o Blic on Reviewer 2

OBLIGATIONS and CONTRACTS / Midterms: Obligations

Chapter 1: General Provisions

Art. 1156. An obligation is a juridical necessity to give, to do or not to do. (n)

Art. 1157. Obligations arise from:(1) Law;(2) Contracts;(3) Quasi-contracts;(4) Acts or omissions punished by law; and(5) Quasi-delicts. (1089a)

Art. 1158. Obligations derived from law are not presumed. Only those expressly determined in this Code or in special laws are demandable, and shall be regulated by the precepts of the law which establishes them; and as to what has not been foreseen, by the provisions of this Book. (1090)

According to Manresa, law is the source of obligation if the law establishes the obligation and the act is nothing more than a factor for determining the moment when it becomes demandable. Law is not the source if it merely acknowledges the existence of an obligation generated by fact.

[Pelayo v. Lauron: According to law, it is the husband’s obligation to support; parents-in-law are not specifically mentioned.][De la Cruz v. Northern Theatrical Ent.: An employer is not required by law to assist his employee in litigation, but because they may be subsidiarily liable, they may opt to.]

Art. 1159. Obligations arising from contracts have the force of law between the contracting parties and should be complied with in good faith. (1091a)

Neither party may unilaterally evade his obligation in the contract, unless:1. Contract authorizes it2. Other party assents

Parties may freely enter into any stipulations, provided they are not

contrary to law, morals, good customs, public order or public policy.

Art. 1160. Obligations derived from quasi-contracts shall be subject to the provisions of Chapter 1, Title XVII, of this Book. (n)

A quasi-contract is that juridical relation resulting from a lawful, voluntary and unilateral act, and which has for its purpose, the payment of indemnity to the end that no one shall be unjustly enriched or benefited at the expense of another. There are 2 kinds:a. Negotiorum gestio -

unauthorized management; this takes place when a person voluntarily takes charge of another’s abandoned business or property without the owner’s authority

b. Solutio indebiti - undue payment; this takes place when something is received when there is no right to demand it, and it was unduly delivered thru mistake

Art. 1161. Civil obligations arising from criminal offenses shall be governed by the penal laws, subject to the provisions of Article 2177, and of the pertinent provisions of Chapter 2, Preliminary Title, on Human Relations, and of Title XVIII of this Book, regulating damages. (1092a)

Governing rules:1. Pertinent provisions of the RPC and

other penal laws subject to Art 2177 Civil Code

a. Art 100, RPC – Every person criminally liable for a felony is also civilly liableEXCEPTIONS – crimes with no private offended party, crimes against the state (e.g. rebellion, treason, espionage etc.)

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2. Chapter 2, Preliminary title, on Human Relations (Civil Code)

3. Title 18 of Book IV of the Civil Code (on damages)

What civil liability arising from a crime includes:

a. restitutionb. reparation of damage causedc. indemnity for consequential

damages

Effect of acquittal in criminal case: when acquittal is due to reasonable

doubt – no civil liability when acquittal is due to exempting

circumstances – there is civil liability

when there is preponderance of evidence – there is civil liability

Art. 1162. Obligations derived from quasi-delicts shall be governed by the provisions of Chapter 2, Title XVII of this Book, and by special laws. (1093a)

It is a fault or act of negligence (or omission of care) which causes damage to another, there being no pre-existing contractual relations between the parties

Elements:a. There must be fault or negligence

attributable to the person chargedb. There must be damage or injuryc. There must be a direct relation of

cause and effect between the fault or negligence on the one hand and the damage or injury on the other hand (proximate cause)

Chapter 2: Nature and Effect of Obligations

Obligation to give – in re Obligation to do/not to do – ad rem

Art. 1163. Every person obliged to give something is also 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. (1094a)

In determining the presence of diligence (or absence thereof), take into consideration the circumstance of the persons, of the time, and of the place.

Test of Negligence (in relation to Art. 1173) – Whether the defendant in committing or causing the negligent act, had used reasonable care and vigilance which a man of ordinary prudence would have employed under the same situation, he is not negligent.

Art. 1164. The creditor has a right to the fruits of the thing from the time the obligation to deliver it arises. However, he shall acquire no real right over it until the same has been delivered to him. (1095)

Fruits – Natural, Civil, Industrial Personal right – Right of a person

to demand from another, as a definite passive subject, the fulfillment of the latter’s obligation.

o In an obligation, it is possible that at first, you don’t know the passive and/or the active subject, but they may be known someday.

Real right – Right or interest of a person over a specific thing without a definite passive subject whom the right may be enforced.

o (Ownership, Possession, Mortgage).

Art. 1165. When what is to be delivered is a determinate thing, the creditor, in addition to the right granted him by Article 1170, may compel the debtor to make the delivery.

Remedies: o Specific performanceo Rescission (Art. 1380)o Resolution (Art. 1191) o Damages (Art. 1170)



If the thing is indeterminate or generic, he may ask that the obligation be complied with at the expense of the debtor.

It is not necessary that creditor should compel the debtor to make delivery, although he may also ask performance from debtor.

If the obligor delays, or has promised to deliver the same thing to two or more persons who do not have the same interest, he shall be responsible for any fortuitous event until he has effected the delivery. (1096)

Art. 1166. The obligation to give a determinate thing includes that of delivering all its accessions and accessories, even though they may not have been mentioned. (1097a)

Accessions – Fruits of a thing or additions to or improvements upon the thing

Accessories – Things joined to or included with the principal thing for the latter’s embellishment, better use, or completion

Art. 1167. If a person obliged to do something fails to do it, the same shall be executed at his cost.This same rule shall be observed if he does it in contravention of the tenor of the obligation. Furthermore, it may be decreed that what has been poorly done be undone. (1098)

In obligations to do, an action for specific performance cannot be filed (as regards the right against involuntary servitude as guaranteed by the Constitution):

o In cases where a) debtor failed to fulfill the obligation or b) the obligation was done in violation of the agreement and said obligation can be performed by others, either the creditor himself or another person may do so; the

debtor should shoulder the expense

o If only the debtor can perform the act/prestation, file for damages

o If performance was poorly done, it may be decreed by court order that creditor may undo it at debtor’s expense

Art. 1168. When the obligation consists in not doing, and the obligor does what has been forbidden him, it shall also be undone at his expense. (1099a)

Art. 1169. Those obliged to deliver or to do something incur in delay from the time the obligee judicially or extrajudicially demands from them the fulfillment of their obligation.

Mora solvendi – default on the part of the debtor; 2 kinds:

1. Mora Solvendi Ex re – default in real obligations

2. Mora Solvendi Ex persona – default in personal obligations

Elements:a. The obligation must be due,

enforceable and already liquidated or determinate in amount

b. There must be non-performance

c. There must be a demand, unless demand is not required

Effects – if lost (even if fortuitous, still liable; shall be liable for interest, damages, action for specific performance or resolution (art 1170, in proper cases)

Mora accipiendi – default on part of the creditor

Effects – obligation by debtor only when lost by gross negligence or fault; damages (expenses due to refusal of creditor to accept)



However, the demand by the creditor shall not be necessary in order that delay may exist:(1) When the obligation or the law

expressly so declare; or(2) When from the nature and the

circumstances of the obligation it appears that the designation of the time when the thing is to be delivered or the service is to be rendered was a controlling motive for the establishment of the contract; or

[Lorenzo Shipping Corporation v. BJ Marthel Int’l: Had the time been intended as a controlling factor, they should have indicated the date.]

(3) When demand would be useless, as when the obligor has rendered it beyond his power to perform.

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 moment one of the parties fulfills his obligation, delay by the other begins. (1100a)

Compensation morae – delay of both debtor and creditor the effect is that it is as if there is no default (but see Art. 1192).

