specific
car
b) Those which are not susceptible of partial performance.
When obligation is presumed divisible
a) Execution of a certain number of days of work, such as an obligation to
work for 30
days
b) Accomplishment of work by metrical unit, such as when five debtors are
obliged to

deliver five tons of sand and gravel. The debtors are obliged to deliver one
ton each.
c) Analogous thing which by their nature are susceptible of division.

Obligation with Penal Clause

Penal clause
An accessory undertaking to assume greater liability in case of breach.
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.
b. To substitute a penalty for indemnity for damages and the payment of
interests in case of non-compliance (art. 1226); 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.
Kinds of penal clause:
According to source:
a) Legal- penalty imposed by law
b) Conventional penalty agreed upon by parties
According to extent of liability
a) Subsidiary when only the penalty can be recovered in case of nonperformance of the
obligation
b) Joint when in case of non-performance of the obligation both the principal
obligation and
the penalty can be recovered.
Proof of actual damages suffered by the creditor is not necessary in order that
the penalty may be demanded (Art. 1228)
Right to recover damages and interest in addition to the penalty
The penalty shall substitute the indemnity for damages, and interest in case the
obligation is not fulfilled. Hence as a general rule, the creditor cannot demand
damages and interests in addition to the penalty except:
a) When the parties so agreed;
b) When the debtor refuses to pay the penalty;
c) When the debtor is guilty of fraud in the fulfillment of the obligation.
- Nullity of the principal carries with it the nullity of the accessory.
- Penalty may be reduced by the court when
a. There is partial or irregular performance of the obligation or

b. Even when there has been no performance when the penalty agreed
upon is iniquitous or unconscionable. (Article 1229)

MODES OF EXTINGUISHMENT OF OBLIGATIONS

1.

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 forms of Extinguishment of the obligation

b) Death of a party in case the obligation is personal
c) Mutual desistance or withdrawal from contract or
agreement
d) Compromise

PAYMENT OR PERFORMANCE
Payment (ART.1232-1261) means not only the delivery of money but also the
performance, in any other manner, of an obligation. (Art.1232)
General Rule:
1233)

Completeness of Payment. Payment should be complete. (Art.

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)
- when there is an express stipulation to that effect.
- When the debt is part liquidated (definitely and determined or
computed) and in part liquidated.
- When the prestations in which the obligation consists are subject to
different terms or conditions which affect some of them.
3. 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
Illustration:
D borrowed P10,000 from C with G as guarantor. Subsequently, D paid C P 2,000.
Unknown to D, T a third person paid C P10,000 believing that D still owed C such
amount. What is the legal effect of the payment by T?
* T can recover P8,000 from D, the law provides that only the amount to
which the creditor has benefited could be reimbursed to the third person paying if
the payment was without knowledge of the creditor. If D cannot pay, T cannot go
after G to collect. (1236)

4.

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.

5. Payment made by a third person who does not intend to be reimbursed by the
debtor is deemed to be a donation, which requires the debtor's consent. But the
payment is in any case valid as to the creditor who has accepted it. (Art. 1238)
D owes C P10,000. T offers to pay Ds obligation and tells D that D need not
reimburse him. However, D does not give his consent to Ts offer not to be
reimbursed. C, nonetheless, accepts the payment from T. Was the payment valid?
* The payment is valid insofar as C is concerned. The case is deemed to be a
donation, however to be constituted as such Ds consent is necessary. (1238)
6. Art. 1239. In obligations to give, payment made by one who does not have the
free disposal of the thing due and capacity to alienate it shall not be valid, without
prejudice to the provisions of Article 1427 under the Title on "Natural Obligations."
a.

