PRE FINALS COVERAGE OBLIGATIONS AND CONTRACTS

What Loss Includes: Loss under this section includes Impossibility of Performance.

When There is a Loss a) When the object perishes (physically destroyed) b) When it goes outside of commerce c) When it disappears in such a way that: 1) Its existence is unknown 2) Or it cannot be recovered What Impossibility of Performance Includes a) Physical impossibility b) Legal impossibility 1) Directly caused when prohibited by Law 2) Indirectly caused as when the debtor is required to enter a military draft c) Moral Imposssibility (impracticability)

Art. 1262. An obligation which consists in the delivery of a determinate thing shall be extinguished if it should be lost or destroyed without the fault of the debtor, and before he has incurred a delay.

When by law or stipulation, the obligor is liable even for fortuitous events, the loss of the thing does not extinguish the obligation, and he shall be responsible for damages. The same rule applies when the nature of the obligation requires the assumption of risk.

Two Kinds of Obligations To Give a) To obligation generic thing b) To give a specific thing

Effect of Loss on an Obligation to Deliver a Specific Thing General Rule the obligation is extinguished Examples of Instances When the Law Requires Liability Even in the Case of Fortuitous Event a) When the debtor is in default (mora) b) When the debtor has promised to deliver the same thing to two or more persons (parties) who do not have the same interest. c) When the obligation arises from a crime d) When a borrower (of an object) has lent the thing to another who is not a member of his own household e) When the thing loaned has been delivered with appraisal of the value, unless there is a stipulation exempting the borrower from responsibility in case of a fortuitous event f) When the payee in solution indebiti is in bad faith. Art. 1263. In an obligation to deliver a generic thing, the loss or destruction of anything of the same kind does not extinguish the obligation. Effect of Loss on Obligation to Deliver a Generic Thing The obligation continues to exist because a generic thing does not really perish (genus ninquam perit-genus never perishes)

Exceptions a) If the generic thing is delimited (like 50 kls. Of sugar from my 1999 harvest when such harvest is completely destroyed) (delimited generic thing) b) If the generic thing has already been segregated or set aside, in which case, it has become specific. Art. 1265. 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 a proof to the contrary, and without prejudice to the provisions of Art. 1165. This presumption does not apply in case of earthquake, flood, storm, or other natural calamity.

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.

Examples of Impossibility a) Legal Impossibility the furnishing of work on Sundays when the same is prohibited by Law b) Physical Impossibility to install a motor in a ship that was lost after the perfection of the contract but prior to such installation.

Effect of Loss Thru a Fortuitous Event in Reciprocal Obligations a) General Rule The obligation that was not extinguished by the fortuitous event remains ( Example. If after perfection a building that was sold is destroyed by lightning, the buyer must still pay, for he bears the loss even if the building had not yet been delivered to him. b) Exceptions: Some exceptions are provided by law, such as: 1) In the case of lease- if the object is destroyed, both the lease and the obligation to pay rent are extinguished. 2) In contracts for a piece of work Here, the worker or contractor cannot successfully ask for the price if the thing be lost by a fortuitous event prior to delivery. Note here that the risk is on the worker.

Art. 1268. When the debt of a thing certain and determinate proceeds from a criminal offense, the debtor shall not be exempted from the payment of its price, whatever may be the cause for the loss, unless the thing having offered by him to a person who should receive it, the latter refused without justification to accept it.

REMISSION OR CONDONATION DEFINED It is the gratuitous abandonment by the creditor of his right

ESSENTIAL REQUISITES FOR REMISSION a) There must be an agreement (since acceptance of the offer is required) b) The parties must be capacitated and must consent (therefore, it is beyond the power of the courts or of Congress to condone interest unless the creditor consents.)

c) There must be subject matter (object of the remission otherwise, there would be nothing to condone) d) The cause or consideration must be liberality (for remission is ESSENTIALLY GRATUITOUS) e) The obligation remitted must have been demandable at the time of remission (otherwise the remission is useless) f) The remission must not be inofficious (otherwise, it would be reducible, so that the legitimes of the compulsory heir would not be impaired) g) Formalities of a donation are requires in the case o an express(not implied) remission.

