Business Law (Obligation & Contract)

ARTICLES 1156-1162 3. Quasi-Contracts; (Art. 2142)

Example:
ARTICLE 1156 • The obligation to return money paid by
An obligation is a juridical necessity to give, to mistake or which is not due.
do or not to do. 4. Acts or omission punished by law; Art. 1161
Juridical Necessity and;
-To give -To do -Not to do Example:
1. The obligation of a thief to return the stolen
Obligation car by him.
➢A legal or moral duty to do or not to do 2. The obligation of a convicted criminal to pay
something. the medical expenses incurred by the victim of
➢comes from the Latin “obligo” which means to his assault.
bind.
5. Quasi-delicts (1089a)
Juridical necessity Example:
➢A mandatory requirement in law. 1. The obligation of the possessor of an
animal to pay for the damage which it may have
Parties to an Obligation
caused.
➢The parties to an obligation are the obligee
2. The proprietor of a building or structure is
and the obligor.
responsible for the damages resulting from its
1. Obligee (giver or doer) - person in favor of total or partial collapse, if it should be due to
whom the obligation is contracted. the lack of necessary repairs (Article 2190).
2. Obligor (recipient) – a person who has
• Juridical relationship (efficient cause)
engaged to perform something.
➢ A legal relationship between members of a
Prestation (subject matter of the obligation) potential class section.
➢Payment of something or the doing of some
• Obligation ex-lege
service.
➢ Obligation that arises from the law itself.
➢It is a presting or a payment of money.
• Obligation Ex-contractu
ARTICLE 1157
➢ Obligation arising from contracts.
Obligations arise from:
Example of Obligation Ex-contractu:
1. Law;
• Mr. C and Mr. D entered into a loan contract
Example:
whereby Mr. D promised to pay his P100,000
1. All Filipinos earning income are required to
debt to Mr. C within one year.
pay income tax (Tax Code).
2. Business registration is required (Local
Obligee + Obligor + Prestation + Juridical
Government Code and Tax Code)
Relationship = Obligation
2. Contracts; - stipulation of the parties (Art.
ARTICLE 1158
1306)
Example: Obligations derived from law are not presumed.
• Obligation to repay a loan by virtue of an Only those expressly determined in this Code or
agreement. in special laws are demandable, and shall be
regulated by the precepts of the law which 3. Breach of contract
establishes them; and as to what has not been • Takes place when a party fails or refuses to
foreseen, by the provisions of this Book. ( 1090) comply, without legal reason or justification.

Examples of Obligations derived from law, never • Freedom of contract

presumed; ➢The liberty or ability of a person to enter into
• The obligation of parents to support their agreement with others.
minor (Art, 195 FC) ➢“the basic and fundamental rights reserved to
• Obligation to pay taxes (Internal Revenue the people”
Code)
• Sanctity of contracts in a Civil Code
• Obligation to deliver the presumptive
➢Between the contracting parties, a contract
legitimes of children (Art 51, FC)
has the "force and effects of the law". Which
“Existence of law necessary before obligations means, a contract is the law between
may arise from law” contracting parties, and therefore, it should be
• The existence of law that prohibits an act is complied with in "good faith"
necessary before obligations may arise. Thus,
• “Good Faith”
there is neither crime nor punishment without
➢ is the total absence of any intention of a
law.
person to take advantage or deceive another
ARTICLE 1159 party.
➢ an honest and sincere intention to fulfill
Obligations arising from contracts have the
one’s obligation.
force of law between the contractual parties
and shall be followed with in good faith. • Compliance in good faith
➢ means compliance or performance in
CONTRACTUAL OBLIGATIONS
accordance to the terms and conditions of the
Contract contract or agreement.
- may be verbal or written
Example of Compliance in Good faith:
- a meeting of minds between two persons
whereby one binds himself, with respect to the • A client hires a service provider to perform
other, to give something or to render some maintenance and repairs on their equipment.
service. The contract specifies the scope of work, service
1. Binding force levels, and response times. Both parties are
2. Requirement of a valid contract obligated to comply with these terms in good
3. Breach of contract faith. If the service provider consistently fails to
meet the agreed-upon service levels or
1. Binding Force
intentionally performs low-quality repairs, they
• Obligations arising from contracts have the
would be breaching the compliance in good
force of law between the contracting parties.
faith requirement.
• As a source of enforceable obligation, contract
must be valid, and cannot be valid if it is against
the law.
ARTICLE 1160
2. Requirement of a valid contract
• Should not be contrary to law, morals, good
customs, public order, and public policy.
Obligations derived from quasi-contracts shall the recipient to return the overpayment to
be subject to the provisions of Chapter 1, Title prevent unjust enrichment.
XVII of this Book.
• Quasi-contract under the Civil Code
• Quasi-contract ➢The Civil Code of the Philippines defines a
➢also known as a contract implied in law or a quasi-contract as a juridical relation that arises
constructive contract, is a legal fiction created from lawful, voluntary, and unilateral acts to
by a court to prevent unjust enrichment. prevent unjust enrichment.
➢arises when one party benefits at the expense
Types of Quasi-Contracts
of another, but no formal agreement exists
between them. • Negotiorum gestio
➢ This refers to the voluntary management of
Key Features of Quasi-Contracts
another person's property or affairs without
• Absence of Agreement: their consent.
Unlike traditional contracts, quasi-contracts
• Solutio Indebiti
don't arise from a mutual agreement between
➢ This refers to the payment of a debt that is
parties. They are imposed by the court to
not owed.
correct an unfair situation.
ARTICLE 1161
• Implied by Law:
The obligation to pay is not based on the Civil obligations arising from criminal offenses
parties' intentions but rather on the court's shall be governed by the penal laws, subject to
interpretation of the law to prevent unjust the provisions of article 2177, and of the
enrichment. pertinent provisions of Chapter 2, Preliminary
Title, on Human Relations, and of Title XVIII of
• Restitutionary Remedy:
this Book, regulating.
The remedy for a quasi-contract is typically
restitution, meaning the party who unjustly • Laws governing civil obligations from criminal
benefited must return the value of the benefit offenses.
received. This can take the form of payment for ➢ Civil obligations arising from criminal offenses
services rendered or the return of goods. shall be governed by penal laws, subject to the
provisions of article 2177, Civil Code, and of the
Examples of Quasi-Contract Situations
pertinent provisions of Chapter 2, Book,
1. Unrequested Services: regulating damages, Civil Code."
• A homeowner unknowingly receives
Key Points of Article 1161
landscaping services from a neighbor who
mistakenly believed they had hired him. The • Civil Liability
court might impose a quasi-contract obligating ➢ This article focuses on the civil aspect of
the homeowner to pay for the services to criminal offenses. It establishes that a person
prevent the neighbor from being unjustly who commits a crime is civilly liable for the
enriched. damages caused to the victim.
2. Mistaken Payments: • Governing Laws
• A person mistakenly pays a bill twice. The ➢ The civil obligations arising from criminal
court might impose a quasi-contract obligating offenses are primarily governed by the penal
laws, specifically the Revised Penal Code (RPC).
Scope of Civil Liability ARTICLE 1162
1. Restitution:
Obligations derived from quasi-delicts shall be
The perpetrator must return the property or
governed by the provisions of Chapter 2, Title
thing that was taken from the victim.
XVII of this Book, and by special laws. (1093a)
2. Reparation:
The perpetrator must compensate the victim • Quasi-delict
for any damage caused to their property or ➢ is the fault or negligence of a person which
person. an act or omission causing damage to another,
3. Indemnity: there being no pre-accompanies existing
The perpetrator must compensate the victim contractual relations between the parties.
for any consequential damages, such as lost
income or medical expenses. • Laws governing quasi-delicts
➢ Obligations derived from quasi-delicts shall
Example: If someone steals a car and causes be governed by the provisions of Chapter 2,
damage to it during the theft, they would be Title XVII of this book, and by special laws.
civilly liable for:
• Restitution: Returning the stolen car to the CHAPTER 2 NATURE AND EFFECTS OF
owner. OBLIGATION
• Reparation: Paying for the damage caused to ART. 1163
the car.
• Indemnity: Compensating the owner for any • Every person obligated to give something is
lost income due to not having the car available also obligated to take care of it with the proper
diligence of a good father of a family unless the
ADDITIONAL NOTE! law or the stipulation of the parties requires
• Article 2177 another standard of care.
➢ This article, found in the Civil Code's chapter
on quasi-delicts, provides additional rules Diligence of a good father of a family.
regarding civil liability in cases where both a • Is the diligence which an ordinary prudent
crime and a quasi-delict are involved. man would exercise with regard to his own
property.
Penal laws • It is also called due diligence
➢ are a set of rules that define crimes and their
corresponding punishments. Due diligence in obligation to give.
• Every person obligated to give something is
Examples of Penal Laws: also obligated to take care of it with proper
1. Murder: The unlawful killing of another diligence of a good family, unless the parties, by
human being with malice aforethought. stipulation requires another standard of care.
2. Theft: The unlawful taking of another • The other standard of care that may be
person's property with the intent to required is extraordinary
permanently deprive them of it. Extraordinary diligence
3. Assault: Intentionally causing physical harm • It is the utmost diligence of a very cautious
to another person. person. That is required of common carriers.
• For the contract of carriage generates a
4. Driving Under the Influence: Operating a relation attended with public duty and neglect
motor vehicle while intoxicated. or malfeasance of the carrier’s employees
naturally could give ground for an action for term "delivery" or tradition has two aspects. (1)
damages; the de jure delivery or execution of deeds of
conveyance; and (2) The delivery of the material
ART. 1164
possession.
• The creditor has a right to the fruits of the • That is why the creditor shall acquire "real
thing from the time the obligation to deliver it rights" to the thing delivered after its delivery.
arises. However, he shall acquire no real right
Real right defined.
over it until the same has been delivered to
A "real right" is a right connected with a thing
him.
rather than a person. A real right includes
Creditor ownership, use, habitation, usufruct, predial
• A creditor is a contingent claimant with a right servitude and real mortgage.
to the fruits of a thing at the time the obligation
ART. 1165
to deliver it arises.
• Article 1164, Civil Code specifies when or the • When what is to be delivered is a determinate
time a creditor's right to the fruits of a thing thing, the creditor, in addition to the right
arises, that is, "at the time the obligation to granted him by article 1170, may compel the
deliver it arises. debtor to make the delivery.
• If the thing is indeterminate or generic, he
Distinction between secured creditor and
may ask that the obligation be complied with at
unsecured creditor.
the expense of the debtor.
• Under Art. 2236, Civil Code, in terms of
• If the obligor delays, or has promised to
preference over properties of a debtor, secured
deliver the same thing to two or more persons
credits are treated differently.
who do not have the same interest, he shall be
• Also, under the Insolvency Law, creditors
responsible for any fortuitous event until he has
having a mortgage over real properties of the
effected the delivery.
debtor are granted certain rights not extended
to unsecured creditors. Determinate thing defined.
• A thing is determinate if it is particularly
Rights to the fruits
designated or physically segregated from all
• Fruits may either be civil, industrial or natural.
others of the same class. It is a concrete,
• Ex: the rents of buildings, the price of leases
particularized object, indicated by its own
of land and other property, and the amount of
individuality, such as cereal grown in a
perpetual and life annuity or other similar
particular area.
income are civil fruits.
• Industrial fruits are those produced by land Indeterminate thing defined.
through cultivation or labor. • A thing is indeterminate if it is not definite,
• Natural fruits are the spontaneous products of not distinct or precise.
the soil, the young and other products of
Additional rights of the debtor when obligation
animals.
to deliver is of a determinate thing.
Delivery • Article 1165 of the Civil Code provides that
• Delivery is the abandonment of the thing by "when what is to be delivered is a determinate
the person who makes the delivery and the thing, in addition to the rights granted him by
taking control of it by the person to whom the article 1170, may compel the debtor to make
delivery is made of the thing delivered. The delivery.
Additional rights indeterminate. of creditor Consequences of failure to do what is obliged
when what is to be delivered in to be done.
• When what is to be delivered is an • The consequences of failure to do, what is
indeterminate thing, the creditor ask that the obliged to be done in an obligation to do is set
obligation be complied with at the expense of forth in Article 1167, Civil Code.
the debtor
Contravention defined
ART. 1166 • Contravention is an act vitiating a legal
condition or obligation. A contravention is
• The obligation to give a determinate thing
traditionally punishable by peines de police. In
incudes that of delivering all its accessions and
the Philippines, if there is an obligation to do,
accessories, even though they may not have
the same shall be executed at the cost of the
been mentioned.
debtor or obligor.
• What is included in obligation to give a
determinate thing? What is poorly done may be undone.
• Article 1166, Civil Code provides that "the • The courts may decree that "what is poorly
obligation to give a determinate thing includes done be undone”.
that of delivering all its accessions and
ART. 1168
accessories even though they may not have
been mentioned" in any agreement between or • When the obligation consists in not doing and
among the parties thereto, as the case may be. the obligor does what has been forbidden him,
it shall also be undone at his expense.
Accession defined.
• Accession is an extension of the right of Consequence of doing one is obliged not to do
dominion; it is also considered a dominion itself • Article 1168 provides that "when the
in its exercise. obligation consists in not doing and the obligor
does what has been forbidden him, it shall also
Accessory defined.
be undone at his expense.
• An accessory is a working part of a large
machinery or instrumentality. For instance, the ART. 1169
accessory of an automobile is an article
designed to be used in connection with such • Those obliged to deliver or to do something
vehicles to add for its utility or ornamentation incur in delay from the time the obligee
and which is primarily adapted for such use judicially or extrajudicially demands from them
whether or not essential to the operation of the the fulfillment of their obligation.
vehicle. However, the demand by the creditor shall not
ART. 1167 be necessary order that delay may exist:
(1) When the obligation or the law expressly so
• If a person obliged to do something fails to do declare; or
it, the same shall be executed at this cost. This (2) When from the nature and the
same rule shall be observed if he does it in circumstances of the obligation it appears that
contravention of the tenor of the obligation. the designation of the time when the thing is to
Furthermore, it may be decreed that what has be delivered or the service is to be rendered
been poorly done be undone. was a controlling motive for the e establishment
of the contract; or
(3) When demand would be useless, as when
the obligor has rendered it beyond this power determining actual damages, the court cannot
to perform. rely on mere assertions, speculations,
conjectures or guesswork but must depend on
In reciprocal obligations, neither party incur in
competent proof and on the best obtainable
delay if the other does not comply or is not
evidence on the actual amount of the loss.
ready to comply in a proper manner with what
is incumbent upon him. From the moment one The case International Corporate Bank vs.
of the parties fulfills his obligation, delay by the Gueco (351 SCRA 516).
other begins. • In this case the Supreme Court inter alia held
that: fraud is the deliberate intention to cause
"In delay" defined.
damage or prejudice, the voluntary execution of
• The words "in delay" used in Article 1169, Civil
a wrongful act, or a willful omission, knowing
Code on obligation to deliver or to do
and intending the effects which naturally and
something mean default (mora), and to put the
necessarily arise from such act or omission.
debtor in default, demand is generally
necessary. • Delay may either be of the creditor Art. 1171
(mora accipiendi) or of the debtor (mora
• Responsibility arising from fraud is
solvendi) or both (compensatio morae).
demandable in all obligations. Any waiver of an
Demand defined and explained. action for future fraud is void.
Demand is a peremptory claim to a thing under
Fraud
color of right. It complies a calling for as owing
• “It is a false representation of fact” • Fraud
or necessary, connoting a peremptory exercise
may be causal (dolo causante) or incidental
of authority or an imperative need. When
(dolo incidenti)
requested for, something is asked for.
No waiver of future fraud is allowed
ART. 1170
• It is void when one of the provisions of the
• Those who in the performance of their contract contains an agreement that:
obligations are guilty of fraud, negligence, or • In case the other party committed a fraud in
delay, and those who in any manner contravene the future, the other party would not be liable
the tenor thereof, are liable for damages. for it or you cannot charge him for the fraud the
other party committed.
Damage
• is the sum of money which the law awards or Art. 1172
imposes as a pecuniary compensation.
• Responsibility arising from negligence in the
Grounds for liability performance of every kind of obligation is also
4 grounds of Article 1170, Civil Code: demandable, but such liability may be regarded
i. Fraud by the courts, according too the circumstances.
ii. Negligence
Negligence
iii. Delay
• “It is the lack of due care and a failure to
iv. Those who in any manner contravene the
perform a duty which ones owes to the injured
tenor of the obligation
party.
Basis for computation and award of actual
Negligence of a good father of the family
damages.
explained
• Basic is the jurisprudential principle that in
• The diligence of a good father of a family is 2. When the nature of the obligation requires
that kind of diligence which an ordinary prudent assumption of risk.
man would exercise with regard to his own • One cannot deliberately incur the obvious risk
property. of personal injury, especially when preventive
measure are at hand.
Art. 1173
Caso Fortuito
• The fault or negligence of the obligor consists
• is an unavoidable accident.
in the omission of that diligence which is
required by the nature of the obligation and Art. 1175
corresponds with the circumstances of the
• Usurious transaction shall be governed by
persons, of the time and of the place. When
special laws.
negligence shows bad faith, the provision of
Article 1171 and 2201, paragraph 2, shall apply. Usury
If the law or contract does not state the • Is a bargain under which a greater profit than
diligence which is to be observed in the to permitted by law is paid, or is agreed to be
performance, that which is expected of a good paid to the creditor by or on behalf of another
father of a family shall be required. debtor for a loan of money, or for is extending
the maturity of a pecuniary debt.
Fault
• When the wrongful act result from EFFECT OF CENTRAL BANK CIRCULAR NO. 905
imprudence, negligence, lack of foresight or lack ON USURY LAW
of skill.
Effect of usurious loans
Foresight • In usurious loans, the entire obligation does
• Foresight is the capability or quality of being not become void because of an agreement for
reasonably anticipatable. Without that quality, a usurious interest.
person lacks foresight.
• Damnum absque injuria The case First Metro Investment Corpotation vs
Este del Sol mountain Reserve, inc. (362 SCRA
Art 1174 101).
• In this case the Supreme Court Held that: A
• Except in cases expressly specified by the law,
contract may be rescinded for failure to comply
or when it is otherwise declared by stipulation,
with an essential obligation, even if the non-
or when the nature of the obligation requires
compliance was not willful or intentional. The
the assumption of risk, no person shall be
key points are:
responsible for those events which could not be
foreseen, or which though foreseen, were
inevitable. Parties Involved:
• First Metro Investment Corporation and Este
Fortuitous Event
del Sol Mountain Reserve, Inc.
• An event which cannot be foreseen, or which,
though foreseen, is inevitable. Supreme Court Ruling:
• The Supreme Court held that a contract can
Exception in the Fortuitous Event
be rescinded (canceled) if a party fails to comply
1. In case specified by the law. with an essential obligation, regardless of
• taxes due the government has to be paid. whether the non-compliance was willful or not.
 The Supreme Court held that a contract can be Unconscionable Penalties:
rescinded if a party fails to comply with an • Penalties may also be reduced if they are
essential obligation, even if the non-compliance deemed iniquitous or unconscionable.
was unintentional. This establishes that non-
ART. 2227
fulfillment of a core contractual requirement is
grounds for termination, regardless of whether Liquidity damages, whether intended as an
the breach was deliberate. indemnity or a penalty shall be equitably
reduced if they are iniquitious or
ART. 1957 - Anti-Usury Provisions
unconscionable.
• Contracts and stipulations under any cloak or
• Liquidated damages are pre-determined
device whatever, intended to circumvent the
monetary amounts that parties agree will be
laws against usury shall be void. The borrower
paid in the event of a contract breach. They can
may recover in accordance with the laws against
serve as either an indemnity (compensation for
usury.
the breach) or a penalty.
Void Contracts for Circumventing Usury Laws:
ART. 1176
• Contracts or stipulations intended to
circumvent anti-usury laws are void. Presumption of Interest Payment:
• If the creditor receives the principal without
Usurious Loans:
any reservations, it is presumed that the
• The borrower may recover the amount paid as
interest has been paid.
interest, but the unpaid principal debt remains
valid, with the usurious interest stipulation Presumption of Installment Payment:
being void. • If the creditor accepts a later installment
without reservations regarding prior
Interest Payments:
installments, it is presumed that earlier
It mentions that no interest shall be due unless
installments have been paid.
it has been expressly stipulated in writing.
Presumption of Payment:
Application to the Case:
• This article deals with the presumption that if
The court emphasized that the interest on the
the debtor has paid interest without
loan should be clearly agreed upon in the
reservations, the principal debt is considered
contract. In this case, the additional agreements
paid.
(consultancy and underwriting) were seen as
attempts to charge extra interest, which was not Application to the Case:
clearly stipulated as interest in the main loan • The court considered whether the payments
agreement. made under the consultancy and underwriting
agreements could be considered as payments
ART. 1229 - Equitable Reduction of Penalties
towards the interest. However, it was found that
Reduction of Penalties: these payments were not properly stipulated as
• Judges may reduce penalties if the principal interest and were instead used to disguise
obligation has been partially or irregularly usurious interest.
fulfilled.
ART. 1177 Rights of Creditors
Pursuit of Debtor's Property: enforce the claimed rights under the
• Creditors can pursue the debtor’s property to agreements. However, since the court found the
satisfy their claims. additional agreements to be void as they were
used to extract usurious interest, these rights
Exercise of Debtor’s Rights:
were not enforceable.
• Creditors may exercise the debtor’s rights
against third parties, except those rights CHAPTER III DIFFERENT KINDS OF
inherent to the debtor’s person. OBLIGATIONS

Challenging Fraudulent Acts: SECTION I. PURE AND CONDITIONAL

• Creditors can challenge actions taken by the OBLIGATIONS
debtor to defraud them.
ARTICLE 1179
Remedies for Creditor:
• This article provides the creditor with •Every obligation whose performance does not
remedies in case the debtor fails to fulfill their depend upon a future or uncertain event, or
obligation. These include exacting fulfillment, upon a past event unknown to the parties, is
pursuing assets of the debtor, and obtaining demandable at once.
court orders for satisfaction.
•Every obligation which contains a resolutory
Application to the Case: condition shall also be demandable, without
• While FMIC sought to enforce its claims prejudice to the effects of the happening of the
through these remedies, the court found that event. (1113)
the obligations under the underwriting and
PURE OBLIGATION
consultancy agreements were not valid, thus
limiting FMIC's ability to claim the additional • A pure obligation is an absolute obligation
amounts. already due and immediately enforceable.
ART. 1178 - Transmissibility of Rights CONDITION
Definition of Transmissibility: • A condition is the equivalent of "requisite" or
• Transmissibility refers to the capability of "requirement."
being transferred from one person to another.
• A condition is a possible future event, the
General Rule on Transmissibility: occurrence of which will trigger the
• All rights acquired through an obligation are performance of a legal obligation.
generally transmissible.
CONDITION PRECEDENT
Exceptions to Transmissibility:
• Rights are not transmissible if prohibited by • A condition precedent suspends the effectivity
law or if there is a stipulation to the contrary. of an obligation until the condition happens.

Transmission of Rights: • It is also called suspensive condition.

• This article states that the rights acquired CONDITION SUBSEQUENT
under an obligation are transmissible unless
otherwise provided by law. • A condition subsequent is a condition the
happening of which extinguishes an obligation.
Application to the Case:
• The court looked into whether FMIC could • It is also called resolutory condition
CONDITION CONCURRENT himself to pay when his means permit him to
do, the obligation shall be deemed to be one
• A condition concurrent is a condition
with a period, subject to the provisions of article
precedent which exists only when parties to a
1197.
contract are found to render performance at
the same time. PERIOD

• It is a kind of situation that seldom occurs as if • A period is a space of time which has an
by chance. influence on an obligation as result of juridical
act, and either suspends its demandableness or
DISTINCTION BETWEEN EFFECT OF FAILURE OF
produces its extinguishment.
COMPLIANCE WITH CONDITION UPON
PERFECTION OF CONTRACTS AND RATIONALE FOR ARTICLE 1180, CIVIL CODE.
PERFORMANCE OF OBLIGATIONS
• Performance of an obligation cannot be left
• There is a distinction between failure of upon the "sole will of the debtor."
compliance with a condition in the performance
• In an obligation, there is always an obligor and
of contracts and the performance of an
obligee, two parties entitled to the protection of
obligation.
law.
• Failure to comply with the condition imposed
ARTICLE 1181
upon the perfection of the contract results in
the failure of the contract. • In conditional obligations, the acquisition or
rights, as well as the extinguishment or loss of
• Failure in the performance of the obligation
those already acquired, shall depend upon the
only gives the other party the option to refuse
happening of the event which constitutes the
to proceed with the sale or to waive the
condition.
condition.
EFFECT OF A CONDITION ON OBLIGATIONS
DEMANDABILITY OF OBLIGATIONS WITH
RESOLUTORY CONDITION. • Article 1181, Civil Code restates the effect of a
condition on an obligation.
• Not with standing the existence of a
resolutory condition which puts an end to the • It gives birth (suspensive condition) or
obligation, it is demandable at once, without extinguishes (resolutory condition), an
prejudice to the effects of the happening of the obligation, obligations subject to a suspensive
event. condition, the acquisition of rights by the
creditor depends upon the happening of the
ARTICLE 1180
event which constitutes the condition.
• When the debtor binds himself to pay when
ARTICLE 1182
his means permit him to do so, the obligation
shall be deemed to be one with a period, • When the fulfillment of the condition depends
subject to the provisions of article 1197. upon the sole will of the debtor, the conditional
obligation shall be void.
PRESUMPTION OF OBLIGATION WITH A
PERIOD • If it depends upon chance or upon the will of a
third person, the obligation shall take effect in
• Article 1180, Civil Code creates the
conformity with the provisions of this Code.
presumption that: "When the debtor binds
POTESTATIVE CONDITION DEFINED • An obligation which may be partly void and
partly valid is a divisible obligation.
• A potestative condition is a condition whose
fulfillment depends upon the exclusive will of CONDITION NOT TO DO IMPOSSIBLE THING
the creditor or the debtor
• Because it is needless to impose an impossible
Two Kinds of Potestative Conditions Namely: condition in an obligation.

• Simple potestative condition. • It "shall be considered a not having been

agreed upon."
• Purely potestative condition.
ARTICLE 1184
FULFILLMENT OF CONDITION DEPENDENT
UPON SOLE WILL OF DEBTOR VOID • The condition that some event happen at a
determinate time shall extinguish the obligation
• Fulfillment of a condition which is dependent
as soon as the time expires or if it has become
upon the sole will of the debtor is contrary to
indubitable that the event will not take place.
law, Article 1182 of the Civil Code.
ARTICLE 1184.
CASUAL CONDITION
Positive (suspensive) Condition
• Casual conditions are conditions that depends
- the happening of an event at a determinate
upon chance or upon the will of third persons.
time.
• In which case the obligation shall take effect in
conformity with the provisions of the Civil Code. The obligation is extinguished:
a. As soon as the time expires without the event
ART. 1183 taking place; or
• Impossible conditions, those contrary to good b. As soon as it has become indubitable that the
customs or public policy and those prohibited event will not take place although the time
by law shall annul the obligation which depends specified has not expired.
upon them. ARTICLE 1185
• The condition not to do an impossible thing • The condition that some event will not
shall be considered as not having been agreed happen at a determinate time shall render the
upon. obligation effective from the moment the time
IMPOSSIBILITY indicated has elapsed, or if it has become
evident that the event cannot occur.
• Impossibility is the fact or condition of not
being able to occur, exist or to be done. If no time has been fixed, the condition
shall be deemed fulfilled at such time as may
• Article 1183, Civil code provides that have probably been contemplated, bearing in
impossible condition, 20 those contrary to good mind the nature of the obligation.
customs or public policy and those prohibited
by law shall annul the obligation that depending Negative Condition - an event will not happen at
upon them. a determinate time.

DIVISIBLE OBLIGATION The obligation shall become effective and

binding:
1. From the moment the time indicated has
elapsed without the event taking place • it’s effect shall retroact to the day when the
2. From the moment it has become evident that obligation was constituted.
the event cannot occur, although the time
Ex. On Jan.20, Sarah agreed to sell his parcel of
indicated has not yet elapsed.
land to Mark for P100,000 should Mark lose a
ARTICLE 1186 case involving the recovery of another parcel of
land. On April 10, Sarah sold his land to Hiro.
• The condition shall be deemed fulfilled when
Mark lost the case on Dec.4. Does Mark have a
the obligor voluntarily prevents its fulfillment.
right to demand the sale of the land by Sarah
Constructive Fulfillment – refers to an obligation upon fulfillment of condition on Dec.4?
prevented by the obligor from happening.
2. In obligation to do or not to do
For constructive fulfillment to operate, the
• no fixed rules is provided
following requisites must be present:
• the court shall decide whether the fulfillment
1. The condition is suspensive of condition have no retroactive effect or from
2. The obligor actually prevents the fulfillment what date such retroactive effect shall take
of the condition effect.
3. He acts voluntarily
Ex. Marga obliged himself to condone the debt
ARTICLE 1187 of Damon, his lawyer, should the latter win
• The effects of a conditional obligation to give, Marga’s case in Supreme Court.
once the condition has been fulfilled, shall RETROACTIVE EFFECTS AS TO FRUITS AND
retroact to the day of the constitution of the INTEREST IN OBLIGATION TO GIVE
obligation. Nevertheless, when the obligation
imposes reciprocal prestations upon the parties, 1. In reciprocal obligations
the fruits and interests during the pendency of
• no retroactivity
the condition shall be deemed to have been
• deemed mutually compensated
mutually compensated. If the obligation is
unilateral, the debtor shall appropriate the
Ex. Using the preceding example, when Mark
fruits and interests received, unless from the
lost the case in court on Dec. 4. Sarah must
nature and circumstances of the obligation it
deliver the land and Mark must pay P100,000.
should be inferred that the intention of the
Sarah does not have to give the fruits received
person constituting the same was different.
from the land before Dec.4 and Mark is not
In obligations to do and not to do, the courts obliged to pay the legal interest on the price
shall determine, in each case, the retroactive since the fruits and interest received are
effect of the condition that has been complied deemed to have been mutually compensated.
with.
2. Unilateral obligations
RETROACTIVE EFFECTS OF FULFILLMMENT OF • no retroactivity
SUSPENSIVE CONDITION. • Gratuitous

1. In obligation to give Ex. Using the preceding example, suppose the

• becomes demandable only upon the promise of Sarah was to donate the parcel of
fulfillment of the condition. land. Upon fulfillment of the condition, Sarah
has to deliver the land but has the right to c.) When the thing deteriorates during the
retain all the fruits and interest he may have pendency of the condition, without the fault of
received during the pendency of the condition. the debtor, the impairment is to be borne by
the creditor.
ARTICLE 1188
d.) If the thing deteriorates, during the
• The creditor may, before the fulfillment of the
pendency of the condition, through the fault of
condition, bring the appropriate actions for the
the debtor, the creditor may choose, after the
preservation of his right.
fulfillment of the condition, between the
The debtor may recover what during the same rescission of the obligation or its fulfillment,
time he has paid by mistake in case of a with indemnity for damages in either case.
suspensive condition.
III. When the thing improved
1. Rights of creditor
e.) If the thing improved during the pendency of
• he may take or bring appropriate actions for the condition, by its nature, or by time, the
the preservation of his right. improvement shall inure to the benefit of the
creditor. The reason for this is to compensate
2. Rights of debtor the creditor who would suffer in case, instead of
he is entitled to recover what he has paid by improvement, there would be deterioration
mistake prior to the happening of the without the fault of the debtor.
suspensive condition. f.) If the thing is improved at the expense of the
• Concept of solutio indebiti applies debtor, he have no other right than that granted
to the usufructuary. By usufruct is meant the
ARTICLE 1189 right to enjoy the property of another which
• When the conditions have been imposed with includes the right to enjoy and use the fruits of
the intention of suspending the efficacy of an the property.
obligation to give, the following rules shall be ARTICLE 1190. Effects of fulfillment of
observed in case of the improvement, loss or resolutory condition
deterioration of the thing during the pendency
of the conditions: • When the conditions have for their purpose
the extinguishment of an obligation to give, the
I. In case of loss of the thing: parties upon the fulfillment of said conditions,
a.) If the thing is lost without the fault of the shall return to each other what they have
debtor, the obligation shall be extinguished. received. In case of the loss, deterioration or
improvement of the thing, the provisions which,
b.) If the thing is lost through the fault of the with respect to the debtor, are laid down in the
debtor, he shall be obliged to pay damage is preceding article shall be applied to the party
understood that the thing is lost when it who is bound to return.
perishes, or goes out of commerce, or
disappears in such a way that its existence is • As for obligations to do and not to do, the
unknown or it cannot be recovered. provisions of the second paragraph of Article
1187 shall be observed as regards the effect of
II. When the thing deteriorate the extinguishment of the obligation.
Effects of fulfillment of resolutory condition.  The contract states that either party can
rescind
1. The obligation is extinguished
5. The remedies of the injured or aggrieved
2. The parties should return or restore to each
party are alternative and not cumulative
other what they have received including the
fruits and interest  Rescission plus damages

3. Rule 1189 will apply to whoever has got a  Fulfillment of the obligation plus
duty to return in case of loss, deterioration or damages.
improvement of the thing.
Section 2 OBLIGATION WITH A PERIOD
4. If the obligation is to do or not to do, the
ARTICLE 1193
courts are given the power to determine the
retroactivity of the fulfillment of the condition. ■ Obligation for whose fulfillment a day
certain has been fixed, shall be demandable
ARTICLE 1191. Right to rescind
only when that day comes.
• The power to rescind obligations is implied in
■ Obligation with a resolutory period take
reciprocal ones, in case one of the obligors
effect at once, but terminate upon arrival of
should not comply with what is incumbent upon
the day certain
him. The injured party may choose between the
fulfillment and the rescission of the obligation, ■ A day certain is understood to be that
with the payment of damages in either case. He which must necessarily come, although it
may also seek rescission, even after he has may not be known when.
chosen fulfillment, if the latter should become
impossible. – If the uncertainty consist in whether the
day will come or not, the obligation is
• The court shall decree the rescission claimed, conditional, and its shall be regulated by the
unless there be just cause authorizing the fixing rules of the preceding Section. (1152a)
of a period.
REQUISITES FOR A VALID PERIOD OR TERM
• This is understood to be without prejudice to
the rights of third persons who have acquired ■ (a) It must refer to the future.
the thing, in accordance with Articles 1385 and ■ (b) It must be certain (sure to come) but
1388 and the Mortgage Law. can be extended. (If eliminated
Right to rescind under article 1191. subsequently by mutual agreement, the
obligation becomes pure and immediately
1. It exist only in reciprocal obligations demandable).
2. It can be demanded only if the parties is ■ (c) It must be physical and legally possible,
ready, willing and able to comply with his own otherwise the obligation is void.
obligations and the other is not
Example:
3. The right to rescind is implied • SMITH, BELL & CO. V. SOTELO MATTI G.R. No.
L-16570. March 9, 1922.
4. The right is not automatic or absolute. Apply
to the court for decree of rescission
• “I’ll give you my house one year after your
 When the object is not yet delivered death.” (VOID)
Obligation with a Period

■ An obligation with a period is one whose Meaning of day certain and a day
consequences are subjective in one way or
DAY CERTAIN
another to the expiration of the period or term.
■ A day certain is that which must necessarily
Grace period come, although it may not be known when.

■ A Grace period, is a right, not an obligation of A DAY

the debtor and when unconditionally conferred, ■ A day is a space of time which elapses
the grace period is effective without further ■ It refers to any day or date that is not
need of demand either calling for the payment specifically stated in the contract.
of the obligation or honoring the right.
ARTICLE 1195
Kinds of Period
■ Anything paid or delivered before the arrival
SUSPENSIVE PERIOD (ex die) of the period, the obligor being unaware of the
■ As when the obligation commences only form period or believing that the obligation has
the arrival of a day certain become due and demandable, may be
Illustration: Joey promises to support Rachel recovered, with the fruits and interests. (1126a)
from the death of Rachel’s father, which means
Illustration
the obligation only begins from the death of
On December 10, 2015, Nitzel owed Digna
Rachel’s father.
$150,000.00, and they agreed Nitzel would pay
RESOLUTORY PERIOD (In diem) this debt plus 1% monthly interest (12%
■ As when the obligation ends upon arrival of annually). However, on January 5, 2016, Nitzel
the period mistakenly believed the debt was already due
Illustration: Joey promises to support Rachel and payable, so she paid the $150,000.00 plus
until Rachel reaches her majority age, which the full 12% annual interest. Since Nitzel was
means the obligation is already effective but will unaware of the proper payment period
terminate once Rachel turns 18.
ARTICLE 1196
ARTICLE 1194
■ Whenever in an obligation a period is
■ In case if loss, deterioration or improvement designated, it is presumed to have been
of the things before the arrival of the day established for the benefit of both the creditor
certain, the rules in article 1189 shall be and the debtor, unless from the tenor of the
observed. same or other circumstances it should appear
that the period has been established in favor of
Example:
one or of the other.
Mr.A obliged himself to give Mr.B his car worht
200,000 if Mr. B will sell Mr.A’s property. The car Illustration
was lost without the fault of Mr.A.
ABESAMIS VS. WOODCRAFT WORKS, INC
The obligation is extinguished and Mr.A is not
liable to Mr.B if Mr.B sells the property. A
This case involved a contract between
person, as a general rule, is not liable for a
Woodcraft Works and Abesamis Shipping for log
fortuitous event.
delivery. Abesamis failed to deliver due to a
storm that swept away the logs. The delivery (4) When the debtor violates any undertaking,
period was accomplished as per the contract, in consideration of which the creditor agreed
which aimed to avoid storms. However, to the period;
Woodcraft Works sued Abesamis to bear the
Example: John borrows ₱50,000 from the bank
losses from the typhoon.
and provides his car as collateral. The bank
ARTICLE 1197 agrees to give him two years to repay the loan.
As part of the agreement, John commits to
■ If the obligation does not fix a period, but
providing quarterly financial statements to the
from is nature and circumstances it can be
bank.
inferred that a period was intended, the courts
my fix the duration thereof. (5) When the debtor attempts to abscond.
(1129a)
Example: Under a 20-year lease between R
Meaning of abscond.
(lessor) and E (lessee), the factory building
“Abscond” typically refers to someone leaving
constructed by E would belong to R upon lease
hurriedly and secretly to avoid detection or
expiration. When the building was destroyed by
arrest.
fire, E could not rebuild it as the insurance
proceeds were unpaid. R then filed an Section 3 ALTERNATIVE OBLIGATIONS
ejectment suit against E.
ARTICLE 1199
ARTICLE 1198
■ A person alternatively bound by different
■ The debtor shall lose every right to make use prestations shall completely perform one of
of the period: them.

(1) When after the obligation has been Alternative obligations

contracted, he becomes insolvent, unless he An alternative obligation is one where the
gives a guaranty or security for the debt; debtor is bound by different prestations of
which he can choose complete performance of
Example: Ar-Jay ₱50,000 from a bank to start a
one.
small business. The loan agreement states that
he has two years to repay the loan in full. Example:
Ar-Jay borrows ₱50,000 from a bank to start a
(2) When he does not furnish to the creditor
small business. The loan agreement states that
the guaranties or securities which he has
he can repay the loan either in cash or with his
promised;
assets of similar value to what is owed.
Example: Ar-Jay borrows ₱50,000 from the bank
ARTICLE 1200
to start his small business. As part of the loan
agreement, he promises to provide a car he ■ The right of choice belongs to the debtor,
owns as collateral (security) within 30 days. unless it has been expressly granted to the
creditor. The debtor shall have no right to
(3) When by his own acts he has impaired said
choose those prestations which are impossible,
guaranties or securities after their
unlawful or which could not have been the
establishment, and when through a fortuitous
object of the obligation. (1132)
event they disappear, unless he immediately
gives new ones equally satisfactory; The right choice which prestation to fulfill
belongs to debtor.
The debtor shall have no right to choose those damages. Because in this situation the creditor
prestations which are: is at fault himself for the debtor's failure to
exercise his right of choice.
• impossible
• unlawful Example: If three people owe a debt of ₱30,000
• not an object of obligation collectively, the creditor can demand the full
amount from any one of them, or just a portion
ARTICLE 1201
from each. If one pays the full amount, they can
■ The choice shall produce no effect except seek reimbursement from the others for their
from the time it has been communicated. respective shares.
(1133)
ARTICLE 1204
Example: Ar-Jay borrows ₱50,000 from a bank
■ The creditor shall have a right to indemnity
to start a small business. The loan agreement
for damages when, through the fault of the
states that he can repay the loan either in cash
debtor, all the things which are alternatively the
or with his assets of similar value to what is
object of the obligation have been lost, or the
owed.
compliance of the obligation has become
Notice comes from the Latin “notitia” which impossible.
means being known and “nocere” to know.
The indemnity shall be fixed taking as a basis
Effect of lack of communication of the choice. the value of the last thing which disappeared,
If the choice is not communicated, as if there is or that of the service which last became
no choice because there was no notice of the impossible.
choice made.
Damages other than the value of the last thing
ARTICLE 1202 or service may also be awarded. (1135a)

■ The debtor shall lose the right of choice when Indemnity defined.
among the prestations whereby he is
Indemnity is the right of the injured party to
alternatively bound, only one is practicable.
claim reimbursement for any loss, damage or
(1134)
liability from a person who has such a duty.
Debtor loses right of choice when only one
Damages is the sum of money which the law
prestation is practicable.
awards or imposes as pecuniary compensation,
ARTICLE 1203 recompense or satisfaction of the injury done or
a wrong sustained as a consequence either of
■ If through the creditor's acts the debtor breach of a contractual obligation or a tortious
cannot make a choice according to the terms of act.
the obligation, the latter may rescind the
contract with damages. Creditor's right to be indemnified.

Effect If creditor's acts prevents exercise of The creditor shall have a right to indemnity for
debtor's right of choice. damages when, through the fault of the debtor,
all the things which are alternatively the object
If through the creditor's acts the debtor make a of the obligation have been lost, or the
choice according to the terms of the obligation, compliance of the obligation has become
the latter may rescind the contract with impossible.
Because in this situation the debtor is at fault. Article 1205 shall still apply with respect to the
The indemnity shall be fixed taking as a basis responsibility of the debtor.
three value of the last thing which disappears or
(2) If the loss of one of the things occurs
that of which the service which has become
through the fault of the debtor, the creditor
impossible. Damages other than the last thing
may claim any of those subsisting, or the price
or service may be awarded.
of what which, through the fault of the former,
Impossibility defined. has disappeared, with a right to damages;

Impossibility is the fact of not being able to Example: Maria owes John either a car, a
exist. motorcycle, or a bicycle. Before John decides,
Maria accidentally damages the car due to her
Example: Mark, John, and Lisa owe ₱50,000 to
negligence. John can now demand either the
Rachel, and the obligation is solidary. If John
motorcycle, the bicycle, or the value of the car
becomes insolvent, Mark and Lisa must pay
that was damaged, along with compensation for
John’s share in addition to their own.
the damages.
ARTICLE 1205
Loss by fortuitous event.
■ When the choice has been expressly given to
A loss by fortuitous event is beyond the control
creditor, the obligation shall cease to be
of the debtor and without his fault. Hence, the
alternative from the say when the selection has
creditor may only choose from the remainder.
been communicated to the debtor.
However, if the loss occurs through the fault of
Until then the responsibility of the debtor shall the debtor the creditor is entitled to the price of
be governed by the following rules: what has disappeared plus damages.

(1) If one of the things is lost through a (2) If all the things are lost through the fault of
fortuitous event, he shall perform the obligation the debtor, the choice by the creditor shall fall
by delivering that which the creditor should upon the price of any one of them, also with
choose from among the remainder, or that indemnity for damages. The same rules shall be
which remains if only one subsists; applied to obligations to do or not to in case
one, some or all of the prestations should
Example: Carla owes Leo either a laptop, a become impossible. (1136a)
tablet, or a smartphone. Before Leo makes his
choice, the smartphone is destroyed by a fire, Example: Alex owes Karen either a ring, a
which was beyond Carla’s control. Leo can now necklace, or a bracelet. Before Karen selects,
choose between the laptop and the tablet. Alex loses all three items because of his
carelessness. Karen can now choose to receive
When obligation ceases to be alternative. the value of any one of the items, plus
When the choice has been expressly given to compensation for the damages caused by the
the creditor, the obligation ceases to be loss.
alternative from the day when the selection has ARTICLE 1206
been communicated to the debtor. Because
when the choice has been made and, therefore, ■ When only one prestation has been agreed
there is no more choice to be exercised by the upon, but the obligor may render another in
creditor. But before the choice has been substitution, the obligation is called facultative.
communicated to the debtor the rules under
The loss or deterioration of the thing intended
as a substitute, through the negligence of the
obligor, does not render him liable. But once the
substitution has been made, the obligor is liable
for the loss of the substitute on account of his
delay, negligence or fraud.

Facultative obligation defined.

A facultative obligation comes into being when

only one prestation has been agreed upon by
the parties to a contract but the obligor may
render another is substitution. In this case, the
loss or deterioration of the thing intended as a
substitute through the negligence of the obligor
does not render him liable. Because the
substitute is presumed to be under the control
of creditor. But once the substitution has been
made, the obligor is liable for the loss of the
substitute. Because once the substitution has
been made, the substitute is already in the
control of the debtor.

(2) If all the things are lost through the fault of

the debtor, the choice by the creditor shall fall
upon the price of any one of them, also with
indemnity for damages. The same rules shall be
applied to obligations to do or not to in case
one, some or all of the prestations should
become impossible. (1136a)

Example: Liza owes Robert either a laptop, a

tablet, or a smartphone. If Liza damages the
smartphone, Robert can demand either the
laptop or the tablet. If all items are lost due to
Liza’s fault, Robert can claim the value of any
one item, plus damages.