Free disposal of the thing due means that the thing to be delivered must
not be subject to any claim or lien or encumbrance of a third person.
b. Capacity to alienate means that the person is not incapacitated to enter into
a contract and for that reason, to make a disposition of the thing due.
7. Art. 1240. Payment shall be made to the person in whose favor the obligation has
been constituted, or his successor in interest, or any person authorized to receive it.
a. Creditor
b. His successor in interest
c. Person authorized to receive it. It refers to both authorized by the
creditor or authorized by the court such as the guardian, executor or
administrator of the estate)
5. Payment to an incapacitated person is valid only if the latter kept the thing
delivered or insofar as the payment has been beneficial to him. Payment made
to third person shall be valid insofar as it redounded to the benefit of the
creditor. It is presumed in the following:
a) If after the payment, the third person acquires the creditors rights
(Subrogation of the payer in the creditors right).
b) If the creditor ratifies the payment to the third person (Ratification
by the creditor).
c) If by the creditors conduct, the debtor has been led to believe that
the third person had authority to receive payment. (Estoppel on the
part of the creditor) (Art.1241 par.2)
D obtained a loan of P10,000 from C who was in his right mind at the time he
granted the loan. On due date, D paid his obligation of P10,000 to C who had since
become insane. C lost P4,000 of the amount he received and spent P6,000 for his
food and other necessary expenses. Was the obligation extinguished?
* The obligation is extinguished up to P6,000 only. Payment of an
obligation to an incapacitated person shall be valid when the person has kept
the thing delivered and only insofar as the payment has been beneficial to
him. (1241)

6. Art. 1242. Payment made in good faith to any person in possession of the
credit shall release the debtor.
7. Art. 1243. Payment made to the creditor by the debtor after the latter has
been judicially ordered to retain the debt shall not be valid.
8. Art. 1244. The debtor of a thing cannot compel the creditor to receive a
different one, although the latter may be of the same value as, or more
valuable than that which is due. In obligations to do or not to do, an act or
forbearance cannot be substituted by another act or forbearance against the
obligee's will.
9. Payment of debts in money shall be made only in the Philippine currency which
the legal tender pursuant to Art. 1249 of the Civil Code in relation to Republic Act
No. 8183. Obligation shall now be payable in the legal tender in the Philippines.
Legal tender means the currency which the debtor may compel his creditor to
accept payment of his debt. However, the parties may stipulate that the
payment may be made in currency under than the legal tender of Philippines at
the time of payment. ( R.A. No. 8183)
Previously coins are legal tender under the New Central Bank Act:
a. Centavo (0.25) and above is legal tender up to P 50.00
b. Centavo (0.10) and below is legal tender up to P 20.00
c. All coins P 1.00 and above including bills are legal tender up to any amount
But pursuant to Section 52 of Republic Act No.. 7653 (The New Central Bank
Act), "Legal Tender Power - All notes and coins issued by the Bank shall be
fully guaranteed by the Government of the Republic of the Philippines and
shall be legal tender in the Philippines for all debts, both public and private. "
This might mean, all notes and coins being served or issued by the Central
Bank of the Philippines When Offered in payment extinguishes the debt is
legal
tender.
One Peso coin is no longer valid tender of payment to any amount.
According to BSP Circular No.. 537 issued by the Central Bank of the
Philippines on July 18, 2006, pursuant to Section 52 of RA 7653 (New Central
Bank Act) and the Monetary Board Resolution No.. 862 dated 6 July 2006, "the
maximum amount of coins to be considered as legal tender is adjusted as
Follows:
1. One thousand pesos (P1, 000.00) for denominations of 1, Piso, Piso 5, and
10 pesos coins; and
2. One hundred pesos (P100.00) for denominations of 1-cent, 5-cent, 10-cent,
25-cent coins.
10. 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)
Value of the currency at the time of the establishment of the obligation is
computed by using the following formula.
Amount to be paid at maturity =
Amount of Obligation