CLASSES OF REMISSION: a) As regards its effect or extent 1) Total 2) Partial ( only a portion is remitted or the remission may refer only to the accessory obligations) b) As regards its date of effectivity: 1) Inter vivos (during life) 2) Mortis Causa (after death) (this must have the formalities of a will and the will must be probated) c) As regards its form: 1) Implied or tacit (this requires no formality) (conduct is sufficient) 2) Express or formal (this requires formalities of a donation if inter vivos; of a will or codicil if mortis causa)

EFFECT IF REMISSION IS NOT ACCEPTED BY THE DEBTOR This would not be remission; however, if the creditor does not really collect within the Statute of limitations (period of prescription), the debt may be said to have been extinguished by PRESCRIPTION.

Art. 1271. The delivery of a private document evidencing a credit, made voluntarily by the creditor to the debtor, implies renunciation of the action which the former had against the latter.

If in order to nullify this waiver it should be claimed to be inofficious, the debtor and his heirs may uphold it by proving that the delivery of the document was made in virtue if payment of the debt.

Art. 1272. Whenever the private document in which the debt appears is found in the possession of the debtor, it shall be presume that the creditor delivered it voluntarily, unless the contrary is proved.

RULE IF THE INSTRUMENT OF CREDIT IS STILL IN CREDITORS HANDS If the instrument of credit is still in the hands of the creditor, this is evidence that the debt has not yet been paid, unless the contrary be fully proved. To rebut the presumption, ordinarily, a receipt of payment must be presented.

PRESUMPTION IN JOINT AND SOLIDARY OBLIGATIONS: Effect if the obligation is joint, or if it is solidary. Example: A and B owe C P 100,0000.00, evidenced by a private document. a) If the private document is found in the possession of A, who is a joint debtor, what is the presumption? Ans. The presumption is that only As debt has been remitted. Reason: As debt is not P100,000 but only P50,000; in other words, his debt is really distinct from Bs debt. b) If the private document is found in the possession of A, who is a solidary debtor, what is the presumption? Ans. Since this is a solidary obligation, the presumption is that the whole obligation (not merely As share) has been remitted. c) In both cases, may the presumption be rebutted? Ans. Yes, the presumption in both cases can be overcome by superior contrary evidence.

Art. 1273. The renunciation of the principal debt shall extinguish the accessory obligation; but the waiver of the latter shall leave the former in force.

RENUNCIATION OF PRINCIPAL EXTINGUISHES ACCESSORY, BUT NOT VICE VERSA.

This follows the rule of accessory follows principal

Art. 1274. It is presumed that the accessory obligation of pledge has been remitted when the thing pledged, after its delivery to the creditor, is found in the possession of the debtor, or of a third person who owns the thing.

CONFUSION OR MERGER OF RIGHTS Merger or Confusion Defined It is the meeting in one person of the qualities of creditor and debtor with respect to the same obligation.

Requisites of a Valid Merger a) It should take between the principal debtor and creditor. Therefore, confusion of the creditor with the person of the guarantor does not extinguish the principal obligation. Of course, in a case like this, the accessory obligation of guaranty is extinguished. Therefore also, there can be no confusion or merger if the debtor and creditor represent (different) juridical entity even if the officers of both are the SAME. b) The merger must be clear and definite. c) The very obligation involved must be the same or identical (because if the debtor acquires certain rights from the creditor with respect to other things, there is no merger). (NoTE: If an heir is a debtor of the deceased, merger does not necessarily follow, for other creditors may be prejudiced.)

EFFECT OF TRANSFER OF RIGHTS: Mere transfer to a third person of rights belonging to both the debtor and the creditor BUT not the credit as against the debt does not result in merger.

