civil law reviewer oblicon

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Starr Weigand 2013 CIVIL LAW REVIEW | DEL CASTILLO

OBLIGATIONS & CONTRACTS1 Obligations What are obligations? An obligation is a juridical necessity to give, do or not to do.2 What are the sources of obligations? Obligations arise from the ff:3 Law Contracts Delicts Quasi-‐Contracts Quasi-‐delicts

Refers to specific (ex. Tax laws) laws which create obligaitons (not including the civil code). Obligations derived from law are not presumed. Only those determined in the Civil Code or in special laws are demandable. They are first governed by the law which created them, then by the provisions on obligations and contracts in the civil code.4

This is the only source which requires consent of the parties. Arises from the stipulations of the parties. They have the force and effect of law between the contracting parties and should be complied with in good faith.5

This refers to civil liability arising form a crime, as every person criminally liable is also civilly liable. IF the accused is acquitted, he is still liable when: * the court declares that he is only civilly liable * the acquittal is based on reasonable doubt. * the civil liability does not arise form the criminal act. These are governed by penal laws, and pertinent provisions of the Civil Code.6 A person cannot recover twice for the same act.7

These are not true contracts, as there is no consent. The obligation is sourced from a natural obligation, like negotorium gestio. This is unilateral as it is created by an act of only one person. These are governed by provisions on extra-‐contractual obligations of the Civil Code. Kinds of quasi-‐contracts: Negotorium Gestio – one undertakes to take care of the property of another, without any obligation to do so. The owner is obliged to compensate such person. Solutio Indebiti – Payment by mistake. The recipient is obliged to return what was received.

These are acts and omissions not punishable by law. The obligation here is to pay for damages. Basically governed by the law on torts and damages. Elements: * Act or omission causing damage to another * There is fault/negligence * There is no pre-‐existing contractual relationship between the parties.

Any obligation not arising form these sources is not an obligation. What are the elements of an obligation? Obligations have the ff. elements: 1) Active subject (the obligee/creditor) – the possessor of the right;

he in whose favor the obligation is constituted. 2) Passive Subject (obligor/debtor) – he who has the duty of giving,

doing or not doing. 3) Object or prestation – the subject matter of the obligation.

1 Based on De Leon, Paras, and Dean Del reviewer of Caroline Tan, Jessamyn Uy and James Ligan. 2 Art. 1156, Civil Code. 3 Art. 1157, Civil Code. 4 Art. 1158, Civil Code. 5 Art. 1159, Civil Code. 6 Art. 1161, Civil Code. 7 Art. 2177, Civil Code.

4) Efficient cause (viculum juris) – the reason why the obligation exists.

What are the types of prestations?

1) Real – Obligation to give, whether a specific (set apart from a class) or a generic thing (deteminate/one of a class).

2) Personal – Obligation to do (positive) or not to do (negative). What are the duties of a debtor in obligations to give specific things? He has the ff. duties:

1) Take care of the thing with the proper diligence of a good father of a family8 Exception: When the law or stipulation requires another standard of care.

What is the proper diligence of a good father of a family? It refers to the diligence which is required by the nature of the obligation and corresponds to the circumstances of person, time and place.

2) Deliver fruits of the thing from the time the obligation to deliver arises.9

Pure obligations – all fruits form the time delivery is required must be given. Conditional (Suspensive) obligations, depends if the obligation is: Reciprocal – the fruits are deemed to be mutually compensated Unilateral – the debtor shall appropriate the fruits and interests received, unless it can be inferred from the nature and circumstances of the obligation that the person constituting it intended otherwise.10 Conditional (Resolutory) obligations – deliver immediately. Obligations with a period – there are 2 views, deliver only upon arrival of the term, or deliver from day one. In either case, fruits will still have to be delivered. Obligations to do/not to do – Courts to determined the retroactive effect of the condition that has been complied with.11

3) Deliver all its accessions and accessories, even if not mentioned.12

Exception: If otherwise stipulated by the parties. What are accessories? Those joined to or included with the principal thing for its better use, perfection, or enjoyment (ex. Keys to a car) What are accessions? These are additions to of improvements upon the thing, which cannot be removed without causing damage to the principal. They become part of the principal. What are the duties of a debtor in obligations to deliver a generic thing?

1) Deliver a thing of a quality intended by the parties taking into account the purpose of the obligation and the other circumstances.

2) To be liable in case of fraud, negligence or delay, in the performance or in the contravention of the terms of the contract.

NB: The duties in obligations to deliver specific things do not apply, since genus does not perish. What are the remedies of the debtor in case of breach of the obligation to give?

Specific thing Generic Thing May seek specific performance – the right to compel the obligor to deliver or perform the obligation Cannot substitute another thing in place of that agreed upon to be delivered.

May seek specific performance May substitute another thing in place of the principal. Genus never perishes.

8 Art. 1163, Civil Code. 9 Art. 1164, Civil Code. 10 Art. 1187, Civil Code. 11 Art. 1187, Civil Code. 12 Art. 1166, Civil Code.

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May be held liable to pay for damages.

May be held liable to pay for damages.

Breach of an obligation What is breach? There is breach if the debtor does not comply with the obligation in accordance with the manner and stipulations agreed upon. What are the sources of breach? The sources are the ff: (though there is really only 2: dolo or culpa. Delay and contravention of terms is only the effect of dolo or cupa) 1) Dolo -‐ there is a deliberate intent to cause damage or prejudice -‐ liability arising form dolo cannot be mitigated or reduced by the courts -‐ waived of an action to enforce liability for future fraud is void. 2) Culpa -‐ No deliberate intent to cause damage. -‐ liability due to negligence may be reduced or mitigated in certain cases. -‐ waiver of an action to enforce liability for future culpa may be allowed in certain cases. 3) Default/Mora -‐ This is a breach or failure to fulfill in time, which requires determination of the reason for the delay. If due to dolo/culpa – debtor is liable. If due to fortuitous event – not liable. When is there delay? There is delay from the time the obligee judicially or extrajudicially demands fulfillment of the obligation.13 When is demand not necessay? Demand by the creditor is not necessary for delay in the ff. cases: a. when the obligation or the law expressly so declares (ex. Taxes); b. when from the nature and circumstances of the obligation it appears that the designation of the time when the obligation is to be fulfilled was a controlling motive for the establishment of the contract; or c. when demand would be useless, as when the obligor has rendered it beyond his power to perform. d. when the creditor voluntarily prevents the fulfillment of the obligation, then the obligation is extinguished. In reciprocal obligations, neither party incurs in delay until the other complies or is ready to comply in a proper manner. Once one of the parties fulfills his obligation, there is delay by the other.14 Kinds of mora: Mora solvendi – default on the part of the debtor. Mora accipiendi – default on the part of the creditor. 4) Contravention of the terms agreed upon -‐ Debtor does not comply with the terms and conditions stipulated by the parties. This also requires determination of the reason for the non-‐fulfillment.

Dolo Culpa Fortuitous Event Liability is on the person most liable. Person is liable as he is aware of the obligation yet he deliberately fails to comply.

There is still liability, but not as harsh as dolo. Person is liable as he failed to exercise the diligence required, though he could have done so.

No liability. Exceptions:

a. When expressly specified by law or stipulation;

b. The nature of the obligation requires assumption of risk;

c. When the debtor is in

13 Art. 1169, Civil Code. 14 Art. 1169, Civil Code.

Debtor in bad faith, thus he is liable for all the damages reasonably attributed to the non-‐performance.

In good faith, liable only for the natural and probable consequences, and those which could have reasonably foreseen at the time of the constitution of the obligation.

default; d. Debtor is

guilty of bad faith such as promising to deliver the same thing to 2 or more persons with different interests.

e. In case of concurrent negligence.

f. When creditor guilty of mora accipiendi.

g. Rule in commodatum – bailor still liable

These are events which could not have been foreseen, or those foreseen but could not have been avoided. Thus, no liability. Requisites:

1) Independent of the will of the debtor

2) Could not have been foreseen, or though foreseen not avoidable

3) Renders the obligation impossible to perform

4) No contributory negligence which causes more damage.

What are the kinds of culpa? Culpa is of three kinds: Culpa Contractual Culpa Aquiliana Culpa Criminal

This is based on the contract between the parties. As long as it is proved that there was a contract and it was not carried out, it is presumed that the debtor was at fault, and he is thus burdened to prove that he was not negligent in his non-‐performance.

This is based on a negligent act. The injured person has to prove the negligence of the defendant, as his action is based on negligence on the part of the latter.

This is based on civil liability arising from a crime. The accused is presumed innocent until proven guilty, thus, it is the prosecution which must prove negligence of the accused.

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Defense of diligence of a good father of a family in the selection and supervision of employees is not proper.

Defense of diligence of a good father of a family is a proper and complete defense.

Defense of a good father of a family is not a good defense.

What are the rules in case of breach in obligations to do or not to do? Obligation to do – If the debtor fails to do it or does it in contravention of the tenor of the obligation, it shall be executed at his cost. It may also be decreed that what was poorly done be undone.15 Obligation not to do – If the obligor does what was forbidden, it shall be undone at his expense.16 What are the remedies of the creditor when there is breach? The creditor can cancel or resolve the contracts, provided there is substantial breach. Exception: No need for substantial breach for resolution/cancellation of the contract when time is of the essence. Does this remedy have to be stipulated or agreed upon by the parties? For Reciprocal obligations – cancellation as a remedy is implied. There is no need for the parties to stipulate.17 For Unilateral obligations – the law is silent, thus, the parties need to stipulate for this remedy to be available in case of breach. Is there a need for court action to resolve/cancel an obligation? GR: No need for court action. However, while it is not necessary to bring a court action if there is a basis that the breach is not material, there is still the risk of cancelling an obligation which a party is not entitled to cancel. If the debtor contests that the breach is only slight and the court agrees, then the court will nullify the resolution made.18 If the obligation involves a contract to sell, resolution/cancellation is not a remedy as there is nothing to cancel/resolve, as such a remedy presumes that there is already an existing obligation. For contracts to sell, It is an obligation subject to a suspensive condition, which is payment of the full purchase price, and if there is no payment, there is no obligation. For obligations subject to a resolutory condition, such a contract of sale, there is already a perfected obligation which may be resolved or cancelled. Is resolution/cancellation the same as rescission? No. they are not the same.