Effects – no more damages (compensated); action for damages, rescission; specific performance

[Santos Ventura Horcoma Foundation v Santos: Compromise agreement is binding upon execution and not upon court approval; valid demand: due, demandable, and liquidated – may be oral or written.][SSS v. Moonwalk Development and Housing Corporation: Demand: there must be indication that the creditor can no longer tolerate the non fulfillment and must demand no less than the compliance with the obligation to do; Not Demand:

mere statement of account, reminder, request.]

Art. 1170. Those who in the performance of their obligations are guilty of fraud, negligence, or delay, and those who in any manner contravene the tenor thereof, are liable for damages. (1101)

Kinds of fraud:1. Fraud in the performance

(malice) – present only during the performance, evades the normal fulfillment;

o Remedy: Damages2. Fraud in the perfection of a

contract (dolo) – present at the time of birth of the obligation, performed to secure consent

3. Causal fraud – substantialo Remedy: Annulment

4. Incidental fraud – not substantial

o Damages (remedy)

Remedies of persons in fraud under obligations are:

a. insist on specific performance (Art. 1233)

b. resolve contract (Art. 1191)

c. claim damages, in either case

[Telefast Communication/Phil. Wireless, Inc. v. Castro, Sr.: They did not do the obligation to transmit the message; neither did they inform that they cannot transmit it (amounting to contravention of the tenor of the obligation).]

Art. 1171. Responsibility arising from fraud is demandable in all obligations. Any waiver of an action for future fraud is void. (1102a)

Past fraud may be waived.

Art. 1172. Responsibility arising from negligence in the performance of every kind of obligation is also demandable, but



such liability may be regulated by the courts, according to the circumstances. (1103)

Simple negligence may be waived. Gross negligence may not be

waived.

Art. 1173. The fault or negligence of the obligor consists in the omission of that diligence which is required by the nature of the obligation and corresponds with the circumstances of the persons, of the time and of the place. When negligence shows bad faith, the provisions of Articles 1171 and 2201, paragraph 2, shall apply.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 a family shall be required. (1104a)

Take into consideration the circumstance of the persons, of the time, and of the place.

Test of Negligence: (in relation to article 1173) – see page 2.

Art. 1174. Except in cases expressly specified by the law, or when it is otherwise declared by stipulation, or when the nature of the obligation requires the assumption of risk, no person shall be responsible for those events which could not be foreseen, or which, though foreseen, were inevitable. (1105a)

Fortuitous event – independent of human will, must render it impossible for the debtor to fulfill the obligation in the usual manner, debtor must be free of participation in the aggravation of the injury to the creditor

[NPC v. CA & Juntilla v. Fontanar: In both cases, it is held that a fortuitous event is humanized by fraud, negligence, delay, or the contravention of the tenor of the obligation by the debtor (debtor at fault or contributed to the aggravation).]

There are 2 kinds of fortuitous event:1. Fortuitous Event – acts of

God2. Force Majeure – acts of man

(not the debtor; e.g. hold-up, arson)

Art. 1175. Usurious transactions shall be governed by special laws. (n)

Usury (defined specifically as interest in excess of a legal rate charged to a borrower for the use of money) has become legally non-existent since the effectivity of Central Bank Circular No. 905. While the Usury Law has been suspended by said circular and parties to a loan agreement have been given leeway to agree on any interest rate, still stipulated interest rates are illegal if unconscionable.

Art. 1176. The receipt of the principal by the creditor without reservation with respect to the interest, shall give rise to the presumption that said interest has been paid.The receipt of a later installment of a debt without reservation as to prior installments, shall likewise raise the presumption that such installments have been paid. (1110a)

[Reformina v. Tomol, Eastern Shipping v. CA, & Commonwealth Insurance Corporation v. CA: Legal interest rate:1. Loan or forbearances in money –> If with stipulation – from the time judicially demanded> If without stipulation – 12% p.a. from Judicial or extrajudicial demand2. Claim for damages – > 6% p.a. from judicial or extrajudicial demand or until the amount is reasonably established3. As regards the final judgment of the first two cases – 12% p.a. (Q: When will your interest earn interest? A: Read Art. 2212.)]



Art. 1177. The creditors, after having pursued the property in possession of the debtor to satisfy their claims, may exercise all the rights and bring all the actions of the latter for the same purpose, save those which are inherent in his person; they may also impugn the acts which the debtor may have done to defraud them. (1111)

Remedies of creditors – generally transmissible (except: law, stipulation, personal obligation):

1. Exact performance - specific, substitute, equivalent

2. Exhaustion of debtor’s properties still in his possession – Attach and execute debtor's property which is not exempt (Art. 2236)

3. Accion subrogatoria (Art. 1171)

Requisites:a. Creditor must have right

of return against debtorb. The debt is due and

demandablec. There is a failure of the

debtor to collect his own debt from 3rd persons either through malice or negligence

d. debtor's assets are insufficient

e. The right of account is not purely personal

4. Accion pauliana Requisites:

a. There is a credit in favor of plaintiff

b. The debtor has performed an act subsequent to the contract, giving advantage to other persons

c. The creditor is prejudiced by the debtor's act which are in favor of 3rd parties and rescission will benefit the creditor

d. The creditor has no other legal remedy

b. The debtor's acts are fraudulent

Art. 1178. Subject to the laws, all rights acquired in virtue of an obligation are transmissible, if there has been no stipulation to the contrary. (1112)

Non-transmissible rights: Prohibited by law:

o Those purely personal in character

o Partnership – in that you cannot have yourself replaced by, say, your friend as partner regardless of how much you trust him/her without gaining others’ consent

o Agency – you cannot have yourself replaced by your friend as agent with the same reasons above without consent of the principal

o Commodatum – you cannot lend to another a thing/object you were lent without obtaining permission from the owner of the thing who lent it to you in the first place

o Shares of solidary creditor as per Art. 1213

Chapter 3: Different Kinds of Obligations

Section 1: Pure and Conditional Obligations

Art. 1179. Every obligation whose performance does not depend upon a future or uncertain event, or upon a past event unknown to the parties, is demandable at once.Every obligation which contains a resolutory condition shall also be demandable, without prejudice to the



effects of the happening of the event. (1113)

Art. 1180. When the debtor binds himself to pay when his means permit him to do so, the obligation shall be deemed to be one with a period, subject to the provisions of Article 1197. (n)

[Patente v. Omega: When they intended that there should be a period within which the debtor should pay his debt, it is for the court to fix the period.][Tiglao v. Manila Railroad: In n obligation with a period but left to the will of the debtor (e.g. paid when funds for the purpose become available) – the court may fix the period & it is not necessarily on a separate action.]

Art. 1181. In conditional obligations, the acquisition of rights, as well as the extinguishment or loss of those already acquired, shall depend upon the happening of the event which constitutes the condition. (1114)

[Javier v. CA: Sale of hope/expectancy is deemed subject to the condition that the thing will come to existence.][Central Phil. University v. CA & Parks v. Province of Tarlac: If the contract is to construct something, it is subject to a resolutory – not a suspensive – condition; and the period to construct shall be a reasonable time depending on circumstance or the courts may determine such period.]

Art. 1182. When the fulfillment of the condition depends upon the sole will of the debtor, the conditional obligation shall be void. If it depends upon chance or upon the will of a third person, the obligation shall take effect in conformity with the provisions of this Code. (1115)

[Vda. De Mistica v. Naguiat: a contract of sale is subject to a resolutory condition (e.g. to construct a building); contract to sell is subject to a suspensive (e.g. until full payment of price); it is not a potestative condition if there is no

indication that it is depended upon the debtor’s will and also if there is partial payment for it means that there is intention to be bound.][Trillana v. Quezon College, Inc.: “… matapos akong makapanghuli ng isda” = example of a potestative/facultative condition; it is void.][Romero v. CA: Contract of sale is perfected at once when a person obligates himself, for a price certain, to deliver & to transfer ownership of a specified thing or right to another over which the latter agrees.][Santos v. CA: A contract of sale is what the law defines it taking into consideration its essential elements and not what the contracting parties call it.]