EXTINCTION OF REAL RIGHTS: Real rights such as usufruct over property, may be extinguished by merger when the naked owner himself becomes the usufructuary.

(NOTE: this is also denominated as consolidation of ownership)

REVOCABILITY OF CONFUSION OR MERGER If the reason for the confusion ceases, the obligation is REVIVED.

Art. 1276. Merger which takes place in the person of the principal debtor or creditor benefits the guarantors. Confusion which takes place in the person of any of the latter does not extinguish the obligation.

Art. 1277. Confusion does not extinguish a joint obligation except as regards the share corresponding to the creditor or debtor in whom the two characters concur.

COMPENSATION

Art. 1278. Compensation shall take place when two persons , in their own right, are creditors and debtors of each other .

COMPENSATION DEFINED It is the extinguishment in the concurrent amount of the obligations of those persons who are reciprocally debtors and creditors of each other.

USEFULNESS OF COMPENSATION In effect, it is a specie of abbreviated payment which gives to each of the parties a double advantage: a) Facility of payment b) Guaranty for the effectiveness of je credit because if one of the parties pays even without waiting to be paid by the other, he could easily made a victim if fraud or insolvency

COMPENSATION DISTINGUISHED FROM PAYMENT a) While payment must be complete and indivisible as a rule, in compensation, partial extinguishment is always permitted.

b) While payment involves action or delivery, true compensation (legal compensation) takes place by operation of law.

COMPENSATION DISTINGUISHED FROM MERGER a) As to the number of persons In confusion, there is only one person in whom is merged the qualities of creditor and debtor. In compensation, there must be two persons who are mutually creditor and debtor to each other. b) As to the number of obligations In confusion, there can be only one In compensation, there must be two.

COMPENSATION DISTINGUISHED FROM COUNTERCLAIM OR SET-OFF a) A set-off or a counterclaim must be pleaded to be effectual, whereas compensation takes place by mere operation of law, and extinguishes reciprocally the two debts as soon as they exist simultaneously, to the amount of their respective sums. b) A set-off or counterclaim works as a sort of judicial compensation, provided that the requirements of the Rules of Court, particularly on Counterclaims and/or Cross-claims are observed.

KINDS OR CLASSES OF COMPENSATION: a) According to its effect or extent: 1) Total if both obligations are completely extinguished because they are of the same or equal amounts. 2) Partial when a balance remains b) According to its origin or cause: 1) Legal this takes place by operation of law, and need not be pleaded. 2) Voluntary or conventional this is due to the agreement of the parties.

3) Judicial (also termed as set-off) this must be pleaded; it can be made effective only by an order from the court 4) Facultative here, one of the parties has the choice of claiming the compensation or of opposing it (perhaps because not all the requisites of legal compensation are present)

Art. 1279. In order that compensation may be proper, it is necessary: 1) That each one of the obligors be bound principally, and that he be at the same time a principal creditor of the other; 2) That both debts consist in a sum of money, or if the things due are consumable, they be of the same kind, and also of the same quality if the latter has been stated; 3) That the two debts are due; 4) That over neither of them there be any retention or controversy; commenced by third persons and communicated in due time to the debtor.

Art. 1287. Compensation shall not be proper when one of the debts arises from a depositum or from the obligations of a depository or of a bailee in commodatum. Neither can compensation be set up against a creditor who has claim for support due bay gratuitous title, without prejudice to the provisions of paragraph 2 of Article 301.

Art. 1288.Neither shall there be compensation if one of the debts consists in civil liability arising from a penal offense.

NOVATION

Art. 1291. Obligations may be modified by: 1) Changing their object or principal conditions; 2) Substituting the person of the debtor 3) Subrogating a third person in the right of the creditor.

Novation Defined: By novation it is understood the substitution or change of an obligation by another, which extinguishes or modifies the first, either changing its object or principal condition, or substituting another in place of the debtor, or subrogating a third person in the right of the creditor.