Rescission19 Resolution20 There has to be lesion or economic prejudice (or was in fraud of creditors). Does not refer to breach. This is a subsidiary remedy, resorted to only when all other remedies fail. Mutual restitution is applicable only in specific instances.

There has to be substantial breach. This is a principal remedy which does not depend on exhaustion of other remedies. But, once a party chooses to cancel the obligation, the choice is irrevocable. There is always the requirement of mutual restitution.

What about usurious interest? Usury is now legally non-‐existent, as the usury law was suspended by the Central Bank. But in case of usurious interest, the whole interest is avoided,

15 Art. 1167, Civil Code. 16 Art. 1168, Civil Code. 17 Art. 1191, Civil Code. 18 UP v. Delos Angeles. 19 Arts. 1380-1385, Civil Code. 20 Art. 1191, Civil Code.

making the obligation as one without interest. Though there is no usury, the interest must not be exorbitant, unconscionable or contra bonus mores. Requisites for recovery of interest:

1) The payment of interest must be expressly stipulated; 2) The agreement must be in writing; and 3) The interest must be lawful.

Are there any presumptions for payments? Yes.

1) Presumption of payment of interest: 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.

2) Presumption of payment of previous installment: Receipt of a later installment of a debt without reservation as to prior installments, shall raise the presumption that such prior installments have been paid.21

What are the rights of creditors? Creditors have the ff. rights:

1) They may exact fulfillment/payment (specific performance) with right to damages;

2) Exhaust the debtor’s property, generally by attachment (except properties exempted y law);

3) Accion subrogatoria: exercise all the rights and bring all the actions of the debtor, except those inherent in his person; and

4) File an accion pauliana: impugn or rescind acts or contracts done by the debtor to defraud creditors.22

Are rights acquired by virtue of an obligation transmissible? GR: Yes, rights acquired by virtue of an obligation are transmissible. Exception: When the law provides otherwise, the contract provides otherwise, or if the obligation is purely personal. Different Kinds of Obligations Pure & Conditional Obligations What are pure obligations? These are obligations whose performance does not depend upon a future or uncertain event, or upon a past event unknown to the parties, and is thus demandable at once.23 What are conditional obligations? Conditional obligations are those whose performance depend upon a condition, i.e. a future or uncertain event, or a past event unknown to the parties. What are the kinds of conditional obligations?

1) Suspensive – the happening of the condition gives rise to the obligation (it is suspended until the happening of the event). Once the condition is fulfilled, the effects retroact to the time the obligation is constituted.

2) Resolutory – The happening of the condition extinguishes the obligation.

-‐ these are demandable at once. Other types of obligations (which may be missed with conditional obligations):

1) Potestative – depends upon the will of one of the parties. May be either:

a. On the part of the debtor, but must not be suspensive, as both the obligation and the condition will be void.

b. On the part of the creditor 2) Casual – depends upon the will of a third person.

21 Art. 1176, Civil Code. 22 Art. 1177, Civil Code. 23 Art. 1179, Civil Code.

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3) Mixed, depends partly upon the will of one of the parties and partly on the will of a third person.

What happens if the condition imposed is illegal, immoral or impossible?

1) Positive Conditions GR: Both the condition and the obligation is void. Exception: In case of gratuitous condition, the condition will be deemed as not written, and thus becomes pure.

2) Negative Conditions The condition will be deemed as not having been agreed upon by the parties, and is deemed as not written, making the obligation pure. Should the parties agree on a date when the condition will be fulfilled? Not really. GR is that when the parties have not agreed to fix the date as to when it should be fulfilled, then the parties should wait subject to the rule on prescription. But since there is yet no obligation, then there is no prescription. Exception: When it becomes obvious that the condition cannot or will not be fulfilled. Prescription will set in at 5 years. If no time is fixed, the condition will be deemed fulfilled at such time as may have probably been contemplated by the parties, bearing in mind the nature of the obligation.24 Period for the fulfillment of the Condition (Term for the condition)

1) Positive -‐ It is extinguished:

a. as soon as the time expires; or b. it becomes indubitable that the event will not take place.

-‐ it is deemed fulfilled when the obligor voluntarily prevents it. 2) Negative -‐ The condition that some event will not happen at a determinable

time shall render the obligation effective from the moment the time indicated elapsed or if it has become evident that the event cannot occur.25

Obligations with a period What is an obligation with a period? It is an obligation with a day certain, such that its demandability is subject to the arrival of such day certain. What is a ‘day certain’? It can be any of the ff:

1) A fixed date 2) Future and certain event which must necessarily come, although

not known when. 3) Past event which is unknown to the parties, with the period

being the date of the discovery thereof by the parties. 4) Payable when able, with the period being fixed by the court,

based on the intention of the parties as shown by the nature of the obligation, and circumstances of the parties.

Other instances when the court may fix the period: 1) When there is no period stipulated, but the parties intended that

there be a period (based on the nature and circumstances) 2) If it depends upon the will of the debtor. -‐ Once fixed, the period can no longer be changed.

When may the court not fix the period?

1) When no term was intended by the parties, and in reality, the obligation is pure.

2) When payable on demand 3) Specific periods are provided for by law 4) When the period in the contract has already expired 5) Res judicata has set in.

24 Art. 1185, Civil Code, 2nd paragraph. Accdg. To Dean Del, this means that the debtor will be released form the obligation. 25 Art. 1181, Civil Code, 1st par..

What are the requisites for a valid period/term?

1) It must refer to the future; 2) It must be certain (sure to come) but can be extended; 3) It must be physically and legally possible.

What is the difference between a period and a condition?

Period Condition An event which must happen sooner or later, at a date known or is certain to happen though not known when. Refers to the future. Fixes the time or the efficaciousness of an obligation.

An uncertain event. May refer to a past event. It causes an obligation to arise or cease.

For whose benefit is the term established? GR: It is established for the benefit of both parties. But, it may be stipulated that it be granted for the benefit of:

1) the debtor – In such a case, he may compel the creditor to accept payment before arrival of the term, but he may not be compelled to pay before such time. May be lost on legal grounds or by stipulation (i.e. an acceleration clause)

2) The creditor – he is entitled to demand payment before arrival of the term, but may not be compelled to accept before such time. The period is waived when there is acceptance of partial payments by the creditor.

What are the legal grounds when the debtor loses the benefit of the period? Yes. The debtor loses the benefit of the period when:

1) The debtor becomes insolvent -‐ Unless, he gives sufficient guaranties/securities

2) The debtor failed to furnish the guaranties/securities promised 3) When, by his own acts, he impairs the guaranties/securities

furnished, and when by a fortuitous event they disappear -‐ Unless, he gives others sufficiently safisfactory.

4) Violation of any undertaking in consideration of which the creditor agreed to the period

5) When the debtor attempts to abscond.26 Retroactive effect:

1) When the condition is fulfilled – the effects retroact back to the time when the obligation was created.

2) Before the condition is fulfilled – the creditor can protect himself by requiring a bond, escrow, etc.

3) If the debtor performs when the obligation is created – this is payment by mistake, and what has been delivered mistakenly may be recovers. Unless he learns after time he delivered then he may only recover interest. If he knew at the time of delivery, then he cannot recover (this becomes a natural obligation from which once performed, you cannot recover).

When is there no retroactivity? For fruits and interests in reciprocal and unilateral obligations.

1) Unilateral – debtor gets the fruits, unless the parties intended otherwise.

2) Reciprocal – counted from the time the condition was fulfilled. 3) For obligations with a period, retroactivity does not apply, since

there is already an obligation from day 1. For fruits, it may ether be from day 1, or from the arrival of the period.

What happens if there is loss, deterioration and/or improvement? Retroactivity applies here, but is only applicable to obligations to deliver specific things. This applies when there is a condition or period, and loss, deterioration or improvement happens before fulfillment or arrival.

26 Art. 1198, Civil Code.

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Loss Deterioration Improvement For total loss, it depends on whose fault it is: Fault of the debtor – he pays for damages. No specific performance and no substitute performance. Fault of the creditor – the debtor is released and no obligation is created. For fortuitous event – the obligation is extinguished, and the debtor is released.

Fault of the debtor – creditor may seek for specific performance or resolution or cancellation, with damages in either case. Fault of the creditor – debtor delivers the thing in such a condition. Fortuitous event – debtor delivers the property in such condition, and the creditor suffers the impairment.

Caused by the debtor – he has usufructuary rights, and only has the right to use before delivery. He can remove if it can be removed without impairing the thing. Caused by the creditor – not entitled to reimbursement for the improvement. Caused by the nature of the thing – this inures to the benefit of the creditor.

What are multiple obligations? Simple obligations – only one prestation or object of obligation. Multiple obligations:

1) Multiple prestations: a. Alternative – one where out of 2 or more prestations which may

be given, only one is due. -‐ creditor cannot be compelled to accept one part of one and one

part of another. Who has the right to determine which one is due? GR: The right belongs to the debtor.

Exception: When it is expressly granted to the creditor, or there is a stipulation granting the right to a 3rd person. Rules on choosing: The person with the right of choice cannot choose those i. impossible ii. unlawful iii. which could not have been the object of the obligation.

What if the prestations are impossible to give except for one? Then there is no more right of choice and the debtor should give that which is possible. What if one of the prestations is illegal? Then the others remain valid and the obligation subsists.

When the person given the right of choice has chosen, what must he do? The choice has no effect except form the time it is communicated, and thus becomes a simple obligation. No need for consent. If it was chosen by third person, then notify both parties. This may be done orally or in writing. There may also be implied/tacit choice. What if the debtor cannot make a choice due to the creditor’s acts? The debtor may rescind, and seek payment for damages. What are the effects of loss? IF the choice is that of the debtor:

If one/some are lost If all are lost Debtor’s fault Creditor’s fault Fortuitous event

If he destroys one of several prestations, then the debtor is just making his choice, and he may choose from the remaining. Creditor any of those remaining or seek for resolution/cancellation of the obligation with damages. Person given the right may choose from those remaining.

Creditor receives damages based on the value of thing that last disappeared. Debtor may resolve/cancel with damages based on the choice of the debtor. Obligation is extinguished.

If the choice is that of the creditor: If one/some are lost If all are lost

Debtor’s fault Creditor’s fault Fortuitous event

Creditor may choose any of the remaining, or seek payment for damages based on the value of the thing chosen by the creditor. The creditor may choose form those remaining. Creditor may choose form the remaining.

Debtor to pay damages based on the choice of the creditor. Obligation is extinguished. Obligation is extinguished.

b. Conjunctive – if all prestations must be performed. c. Facultative – only one prestation has been agreed upon but the

obligor may render another in substitution. (Accessory/substitute obligations)

-‐ The nullity of the principal obligation carries with it the nullity of the accessory/substitute.

-‐ If the principal is impossible, the substitute does not have to be given, but if it is the substitute which is impossible, the principal must still be given.

-‐ The right of choice only belongs to the debtor. What are the effects of loss?

* Loss of substitute GR: Loss of the substitute does not affect the principal prestation. And the debtor may still deliver the principal. Exception: If the debtor has already chosen the substitute and has communicated this to the creditor. In such a case, the creditor is liable to the debtor. * Loss of principal If due to fortuitous event – the obligation is extinguished. If due to the fault of the debtor – the debtor converts substitute into the principal obligation. He is just making his choice. If due to the fault of the creditor – the obligation is extinguished. How do you determine if the obligation is facultative or alternative? Consider it as an alternative obligation as it creates more reciprocity of rights. In order for it to be a facultative obligation, the intent to make it so must be clear.

2) Multiple parties – There are 2/more creditors and/or 2/more debtors.

a. Joint obligations – Each obligor answers only for a part of the whole liability, and to each of the creditors belongs only a part of the correlative rights. Divided into as many equal shares as there are debtors or creditors.

b. Solidary obligations – The active and passive subjects may demand the fultillment of or must comply with the whole obligation.

How do you determine if the obligation is joint or solidary? GR: If it cannot be determined, such that the obligation does not so state, or when from the nature or the law, such cannot be determined, then the obligation is joint. Indivisibility of the prestation does not necessarily mean that the obligation is solidary, neither does solidarity imply indivisibility.27 Are there different kinds of solidarity? Yes. There is:

1) Active solidarity – solidarity on the part of the creditor. 2) Passive solidarity – solidarity on the part of the debtors.


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3) Mixed solidarity – solidarity on the part of both parties, both the debtors and creditors.

Can there be solidarity even if the debtors and creditors are bound by different terms and conditions? Yes. Solidarity may exist although the creditors and the debtors may not be bound in the same manner and by the same periods and conditions.28 In such a case, the creditor may recover that part which is pure and unconditional, and leave in suspense the right to demand fulfillment of the remainder until expiration of the term or fulfillment of the condition. The whole solidary obligation may be recovered from the debtors minus the share of those with unmatured conditions. To whom must payment be made? GR: To any one of the solidary creditors. Exception: If there is already a demand, then payment must be made to the creditor who demanded payment, whether judicially or extrajudicially. If one of the debtors dies, can the creditor still go against the debtor who died? Yes. The creditor’s rights are not frustrated, and he may still collect from the estate of the deceased. Solidary creditor may file an action against the estate, or claim form the other solidary debtors. What may the solidary creditors do? 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. Thus, they cannt:

1) Assign their rights to another person without the consent of the other creditors. But the consent of others is not required if the assignment is to another solidary creditor.

2) But, they may novate, compensate, engage in confusion/merger, or remit the debt which extinguishes the obligation, but they are liable to the others for the latter’s share, unless all of them consents. In the latter case, no reimbursement is required.

Rules on payment:

1) Creditor may proceed against any one of the solidary debtors or some, or all of them simultaneously, and demand against one does not prevent subsequent demands against the others, unless the debt has already been fully paid.29

2) Payment made by one solidary debtor – if there is full payment, then this extinguishes the obligation.

3) If 2/more solidary debtors offer to pay – creditor may choose from whom to accept.

4) If one of the solidary debtors cannot pay his share due to insolvency – the share of the insolvent debtor will be borne by the other co-‐debtors, in proportion to the debt of each.30 Insolvency is never a defense. The insolvent may be held to reimburse the others once the insolvency ceases.

What are the effects of extinguishment of obligations in solidary obligations?

1. For active solidarity: • If one of the solidary creditors novates, compensates, confuses,

or remits the debt of the debtor, then the obligation is extinguished between creditors and debtor. But, such creditor is still liable to the other creditors for the latter’s share:

-‐ as among themselves, the solidary creditors are liable jointly. -‐ If the extinguishment is due to a fortuitous event, no

reimbursement among them is required. -‐ If there is no agreement as to apportionment, then it is deemed

that they share equally. 2. For passive solidarity


• The obligation is extinguished as between the debtor and creditor. But, a new obligation is created among the debtors such that they must pay the debtor who paid the creditor, and such obligation amongst themselves is joint.

-‐ However, there is no reimbursement require if payment was made after the obligation has prescribed or became legally impossible. The paying creditor shoulders the whole obligation. He may however recover form the creditor what was paid, unless he knew of the prescription or impossibility, he can no longer recover from the creditor.

-‐ If there is novation, and it is partial, there is the obligation to reimburse the debtor who obtained the novation. But if the novation is total, there is no obligation to reimburse.

-‐ If there is compensation, confusion or remission, there is also a right of reimbursement, unless the condonation is of the whole obligation, or when the debtor is sued for the loss of the thing due. If the condonation is only of one share, debtor condoned may be compelled to pay the remaining minus his own share, and he thus has the right to be reimbursed by the others for what was paid.

What are the effects of loss or impossibility? If due to a fortuitous event:

-‐ before demand, then the obligation is extinguished. -‐ After demand, the debtor/s still liable. The liability is converted

into one for damages. If due to the fault of one solidary debtor – they are still liable. Defenses:

1) Complete defense – Derived form the nature of the obligation, and there is no liability at all. Ex. Lack of consideration, absolute simulation, illegal consideration, extinguishment of obligation, non-‐fulfillment of suspensive condition, statue of frauds.

2) Personal defense – complete defense, as a general rule. Examples:

Vitated consent/Incapacity to give consent – complete defense; arises from the participation in the obligation. Non-‐fulfillment of condition regarding his share, non-‐arrival of term regarding his share – partial defense, only applicable as to the share involved.

3) Personal to others – Partial defense regarding the share of the others involved.

What defenses may a solidary debtor invoke? A solidary debtor may, in actions filed by the creditor, avail himself of all defenses which are derived form the nature of the obligation and those which are personal to him, or pertain to his share. As to those personal to other co-‐debtors, he may avail himself thereof only as regards that part of the debt which the latter are responsible.31 What are the differences between solidary debtor and a surety?

Solidary debtor Surety He is a principal party to the contract May be made to pay the whole amount of the obligation, and may not bind himself for less. He collects from the other debtors what he has paid, but can collect only the share pertaining to each, minus his share. Extension of time to pay will not release the solidary debtor.

Not a principal party. his liability is merely based on an accessory contract. Can bind himself for less than the amount in the principal contract. Collects the entire amount agreed upon. Extension of time for the principal debtor without the surety’s consent will release him from the contract.

Joint Indivisible Obligations


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What is the effect of the indivisibility of the object of the obligation on the joint/solidary nature of the obligation? The divisibility or indivisibility of the things which are the object of the obligation does not alter its solidary/joint nature.32

Solidarity Indivisibility This refers to the relations of the parties. Requires at least 2 debtors or 2 creditors. The fault of one is the fault of the others.

This refers to the nature of the object of the obligation. There may be only one debtor and one creditor. The fault of one party is not the fault of the others.

What is the effect of a joint indivisible obligation? A joint indivisible obligation gives rise to indemnity for damages form 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 the value of the service which the obligation consists.33 What kinds of obligations are considered as indivisible?

1) Obligations to give definite things 2) Those which are not susceptible of partial performance 3) Those so provided by law to be indivisible 4) Those intended by the parties to be indivisible.34

In obligations to do, indivisibility is determined by the character of the prestation. What kinds of obligations are deemed divisible?

1) When the object of the obligation is the execution of a certain number of days work

2) Accomplishment of work by metrical units 3) To pay a certain amount in installments 4) Those susceptible of partial perfomance.35

How do you enforce these obligations? This is enforced against all debtors. What is the effect of non-‐compliance? The obligation is converted into a monetary obligation for indemnity. Obligations with a penal clause What is a penal clause? It is an accessory undertaking attached to an obligation to assume greater liability in case of breach of an obligation. This is basically liquidated damages, and proof of actual damages is not required to demand for payment of the penalty.36 What is the purpose of a penal clause? Such is a penalty which takes the place of indemnity for damages and the payment of interest. Exceptions:

1) When there is an express stipulation to the effect that damages or interest may still be recovered despite the penalty clause.

2) When the debtor refuses to pay the penalty imposed in the obligation, then the penalty will earn interest from the date of demand.

3) When the debtor is guilty of fraud or dolo in the fulfillment of the obligation.

May the penalty be reduced by the courts?

32 See Art. 1223, Civil Code. 33 Art. 1224, Civil Code. 34 Art. 1225, Civil Code. 35 Art. 1225, Civil Code. 36 Art. 1228, Civil Code.

Yes. The penalty may be reduced by the courts when: 1) the obligation has been partly complied with 2) when there is irregular performance 3) the penalty is iniquitous or unconscionable.37

When may the penalty not be enforced? It may not be enforce when:

1) The breach is due to the fault of the debtor. 2) Fortuitous event intervened, unless the debtor expressly agreed. 3) Debtor is not yet in default.

Can the penalty be the substitute of the principal obligation? No. The debtor cannot exempt himself from the performance of the obligation by paying the penalty, unless such right is reserved for him. The creditor may also not demand fulfillment of the obligation and payment of the penalty at the same time, unless this right is expressly granted to him. If after the creditor has decided to require the fulfillment of the obligation, the performance becomes impossible without his fault, then the penalty may be enforced.38 What is the effect of nullity of the principal obligation/the penalty clause? The nullity of the penal clause does not carry with it that of the principal obligation. But, the nullity of the principal obligation carries that of the penalty.39 Extinguishment of obligations How are obligations extinguished? Obligations are extinguished by the ff. modes:

1) Payment/performance 2) Loss of the thing due 3) Condonation or remission of debt 4) Confusion or merger of the rights of creditor and debtor 5) Compensation 6) Notvation 7) Other modes recognized by law, such as annulment, rescission,

fulfillment of a resolutory condition, prescription, death of a party in case of personal obligations, fortuitous event, impossibility, mutual desistance.40

What is payment? Payment means not only the delivery of money but also the performance, in any other manner, of an obligation.41 What are the 3 principles in payment? The 3 principles are integrity, identity and indivisibility. What does integrity in payment mean? This just means that performance or payment be made in accordance with the terms and conditions of the obligation, and cannot be varied by any one party. Exceptions:

1) Substantial performance – performance of an obligation must be according to the fair intent of the contract, with an attempt to perform. If the obligation is almost fully paid and was done in good faith, the debtor can be considered as having fulfilled his obligation and can enforce fulfillment of the obligation, but he is still liable to make good the balance. He is still liable for any amount suffered by the creditor, but the latter may not yet sue, as the debtor may still perform the balance.

2) Waiver – when there has been implied consent of the creditor, such that he accepts knowing that the performance was

37 Art. 1229, Civil Code. 38 Art. 1227, Civil Code. 39 Art. 1230, Civil Code. 40 See Art. 1231, Civil Code. 41 Art. 1232, Civil Code.

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incomplete or irregular, and without expressing any objection, the obligation is deemed complied with.42

3) Impossibility – when it is proven that the impossibility is one that could not have been contemplated by the parties, which renders the obligation beyond the capacity of the debtor to perform, the obligor may be released in whole or in part. This refers to the principle of rebus sic stantibus, which provides that an agreement remains valid only if the same conditions prevailing at the time of contracting continue to exist at the time of performance.43

What does the principle of identity mean? This means that the terms of the contract remain as the law between the parties and the subject matter thereof cannot be changed without the consent of the parties. 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 due. In obligations to do or not to do, an act or forebearance cannot be substituted by another act or forebearance against the creditor’s will.44 Exceptions:

1. Facultative obligations 2. Dation in payment 3. Novation 4. Waiver

For obligations to deliver indeterminate things, and the parties do not provide for the quality of the thing to be delivered, what should be delivered? If the obligation consists in the delivery of an indeterminate thing or generic thing, the creditor cannot demand a thing of superior quality. The debtor may also not deliver a thing of inferior quality. The purpose of the obligation, and other circumstances shall be taken into account.45 If it still cannot be determined, judicial interpretation may be resorted to. What does indivisibility in payment mean? This means that there should always be full performance of the obligation, not just mere partial performance. A debt shall not be understood to have been paid unless the thing or service is which the obligation consists has been completely delivered or rendered. Exceptions:

1) When there is a contrary stipulation allowing partial performance.

2) When the obligation is covered by different conditions or different terms

3) Partial liquidation 4) Joint debtor pays his share or the creditors demands the same 5) Solidary debtor pays only the part demandable 6) In cases of compensation, when one debt is larger than the

other, the balance left is yet to be paid. 7) When the obligation consists in work done in parts.

What are the rules when payment is made by a 3rd person? The creditors may not be compelled to accept payment by a third person, except:

1) when there is a stipulation providing for the contrary; or 2) the 3rd person has an interest in the fulfillment of the obligation,

such as a guarantor. If the 3rd person is not interested in the obligation, and the creditor does not accept the payment, there is no default. If he accepts payment, then the obligation is extinguished, but the debtor must reimburse the payor. Rules on payment by 3rd person:

1) If payment was made with knowledge and consent of the debtor – payor is entitled to reimbursement and subrogation, and thus

42 Art. 1235, Civil Code. 43 See Art. 1267, Civil Code. 44 Art. 1244, Civil Code. 45 Art. 1246, Civil Code.

may exercise all the rights and actions that could be exercised by the creditor, such as those arising from a mortgage, guaranty or penalty clause.

2) If payment was made against the will of the debtor – right of reimbursement of 3rd person is only up to the extent that the debtor was benefitted.

3) If payment was allowed by the debtor, though he did not consent thereto – full reimbursement to be made.

4) If payment was made without the intention of being reimbursed – rules on donation to be followed. Acceptance of donee required, and if there is not acceptance there is not consent, thus reimbursement limited to the amount by which the debtor was benefitted.

When may you recover the payment made from the creditor?

1) When the debt has prescribed; 2) The debt had been completely remitted; 3) The debt has already been paid; 4) When legal compensation has taken place.

What if payment was made by an incapacitated person? GR: I the person paying has not capacity, then the payment is voidable if accepted, and may still be recovered. The creditor, however cannot be compelled to accept. Exception: When a minor between 18 and 21, who has entered into a contract without the consent of his parents or guardian, voluntarily pays a sum of money or delivers a fungible thing in fulfillment of the obligation, there shall be no right to recover the same from the creditor who has consumed it in good faith.46 To whom should payment be made? Payment may be made to the ff:

1) The creditor; 2) His heirs; 3) His assigns (Assignment of credit does not need consent of the

debtor, but requires notice to him, and if there is no such notice, then it does not bind him)

4) Persons authorized to receive payment. Exceptions: Payment to the above will be void when:

1) There is a judicial order for the retention of debts (ex. Garnishment)

2) A writ of injunction was issued which prohibits payment to the creditor;

3) In the case of insolvent creditors. What happens if payment was made to unauthorized persons? The payment is valid, but only to the extent that it benefits the creditor. The debtor should prove that the payment benefitted the creditor. Exceptions:

1) If after payment the 3rd person acquires the creditor’s right (Subrogation);

2) If the creditor ratifies the payment to the 3rd person; 3) If by the creditor’s acts, the debtor has been led to believe that

the 3rd person had authority to receive payment (estoppel).47 What are the requisites for a valid payment to a person in possession of the credit?

1) Payment must be made in good faith; 2) The payee must be in possession of the credit itself, not merely

the document evidencing it. What are the effects of payment to an incapacitated person? Payment to an incapacitated person is valid only if:

1) The incapacitated person has kept the thing delivered; or 2) Insofar as the payment has been beneficial to him.


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What are the rules in case of payment of monetary obligations:

1) It must be in legal tender, or that which a debtor may compel the creditor to accept in payment of debt. Though the parties may agree on what currency payment would be made.

2) Payment is subject to the rules on inflation: inflation/deflation only when there is an extraordinary increase/decrease in the purchasing power of the money. Determining whether there is extraordinary inflation/deflation is a judicial determination, and he who alleges must prove, but figures form BSP are evidence which may be considered. In case of extraordinary inflation/deflation, the value of the currency at the time of the establishment of the obligation is to be applied, unless there is an agreement to the contrary.48

3) Payment using coins: Coins are legal tender but only up to a certain amount:

Centavos – only up to PhP100.00 Pesos – Only up to PhP1,000.00

4) Mercantile documents – checks are not legal tender, and only has the effect of payment when they have been encashed or when through the fault of the creditor they have been impaired.49 But, once accepted, creditor cannot set up the defense that payment was not in legal tender.

Where must payment be made? Payment is to be made in the place stipulated in the contract. If there is no stipulation, and the obligation is to deliver a determinate thing, payment is to be made where it is located. For indeterminate things, the domicile of the debtor. If the debtor changes his domicile in bad faith, or after he incurs in delay, creditor may charge debtor for extra expenses incurred in collecting the payment. What are the special forms of payment?

1) Application of payments -‐ it is the designation of the debt to which should be applied a

payment made by a debtor who owes several debts in favor of the same creditor.

Requisites: 1) There must be 2/more debts (severality of debts) 2) The debts must be of the same kind 3) Owed by the same debtor in favor of the same creditor 4) All the debts must be due

Exception: If there is a stipulation to contrary, or when it is made by the party for whose benefit the term is constituted.

5) Payment is not enough to extinguish all debts. How is application made?

a) to what debt the payment is to be applied is the preferential right of choice of the debtor, unless a contrary agreement appears.

-‐ the debtor may not choose to pay part of the principal ahead of the interest, unless the creditor consents.

-‐ Application shall be made at the time of payment. If not made by the debtor, creditor may recommend to what debt the payment is to be applied, which must be accepted by the debtor. If not accepted, the debtor makes the application.

b) Creditor can choose if this was agreed upon, unless there is a cause for invalidity of the payment.

-‐ if the obligation itself is void, then the application of payments is also void.

-‐ If the creditor makes the application without the consent of the debtor, the application is not valid.

c) If neither of the parties makes the application, or if the application is invalid, the application is made by operation of law.

-‐ The application shall first be made to the most onerous obligation.


-‐ If all are equally onerous, then application shall be made to all of them.

May the application be revoked? Once the application is made, it is irrevocable. Except when both parties agree. But the parties may not agree to revoke the application if 3rd parties will be prejudiced.

2) Dacion en Pago -‐ It is the mode of extinguishing the obligation where the debtor

alienates property in favor of the creditor for the satisfaction of a monetary debt.

-‐ Governed by the law on sales. And warranties in sales applies. If there is a breach of a warranty, there is no payment, and the obligation remains.

-‐ The obligation may be extinguished in full or partially, as the parties may agree on the price of the property which may be lower than the amount of the debt.

-‐ Requires the consent of the creditor. 3) Cession (Assignment in favor of the Creditor) -‐ It is a process by which the debtor transfers all the properties

not subject to execution in favor of his creditors so that the latter may sell them, and thus apply the proceeds to their credits.

-‐ May be legal, as when it is governed by the Insolvency Law, and majority of the creditors must agree, or it may be voluntary, where all of the creditors must agree.

Requisites: a) There is more than one debt b) To more than one creditor c) There is complete or partial insolvency of the debtor d) Abandonment of all of the debtor’s properties not exempt from

execution in favor of the creditors e) Acceptance or consent by all creditors.

What are the effects of a cession? The creditors do not become the owners of the properties, but they are merely given the authority to sell them and apply the proceeds their credits. The balance remains collectible. As among the creditors, they will collect their creditors in the order of preference agreed upon by them, and if there is no such agreement, then by the order established by the law. What are the differences between Cession and Dacion en Pago?

Dacion en Pago Cession This basically creates a contract of sale. Does not require plurality of creditors. Only the specific creditor’s consent is required. May take place during insolvency of the debtor. Transfers ownership over the thing to the creditor.

This is a mere contract of agency to sell. Requires plurality of creditors. Requires consent of all creditors. Requires full or partial insolvency of the debtor. Does not transfer ownership to the creditor.

4) Tender of payment and Consignation

What is tender of payment? Tender of payment is the act of offering to the creditor what is due to him together with a demand that he accept the same. There must be a fusion of intent, ability, and capacity to make good the offer. Once this is accepted by the creditor, the obligation is extinguished. Tender of principal must be with tender of the interest. What is consignation? Consignation is the act of depositing the thing due with the court or judicial authorities whenever the creditor cannot accept or refuses to accept the payment, and as such, it is a judicial process, except in cases falling under the

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Rent Control Act (the debtor is allowed to consign payment with the bank upon notice to the lessor). This produces the effect of payment. Requisites:

1) Existence of a valid debt, which must be due 2) A valid prior tender, except when:

a) The creditor is absent or does not appear at the place of payment.

b) The creditor is incapacitated at the time it is due and does not have a legal representative.

c) Without just cause, the creditor refuses to give a receipt. d) When 2/more persons claim the same right to collect (action in

interpleader is the proper remedy with consignation) e) Title of the obligation is lost. f) Debtor was previously notified by the creditor that he will not

accept any payment. 3) Prior notice of consignation to all persons interested (except if

notice would be useless) 4) Actual consignation (deposit), which places the property in

custodial egis 5) Subsequent notice of consignation to all persons interested.

When does consignation produce the effect of payment? Consignation produces the effect of payment when the court approves the consignation and orders the cancellation of the obligation. The expenses of consignation is generally borne by the creditor. What are the effects of a valid tender without consignation?

1) It stops the running of the prescriptive period; and 2) Stops the running of the interest.

What are the effects of an improper consignation? 1) The obligation remains; 2) The debtor is considered in default; 3) Interest continues to run from the time it is due; and 4) The prescriptive period continues to run.

May the thing consigned still be withdrawn? It may be withdrawn as a matter of right before the creditor accepts the consignation, or before there is a judicial declaration that the consignation was proper. As a matter of privilege, it may be withdrawn, after consignation had been properly made, and the creditor authorizes the withdrawal. In the latter case, the obligation remains, the creditor loses any preference he has over the thing, and the guarantors and sureties who did not consent will be released. Who bears the risk of loss of the thing consigned? GR: Loss is borne by the creditor: If due to a fortuitous event – The obligation is extinguished. If due to creditor’s fault – obligation is extinguished. Debtor’s fault – the obligation remains and he is liable for damages. Fault of the court/sheriff – Creditor assumes the action of the court/sheriff, and the loss is borne by him. Loss of the thing due Loss refers to obligations to give, and impossibility refers to obligations to do/not to do.

-‐ such must arise after the constitution of the obligation -‐ if it is already lost or impossible from the start then the

obligation is void. What are the kinds of impossibility?

1) Legal impossibility – such as when it is prohibited by the law 2) Physical impossibility 3) Moral impossibility – the obligation becomes so difficult that it

was manifestly beyond the contemplation of the parties. What are the effects of loss?

If what was lost is a specific thing – the obligation is extinguished. Exceptions:

a) When debtor is at fault; b) When the debtor is made liable for a fortuitous event.

-‐ in such cases, the obligation is converted into a monetary obligation for damages.

If what was lost was a generic thing – the obligation continues to exist as genus does not perish. Exceptions:

a) If the thing has been delimited (Ex. 50 kilos of rice from 200 the harvest last year);

b) If the thing has already been segregated or set aside, and thus has become specific.

What happens if the cause of the loss is not known? The law provides for a presumption that it is the debtor’s fault, if the thing was in his possession, unless it was due to a natural clalamity. What happens if the loss is due to the fault of a 3rd person? The obligation is extinguished without prejudice to the creditor’s right of legal subrogation, and thus will have all the rights of action which the debtor may have against the 3rd person. Exception: If there is collusion between the debtor and the 3rd person, the debtor is still liable. Condonation or Remission of Debt What is condonation/remission of a debt? It is a gratuitous abandonment by the creditor of his right to compel performance. This must comply with the formalities of donations. Requisites:

1) Acceptance by the debtor (if not accepted, there is no remission, and debt is extinguished by prescription).

Mortis causa – no need to formally accept. In succession, if it is not repudiated, then there is deemed to be an acceptance. Inter vivos – acceptance should be expressed, depending on what kind of property is involved:

a) Real Property – the donation and the acceptance must be in a public instrument

b) Personal Property less than Php5,000 – there may be oral acceptace and donation, so long as there is simultaneous delivery of the property.

c) Personal property exceeding PhP5,000 – Donation and acceptance must be in writing.

2) Capacity of both parties 3) Gratuitous act on the part of the Creditor 4) Formalities required were followed: a) Express condonation – requires formalities of a will (if mortis

causa) or formalities of a donation (if inter vivos) b) Implied condonation – Delivery of a private document evidencing a

credit made voluntarily by the creditor to the debtor.50 This however does not apply to public documents. It must be delivered by the creditor himself, or proof of voluntary delivery by the creditor. There is also a presumption of voluntary delivery, when the private document evidencing the debt is found in the possession of the debtor.51 If in the possession of a joint debtor, then it is presumed that only his debt is remitted.

May you condone the security and not the debt itself? Yes. This is possible for pledges. When the thing pledged is found in the possession of the debtor or a 3rd person who owns it, then there is an implied remission.52 If the accessory obligation is remitted, the debt becomes unsecured, and the principal obligation remains.


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Confusion or Merger What is confusion or merger? Consfusion or merger is the meeting in one person of the qualities of creditor and debtor with respect to the same obligation. Requisites:

1) Takes place between the principal debtor and principal creditor 2) Must be clear and definite 3) The obligation must be the same or identical. -‐ if the debtor acquires certain rights from the creditor with respect

to other things, then there is no merger or confusion. What is the effect of confusion/merger on the guarantors and joint obligations? The guaranty is extinguished dues to such merger or confusion. For joint obligations, the confusion will extinguish only the share corresponding to the creditor/debtor in whom the 2 characters concur. For solidary obligations, the entire oblgation is extinguished. Compensation What is compensation? Compensation takes place when 2 persons, in their own right, are the debtors and creditors of each other.53 What is the difference between Confusion and Compensation?

Confusion Compensation There is only 1 person, which becomes both the creditor and debtor. There can be only 1 obligation.

There must be 2 persons who are mutually creditors and debtors of each other. There must be 2 obligations involved.

Requisites: 1) Both obligations must be due and demandable (except for

facultative obligations; and those agreed upon by the parties, as they may agree upon compensation of those not yet due54.)

2) Both obligations must be liquidated. 3) Both parties must be principally bound. 4) Obligation consists of a sum of money or if things due are fungible,

must be of the same kind. 5) Lack of retention or controversy by 3rd persons (ex.

Garnishment/attachment). What are the kinds of compensation? Compensation may be classified:

1) According to extent: a) Total – both obligations are completely extinguished as they are of

the same or equal amounts. b) Partial – when there remains to be a balance.

2) According to cause: Legal -‐ takes place by operation of law. Voluntary or conventional – due to the agreement of the parties. Judicial – effective only by an order of the court. Facultative – One of the parties has the choice of claiming the compensation or of opposing it. When is compensation prohibited by law?

1) When the debts arise from a depositum – except for bank deposits, unless it is for and credits in a branch in one country and that in another. These entities are separate and distinct.

2) Obligations of a depositary 3) Obligations of a bailee in commodatum 4) Claim for future support 5) Civil liability arising form a penal offense


6) Damages suffered by a partnership through the fault of a partner, cannot be compensated with profits earned and benefits he may have earned from the partnership

7) Taxes. But, in some cases, compensation may be claimed by the party for whose benefit the prohibition is imposed (Ex. Bailor or depositor may claim compensation. What is the effect of assignment on compensation of debts? Depends if the assignment is:

1) With the consent of the debtor – this amounts to a waiver of the compensation, thus, cannot be set up against the assignee. Except when the right to compensation is reserved.

2) With knowledge/notice without the consent of the debtor – compensation can be set up regarding debts prior to the assignment, those that matured before such assignment.

3) Assignment made without the knowledge or notice to debtor – debtor can set up compensation as a defense for all debts maturing prior to knowledge of the assignment.

What is the effect of compensation in rescissible or voidable contracts? Rescissible or voidable contracts valid until annulled, hence compensation is allowed before they are judicially rescinded or avoided.55 Novation What is novation? There is novation when a new agreement is created, modifying the old one, and thereby extinguishing the latter. What are the kinds of novation? Novation may be:

1) Real/Objective – changing the subject matter of the obligation or the principal condition thereof.

2) Personal/Subjective – change in the persons a) Substitution of the person of the debtor

i. Expomision – the old debtor does not participate, and the change is initiate by a 3rd person. The new debtor and the creditor must consent, and the old debtor will not be liable for insolvency of the new debtor, or if the latter does not fulfill.

ii. Delegacion – The initiative comes from the debtor himself. All the parties must consent. If new debtor does not pay, the old obligation is not revivied. Insolvency of new debtor does not make the old debtor liable, unless such insolvency was already existing and of public knowledge, or was known to the debtor at the time of the delegacion.

Payment by 3rd person Change of debtor Debtor is not necessarily released from the debt, he is still liable for reimbursement or pay the remaining balance. There is only one obligation. 3rd person has no obligation to pay if the debtor is insolvent.

The debtor is released from the obligation. There are 2 obligations, one is extinguished and a new one is created. New debtor has to pay.

b) Subrogation – transfer to a third person of all the rights

appertaining to the creditor. There may be legal subrogation, of conventional or voluntary, which is agreed upon by the parties.

What is the difference between assignment of credit and conventional subrogation?

Assignment of Credit Conventional Subrogation Transfer of the same right or credit, but the transfer does not extinguish

Extinguishes the obligation and creates a new one.


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the credit. Does not require the debtor’s consent, and mere notice to him is sufficient. The debtor generally still has the right to present against the new creditor any defense available against the old creditor.

Requires the debtor’s consent. No right to present against the new creditor any defense which he could have set up agains the old creditor.

3) Mixed – Change of object and the parties. Presumption of legal subrogation:

1) When the creditor pays another creditor who is preferred, even without the debtor’s knowledge.

2) When a 3rd person, not interested in the obligation pays with the express or tacit approval of the debtor.

3) When, even without knowledge of the debtor, a person interested in the fulfillment of the obligation pays without prejudice to the effects of confusion as to the latter’s share.56 This applies to joint obligations.

What are the forms of an novation? Novation may be:

1) Express – declared in unequivocal terms. 2) Implied – when 2 obligations are essentially incompatible with

each other. What is the extent of the effect of novation?

1) Extinctive – there is total novation, and the old obligation is completely extinguished.

2) Modificatory – old obligation is merely modified, and changes only the minor terms of the agreement. this is only partial novation.

What are the requisite for a proper novation?

1) The existence of a valid old obligation (There can be no novation if the old obligation is void or already extinguished, as there is nothing to novate). If the contract is voidable, and debtor consents to novate, he waives the right to annul the contract. Rescissible contracts may also be novated. If there is already prescription, the obligation is converted into a natural obligation and this may be the cause of a new obligation. The debtor loses the right to invoke prescription as a defense.

2) Intent to extinguish the old obligation. 3) Validity of the new obligation, except when the parties intended

that the former relation should be extinguished in any event. What is the effect of novation on the accessory obligation? GR: The extinguishment of the principal obligation carries with it the extinguishment of the accessory obligation. Exception: For stipukations pur autrui, the accessory obligation/stipulation made in favor fo the 3rd person remains, unless such person also consents to the novation. Contracts What is a contract? A contract is the meeting of the minds between 2 persons, whereby one binds himself, with respect to the other, to give something or to render some service.57 What are the principles in contracts?

1) Autonomy – The parties may establish such stipulations, clauses, terms and conditions as they may deem convenient, provided, they are not contrary to law, morals, good costums, public order, and public policy.58


2) Mutuality – Contracts must bind both contracting parties; their validity or compliance cannot be left to the will of one of them.59

Exception: 3rd persons may be allowed to determine performance. The decision is not binding until it is made known to both parties. Such determination is not binding if it is evidently inequitable, and in such a case, the courts will have to determine what is equitable.

3) Relativity – Contracts take effect only between the parties, their heirs or assigns, except in cases where the rights and obligations arising form the contract are not transmissible by their nature, or by stipulation, or by provision of law.60 Cases when 3rd persons can be affected by a contract:

a. Contracts containing a stipulation pour autrui b. Contracts containing real rights – 3rd persons coming into

possession of the thing are bound by it. c. Contracts entered into to defraud creditors – creditor who are 3rd

parties may seek rescission (accion pauliana). d. Contracts which have been violated due to tortuous interference –

3rd person liable for damages to other contracting parties. e. In contracts creating status – ex. Marriage which must be

respected by strangers. f. Negotorium gestio – owner bound in a proper case by contract =s

entered into by the gestor or person voluntarily undertaking the management or agency of the business of another without authority.

g. Collective contracts – majority rules minority (Ex. CBA, suspension of payments, etc)

h. Accion subrogatoria – laborers/furnishers of materials for work undertaken by a contractor have an action against the owner up to the amount owing to them form the contractor at the time the claim is made.

4) Obligatory force – obligations arising from contracts have the force and effect of law between the contracting parties, and should be complied with in good faith.61

5) Consensuality of contracts – Contracts are perfected by mere consent, and from that moment the parties are bound not only by the fulfillment of what has been expressly stipulated but also to all the consequences which, according to their nature, may be in keeping with good faith, usage and law.62

What are the essential reuisites of a valid contract?

1) Consent – it is manifested by the meeting of the offer and the acceptance upon the thing which are to constitute the contract.63 Such consent must be upon the subject matter, the terms, and the cause or consideration of the contract.

Who are those incapacitated to give consent to a contract? a. Minors – they cannot give consent by themselves, unless properly

represented by guardians. If they have no representation and only one paty is a minor, the contract is voidable. It is unenforceable if both parties are minors without proper representation.

b. Insane/demented persons – the contracts they enter into are voidable.

c. Deaf mutes – those who cannot write. -‐ in these cases, the contracts they enter into are voidable, unless

expressly declared by the law to be void, such as contracts of marriage.

Consent must be communicated. Offer – must be communicated to the offeree Requirements:

a. Definite, absolute, unconditional – the terms must be clear, which must state the kind of contract to be entered into, the subject

59 Art. 1308, Civil Code. 60 Art. 1311, Civil Code. 61 Art. 1359, 1305, Civil Code. 62 Art. 1315, Civil Code. 63 Art. 1319, Civil Code.

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matter, the consideration and the substantial terms and conditions of the contract.

b. Intentional c. Clearly communicated – need not to be in writing, so long as all the

requirements are present. Business advertisements – merely considered as an invitation to make an offer, unless it appears otherwise. Advertisements Bid – also an invitation to make an offer, and the advertiser is not bound to accept the highest or lowest price, except if a contrary intent appear. Test for offers: can the offeree just say yes or no. if so, then it is a complete and valid offer. The offer must be accepted. What is acceptance? It is the manifestation of the offeree of his assent to the terms of the offer. This must be absolute and unconditional, and made before the offer is revoked. The offeror must learn or know of the acceptance. What is the effect of a qualified acceptance? A qualified acceptance is basically a rejection of the original offer, and constitutes as a counter-‐offer. Such must be accepted before a contract may arise. What are the ways of terminating an offer before acceptance:

1) revocation by the offeror before he learns of the acceptance 2) death of either party 3) insanity of either party 4) civil interdiction of either party 5) when there is a period given for acceptance, and the offeror

withdraws any time before acceptance by communicating such withdrawal, except if the option is founded on a paid or promised consideration.

What are options? These are basically rights given for a limited period of time to accept an offer. It is an unaccepted offer, which gives the offeree time to determine w/n to accept. This is not exclusive, unless, there is a separate consideration given for the option. What is earnest money? It is basically a down payment which forms part of the purchase price, and there is already a contract perfected. What are the differences between a contract of sale, contract to sell, and an option contract?

Contract of Sale Contract to Sell Option Contract Ownership transfers the moment it is entered into. There is breach when there is failure to pay the balance of the purchase price. In case of breach, specific performance may be sought.

Ownership is not transferred until there is full payment of the purchase price. Non-‐payment is not breach, but what has been paid may be lost. There is no breach, thus no specific performance or resolution, the remedy is to sue for damages.

There is no contract yet, and there is merely the option contract which gives the offeree a right, not an obligation. There is breach when the offeror enters into a contract with another person. Remedy is an action for rescission of the contract with another person, as it is a contract considered as in fraud of creditors.

What is a right of first refusal? It is part of an existing contract which is basically a promise. It does not arise until the person decides to sell the property over which you have a ROFR. There is breach when the offeror sells the property to another person without offering it first to the offeree, and the remedy is rescission of the contract with the other person.

What are the vices of consent? The vices of consent are:

1) Fraud – There is fraud when through insidious words or machinations of one of the contracting parties, the other is induced to enter into a contract, which without them, he would not have agreed to.64 Failure to disclose facts when there is a duty to disclose them, as when the parties are bound by confidential relations, constituted fraud.65 To vitiate a contract, it must be serious and not employed by both parties. For incidental fraud, the person employing it is only liable for damages.66 Usual exaggerations in trade when the other party had opportunity to know the facts is not in themselves fraudulent.67

2) Mistake – This refers to mistake of fact, which is mistake in the substance of the thing which is the subject matter of the contract, or in any of tits essential conditions. Error in identity is not mistake, except if it involves a contract for services. Simple mistake of account gives rise only to its correction. There is no mistake if the party alleging it knew of the doubt or contingency or risk affecting the object of the contract. Mutual error as to the legal effect of an agreement when the real purpose of the parties is frustrated, may vitiated consent.

3) Violence – there is violence when in order to wrest consent, serious or irresistible force is employed.68 May be employed by a 3rd person.

4) Intimidation – there is intimidation when one of the contracting parties is compelled by a reasonable and well-‐grounded fear of an imminent and grave evil upon his person or property, or upon the person or property of his spouse, descendants, or ascendants, to give his consent. To determine the degree of intimidation the age, sex, and condition of the person shall be borne in mind. Threat to enforce one’s claim through competent authority, if the claim is just or legal, does not vitiate consent.69 May be employed by a 3rd person.

5) Undue influence – there is undue influence when a person takes advantage of his power over the will of another, depriving the latter of a reasonable freedom of choice. The ff. circumstances shall be considered: the confidential, family, spiritual and other relations between the parties, or the fact that the person alleged to have been unduly influenced was suffering from mental weakness, or was ignorant, or in financial distress.70

Simulated Contracts

1) Absolutely simulated – the parties did not intend to be bound at all. This is void.71

2) Relatively simulated – the parties merely conceal their true agreement, and this is valid and binding, so long as it does not prejudice a 3rd person and not intended for any purpose contrary to law, morals, good customs, pubic order, or public policy.72

3) Object of the Contract – this is the subject matter of the contract.

What may be the subject matter of a contract? All thing which are not outside the commerce’s of man, including future things, may be the object of a contract. All rights which are not intransmissible may also be the object of a contract. All services which are not contrary to law, morals, good customs, public order, or public policy may be the object of a contract.73

64 Art. 1338, Civil Code. 65 Art. 1339, Civil Code. 66 Art. 1344, Civil Code. 67 Art. 1340, Civil Code. 68 Art. 1335, Civil Code. 69 Art. 1335, Civil Code. 70 Art. 1337, Civil Code. 71 Art. 1345 and 1346, Civil Code. 72 Art. 1345 and 1346, Civil Code. 73 Art. 1347, Civil Code.

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What may not be the object of a contract? Future inheritance, except in cases allowed by law. Things which are outside the commerce of man. Intransmissible rights. Services contrary to law, moral, public policy, or public order. Impossible things or services. Requirements for an object of a contract to give:

1) Within the commerce of man – legal, licit, not contraband, and not prohibited by law.

2) Must be determinate – may be particularly designated or physically segregated, so long as the parties know what the object is.

3) Must be existing or capable of coming into existence – obligee must be capable of transferring ownership. If he acquires ownership later on, it automatically transfers to the other person. For things yet to be produced, it need only to be capable of coming into existence, except for future inheritance, donation, and support.

3) Cause or Consideration of contracts – it is the prestation or promise of a thing or service by the other. It is the proximate reason why the parties entered into the contract.

Requisites for cause/consideration:

1) Must exist at the time the contract is entered into. 2) Must be lawful. 3) Must be true/real.

What are the different kinds of cause/consideration:

1) Onerous – the cause is that which was promised. 2) Remuneratory – the cause is past service. 3) Gratuitous – liberality is the cause.

What is the difference between a cause and a motive?

Cause Motive It is the legal reason for entering into the contract.

It is the personal reason for entering into the contract. Does not affect the contract, except if the motive is equivalent to the cause, as when it predetermines the cause of the contract.

What is the effect of a false cause? A false cause, but not illegal, renders the contract void. Except when there is another lawful cause. What is the effect when there is no cause? When the contract has no cause, the contract is void and produces no effect. What if the effect of an illegal contract? It also renders the contract void. What is the effect of failing to state the cause in the contract? It will not affect the contract, as it is presumed that the contract is for a lawful cause. The burden to prove the contrary is on the debtor. What is the effect of lesion/inadequacy of cause? This does not invalidate the contract, except if this was due to fraud, mistake or undue influence. Is form an essential element of a contract? Generally form is not an essential element. Contracts are obligatory in whatever form they are entered into, so long as the essential elements are present. Exception:

1) When form is necessary for validity: Such as for donation. In such a case, if it does not follow the proper form, the contract is void.

2) When form is necessary for enforceability: Such as those falling under the statute of frauds.

If form is only necessary for the convenience of the parties (such as for registration), the contract is still valid, but either party may compel the other to execute the contract in its proper form. For real contracts, delivery is an essential element, such in contracts of pledge. Reformation What is reformation? It is that remedy by means of which a written instrument is amended or rectified so as to express or conform to the real agreement or intention of the parties, when by reason of mistake, fraud, inequitable conduct, or accident, the instrument fails to express such agreement or intention. Requisites for reformation:

1) There was meeting of the minds between the parties; 2) The true intent was not expressed; 3) Due to mistake, fraud, inequitable conduct, or accident; 4) The facts constituting the basis for relief if put in issue in the

pleadings; and 5) There is clear and convincing evidence of mistake, fraud,

inequitable conduct, or accident. Who may file an action for reformation? This may be filed only by the injured party, except in case of mutual mistake when the action may be brought by either. When can there be no reformation? There can be no reformation in the ff. cases:

1) In simple donations inter vivos when no condition is imposed. 2) In the case of wills. 3) When the real agreement is void. 4) When one party has brought an action to enforce the instrument,

such party cannot subsequently seek for reformation. Defective Contracts What are the defective contracts:

1) Rescissible contracts 2) Voidable contracts 3) Unenforceable contracts 4) Void contracts

What are rescissible contracts? Rescissible contracts are contracts validly agreed upon because all the essential elements exist, and therefore, legally effective, but in the cases established by law, the remedy of erscission is granted in the interest of equity. What contracts are rescissible? The ff. contracts are rescissible:

1) Those which are entered into by guardians whenever their wards whom they represent suffer lesion or economic prejudice of more than ¼ of the value of the things which are the object thereof;

2) Those agreed upon in representation of absentees, when the latter suffer lesion up to the amount stated above;

3) Those undertaken in fraud of creditors, when the latter cannot in any other manner collect the claims due them;

4) Those which refer to things under litigation, if they have been entered into by the defendant without the knowledge and approval of the litigants or of competent judicial authority;

5) All other contracts specially declared by law to be subject to rescission.74


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Basically, there are 3 kinds: 1) Those entered into by people in a fiduciary capacity, such as

guardians and representatives of absentees; Does not apply to contracts approved by the court.75

2) Those entered into in fraud of creditors; 3) Those specially declared by law to be rescissible.

When can the wards/absentees bring this action? Within 4 years from acquiring capacity. For insane, during a lucid interval. For absentees, 4 years from the time of knowledge of his domicile. What are contracts in fraud of creditors?

1) Those undertaken in fraud of creditor, when the latter cannot in any other manner collect their credits.

Requirements: a) Prior creditor (before the rescissible transaction) b) Fraud by the debtor.

Things to prove: no other means to satisfy the credit and the debtor acted in bad faith. If there is no evidence of fraud, creditor may rely on presumptions:

a) If the contract was gratuitous, it is presumed to be in fraud of creditors if the debtor did not reserve sufficient property for purposes of paying his prior creditors.

b) If the contract was onerous, there a presumption of fraud is the debtor enters into the transaction after a writ of attachment or a judgment against him is issued in a prior proceeding.

c) In addition, the design to defraud creditors may be proved in any other manner authorized by the law on evidence.76

If the presumptions do not apply, there are still badges of fraud, some of which are:

• Consideration for the conveyance is fictitious or inadequate; • Transfer made by a debtor after suit has been begun and while it is

pending against him; • Sale upon credit by an insolvent debtor; • Transfer of all or nearly all of the property by the debtor, especially

when he is insolvent or greatly embarrassed financially; • Evidence of large indebtedness or complete insolvency; • Transfer is made between father and son, when there are present

some or any of the above circumstances; • Failure fo the vendee to take exclusive possession of the property

sold; • At the time of the conveyance, the vendee was living with the

vendor, and the former knew that there was a judgment rendered against the latter.

• It was known to the vendee that the vendor had no properties other than that sold to him.

• Certificate of title tot the land remained in the name of the vendor, who declared them for tax purposes and paid taxes due.

2) Those where the objects of litigation were sold without the

approval of the court or consent of the plaintiff. IS there a requirement of restitution in rescission due to fraud of creditors? No. It is the creditor who is prejudiced and there is nothing for the creditor to restitute. This is also only a partial rescission, only to the extent that the creditor was prejudiced. Principle of unjust enrichment still applies. Limit to the remedy of rescission: Once the property falls into the hands of a person in good faith, the right to rescind is extinguished, and the remedy is only an action for damages against the debtor. If no recovery can be made from the debtor, creditor may seek for recovery from the person in bad faith. Voidable Contracts


What are voidable contracts? These are contracts which possess all the requisites of a valid contract but one of the parties is incapable of giving consent or the consent was vitiated by mistake, violence intimidation, undue influence or fraud. When should the action for annulment be filed? For cases of intimidation, violence, undue influence – within 4 years form the time the defect ceases. For mistake or fraud – within 4 years from the time of the discovery of the same. For contracts entered into by those incapacitated – within 4 years from the time their incapacity or guardianship ceases. Are expressions of opinions enough to constitute fraud? No, unless made by an expert and the other party relied on his special knowledge. Legal opinions are basis in good faith. What is the effect of ratification on a voidable contract? Ratification extinguishes the action to annul a voidable contract.77 Ratification may be express or implied. It is implied when with knowledge of the reason rendering the contract voidable, the person having the right to file the action executes an act which necessarily implies an intention to waive such right.78 Who may effect ratification? May be by the guardian of the incapacitated, or the incapacitated himself after attaining capacity. This does not require the consent of the party who has no right to bring the action. What are the effects of ratification? Ratification cleanses the contract from all its defects from the moment it was constituted.79 Who may bring the action? Two requisites must concur:

1) The plaintiff must have an interest in the contract, and 2) the victim and not the guilty party may file. -‐ Persons who are capable cannot allege the incapacity of those with

whom they contracted, nor can those who exerted intimidation, etc. base their action upon the flaws of the contract.80

What is the effect of annulling a contract? An obligation having been annulled, the contracting parties shall restore to each other the things which have been the subject of the contract, either the fruits and the price with interest, except in cases provided by law. for obligations to render service, the value thereof shall be the basis of damages.81 The incapacitated person is not obliged to make any restitution, except insofar as he has been benefitted by the things or the price he received.82 If the person obliged to return cannot do so as the thing was lost due to his fault, he should return the fruits and value of the thing at the time of the loss with interest. As long as one of the contracting parties does not restore what is required of him, the other cannot be compelled to comply with what is incumbent upon him. What is the effect of loss of the thing? The action for annulment of contracts shall be extinguished when the thing which is the object of the contract is lost through the fraud or fault of the person who has a right to institute the action. If based on incapacity, loss of

77 Art. 1392, Civil Code. 78 Art. 1393, Civil Code. 79 Art. 1396, Civil Code. 80 Art. 1397, Civil Code. 81 Art. 1398, Civil Code. 82 Art. 1399, Civil Code.

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the thing will not be an obstacle to the success of the action, unless the loss took place through fraud or fault of the plaintiff.83 Unenforceable Contracts What are unenforceable contracts? These are contracts that cannot be enforced in court or sued upon by reason of defects provided by law, until and unless they are ratified according to law. unenforceability is a defense. Thus, there is no prescriptive period. What are the unenforceable contracts in the Civil Code? The ff. contracts are unenforceable, unless they are ratified:

1. Those entered into in the name of enother person by one who has been given no authority or legal representation or who has acted beyond his powers; (This cannot be enforced against the person claiminf to be a legal representative)

2. Those that do not comply with the Statute of Frauds, unless there be some not or memorandum in writing, subscribed by the party charged or his agent (evidence of such an agreement cannot be received without suchwriting or secondary evidence of its contents) :

a. An agreement that by its terms is not to be performed within a year form the making thereof;

b. A special promise to answer for the debt, default or miscarriage of another;

c. An agreement made in consideration of marriage, other than a mutual promise to marry;

d. An agreement for the sale of goods, chattels or things in action, at a price not less than P500.00

Exceptions: • The buyer accepts and receives part of the goods, etc., or pays at the same time some part of the purchase money. • If sale made through auction: entry by the auctioneer in the sales book at the time of the sale of the amount and kind of property sold, the terms of the sale, price name of the parties.

e. An agreement for lease for alonger period than 1 year, of for the sale of real property or an interest therein;

f. A representation as to the credit of a 3rd person. 3. Those where both parties are incapable of giving consent to a

contract. Void Contracts What are void contracts? These are contracts which by virtue of some defects, generally produce no effect at all. They are considered as inexistent from the very beginning. What are the void contracts? The ff. Contracts are void and inexistent form the beginning:

1) Those whose cause, object or purpose is contrary to law, morals, good customs, public order, or public policy;

2) Those absolutely simulated or fictitious; 3) Those whose cause or object did not exist at the time of the

transaction; 4) Those whose object is outside the commerce of man; 5) Those which contemplate an impossible service; 6) Those where the intention of the parties as to the principal object

of the contract cannot be ascertained; and 7) Those expressly prohibited or declared void by law. 8) A contract which is the direct result of a previous illegal contract, is

also void and inexistent. These may not be ratified, and the right to set up the defense of illegality cannot be waived. The action or defense for the declaration of the inexistence of a contract does not prescribe.84


If the act illegality of the cause or consideration is also a criminal offense: Both parties are in pari delicto -‐ They have no action against each other. They may both be prosecuted under the RPC. The effects or instruments of the crime will be disposed of in accordance with the RPC. If only one is guilty, but the illegality also constitutes a criminal offense – the innocent may claim what he has given, but may not be compelled tp comply with his promise. If the act is illegal but not a criminal offense: When both are at fault – neither may recover what he has given, or demand performance of the other’s undertaking. If only one at fault – he cannot recover what he has given or ask for fulfillment of the promised. The other not at fault may demand return of what he gave and may not be compelled to comply with his promise. When may the court allow recovery?

1) When money is paid or property delivered for an illegal purpose, the contract may be repudiated by one of the parties before the purpose has been accomplished, or before any damage has been caused to a third person. In such case, the courts may, if the public interest will thus be subserved, allow the party repudiating the contract to recover the money or property.

2) Where one of the parties to an illegal contract is incapable of giving consent, the courts may, if the interest of justice so demands allow recovery of money or property delivered by the incapacitated person.

3) When the agreement is not illegal per se but is merely prohibited, and the prohibition by the law is designated for the protection of the plaintiff, he may, if public policy is thereby enhanced, recover what he has paid or delivered.

4) When the price of any article or commodity is determined by statute, or by authority of law, any person paying any amount in excess of the maximum price allowed may recover such excess.

5) When the law fixes, or authorizes the fixing of the maximum number of hours of labor, and a contract is entered into whereby a laborer undertakes to work longer than the maximum thus fixed, he may demand additional compensation for service rendered beyond the time limit.

6) When the law sets, or authorizes the setting of a minimum wage for laborers, and a contract is agreed upon by which a laborer accepts a lower wage, he shall be entitled to recover the deficiency.

Separability of illegal stipulations: In case of a divisible contract, if the illegal terms can be separated from the legal ones, the latter may be enforced. Who may raise the defense of illegality? The defense of illegality of contract is not available to third persons whose interests are not directly affected. TRUSTS

-‐ These are basically fiducirary relationships established between 3 persons:

a. the trustor – creator of the trust b. ttrustee – the one in whom confidence is reposed as regards

property for the benefit of another person; c. beneficiary – for whose benefit the trust was created.

Kinds of trusts: Express -‐ Express trusts are created by the intention of the trustor or of the parties. Implied -‐ Implied trusts come into being by operation of law. Resulting trust – It was intended by the parties to be a trust, but was not effective as an express trust. Express Trusts


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GR: Does not prescribe X: If trustee repudiates the trust. Art. 1443. No express trusts concerning an immovable or any interest therein may be proved by parol evidence. Art. 1444. No particular words are required for the creation of an express trust, it being sufficient that a trust is clearly intended. Art. 1445. No trust shall fail because the trustee appointed declines the designation, unless the contrary should appear in the instrument constituting the trust. Art. 1446. Acceptance by the beneficiary is necessary. Nevertheless, if the trust imposes no onerous condition upon the beneficiary, his acceptance shall be presumed, if there is no proof to the contrary. Implied Trusts Prescribes: 10 years. Art. 1447. The enumeration of the following cases of implied trust does not exclude others established by the general law of trust, but the limitation laid down in Article 1442 shall be applicable. Art. 1448. There is an implied trust when property is sold, and the legal estate is granted to one party but the price is paid by another for the purpose of having the beneficial interest of the property. The former is the trustee, while the latter is the beneficiary. However, if the person to whom the title is conveyed is a child, legitimate or illegitimate, of the one paying the price of the sale, no trust is implied by law, it being disputably presumed that there is a gift in favor of the child. Art. 1449. There is also an implied trust when a donation is made to a person but it appears that although the legal estate is transmitted to the donee, he nevertheless is either to have no beneficial interest or only a part thereof. Art. 1450. If the price of a sale of property is loaned or paid by one person for the benefit of another and the conveyance is made to the lender or payor to secure the payment of the debt, a trust arises by operation of law in favor of the person to whom the money is loaned or for whom its is paid. The latter may redeem the property and compel a conveyance thereof to him. Art. 1451. When land passes by succession to any person and he causes the legal title to be put in the name of another, a trust is established by implication of law for the benefit of the true owner. Art. 1452. If two or more persons agree to purchase property and by common consent the legal title is taken in the name of one of them for the benefit of all, a trust is created by force of law in favor of the others in proportion to the interest of each. Art. 1453. When property is conveyed to a person in reliance upon his declared intention to hold it for, or transfer it to another or the grantor, there is an implied trust in favor of the person whose benefit is contemplated. Art. 1454. If an absolute conveyance of property is made in order to secure the performance of an obligation of the grantor toward the grantee, a trust by virtue of law is established. If the fulfillment of the obligation is offered by the grantor when it becomes due, he may demand the reconveyance of the property to him. Art. 1455. When any trustee, guardian or other person holding a fiduciary relationship uses trust funds for the purchase of property and causes the conveyance to be made to him or to a third person, a trust is established by operation of law in favor of the person to whom the funds belong.

Art. 1456. If property is acquired through mistake or fraud, the person obtaining it is, by force of law, considered a trustee of an implied trust for the benefit of the person from whom the property comes. Art. 1457. An implied trust may be proved by oral evidence. NATURAL OBLIGATIONS

-‐ There is a moral not a legal duty to perform or pay, but the person performing or paying feels that in good conscience he should comply with his undertaking which is based on moral grounds.

-‐ Not compelled to perform, but once performed, not recovery can be made.

-‐ Examples in the Code are not exclusive. ESTOPPEL

-‐ admissions, representations made by a person which may no longer be denied or take back.

-‐ May be compelled to perform or make liable for penalties or damages.the other party may rely in good faith on such representations.

Kinds: Estoppel in Pais – Action or inaction

-‐ equitable estoppel, wherein the act or inaction leading another to believe certain things whih are false.

-‐ May be estoppel by silence: There should be an obligation to make a disclosure or make representations, but the party failed to do so, such as in contracts of insurance, and security laws.

-‐ Different from Laches: Does not refer to period, it refers to conditions and situations. Changes will no longer be allowed or the parties will not longer be allowed to return to original condition. A lot had relied on it and a lot will be prejudiced if change is allowed. This is essentially equitable estoppel, subject to judicial discretion through the appreciation of the evidence.

Estoppel By Deed – may be by conduct or through acceptance of benefits. -‐ may result from a written instrument, res judicata, or by judgment

or judicial record. -‐ Art. 1437 to 1438.

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