A potestative/facultative condition dependent upon the will of the debtor is void if it is a suspensive condition but is not if it is a resolutory condition.

Art. 1183. Impossible conditions, those contrary to good customs or public policy and those prohibited by law shall annul the obligation which depends upon them. If the obligation is divisible, that part thereof which is not affected by the impossible or unlawful condition shall be valid.

An example of an impossible condition: killing your best friend (as per recitation examples)

The condition not to do an impossible thing shall be considered as not having been agreed upon. (1116a)

In this case, the obligation would still subsist but the condition will be done away; i.e. the obligation becomes simple, pure and immediately demandable as if there’s no condition involved: e.g. if the condition is not to kill your best friend (once again, as per recitation examples)

Art. 1184. The condition that some event happen at a determinate time shall



extinguish the obligation as soon as the time expires or if it has become indubitable that the event will not take place. (1117)

Art. 1185. The condition that some event will not happen at a determinate time shall render the obligation effective from the moment the time indicated has elapsed, or if it has become evident that the event cannot occur.If no time has been fixed, the condition shall be deemed fulfilled at such time as may have probably been contemplated, bearing in mind the nature of the obligation. (1118)

Art. 1186. The condition shall be deemed fulfilled when the obligor voluntarily prevents its fulfillment. (1119)

[Visayan Sawmill v. CA: If a contract is not perfected, you cannot rescind; positive suspensive condition did not happen.]

Art. 1187. The effects of a conditional obligation to give, once the condition has been fulfilled, shall retroact to the day of the constitution of the obligation. Nevertheless, when the obligation imposes reciprocal prestations upon the parties, the fruits and interests during the pendency of the condition shall be deemed to have been mutually compensated. If the obligation is unilateral, the debtor shall appropriate the fruits and interests received, unless from the nature and circumstances of the obligation it should be inferred that the intention of the person constituting the same was different.

All the fruits of a thing before the happening of the condition involved in the obligation will be the debtor’s, unless otherwise from the nature and circumstances of the obligation said fruits will also be given to the creditor. “The creditor has a right to the fruits of the thing from the time the obligation to deliver it arises.” (Art. 1164.)

In obligations to do and not to do, the courts shall determine, in each case, the retroactive effect of the condition that has been complied with. (1120)

Art. 1188. The creditor may, before the fulfillment of the condition, bring the appropriate actions for the preservation of his rights

Examples: o writ of injunctiono annotation of creditor’s

right, security (if debtor becomes insolvent)

o actions to set aside alienations made by debtor to defraud creditor

o action against adverse possessors to interrupt the running of prescriptive period

The debtor may recover what during the same time he has paid by mistake in case of a suspensive condition. (1121a)

Art. 1189. When the conditions have been imposed with the intention of suspending the efficacy of an obligation to give, the following rules shall be observed in case of the improvement, loss or deterioration of the thing during the pendency of the condition:(1) If the thing is lost without the fault of

the debtor, the obligation shall be extinguished;

Kinds: physical, legalo e.g. something not outside the

commerce of man but eventually became outside (if thing originally was already outside the commerce of man, the obligation is void)

(2) If the thing is lost through the fault of the debtor, he shall be obliged to pay damages; it is understood that the thing is lost when it perishes, or goes out of commerce, or disappears in such a way that its existence is unknown or it cannot be recovered;



A thing is lost when it – o Perishes;o Goes outside the commerce of

man;o Disappears, and:

1. its existence is unknown; or2. even if known, cannot be

recovered (this is also known as the “physical impossibility of recovery”)

(3) When the thing deteriorates without the fault of the debtor, the impairment is to be borne by the creditor;

(4) If it deteriorates through the fault of the debtor, the creditor may choose between the rescission of the obligation and its fulfillment, with indemnity for damages in either case;

(5) If the thing is improved by its nature, or by time, the improvement shall inure to the benefit of the creditor;

If the thing is damaged by fault of debtor, may offset damage with improvement (Arts. 562, 579, 580)

(6) If it is improved at the expense of the debtor, he shall have no other right than that granted to the usufructuary. (1122) If improvements can be removed

without damaging the property: remove

If improvements cannot be removed: usufruct (refer to articles mentioned in No. 5 – rights of usufruct)

Art. 1190. When the conditions have for their purpose the extinguishment of an obligation to give, the parties, upon the fulfillment of said conditions, shall return to each other what they have received.In case of the loss, deterioration or improvement of the thing, the provisions which, with respect to the debtor, are laid down in the preceding article shall be applied to the party who is bound to return.

In this case, the creditor, being the party bound to return, becomes the debtor in the obligation to return

the thing involved. Article 1189 applies here.

As for the obligations to do and not to do, the provisions of the second paragraph of Article 1187 shall be observed as regards the effect of the extinguishment of the obligation. (1123)

Art. 1191. The power to rescind obligations is implied in reciprocal ones, in case one of the obligors should not comply with what is incumbent upon him.The injured party may choose between the fulfillment and the rescission of the obligation, with the payment of damages in either case. He may also seek rescission, even after he has chosen fulfillment, if the latter should become impossible.The court shall decree the rescission claimed, unless there be just cause authorizing the fixing of a period.This is understood to be without prejudice to the rights of third persons who have acquired the thing, in accordance with Articles 1385 and 1388 and the Mortgage Law. (1124)

[Gil v. CA: Reciprocal obligations are performed simultaneously; in a contract of sale, the vendee is entitled to retain the purchase price if the vendor fails to perform any essential obligation of the contract.][Ayson-Simon v. Adamos: Prescriptive period = 4 years from the time judgment on prior action for specific performance which has become impossible to execute becomes final.][Buenaventura Angeles v. Ursula Torres Calasanz: If there is only casual breach/slight breach, unilateral cancellation is not warranted.][Delta Motor Corp. v. Genuino & Pagtalunan v. De la Cruz Vda. De Manzano: Notice of rescission may be oral or written, the latter of which must be notarized if it concerns real estate.][Jison v. CA & Dyjamco v. CA: There is no need for judicial rescission if there is an automatic revocation clause, that it may



be cancelled for violation of any of its terms and conditions.][Fabrigas v. San Francisco Del Monte: An automatic cancellation clause contrary to RA 6552 is void; (RA 6552: An Act to Provide Protection to Real Estate on Installment Requirements – grace period of 60 days).][Areola v. CA: Reciprocal obligations are those that arise from the same cause in which each party is both debtor and creditor of the other, such that the obligation of one is dependent upon the obligation of the other.][Tayag Company, Inc. v. CA: Constructive fulfillment under Art. 1186 also applies to reciprocal obligations; substantial compliance by partial payment prevents exercise of right to rescind.]

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. (n)

[Osmeña III v. SSS: Acceptance of payment after the end of grace period shall be deemed a waiver of the right to rescind (creditor is bound in estoppel).]

In this scenario, the party who suffered more may still recover damages.

Section 2: Obligations with a Period Art. 1193. Obligations for whose fulfillment a day certain has been fixed, shall be demandable only when that day comes.Obligations with a resolutory period take effect at once, but terminate upon arrival of the day certain.A day certain is understood to be that which must necessarily come, although it may not be known when.If the uncertainty consists in whether the day will come or not, the obligation is

conditional, and it shall be regulated by the rules of the preceding Section. (1125a)

Art. 1194. In case of loss, deterioration or improvement of the thing before the arrival of the day certain, the rules in Article 1189 shall be observed. (n)

Art. 1195. Anything paid or delivered before the arrival of the period, the obligor being unaware of the period or believing that the obligation has become due and demandable, may be recovered, with the fruits and interests. (1126a)

This provision is comparable with the second paragraph of Art. 1188

Art. 1196. Whenever in an obligation a period is designated, it is presumed to have been established for the benefit of both the creditor and the debtor, unless from the tenor of the same or other circumstances it should appear that the period has been established in favor of one or of the other. (1127)

EXAMPLE: We have here an obligation to “pay on or before” a certain date; it would depend on either the debtor’s or the creditor’s discretion as to when payment should be made. The debtor may decide to pay (he can’t be compelled to pay before the due date, but he may choose to pay before such due date if he wants to); the creditor also has the same right (he can demand payment anytime). However, if there is no stipulation, then the presumption is that the period is intended for both parties’ benefit.

Art. 1197. If the obligation does not fix a period, but from its nature and the circumstances it can be inferred that a period was intended, the courts may fix the duration thereof.The courts shall also fix the duration of the period when it depends upon the will of the debtor.In every case, the courts shall determine such period as may under the circumstances have been probably contemplated by the parties. Once fixed



by the courts, the period cannot be changed by them. (1128a)

[Araneta v. Phil. Sugar Estate Dev’t. Inc.: If the parties agreed on a “reasonable time”, the court could not just fix the period – the court would have to wait for the reasonable time to elapse (it requires a separate court action to fix the period).]

Art. 1198. The debtor shall lose every right to make use of the period:(1) When after the obligation has been

contracted, he becomes insolvent, unless he gives a guaranty or security for the debt;

(2) When he does not furnish to the creditor the guaranties or securities which he has promised;

(3) When by his own acts he has impaired said guaranties or securities after their establishment, and when through a fortuitous event they disappear, unless he immediately gives new ones equally satisfactory;

(4) When the debtor violates any undertaking, in consideration of which the creditor agreed to the period;

(5) When the debtor attempts to abscond. (1129a)

To abscond is to depart in a sudden and secret manner.

Section 3: Anternative Obligations

Art. 1199. A person alternatively bound by different prestations shall completely perform one of them.The creditor cannot be compelled to receive part of one and part of the other undertaking. (1131)

Art. 1200. The right of choice belongs to the debtor, unless it has been expressly granted to the creditor. [italics added for emphasis]The debtor shall have no right to choose those prestations which are impossible, unlawful or which could not have been the object of the obligation. (1132)

Art. 1201. The choice shall produce no effect except from the time it has been communicated. (1133)

Art. 1202. The debtor shall lose the right of choice when among the prestations whereby he is alternatively bound, only one is practicable. (1134)

Art. 1203. If through the creditor's acts the debtor cannot make a choice according to the terms of the obligation, the latter may rescind the contract with damages. (n)

Art. 1204. The creditor shall have a right to indemnity for damages when, through the fault of the debtor, all the things which are alternatively the object of the obligation have been lost, or the compliance of the obligation has become impossible.The indemnity shall be fixed taking as a basis the value of the last thing which disappeared, or that of the service which last became impossible.Damages other than the value of the last thing or service may also be awarded. (1135a)

Art. 1205. When the choice has been expressly given to the creditor, the obligation shall cease to be alternative from the day when the selection has been communicated to the debtor.Until then the responsibility of the debtor shall be governed by the following rules:(1) If one of the things is lost through a

fortuitous event, he shall perform the obligation by delivering that which the creditor should choose from among the remainder, or that which remains if only one subsists;

(2) If the loss of one of the things occurs through the fault of the debtor, the creditor may claim any of those subsisting, or the price of that which, through the fault of the former, has disappeared, with a right to damages;

(3) If all the things are lost through the fault of the debtor, the choice by the creditor shall fall upon the price of any one of them, also with indemnity for damages.



The same rules shall be applied to obligations to do or not to do in case one, some or all of the prestations should become impossible. (1136a)

Facultative Obligations

Art. 1206. When only one prestation has been agreed upon, but the obligor may render another in substitution, the obligation is called facultative.The loss or deterioration of the thing intended as a substitute, through the negligence of the obligor, does not render him liable. But once the substitution has been made, the obligor is liable for the loss of the substitute on account of his delay, negligence or fraud. (n)

Section 4: Joint and Solidary Obligations

[IMIDC v. NLRC: Solidarity is not implied, it must be expressed.]

Synonyms of “solidary”: Mancomunada solidaria De mancomun e insolidum In solidum Juntos or separadamente Joint & severally Invidually & collectively … each to pay the whole value… “I promise to pay” (signed by 2+

debtors) Collectively [Ronquillo v. CA: other synonym:

“individually and jointly”]

Solidarity is provided by law: Parents, for the acts & omissions of

minor children, are solidarily liable Under the RPC: liability of

principals, accomplices and accessories

Art. 1194: liability of joint tortfeasors

Art. 1207. The concurrence of two or more creditors or of two or more debtors in one and the same obligation does not imply that each one of the former has a right to demand, or that each one of the

latter is bound to render, entire compliance with the prestation. There is a solidary liability only when the obligation expressly so states, or when the law or the nature of the obligation requires solidarity. (1137a)

Joint – The presumption when 2 or more creditors or 2 or more debtors concur in one and the same obligation is that said obligation is joint.

Effects:a. Demand on one produces

delay only with respect to the debt

b. Interruption in payment by one does not benefit or prejudice the other

c. Vices of one debtor to creditor has no effect on the others

d. Insolvency of one debtor does not affect other debtors

An apt quote to describe a joint obligation is “to each his own” – a joint debtor is liable only to the extent of his share of the debt.

EXAMPLE: Q, W, E, and R are the creditors. A, S, D, and F are joint debtors. The debtors owe the creditors a total of P8000. This way, each of the joint debtors owes Q,W,E, and R P1000 each.

Solidary – Solidarity must be expressed in stipulation or provided by law or by nature of obligation.

As regards solidary obligations, the act, fault, misfortune or benefit of one is the act, fault, misfortune, benefit of all (as taken from the words of Atty. Cahayon in his ever-wonderful book, Essentials of Business Law).

EXAMPLE: In the same scenario as above, if any of the creditors collect the debt from any of the solidary debtors (A, S, D, or F) – for the purposes of this



example, let’s say the creditors collected from A – the debtor should pay the whole P8000 (and, of course, A would not pay 4 times just because all four creditors collected from him: that’s how solidary obligations work).

a. Active solidarity – solidarity on the part of the creditors or obligees

Effects:1. Death of 1 solidary creditor

transmits share to heirs (but collectively)

2. Each creditor represents the other in the act of recovery of payment

3. Credit is divided equally between creditors as among themselves

4. Debtor may pay any of the solidary creditors

b. Passive solidarity – solidarity on the part of debtors or obligors

Effects:1. Each debtor may be

requested to pay whole obligation with right to recover from co-debtors

2. Interruption of prescription to one creditor affects all

3. Interest from delay on 1 debtor is borne by all

c. Mixed solidarity – solidarity on the part of the obligors and obligees, or the part of the debtors and the creditors

d. Conventional solidarity – agreed upon by the parties

e. Legal solidarity – solidarity imposed by law

Instances where law imposes solidary obligation:1. obligations arising from tort2. obligations arising from

quasi-contracts3. legal provisions regarding

obligation of devisees and legatees

4. liability of principals, accomplices, and accessories of a felony

5. bailees in commodatum Effects:

a. If payment made before debt is due: no interest can be charged; otherwise – interest can be charged

b. insolvency of one – others are liable for share pro-rata

c. if different terms & conditions – collect only what is due, later on collect from any

d. no reimbursement if payment is made after prescription or became illegal

e. remission made after payment is made – co-debtor still entitled to reimbursement

f. effect of insolvency or death of co-debtor – still liable for whole amount

g. fault of any debtor – everyone is responsible – price, damage & interest

h. complete/ personal defense – total or partial ( up to amount of share only ) if not personal to him

Effect of loss or impossibility of the prestation:a. if without fault – no liabilityb. if with fault – there is

liability (also for damage and interest)

c. loss due to fortuitous event after default – there is liability (because of default)

NOTE: Computations to determine the extent liability as regards joint and solidary obligations are discussed on Appendix A (p. 26).

Art. 1208. If from the law, or the nature or the wording of the obligations to which the preceding article refers the contrary does not appear, the credit or debt shall be presumed to be divided into as many



shares as there are creditors or debtors, the credits or debts being considered distinct from one another, subject to the Rules of Court governing the multiplicity of suits. (1138a)

Art. 1209. If the division is impossible, the right of the creditors may be prejudiced only by their collective acts, and the debt can be enforced only by proceeding against all the debtors. If one of the latter should be insolvent, the others shall not be liable for his share. (1139)

Art. 1210. The indivisibility of an obligation does not necessarily give rise to solidarity. Nor does solidarity of itself imply indivisibility. (n)

Art. 1211. Solidarity may exist although the creditors and the debtors may not be bound in the same manner and by the same periods and conditions. (1140)

“The solidarity of the debtors is not affected even if different terms and conditions are assumed or made applicable to them.Enforcement of the terms and conditions may be made at different times. The obligations which have matured can be enforced while those still undue will have to be awaited. Enforcement can be made against any one of the solidary debtors although it can happen that a particular obligation chargeable to a particular debtor is not yet due. He will be answerable, nonetheless, for all prestations which fall due although chargeable to the other debtors. Thus, the essence of solidarity remains.” (Pineda, Obligations and Contracts, 2009 edition, p. 174)

Art. 1212. Each one of the solidary creditors may do whatever may be useful to the others, but not anything which may be prejudicial to the latter. (1141a)

Art. 1213. A solidary creditor cannot assign his rights without the consent of the others. (n)

Art. 1214. 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. (1142a)

Art. 1215. 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. (1143)

Art. 1216. The creditor may proceed against any one of the solidary debtors or some or all of them simultaneously. The demand made against one of them shall not be an obstacle to those which may subsequently be directed against the others, so long as the debt has not been fully collected. (1144a)

Art. 1217. 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.

[Republic Glass Corp. v. Qua: If a solidary debtor pays only his proportionate share, he is not entitled for reimbursement (it is not novation).][Diamond Builders v. Country Bankers: Suretyship is different from solidary liability.]

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 co-debtors, in proportion to the debt of each. (1145a)

NOTE: As regards the third paragraph of Art. 1217, see Appendix 2 (p. 27).

Art. 1218. Payment by a solidary debtor shall not entitle him to reimbursement from his co-debtors if such payment is made after the obligation has prescribed or become illegal. (n)

Art. 1219. The remission made by the creditor of the share which affects one of the solidary debtors does not release the latter from his responsibility towards the co-debtors, in case the debt had been totally paid by anyone of them before the remission was effected. (1146a)

Art. 1220. The remission of the whole obligation, obtained by one of the solidary debtors, does not entitle him to reimbursement from his co-debtors. (n)

Art. 1221. If the thing has been lost or if the prestation has become impossible without the fault of the solidary debtors, the obligation shall be extinguished.If there was fault on the part of any one of them, all shall be responsible to the creditor, for the price and the payment of damages and interest, without prejudice to their action against the guilty or negligent debtor.If through a fortuitous event, the thing is lost or the performance has become impossible after one of the solidary debtors has incurred in delay through the judicial or extrajudicial demand upon him by the creditor, the provisions of the preceding paragraph shall apply. (1147a)

Art. 1222. A solidary debtor may, in actions filed by the creditor, avail himself of all defenses which are derived from the nature of the obligation and of those which are personal to him, or pertain to his own share. With respect to those which

personally belong to the others, he may avail himself thereof only as regards that part of the debt for which the latter are responsible. (1148a)

Section 5: Divisible and Indivisible Obligations

Art. 1223. The divisibility or indivisibility of the things that are the object of obligations in which there is only one debtor and only one creditor does not alter or modify the provisions of Chapter 2 of this Title. (1149)

Art. 1224. A joint indivisible obligation gives rise to indemnity for damages from the time anyone of the debtors does not comply with his undertaking. The debtors who may have been ready to fulfill their promises shall not contribute to the indemnity beyond the corresponding portion of the price of the thing or of the value of the service in which the obligation consists. (1150)

Art. 1225. For the purposes of the preceding articles, obligations to give definite things and those which are not susceptible of partial performance shall be deemed to be indivisible.When the obligation has for its object the execution of a certain number of days of work, the accomplishment of work by metrical units, or analogous things which by their nature are susceptible of partial performance, it shall be divisible.However, even though the object or service may be physically divisible, an obligation is indivisible if so provided by law or intended by the parties.In obligations not to do, divisibility or indivisibility shall be determined by the character of the prestation in each particular case. (1151a)

Section 6: Obligations with a Penal Clause

Penal clause – accessory undertaking to assume greater liability in case of breach



Is it the same as liquidated damages?

o GENERAL RULE: there is no difference; however, the penalty in its punitive aspect is different from liquidated damages (for more information, see the ever-wonderful Jurado reviewer)

Purpose: 1. to ensure performance of an

obligation2. to substitute as indemnity for

damages or interest3. to penalize the debtor (as

provided by the ever-wonderful book of Atty. Cahayon)

Characteristics:1. Subsidiary –

o GENERAL RULE – only penalty can be demanded, principal cannot be demanded

o EXCEPTION – Penalty is joint or cumulative

2. Exclusive - takes place of damage, damage can only be demanded in the ff. cases:a. Stipulation – granting rightb. Refusal to pay penaltyc. With dolo (not of creditor)

Causes for reduction of penalty:a. If there is partial/irregular

performanceb. if the penalty provided is

iniquitous/unconscionable Art. 1226. In obligations with a penal clause, the penalty shall substitute the indemnity for damages and the payment of interests in case of noncompliance, if there is no stipulation to the contrary. Nevertheless, damages shall be paid if the obligor refuses to pay the penalty or is guilty of fraud in the fulfillment of the obligation.The penalty may be enforced only when it is demandable in accordance with the provisions of this Code. (1152a)

Art. 1227. The debtor cannot exempt himself from the performance of the obligation by paying the penalty, save in

the case where this right has been expressly reserved for him. Neither can the creditor demand the fulfillment of the obligation and the satisfaction of the penalty at the same time, unless this right has been clearly granted him. However, if after the creditor has decided to require the fulfillment of the obligation, the performance thereof should become impossible without his fault, the penalty may be enforced. (1153a) (italics added for emphasis)

As regards the debtor: right to exempt oneself from performance by paying the penalty instead should be expressly reserved to him

As regards the creditor: right to demand both fulfillment and satisfaction of penalty could be implied, as long as it is clear that the right has been given to him

Art. 1228. Proof of actual damages suffered by the creditor is not necessary in order that the penalty may be demanded. (n)

Art. 1229. The judge shall equitably reduce the penalty when the principal obligation has been partly or irregularly complied with by the debtor. Even if there has been no performance, the penalty may also be reduced by the courts if it is iniquitous or unconscionable. (1154a)

Art. 1230. The nullity of the penal clause does not carry with it that of the principal obligation.The nullity of the principal obligation carries with it that of the penal clause. (1155)

Chapter 4: Extinguishment of Obligations

General Provisions

Art. 1231. Obligations are extinguished:(1) By payment or performance;(2) By the loss of the thing due;



(3) By the condonation or remission of the debt;

(4) By the confusion or merger of the rights of creditor and debtor;

(5) By compensation;(6) By novation.Other causes of extinguishment of obligations, such as annulment, rescission, fulfillment of a resolutory condition, and prescription, are governed elsewhere in this Code. (1156a)

The enumeration in Art. 1231 is by no means exhaustive as there are other means of extinguishing an obligation; a few of them are:

o By death of the debtor when obligation is purely personal

o Waiver or renunciation by the creditor (Art. 6)

o Happening of fortuitous events (Art. 1174)

Section 1: Payment or Performance

The following are the requisites for valid payment/performance:

A. With respect to prestation itself:a. identityb. integrity or completenessc. indivisibility

B. With respect to parties - must be made by proper party to proper partya. Payor

o Payor – the one performing, he can be the debtor himself or his heirs or assigns or his agent, or anyone interested in the fulfillment of the obligation; can be anyone as long as it is with the creditor's consent

o Third person pays/performs – only the creditor's consent; if performance is done also with debtor's consent, he takes the place of the debtor; there is subrogation except if the

3rd person intended it to be a donation

o Third person pays/performs with consent of creditor but not with debtor's consent – the repayment is only to the extent that the payment has been beneficial to debtor

b. Payeeo Payee – creditor or obligee

or successor in interest of transferee, or agent

o Payee can also be third person - if any of the ff. concur: It must have redounded

to the obligee's benefit and only to the extent of such benefit

It falls under Art. 1241, par. 1-3 - the benefit is total so performance is total

c. Anyone in possession of the credit – but will apply only if debt has not been previously garnished

Art. 1232. Payment means not only the delivery of money but also the performance, in any other manner, of an obligation. (n)

Art. 1233. A debt shall not be understood to have been paid unless the thing or service in which the obligation consists has been completely delivered or rendered, as the case may be. (1157)

Art. 1234. If the obligation has been substantially performed in good faith, the obligor may recover as though there had been a strict and complete fulfillment, less damages suffered by the obligee. (n)

Art. 1235. When the obligee accepts the performance, knowing its incompleteness or irregularity, and without expressing any protest or objection, the obligation is deemed fully complied with. (n)

Art. 1236. The creditor is not bound to accept payment or performance by a third



person who has no interest in the fulfillment of the obligation, unless there is a stipulation to the contrary.Whoever pays for another may demand from the debtor what he has paid, except that if he paid without the knowledge or against the will of the debtor, he can recover only insofar as the payment has been beneficial to the debtor. (1158a)

Art. 1237. Whoever pays on behalf of the debtor without the knowledge or against the will of the latter, cannot compel the creditor to subrogate him in his rights, such as those arising from a mortgage, guaranty, or penalty. (1159a)

Art. 1238. 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. (n)

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." (1160a)

Free disposal means that it is not subjected to any claim, lien or encumbrance.

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. (1162a)

[BPI v. CA: Payment made to the wrong party does not extinguish the obligation as to the creditor who is without fault or negligence, even if the debtor acted in utmost good faith and by mistake as to the person of the creditor or through error induced by fraud of a third person.][Culaba v. CA: Payment should 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 person dealing with an agent is put upon inquiry and must discover upon his peril the authority of the agent (due diligence).]

Art. 1241. Payment to a person who is incapacitated to administer his property shall be valid if he has kept the thing delivered, or insofar as the payment has been beneficial to him.

Articles in the Civil Code regarding capacity:o Art. 38. Minority, insanity or

imbecility, the state of being a deaf-mute, prodigality and civil interdiction are mere restrictions on capacity to act, and do not exempt the incapacitated person from certain obligations, as when the latter arise from his acts or from property relations, such as easements. (32a)

o Art. 39. The following circumstances, among others, modify or limit capacity to act: age, insanity, imbecility, the state of being a deaf-mute, penalty, prodigality, family relations, alienage, absence, insolvency and trusteeship. The consequences of these circumstances are governed in this Code, other codes, the Rules of Court, and in special laws. Capacity to act is not limited on account of religious belief or political opinion.A married woman, twenty-one years of age or over, is qualified for all acts of civil life, except in cases specified by law. (n)

Payment made to a third person shall also be valid insofar as it has redounded to the benefit of the creditor. Such benefit to the creditor need not be proved in the following cases:(1) If after the payment, the third person

acquires the creditor's rights;



(2) If the creditor ratifies the payment to the third person;

(3) If by the creditor's conduct, the debtor has been led to believe that the third person had authority to receive the payment. (1163a)

Art. 1242. Payment made in good faith to any person in possession of the credit shall release the debtor. (1164)

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. (1165)

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. (1166a)

4 special forms of payment:1. Dation in payment2. Application of payment3. Cession4. Tender of payment and

consignation

Art. 1245. Dation in payment, whereby property is alienated to the creditor in satisfaction of a debt in money, shall be governed by the law of sales. (n)

Dation is governed by the law on sales.

2 implied warranties: a. warranties against hidden

defectsb. warranties against eviction

[Caltex, Inc. v. IAC: GENERAL RULE – Dacion extinguishes the obligation to the extent of the value of the thing delivered. (Hence it does not necessarily mean total extinguishment.) EXCEPTION: Agreement of the parties (expressed or implied or by their silence that it is for total extinguishment) – contemporaneous and

subsequent acts shall be principally considered.]

Art. 1246. When the obligation consists in the delivery of an indeterminate or generic thing, whose quality and circumstances have not been stated, the creditor cannot demand a thing of superior quality. Neither can the debtor deliver a thing of inferior quality. The purpose of the obligation and other circumstances shall be taken into consideration. (1167a)

Art. 1247. Unless it is otherwise stipulated, the extrajudicial expenses required by the payment shall be for the account of the debtor. With regard to judicial costs, the Rules of Court shall govern. (1168a)

Art. 1248. Unless there is an express stipulation to that effect, the creditor cannot be compelled partially to receive the prestations in which the obligation consists. Neither may the debtor be required to make partial payments.However, when the debt is in part liquidated and in part unliquidated, the creditor may demand and the debtor may effect the payment of the former without waiting for the liquidation of the latter. (1169a)

Art. 1249. The payment of debts in money shall be made in the currency stipulated, and if it is not possible to deliver such currency, then in the currency which is legal tender in the Philippines.

Legal tender – such currency that which may be used for the payment of all debts, whether public or private

Coins are considered as legal tender:

o up to P1000 for P1 coins above – that is, P1, P5, P10

o up to P100 for coins below P1 – that is, 1c, 5c, 10c, 25c (as per BSP Circular No. 537)



The delivery of promissory notes payable to order, or bills of exchange or other mercantile documents shall produce the effect of payment only when they have been cashed, or when through the fault of the creditor they have been impaired.In the meantime, the action derived from the original obligation shall be held in the abeyance. (1170)

[Tibajia v. CA: Sec. 3 of RA 265 – checks are not legal tender; Sec. 1 of RA 529 – “obligations x x x shall be discharged upon payment of any coin or currency” (considered as legal tender for public and private purposes).][Papa v. Valencia & Co., Inc. & Padilla v. Paredes: Checks are considered only as payment only when they have been cashed or through the creditor's fault has been impaired. A check is not legal tender; acceptance of check implies an undertaking of due diligence in presenting it for payment, and if he for whom it is received sustains loss by want of such diligence, it will be held to operate as actual payment of debt for which the check was given (in the first case, the creditor did not encash the check for 10 years, presumption is that it was encashed).As regards the Padilla case: RA 8183 – all monetary obligations shall be settled in the Philippine currency which is the legal tender in the Philippines. However, the parties may agree that the obligation or transaction shall be settled in any other currency at the time of payment.][Hydro Resources v. NIA: In the past, foreign currency was not deemed as legal tender even if such was stipulated, except if there are foreign bodies involved.]

Art. 1250. In case an extraordinary inflation or deflation of the currency stipulated should supervene, the value of the currency at the time of the establishment of the obligation shall be the basis of payment, unless there is an agreement to the contrary. (n)

NOTE: Art. 1250 applies only to contractual obligations.

[Filipino Pipe and Foundry Corporation v. Nawasa & Almeda v Bathala Marketing: Extraordinary inflation is defined as the decrease of increase in the purchasing power of Philippine currency which is unusual or beyond common fluctuation in the value of said currency and such increase or decrease could not have been reasonably foreseen or manifestly beyond the contemplation of the parties at the time of the establishment of the obligation. What is considered normal (universal trend and worldwide occurrence) is not an extraordinary inflation/deflation.]

Art. 1251. Payment shall be made in the place designated in the obligation.There being no express stipulation and if the undertaking is to deliver a determinate thing, the payment shall be made wherever the thing might be at the moment the obligation was constituted.In any other case the place of payment shall be the domicile of the debtor.If the debtor changes his domicile in bad faith or after he has incurred in delay, the additional expenses shall be borne by him.These provisions are without prejudice to venue under the Rules of Court. (1171a)

Subsection 1: Application of Payments

Art. 1252. He who has various debts of the same kind in favor of one and the same creditor, may declare at the time of making the payment, to which of them the same must be applied. Unless the parties so stipulate, or when the application of payment is made by the party for whose benefit the term has been constituted, application shall not be made as to debts which are not yet due.If the debtor accepts from the creditor a receipt in which an application of the payment is made, the former cannot complain of the same, unless there is a cause for invalidating the contract. (1172a)



Art. 1253. If the debt produces interest, payment of the principal shall not be deemed to have been made until the interests have been covered. (1173)

Art. 1254. When the payment cannot be applied in accordance with the preceding rules, or if application cannot be inferred from other circumstances, the debt which is most onerous to the debtor, among those due, shall be deemed to have been satisfied.If the debts due are of the same nature and burden, the payment shall be applied to all of them proportionately. (1174a)

Subsection 2: Payment by Cession Art. 1255. The debtor may cede or assign his property to his creditors in payment of his debts. This cession, unless there is stipulation to the contrary, shall only release the debtor from responsibility for the net proceeds of the thing assigned. The agreements which, on the effect of the cession, are made between the debtor and his creditors shall be governed by special laws. (1175a)

Cession/Assignment in favor of creditors – the process by which debtor transfer all the properties not subject to execution in favor of creditors is that the latter may sell them and thus, apply the proceeds to their credits; extinguish up to amount of net proceeds (unless with contrary stipulation)

Kinds:1. Legal – governed by the

insolvency law2. Voluntary – agreement of

creditors Requisites for voluntary

assignment:a. More than 1 debtb. More than 1 creditorc. Complete or partial insolvency

of debtord. Abandonment of all debtor’s

property not exempt from execution

e. Acceptance or consent on the part of the creditors

Effects:a. Creditors do not become the

owner; they are merely assignees with authority to sell

b. Debtor is released up to the amount of the net proceeds of the sale, unless there is a stipulation to the contrary

c. Creditors will collect credits in the order of preference agreed upon, or in default of agreement, in the order ordinarily established by law

If debtor is only insolvent in fact, creditors may not accept payment by cession from him. His remedy is to have himself declared as insolvent according to our insolvency law, and after that he may enforce cession already.

If he also was able to get a certificate of discharge, his debt may be totally extinguished.

Subsection 3: Tender of Payment and Consignation

Art. 1256. If the creditor to whom tender of payment has been made refuses without just cause to accept it, the debtor shall be released from responsibility by the consignation of the thing or sum due.Consignation alone shall produce the same effect in the following cases:(1) When the creditor is absent or

unknown, or does not appear at the place of payment;

(2) When he is incapacitated to receive the payment at the time it is due;

(3) When, without just cause, he refuses to give a receipt;

(4) When two or more persons claim the same right to collect;

(5) When the title of the obligation has been lost. (1176a)

[Roman Catholic Archbishop of Malolos v IAC: Tender of payment involves a positive and unconditional act by the obligor of offering legal tender currency as payment to the obligee for the



former's obligation and demanding the latter to accept the same; tender of payment presupposes that the obligor is not only able, ready, and willing but moreso in the act of performing his obligation. When tender of payment is not valid the subsequent consignation did not operate to discharge the former from his obligation to the latter.][Rayos v. Reyes: The requisites of a valid consignation are the following: 1) Existence of valid debt 2) Consignation was made because of some legal cause – previous valid tender was unjustly refused or circumstances making previous tender exempt 3) Prior notice of consignation had been given to the person interested in performance of obligation (1st notice)4) Actual deposit/consignation with proper judicial authorities5) Subsequent notice of consignation (2nd notice)The approval of the court or the obligee's acceptance is not necessary where the obligor has performed all acts necessary to a valid consignation.][PAL v. CA: In this case, PAL issued a check to the absconding deputy sheriff Emilio Reyes. PAL issued it in Reyes' name. The court held that this is a bad practice. The proper persons to whom payment must be made are:1) Creditor/obligee/active subject2) agent having authority (assigned by the creditor)3) those authorized by lawIn this case, the sheriff got the payment in check issued to him in his name and absconded (it was argued that it should have been payment in cash because checks are not legal tender, but it was said in the dissent that had it been in cash or in check in the name of the absconding sheriff, it would have been the same, because the sheriff absconded either way). In this case, they ruled that the correct and prudent thing to do is to issue it in the creditor's name.]

Art. 1257. In order that the consignation of the thing due may release the obligor, it must first be announced to the persons interested in the fulfillment of the obligation.The consignation shall be ineffectual if it is not made strictly in consonance with the provisions which regulate payment. (1177)

Art. 1258. Consignation shall be made by depositing the things due at the disposal of judicial authority, before whom the tender of payment shall be proved, in a proper case, and the announcement of the consignation in other cases.The consignation having been made, the interested parties shall also be notified thereof. (1178)

Art. 1259. The expenses of consignation, when properly made, shall be charged against the creditor. (1178)

Art. 1260. Once the consignation has been duly made, the debtor may ask the judge to order the cancellation of the obligation.Before the creditor has accepted the consignation, or before a judicial declaration that the consignation has been properly made, the debtor may withdraw the thing or the sum deposited, allowing the obligation to remain in force. (1180)

Art. 1261. If, the consignation having been made, the creditor should authorize the debtor to withdraw the same, he shall lose every preference which he may have over the thing. The co-debtors, guarantors and sureties shall be released. (1181a)

Section 2: Loss of the Thing Due 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 in 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. (1182a)

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. (n)

GENERAL RULE – Genus nunquam perit – genus never perishes

EXCEPTION – Delimited Generic (if the thing has already been segregated), monetary obligation

Art. 1264. The courts shall determine whether, under the circumstances, the partial loss of the object of the obligation is so important as to extinguish the obligation. (n)

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 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. (1183a)

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. (1184a)

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. (n)

Rebus sic stantibus – doctrine in international law allowing for treaties to become inapplicable because of a fundamental change of circumstances; this doctrine is applied to a certain point as regards Art. 1267

“This doctrine cannot be applied absolutely in contractual relations. To do so, will undermine the stability of contracts because when the conditions would cease to exist, the contracts must also cease. It is

only in extremely unusual change that equity shall come to the succor of the debtor. It must be noted that the parties have assumed the risk of unfavorable developments. Consequently, they must be vigilant to protect themselves against that risk.” (Pineda, Obligations and Contracts, 2000 edition, p. 264)

Rule: Obligor may be released in whole or in part

Requisites:o The event or change could not

have been foreseen at the time of the execution of the contract

o The performance is extremely difficult, but not impossible (because if it is impossible, it is extinguished by impossibility)

o The event was not due to the act of any of the parties

o The contract is for a future prestation

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 been offered by him to the person who should receive it, the latter refused without justification to accept it. (1185)

Art. 1269. 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. (1186) Section 3: Condonation or Remission

of the Debt

Donation, rules as to form:o Written (public instrument)

– if concerns real propertyo Written (private document)

– movable property whose value exceeds P5000

o Oral if movable and with value less than P5000



o The consideration is the liberality of the creditor

Art. 1270. Condonation or remission is essentially gratuitous, and requires the acceptance by the obligor. It may be made expressly or impliedly.One and the other kind shall be subject to the rules which govern inofficious donations. Express condonation shall, furthermore, comply with the forms of donation. (1187)

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

As to private documents only; public documents ordinarily have copies

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 of payment of the debt. (1188)

Art. 1272. Whenever the private document in which the debt appears is found in the possession of the debtor, it shall be presumed that the creditor delivered it voluntarily, unless the contrary is proved. (1189)

Art. 1273. The renunciation of the principal debt shall extinguish the accessory obligations; but the waiver of the latter shall leave the former in force. (1190)

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. (1191a)

Only the accessory obligation is extinguished (the reason being that in a pledge, it is required that you deliver the property unlike in mortgage where it is not required)

Accessory follows the principal and not the other way around

Section 4: Confusion or Merger of Rights

Art. 1275. The obligation is extinguished from the time the characters of creditor and debtor are merged in the same person. (1192a)

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. (1193)

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. (1194)

REQUISITES:o It must take place between

principal debtor & principal creditor only

o Merger must be clear & definiteo The obligation involved must be

same & identical – one obligation only

o Revocable, if reason for confusion ceases, the obligation is revived

Section 5: Compensation Art. 1278. Compensation shall take place when two persons, in their own right, are creditors and debtors of each other. (1195)

Kinds of compensation:a. Legal compensation – by

operation of law; as long as the 5 requisites in Art. 1279 concur – even if unknown to parties & if payable in diff places; indemnity for expense of exchanges; even if not equal debts – only up to concurring amount



b. Conventional compensation – agreement of parties is enough, forget other requirement as long as both consented

c. Facultative compensation – one party has choice of claiming/opposing – one who has benefit of period may choose to compensate

o not all requisites are present

o depositum; commodatum; criminal offense; claim for future support; taxes

d. Judicial compensation – set off; upon order of the court; needs pleading & proof; all requirements must concur except liquidation

e. Total compensation – when 2 debts are of the same amount

f. Partial compensation – when 2 debts are not of the same amount

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 be due;(4) That they be liquidated and

demandable;(5) That over neither of them there be any

retention or controversy, commenced by third persons and communicated in due time to the debtor. (1196)

[International Corp Bank v IAC & Silahis Marketing Corp v IAC: If the requisites of legal compensation as enumerated in Art. 1279 are present, compensation by operation of law takes effect even without the parties' consent. Compensation is not proper when the claim of the person asserting the set-off

against the other is not clear nor liquidated; compensation cannot extend to unliquidated, disputed claim arising from breach of contract.][Francia v IAC: Rules – tax cannot be subject to set-off or compensation, the main reason being that it is a duty. Other reasons in the case mentioned are that the collection of tax cannot await the results of a lawsuit against the government, and that the tax was due to the city government but the expropriation was affected by the national government (not principal debtor and creditor of each other).]

Art. 1280. Notwithstanding the provisions of the preceding article, the guarantor may set up compensation as regards what the creditor may owe the principal debtor. (1197)

This is because a guarantor is subsidiarily liable whereby he may be compelled to pay only when the debtor cannot pay.

This is as opposed to a surety who is solidarily liable with the debtor.

Art. 1281. Compensation may be total or partial. When the two debts are of the same amount, there is a total compensation. (n)

Art. 1282. The parties may agree upon the compensation of debts which are not yet due. (n)

Art. 1283. If one of the parties to a suit over an obligation has a claim for damages against the other, the former may set it off by proving his right to said damages and the amount thereof. (n)

Art. 1284. When one or both debts are rescissible or voidable, they may be compensated against each other before they are judicially rescinded or avoided. (n)

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.

With [knowledge and] consent: o GENERAL RULE – no

compensation (with respect to his debts and credits with the Principal Creditor)

o EXCEPTION – when the debtor expressly reserved his right to 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.

With knowledge but without consent:

o Debtor may set up compensation but only to those credits that became due prior to the assignment.

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. (1198a)

Without knowledge and consent:

o Debtor may set up compensation to those credits that became due prior to his knowledge and also those made later until he had knowledge of such assignment.

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. (1199a)

Art. 1287. Compensation shall not be proper when one of the debts arises from

a depositum or from the obligations of a depositary or of a bailee in commodatum.Neither can compensation be set up against a creditor who has a claim for support due by gratuitous title, without prejudice to the provisions of paragraph 2 of Article 301. (1200a)

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

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. (1201)

Art. 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. (1202a)

Facultative compensation: when only one of the parties have the right to set up compensation.

o In case of deposit, the depositor (owner of the thing deposited) may set up compensation.

o In case of commodatum, the owner of the thing (he/she who lent said thing to another person) may set up compensation

o In cases of support, the one entitled to support may set up compensation.

o In case of obligations arising from penal offense, only the offended party may set up compensation

EXAMPLE: Sarah was raped by a person (hereinafter “the offender”) whom she owes P50000, and subsequently, she won the rape case against said offender, awarding her P50000 in damages.



If you were Sarah, and the offender would say, “Let’s just compensate,” would you agree? The makers of this reviewer think that not agreeing with such an arrangement is the better – and expected – opinion.

Of course, if Sarah was exceedingly annoyed with the offender to the point where she’d rather die than see his face ever again, she can set up compensation (on the grounds of her aversion to the notion of seeing him ever again).

Good luck in the midterm exams!

Appendix A

There is a chance that you would encounter problem-solving questions like this in the exam (ranging from slim to sure-fire, more or less depending on your professor handled discussions on the subject). Therefore, to prepare you for such a scenario, here are a couple of problems that will teach you how to easily determine a debtor’s liability as regards joint and solidary obligations.

PROBLEM 1: Active solidarity: creditors are solidary, debtors are joint. A and S are joint debtors. Q, W, E, and R are solidary creditors. A and S owe a total of P8000 to the creditors.

QUESTION: How much should A pay Q when Q demands from him?ANSWER: P4000



SOLUTION: Get the total amount of the debt (in this case, P8000) and analyze the problem.

If the debtors are jointly liable, add the number of debtors to the number of debtors. In the example on p. 11-12, there are 4 debtors (A, S, D and F) and 4 creditors (Q, W, E and R) – using said examples, we have 8 persons involved all in all. We take the P8000 debt, and divide it by the total number of persons:

8000 / 8 = 1000

That is how the answer at the example in p. 11 was reached.

If a solidary obligation is concerned, it’s either the debtors or the creditors who are solidary and the other party in either case is joint. In this case, we should first determine who amongst the two parties are joint. In the problem above, the debtors are jointly liable. Now, we count – in this case, there are 2 debtors. Next, we proceed with the same step as earlier, the only difference being that we divide the total debt by the number of jointly liable persons:

8000 / 2 = 4000

If all parties are solidary, then close your eyes and thank God (or any supernatural being you subscribe your faith to, for that matter) because you won’t break a sweat on this one:

8000

PROBLEM 2: Passive solidarity: creditors are joint, debtors are solidary. A and S are solidary debtors. Q, W, E, and R are joint creditors. A and S owe a total of P8000 to the creditors.

QUESTION: How much should A pay Q when Q demands from him?ANSWER: P2000

SOLUTION: We apply the second technique mentioned in Problem 1 and first determine who amongst the parties are joint. In this case, the creditors are joint – there are 4 creditors, hence knowing that we move on with the compulsory division:

8000 / 4 = 2000

Appendix B

The thing with provisions like Article 1217 is that when explanatory examples are given in legal texts, the shares involved are always equal. (Don’t believe a word of it? Try looking at some book – any book – on Obligations and Contracts and you’ll see for youself.) This tends to mislead the average reader into associating proportionate division with equal division, when actually it’s all a matter of context. This section intends to address this predicament.

PROBLEM: A, B, and C are solidary debtors of Q in the amount of P140. Their share in the debt is:

A = P60



B = P40C = P40

Upon demand of Q to A, A paid P140 to Q, thereby extinguishing the obligation to Q and giving rise to the right of A to claim reimbursement from B and C. In the course of events, C became insolvent.

QUESTION: How much may A collect from B?

Some would answer P40, which is A’s share of the debt. That is the worst answer.Some took the provision into consideration but applied it the wrong way, answering P60. Yes, that’s wrong. The answer is actually…

ANSWER: 76

How come? Here’s why:

C’s share (him being insolvent) will be proportionately divided between A and B. And since A and B would have to be 60%-40%, respectively:

40% of 40 = 16

Now, we add what we got to A’s share (which is 60):

16 + 60 = 76

The point is, when the law says “proportionately” or “pro rata”, equality does not necessarily follow.

F I N


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