Kinds of Novation: a) According to its object or purpose 1) Real or Objective changing the object or the principal condition of the obligation 2) Personal or Subjective change of persons a) Substituting the person of the debtor Expromision or Delegacion b) Subrogating a third person in the rights of the creditor may be by agreement conventional subrogation, or by operation of law. legal subrogation 3) Mixed (Change of object and Parties) b) According to the Form of its Constitution 1) express 2) implied (when the two obligations are essentially incompatible with each other c) According to Its Extent or Effect 1) total or extinctive novation ( when the old obligation is completely extinguished) 2) partial or modificatory this is also termed imperfect or improper novation Here the old obligation is merely modified; thus it still remains in force except insofar as it has been modified. Should there be any doubt as to whether the novation is total or partial, it shall be presumed to be merely modificatory.

REQUISITES OF NOVATION****

a) The existence of a valid old obligation.

1) If the old obligation is VOID or NON-EXISTENT, there is nothing to novate. 2) If the old obligation is VOIDABLE, novation is still possible provided the obligation has not yet been annulled. b) The intent to extinguish or to modify the old obligation by a substantial difference (the extinguishment or modification itself is a RESULT of novation) c) The capacity and consent of all the parties (except in the case of expromision, where the old debtor does not participate). d) The validity of the new obligation.

Art. 1293. Novation which consists in substituting a new debtor in the place of the original one, may be made even without the knowledge or against the will of the latter, but not without the consent of the creditor. Payment by the new debtor gives him the rights mentioned in Articles 1236 and 1237.

Two kinds of personal or subjective novation: a) Change of the debtor (passive) b) Change of the creditor (active)

EXPROMISION a) Here the initiative comes from a third person b) It is essential that the old debtor be RELEASED from his obligation, otherwise there will be no EXPROMISION, no novation.

REQUISITES FOR EXPROMISION a) The initiative comes from a third person (who will be the new debtor) b) The new debtor and the creditor must CONSENT c) The old debtor must be excused or released from his obligation

-The old debtors consent or knowledge is not required

DELEGACION a) This is defined as a method of novation caused by the replacement of the old debtor by a new debtor, who (the old debtor) has proposed him to the creditor, and which replace,ent has been agreed to by said creditor and by said new debtor. b) Note that here the delegacion or initiative comes from the old debtor himself. c) As in the case of expromision, the old debtor must be released from the obligation; otherwise, there is no valid delegacion.

PARTIES IN DELEGACION a) The delegante the original debtor b) The delegatorio the creditor c) The delegado the new debtor

Art. 1294. If the substitution is without the knowledge or against the will of the debtor, the new debtors insolvency or non-fulfillment of the obligation shall not give rise to any liability on the part of the original debtor.

Art. 1295.**** The insolvency of the new debtor, who has been proposed by the original debtor and accepted by the creditor, shall not revive the action of the latter against the original obligor, except when said insolvency was already existing and of public knowledge, or known to the debtor, when he delegated his debt.

Art. 1300. Subrogation of a third person in the rights of the creditor is either legal or conventional. The former is not presumed, except in cases expressly mentioned in this Code; the latter must be clearly established in order that it may take effect.

SUBROGATION DEFINED Subrogation (extinctive subjective novation by change of the creditor ) is the transfer to a third person of all the rights appertaining to the creditor,

including the right to proceed against guarantors, or possesors of mortgages, subject to any legal provision or any modification that may be agreed upon.

LEGAL SUBROGATION NOT PRESUMED Legal subrogation is not presumed, except in the case expressly mentioned in the law.

CONVENTIONAL SUBROGATION MUST BE ESTABLISHED -otherwise it is as if no subrogation has taken place.

Art. 1301. Conventional subrogation of a third person requires the consent of the original parties and of the third person.