Amount of the obligation

Value at the date of Maturity

Example:
D borrowed P 1 Million from c payable at the end of 10 years. Suppose that
before maturity of the loan, an extraordinary inflation supervened causing the

value of the debt to fall to P 500,000 on the date of maturity. Following the
above formula:
A = ( 1 million/500,000.00) x P 1Million
=2xP1M
= P 2 Million is the equivalent value of P 1 M in the date of maturity
Suppose that before maturity of the loan, an extra-ordinary deflation supervened
causing the value of the debt to rise to P 4 Million on the date of the maturity of
the loan, how much must D pay C on maturity?
A = ( 1M/4 M) x 1 M
= P 250,000 equivalent value of P 1 M on the date of maturity
11. What are the different special forms of payment?
a) Dation in Payment or dacion en pago (Art. 1245)
b) Application of Payment ( Arts. 1252-1254)
c) Payment by Cession (Art.1255)
d) Tender of Payment and Consignation Arts. 1256-1261)
12. Dation in Payment of Dacion en pago, adjudicacion en pago or datio in solutum
is a special form of payment where the debtor conveys to the creditor ownership
a thing belonging to him as accepted equivalent to payment or performance of
the obligation.
Dation in payment is governed by the law on sales.

13. What is Application of Payment?

Application of payment may be defined as the designation of debt to which
payment must be applied when the debtor has several obligations of the same
kind in favor of the same creditor.
Requisites:
a) There must be only one debtor and only one creditor;
b) There must be two or more debts of the same kind;
c) All debts must be due;
d) The amount paid by the debtor must not be sufficient to cover the total
amount of all the
debts.
The right to make an application of payment belongs to the debtor. However
if he does not avail himself of this right, the creditor may wrest the initiative
from him by giving to him a receipt designating the debt to which the payment
shall applied. But even this does not really constitute an exception because the
debtor may either accept or reject the application. (See Art. 1252)
* Strictly speaking, it is not a form of payment but more of a mode of payment.
What is meant by legal application of payment?
Legal application of payment refers to the following the rules, both of which are
enunciated in Art. 1254 of the Civil Code;
a) When neither the debtor nor the creditor makes any application of
payment or if it cannot
be inferred from other circumstances, the debt which is most onerous to
the debtor among
those which are due shall be deemed to have been satisfied. The
following may be given
Examples.

Where there are various debts, which are due and they were
incurred at different dates the oldest are more onerous.
Where there are various debts, which are due and they were
incurred at different dates the oldest are more onerous.
Where one bears interest and the other does not, the former is
more onerous
Where one s secured the other is not, the former is more onerous
Where the debtor is bound as principal in one and as guarantor or
surety in another, the former is more onerous
Where the debtor is bound as solidary debtor in one and as a sole
debtor in another, the former is more onerous.
b) If the debts due are of the same nature and burden, the payment shall
be applied to all of them proportionately
-

Illustrations:
1. D owes C the following debts: P4,000 due on May 1; P4,000 due on May 8; P4,000
due on May 15; P4,000 due on May 22; P4,000 due on May 29; and P4,000 due on
June 5. The debts represented the price of magazines which were delivered to D on
a weekly basis. Of the six debts, the one due on May 22 is secured by a pledge of
Ds ring. By agreement of the parties, C may demand payment even before the due
date of the debt. As of May 31, D had not paid any of the six debts. On May 31, D
wanted to make payment but he had only P4,000. How is the payment to be
applied?
* Since no agreement as to which debts should be settled first and absent the
fact that the creditor has not issued any receipt applying the amount to any of the
debts to which the debtor has not protested and there was no cause of invalidating
the same, and the period is for the benefit of the creditor then the P4,000 should be
applied to the one due on May 22 since it is most burdensome.
2. Refer to no. 1, Assuming that D did not designate the debt to be paid when he
remitted the amount of P4,000 to C on May 31. C issued a receipt for the payment
he received from D but he did not also designate the debt that was being paid. How
would the payment be applied?
* The payment shall be applied to the debt due on May 22 since it is the most
onerous.
14. Payment by Cession or Assignment it is a special form of payment
whereby the debtor
abandons all of his property for the
benefit of his
creditor in order that from the proceeds
thereof the latter may obtain payment
of their
credits. Also known as voluntary
cession or
insolvency.
There is no transfer of ownership but merely grants the creditors of a debtor to
sell properties of said insolvent debtor and apply the proceeds to their respective
credit. Debtor is released only up to the net proceeds of the sale. He remains
liable to the creditor as to the remaining balance unless otherwise agreed to
release him to his entire obligation.
Compare Cession from Insolvency under FRIA.
Cession has no court
intervention while Fria whether rehabilitation or Insolvency (Voluntary or
Involuntary or whether court supervised or not) requires court intervention.
DISTINCTIONS:

15. Meaning of Tender of payment consists in the manifestation made by the

debtor to the creditor of his decision to comply immediately with the obligation.
Meaning of Consignation: refers to the deposit of the object of the obligation
in a competent court in accordance with the rules prescribed by law after refusal
or inability of the creditor to accept tender of payment.
As a rule, there must be tender of payment first before consignation can be
effected.
Distinguish Tender of Payment from Consignation:
Tender of payment is antecedent of consignation; in order words, while the first
is preparatory act, the second is the principal act, which will produce the effects
of payment.
Tender of payment is by its very nature extra judicial in character, wile
consignation is judicial.
Requisites for Consignation:
a) That there is a debt that is due:
b) That the consignation has been made either because the creditor to whom
tender of payment was made refused to accept the payment without just cause
or because any of the stated by law for effective consignation without previous
tender of payment exists. (Art.1256)
c) That previous notice of the consignation has been given to the persons
interested in the fulfillment of the obligation. (Art.1256)
d) That the thing or amount due had been placed at the disposal or judicial
authority (Art.1258 par. 1)
e) That after the consignation has been made the person interested in the
fulfillment of the obligation had been notified thereof. (Art. 1258 par. 2)
f) Judicial declaration that the consignation is proper with prayer on the part of
the debtor to be discharged from the obligation.
h) Payment by the creditor of the expenses for consignation if properly made by
the debtor.
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)
Debtor can withdraw the thing deposited as a matter of right before the creditor
accepts or before a judicial declaration is made by the court. In effect, obligation
remains (Art. 1260). If the consignation has been made properly, creditor should
authorize the debtor to withdraw the same and he shall lose every preference
which he may have over the thing. The co-debtor, guarantors and sureties shall
be released.
( Art. 1261)
16. 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

a. Physical loss when a thing perishes as when the house is burned and
reduced to ashes.
b. Legal loss when the thing goes out of commerce.
c. Civil loss when the thing disappears in such a way that its existence is
unknown or even if known, it cannot be recovered, whether as a matter of
fact or of law.
d. Physical or legal impossibility
Art. 1266. The debtor in obligations to do shall also be released when the
prestation becomes legally or physically impossible without the fault of the
obligor.
e. Difficulty of performance
Art. 1267. When the service has become so difficult as to be manifestly
beyond the contemplation of the parties, the obligor may also be released
therefrom, in whole or in part
In order that an obligation shall be extinguished by the loss or destruction of
the thing if is essential that the following requisites must concur:
a) The thing, which is lost, is specific or determinate
b) The thing is loss without any fault of the debtor if that thing is lost through the
fault of the debtor the obligation is transformed into an obligation to indemnify
the obligee or creditor for damages.
c) The debtor is not guilty of delay
Exceptions to the above rule are as follows:
a) When by law the obligor is liable for fortuitous events (Arts. 1174 and 1262
par 2)
b) When by stipulation the obligor is liable even for fortuitous events. (Arts 1174
and 1262
par 2)
c) When the nature of the obligation requires the assumption of risk. (Arts. 1174
and 1262
par 2)
d) When the loss of the thing is due party to the fault of the debtor (Art 1262 par
1 CC)
e) When the loss of the thing occurs after the debtor has incurred in delay. (Art
1262 par.1
and Art 1135 par. 3)
f) When debtor promised to deliver the same thing to two or more persons who
do not
have the same interest (Art. 1165 par 3)
g) When the obligation is generic (Art.1263)
h) When the debt of a certain and determinate thing proceeds from a criminal
offense (Art
1268)
Art. 1265 provides that whenever the thing is lost in the possession of the debtor,
it shall be presumed that the loss was due to his fault, unless there is proof to
the contrary, and without prejudice to the provisions of article 1165. This
presumption does not apply in case of earthquake, flood, storm, or other natural
calamity.
Art. 1269 provides that the obligation having been extinguished by the loss of the
thing, the creditor shall have all the rights of action which the debtor may have
against third persons by reason of the loss. This right is transferred by operation
of law.
17. 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.
Example:
a) Express Condonation involving real property must be in public
instrument together with the acceptance of donee.
b) Express Condonation of personal property amounting to P
5,000 above must be in writing together with the acceptance
of donee
Important principles on Remission:
1. 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.
2. 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) Example of implied
remission
3. Whenever the private document is found in possession of
the debtor, it is presumed that the creditor delivered the
document voluntarily. (Art. 1272).
4. 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. Example of Implied
remission
18.

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)
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 in fact a novation where
the guarantor now 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.
19. COMPENSATION Compensation may be defined as a mode of extinguishing
in their concurrent amount those obligations persons who in their own right are
creditors and debtors of each other.
Requisites for legal compensation under Article 1279:
a) There must be two parties, who in their own right, are principal creditors and
principal
debtors of each other. (Arts. 1278, 1279. No. 1)
b) Both debts must consist in money, or if the things due are fungibles
(consumables), they
must be of the same kind and quality (Art. 1279. NO.2)
c) Both debts must be due (Art. 1279. NO. 3)
d) Both debts must be liquidated and demandable ( Art 1279 NO. 4)
e) There must be no retention or controversy commenced by third persons over
either of
the debts and communicated in due time to the debtor (Art.1279 NO. 5 CC)
f) The compensation must not be prohibited by law (Arts 1278, 1288)

Under Article 1290 When all the requisites mentioned in Article 1279
are present, 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.
Guarantor cannot set up compensation. Exception:
D owes C P20,000 with G as Guarantor. C, on the other hand, owes D, P15,000. Both
debts are already due but D is insolvent. Can compensation take place?
* Yes. A guarantor can set up compensation as regards what the creditor may
owe the principal debtor. However, C may still collect from G P5,000.
Instances when legal compensation is not allowed by law:
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.
Illustration/Exception:
Francis, husband and Mitch, wife are legally separated. By order of the court which
decreed the legal separation, Francis is obliged to give a monthly support of
P20,000 to Mitch payable in advance within the first five days of the month. Mitch
owes Francis P20,000 by way of loan. On the other hand, Francis has not yet given
Mitchs support for P20,000 for the preceding month and another P20,000 for the
present month. All the debts are due. Can compensation take place?
* Yes. If Mitch demands her support for the current month, Francis may claim
compensation as regards the loan that Mitch owes him.
Different classification of Compensation:
a) Legal when it takes place by operation of law from the moment all of the
requisites

prescribed by law are present (Arts 1278 & 1279)

b) Voluntary when the parties who are mutuality creditors and debtors agree to
compensate their respective obligations even if the requisites of
compensation
may not be present.
c) Judicial when it takes effect by judicial decree.
d) Facultative when it can only be set up by one of the parties.
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.
In contract of commodatum, the bailee cannot set up compensation but the
bailor can.
Reason: This is because it would violate the fiduciary character of the contract
of deposit or commodatum. But the depositor or bailor can set up by way of
compensation against the depositarys or bailees credit. Here, only one party
can set up compensation. (Art. 1287)
Person obliged to give support cannot also set up compensation unless support
has developed into arrears. In such case, compensation is possible.(Art. 1287)
Neither shall there be compensation if one of the debts consists in civil liability
arising of a crime. The one whose obligation arose from said liability cannot set
up compensation against the other but the latter can. (Art. 1288)
Art. 1285. The debtor who has consented to the assignment of rights made by a
creditor in favor of a third person, cannot set up against the assignee the
compensation which would pertain to him against the assignor, unless the
assignor was notified by the debtor at the time he gave his consent, that he
reserved
his
right
to
the
compensation.
If the creditor communicated the cession to him but the debtor did not consent
thereto, the latter may set up the compensation of debts previous to the cession,
but
not
of
subsequent
ones.
If the assignment is made without the knowledge of the debtor, he may set up
the compensation of all credits prior to the same and also later ones until he had
knowledge of the assignment.
Illustrations:
1. D owes C P20,000 due on June 20. C owes D P14,000 due on June 15. On June 12,
C assigned his right to X. D consented to such assignment without any reservation
of his right to the compensation. On June 20, how much may X collect from D?
* P20,000. No compensation shall take place since there was no reservation
of such right by D upon the assignment of the credit. (1285 par 1)
2. D owes C P30,000 due on June 20. C owes D the following debts: P15,000 due on
June 2; P4,000 due on June 14; P6,000 due on June 16; and P3,000 due on June 18.
On June 17, C assigned his right to X. C notified D of the assignment but D did not
give his consent thereto. How much may X collect from D on June 20?
* P5,000. Since the assignment, although with knowledge, is without consent
of D therefore compensation shall take place but only to the debts prior to the
assignment. (1285 par 2)
3. Refer to no. 2. Assume the same facts except that when C made the assignment
of his credit to X, C did not notify D about it. It was only on June 20 when X went to
D to collect that D learned of the assignment. How much may X collect from D?

* P2,000. The assignment is without knowledge of D, therefore the latter may

set up compensation of all credits prior to the same and also later ones until he had
knowledge of the assignment. (1285 par 3)
Art. 1286. Compensation takes place by operation of law, even though the debts
may be payable at different places, but there shall be an indemnity for expenses
of exchange or transportation to the place of payment.
AS TO EFFECT:
Total when the debts to be compensated are equal in amount:
Partial when the debts to be compensated are not equal in amount.
Note: The rule on application of payment is also applicable in compensation.
In case there are several debts, when the debtor cannot set up compensation
against the assignee if he knows that assignment was made by the
creditor/assignor and he did not notify the assignor that he reserves his right to set
up compensation. He can however collect from the creditor what he could have set
off against the creditor had there been no assignment made by the latter. If the
debtor knows about the assignment but did not consent, he can set up
compensation against the assignee to obligations previous to the assignment. But
he has no knowledge of the assignment, he can set up compensation of all credits
prior, subsequent to the assignment until he obtains knowledge of the assignment.
(Art. 1285)
Art. 1289. If a person should have against him several debts which are susceptible
of compensation, the rules on the application of payments shall apply to the order
of the compensation.
20. NOVATION (Arts. 1291 1304)
Novation is the substitution or change of an obligation by another, resulting in its
extinguishment or modification, either by changing its object or principal conditions
or by substituting another in place of the debtor, or by subrogating a third person in
the rights of the creditor
Classification of Novation:
a) Objective or real refers to the change either in the cause object or principal
conditions
of the obligation
b) Subjective or personal refers to the substitution of another person of the
debtor
(passive) or subrogating a third person of the rights of the creditor (active).
(Arts. 1291, Nos. 2 and 3)
c) Mixed refers to the combination of objective and subjective novation.
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
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.

NOVATION is not presumed. If must be clearly and unmistakably

established either by the express agreement of the parties or acts of equivalent
import.
Kinds of Novation:
According to origin:
1. Legal that which takes place by operation of law.
2. Conventional that which takes place by agreement of the parties.
According to how it is constituted:
1. Express- when it is so declared in unequivocal terms.
2. Implied - when the old and the new obligations are essentially
incompatible with each
other.
According to extent or effect:
1. Total or extinctive - when the old obligation is completely extinguished.
2. Partial or modificatory-when the old obligation is merely modified.
According to the subject:
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:
A. Expromission or that which takes place when a third person of
his own initiative and without the knowledge or against the will of
the original debtor assumes the latters obligation with the
consent of the creditor.
Effect the new debtors insolvency or non-fulfillment of the
obligation will not revive the action of the creditor against the old
debtor whose obligation is extinguished by the assumption of the
debt by the new debtor. If the new debtor pays the creditor, he is
not subrogated with the rights of the creditor; he is only entitled
to be beneficial reimbursement.
B. Delegation one which takes place when the creditor accepts a
third person to
take place of the debtor at the instance of the latter. The creditor
may withhold approval. (art. 1295) In delegacion, all the parties the
old debtor, the new debtor and the creditor must agree. If the
payment was made with the consent of the original debtor or on his
own initiative (delegacion), the new debtor is entitled to
reimbursement and subrogation under Art.1237
Effect of new debtors insolvency or non-fulfillment of the obligation in
delegacion:
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.
Illustration:
D owes C P50,000. Subsequently, D proposed to C that T will assume his (Ds) debt.
C accepted the proposal of D. On due date, T could not pay because of his
insolvency which was in fact existing but was not known to D or of public knowledge
at the time that he delegated his debt. Can C hold D liable?
*C cannot hold D liable because his (Ds) obligation was extinguished when
he was substituted by T. (1295)
Other pertinent provisions:
Art. 1296. When the principal obligation is extinguished in consequence of a
novation, accessory obligations may subsist only insofar as they may benefit
third persons who did not give their consent. Referring to Stipulation Pour Autrui.
Art. 1297. If the new obligation is void, the original one shall subsist, unless the
parties intended that the former relation should be extinguished in any event.
Art. 1298. The novation is void if the original obligation was void, except when
annulment may be claimed only by the debtor or when ratification validates acts
which are voidable.
Art. 1299. If the original obligation was subject to a suspensive or resolutory
condition, the new obligation
shall be under the same condition, unless it is
otherwise stipulated. (n)
KINDS OF SUBROGATION (Art. 1300)
Conventional Subrogation when it takes place by express
agreement of the original parties. (The debtor, the original creditor and the
third person) Consent of all parties required.
Conventional Subrogation requires consent of all of the parties, to wit, the
debtor, the old creditor and the new creditor.
Distinction between conventional subrogation and assignment of credit.
Assignment of Credit
There is mere transfer of the same
right or credit. The transfer did not
extinguish credit.
It does not require the debtors
consent. Mere notification to him is
sufficient.
The defect in the credit or right is not
cured simply by assigning the same.
Here, the debtor generally has still
the right to present against new
creditor any defense available as
against old debtor.
Here creditor is the one ceding or
transferring his rights.

Conventional Subrogation
Extinguishes the obligation and creates a
new one
Requires debtors consent
The defect of the old obligation may be
cured in such a way that the new
obligation becomes entirely valid. Thus
here, there is no right to present against
new creditor any defense which he, the
debtor or could have set up against the
old creditor.
Here, somebody makes payment in
behalf of the debtor with the latters
consent.

Legal Subrogation when it takes place without agreement but by operation

by law
Cases of Legal Subrogation:
a) When a creditor pays another creditor who is preferred (see arts. 2236,
2251)
b) When a third person without interest in the obligation pays with the
approval of the
debtor;
c) When a third person with interest in the obligation pays with the
approval of the debtor.
What comprises subrogation?
Art. 1303. Subrogation transfers to the persons subrogated the credit with all the
rights thereto appertaining, either against the debtor or against third person, be
they guarantors or possessors of mortgages, subject to stipulation in a conventional
subrogation. Under article 1235 subrogation includes rights arising from
a. Mortgage or pledge or other forms of security
b. Guaranty
c. Penalty or penal clause
Effect of Total Subrogation:
It transfer to the new creditor the credit and all of the rights and actions
that could have been exercised by the former creditor either against the debtor
or against third persons, be they guarantors or mortgagors. (Art. 1303)
Effect of Partial Subrogation:
The creditor to whom partial the new creditor has made payment remains a
creditor to the extent of the balance of the debt. In case of insolvency of the
debtor, old creditor is given preferential right to recover the remainder as
against the new creditor. (Art, 1304)
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