CONVENTIONAL OR VOLUNTARY SUBRO GATION For the conventional or legal subrogation, the CONSENT OF ALL the opartie is required: a) The debtor because he becomes liable under the new obligation; and because his old obligation ends b) The old creditor because his credit is affected c) The new creditor because he becomes a party of the obligation

Art. 1302. It is presumed that there is legal subrogation: 1) When a creditor pays another creditor who is preferred, even without the debtors knowledge 2) When a third person, not interested in the obligation, pays with the express or tacit approval of the debtor 3) When, even without the knowledge of the debtor, a person interested in the fulfilment of the obligation pays, without prejudice to the effects of confusion as to the latters share.

Art. 1303. Subrogation transfers to the person subrogated the credit with all the rights thereto appertaining, either against the debtor or against third persons, be they guarantors or possesors of mortgages, subject to stipulation in a conventional subrogation.

CONTRACTS

Art. 1305. A contract is a meeting of minds between two persons whereby one binds himself, with respect to the other, to give something or to render some service.

ELEMENTS OF A CONTRACT a) Essential elements without them a contract cannot exist Examples: consent, subject matter, cause or consideration. In some contracts, form is also essential; still in others, delivery is likewise essential b) Natural elements those found in certain contracts, and presumed to exist, unless the contrary has been stipulated Examples: warranty against eviction and against hidden defects in the contract of sale c) Accidental elements these are the various particular stipulations that may be agreed upon by the contracting parties in a contract. They are called accidental, because they may be present or absent, depending upon whether or not the parties have agreed upon them. Examples: the stipulation to pay credit; the stipulation to pay interest; the designation of the particular place for delivery or payment.

CLASSIFICATION OF CONTRACTS a) According to perfection or formation:

1) Consensual perfected by mere consent; example: sale 2) Real perfected by delivery examples: depositum, pledge, commodatum 3) Formal or solemn those where special formalities are essential before the contract may be perfected, examples: a donation inter vivos of real property requires for its validity a public instrument. b) According to cause or equivalence of the value of prestations: 1) Onerous where there is an interchange of equivalent valuable consideration 2) Gratuitous or lucrative this is FREE, thus one party receives no equivalent prestation except a feeling that one has been generous or liberal 3) Remunerative one where one prestation is given for the benefit or service that had been rendered previously. c) According to importance or dependence of one upon another: 1) Principal here, the contract may stand alone by itself. Examples: sales, lease 2) Accessory this depends for its existence upon another contract; example: mortgage. Here the principal contract is one of LOAN. d) According to the parties obligated: 1) Unilateral where only one of the parties has an obligation : example: commodatum like the borrowing of the bicycle 2) Bilateral or synalagmatic here, both parties are required to render reciprocal prestations: example: sale e) According to their name or designation: 1) Nominate here the contract is given a particular or special name; examples: commodatum, partnership, sale, agency, deposit 2) Innominate also called contraltos innominados those not given any special name; example: do ut des i give that you may give. f) According to the risk of fulfilment 1) Commutative here the parties contemplate a real fulfilment; therefore, equivalent values are given. Examples:sales, lease 2) Aleatory here the fuilfillment is dependent upon chance; thus the values vary because of the risk of chance; example:insurance contract g) According to the time of performance or fulfilment:

1) Executed one completed at the time the contract is entered into, that is, the obligations are complied with at this time: example: a sale of property which has already been paid for. Note: in the case of personal property, this results in tangible property itself, a chose in possession. 2) Executor y one where the prestations are to be complied with at some future time; example: a perfected sale, where the property has not yet been delivered, and where the price has not yet been given. In the meantime, there is only a chose in action Note: if the whole or a part of the property or price has been delivered, the contract may be said to be partially executed

h) According to subject matter: 1) contract involving things (like Sale) 2) contracts involving rights or credits (provided these are transmissible, like a contract of usufruct, or assignment of credits) 3) contracts involving services (like agency, lease of services, a contract of common carriage, a contract of carriage (simple carriage) i) according to obligations imposed and regarded by the law: