REVIEW NOTES
IN
BUSINESS LAW
2013 EDITION
RANDY BISA BLANZA
Lawyer
Certified Public Accountant
Master of Public Administration
Career Executive Service Eligible
ActingDean:
Tabaco College, College of Law
Faculty Member:
Divine Word College of Legazpi, College of Business Education
Copyright
By
RANDY BISA BLANZA
______________________________
ALL RIGHTS RESERVED
Any copy of this book without the original signature
of the author on this page shall be considered
as having proceeded from illegal source
Published and Printed By:
PISPIS PRINTING SERVICES
Ligao City
PREFACE
The "Business Law and Taxation" subject in the CPA board exam will now officially be treated as two (2) separate subjects in the said exam starting on OCTOBER 2013 board exam. It is now imperative that focus shall be given to all topics included in the syllabus for the CPA Licensure Examinations for Business Law to increase the chances of passing the CPA licensure Examinations.
The topics are incorporated in this Review Notes, and discussed in a manner that can easily be understood by accounting students and CPA reviewees. The author adopted the outline approach, with illustrations used to explain the provisions of law. Additionally, end of chapter assessments varying from True or False, Multiple Choice Questions, Enumeration Types and similar diagnostic means are included in this book to determine the competency and understanding of the student/reviewee of the topics covered under the business law course.
The author wishes that this book will help students and CPA reviewees to better understand the concept of business law and its applications, and further help them to achieve their desire to become a full-pledged Certified Public Accountant in the future.
Malilipot, Albay, Philippines. September 1, 2013
ACKNOWLEDGEMENT
The author wishers to express his sincerest thanks to the following persons who inspire him to devote time and efforts to create his first ever book:
To Divine Word College of Legazpi, Aquinas University of Legazpi and Tabaco College, for the support and patronizing the author’s book as reference materials for their subjects in business law and other related subjects;
To his family, Mama, Mama Kikay, Mama Ding, Mama Iya; and siblings Jean, Gerardo, Darwin, Glena, Gilbert, Myzel, Norvin, Rianne and Feevrey; and pamangkins Lyndon and Jack Francis Bibal, Ma. Andrianna and Ma. Alyzel Blanza, Ernest James and Darwin James Blanza, Symon James and Ayrinne Gaile Blanza,and Princess Genn Blanza for their unending support, motivation and care;
To his bestfriends, Darwin Bonagua, Rodel Lorico and Carmela Monica Borromeo, for the valuable encouragement and moral support to take the path where his passion is.
To Margarita Cheska Alonzo, for the inspiration to strive hard to reach goals in life. To his students accountancy and law students, for their comments, recommendations and suggestions to improve this book.
And above all, to Almighty God, the giver of all things, and the source of all wisdom.
THE CPA LICENSURE EXAMINATIONS SYLLABUS FOR BUSINESS LAW
This subject tests the candidates' knowledge of the legal implications of business transactions, business associations, and negotiable instruments, particularly as they relate to accounting and auditing situations. Candidates should know and understand the pertinent legal provisions, general principles, concepts, and underlying philosophy of the law. The business law examination is not intended to test the candidates' competence to practice law or their expertise in legal matters but to determine that their knowledge is sufficient to enable them to recognize the legal implications of business situations, apply the underlying principles of law to accounting and auditing, and know when to seek legal counsel or recommend that it be sought.
Each examination will contain a minimum of 50 and maximum of 70 multiple choice questions, allocated to the different subject areas, as indicated below:
I. LAW ON BUSINESS TRANSACTIONS Obligations and Contracts
1.1 Obligations
a. Sources of obligations and their concepts 1. Law
2. Contracts 3. Quasi-contracts 4. Delicts
5. Quasi-delicts
b. Kinds of obligations in general under the Civil Code c. Specific circumstances affecting obligations in general
1. Fortuitous events 2. Fraud
3. Negligence 4. Delay
5. Breach of contract
d. Duties of the obligor in obligation to do or not to do e. Extinguishment of obligation with special emphasis on
1. Payment of debts of money
2. Mercantile documents as means of payment 3. Special forms or modes of payment
4. Remission or condonation, confusion, compensation and novation 5. Effect of insolvency and bankruptcy on extinguishment of obligation 1.2 Contracts
a. Concepts and classification b. Elements and stages
d. Persons bound e. Consent 1. Capacitated persons 2. Requisites 3. Vices of consent f. Objects of contracts g. Considerations of contracts h. Formalities of contracts
i. Interpretation and reformation of contract j. Defective contracts 1. Rescissible 2. Voidable 3. Unenforceable 4. Void 2.0 Contract of Sales
2.1 Nature, forms and requisites 2.2 Distinguished from
a. Dacion en pago b. Cession in payment c. Contract for a piece of work d. Barter
2.3 Earnest money as distinguished from option money 2.4 Rights/obligations of vendor and vendee
2.5 Remedies of unpaid seller
2.6 Warranties (in relation to consumer laws)
2.7 Sale with a right to repurchase or conventional redemption, legal redemption 2.8 Sale on credit
2.9 Installment sales
a. Personal property - Recto Law b. Real property - Maceda Law c. PD 957 / Condominium Act
3.0 Contract of Agency, Pledge and Mortgage
3.1 Contract of agency
a. Nature, forms and kinds of agency b. Obligations of agents and principals c. Guaranty of commission agents d. Modes of extinguishing an agency 3.2 Pledge
a. Nature and binding effect on third persons b. Obligations/rights of pledgor and pledge c. Pactum commissorium
d. Modes of extinguishments 3.3 Mortgage
a. Real and chattel 1. Nature 2. Requisites
3. Rights and obligations of mortgagor and mortgagee 4. Requisites to have binding effect on third persons
5. Mode of extinguishment
II.LAW ON BUSINESS ASSOCIATIONS
4.0 Partnership
4.1 Nature and as distinguished from corporation 4.2 Elements and kinds
4.3 Formalities required 4.4 Rules of management
4.5 Distribution of profits and losses 4.6 Sharing of losses and liabilities 4.7 Modes of dissolution
4.8 Limited partnership 5.0 Corporations
5.1 Nature and classes of corporation 5.2 Requirements for organization 5.3 Powers of a corporation
a. Expressed b. Implied c. Incidental
5.4 Board of Directors/Corporate Officers a. Qualifications
b. Election and removal c. Powers and fiduciary duties 5.5 Classes of stocks
a. Concepts b. Subscriptions
5.6 Powers, duties, rights and obligations of stockholders 5.7 Majority and minority control
5.8 Corporate reorganization a. Mergers
b. Consolidations
c. Other business combinations 5.9 Modes of dissolution and liquidation 5.10 Foreign corporations
a. License to do business 1. Purpose of the license
2. Requirements for application/ issuance of license 3. Consequence of doing business without a license b. Definition and rights of foreign corporation
c. Definition of doing business and its relation to foreign investments d. Resident agent (purpose, qualifications)
e. Suits against foreign corporations f. Suspension/revocation of license g. Withdrawal from business
5.11 Kinds and availability of corporate books
III.LAW ON NEGOTIABLE INSTRUMENTS
6.0 Negotiable Instruments Law 6.1 Negotiability of instrument
6.3 Construction of ambiguous instrument 6.4 Parties and their liabilities
6.5 Indorsements
6.6 Accommodation party 6.7 Consideration
6.8 Manner and consequence of transfer of instruments
6.9 Dishonored instruments and its effects (including clearing house rules and BP 22) 6.10 Requisites of holder in due course
6.11 Defense of parties 6.12 Forgery and its effects
6.13 Discharge of negotiable instruments and the parties secondarily liable.
TABLE OF CONTENTS
I. Obligations ………..
End of Chapter Questions
True or False ……….
Multiple Choice ……….
Answers ……….
II. Contracts ………..
End of Chapter Questions
True or False ……….
Multiple Choice ……….
Answers ……….
III. Sales ………...
End of Chapter Questions
True or False ………..
Multiple Choice ………..
Answers ………
IV. Agency ………..………..
End of Chapter Questions
True or False ……….
Multiple Choice ……….
Answers ……….
V. Pledge, Mortgage and Antichresis ………. End of Chapter Questions
True or False ………
Multiple Choice ………
Answers ……….
VI. Partnership ……….
End of Chapter Questions
True or False ………
Multiple Choice ………
Answers ………..
VI. Corporations ………
End of Chapter Questions
True or False ………
Multiple Choice ………
Answers ………
VII. Negotiable Instruments ……… End of Chapter Questions
True or False ………
Multiple Choice ………
OBLIGATIONS
Obligation, definedAn obligation is a juridical necessity to give, to do or not to do. (Article 1156, New Civil Code). Obligation is used in reference to anything that an individual is required to do because of a promise, vow, oath, contract, or law. It refers to a legal or moral duty that an individual can be forced to perform or penalized for neglecting to perform. Juridical necessity means that the court can be asked to order the obligor to perform the obligation.
Elements of Obligation
1. Active Subject (creditor/obligee) - one who has the right to demand performance of the obligation
2. Passive Subject (debtor/obligor) - one who is obliged to perform the obligation.
3. Prestation – the subject matter of the obligation. It may consist of giving, doing or not doing. Prestations in real obligation is the thing, whether determinate or generic and the services or acts in personal obligations.
4. Efficient cause - the vinculum or the legal or juridical tie that binds the parties to an obligation. It may consist of any of the five sources of obligation (law, contract, quasi-contract, delict and quasi-delict).
Requisites of a valid obligation
1. It must be licit
2. It must be possible, physically and judicially 3. It must be determinate or determinable 4. It must have pecuniary value
Vinculum juris – the legal/juridical tie that binds the parties to the obligation Causa (causa debendi/causa obligationes) – why obligation exist
Examples:
1. Obligation to give – “X promise to give A P2,000 monthly allowance until the latter finishes college”. Here, A is the active subject; X is the passive subject; the P2,000 monthly allowance is the prestation; and the right to support is the efficient cause.
2. Obligation to do – “M obliged himself to pay N the amount of P100,000, as full payment of land he purchased from the latter.” N is the active subject; M is the passive subject; the amount of P100,000 as payment is the prestation; and the contract of sale is the efficient cause.
3. Obligation not to do – “P bound himself not to construct a fence in his land so as to obstruct the free passage of rainwater from the land of Q”. Here, Q is the active subject; P is the passive subject; the non-construction of fence is the prestation; and the right of easement is the efficient cause.
Civil obligation vs. natural obligation
Article 1423 of the New Civil Code classifies obligations into civil or natural. "Civil obligations are a right of action to compel their performance. Natural obligations, not being based on positive law but on equity and natural law, do not grant a right of action to enforce their performance, but after voluntary fulfillment by the obligor, they authorize the retention of what has been delivered or rendered by reason thereof".
Civil obligation Natural obligation
1. Based on law 1. Based on equity and moral justice 2. Enforceable by court actions 3. Cannot be enforced by court action
Examples of natural obligation:
1. X is indebted to A for the amount of P10,000 covered by a promissory note with maturity date of December 31, 2000. Despite demand from A, X failed to pay the amount in the PN. On June 1, 2013 (after the lapse of more than 12 years), X paid A the amount of P10,000. When X learned that the PN has already prescribed (and therefore not anymore enforceable), he now seeks to recover from A the P10,000. Can he recover the amount paid to A?
Answer: NO. The obligation becomes a natural obligation and the debtor who voluntarily pays can no longer recover what he has given based on equity and moral justice.
2. X died leaving two heirs, A and B. At the time of his death, X has an assets of P1,000,000 and liabilities of P1,200,000, thus leaving a net liabilities of P200,000. A and B paid the creditor of X for the corresponding amount. However, after payment, the heirs learned that they are only liable to the extent of value of assets inherited from the decedent. Can A and B recover the P200,000 they paid to the creditor of X?
Answer: NO. The obligation is a natural obligation and the heir/s who voluntarily pays the decedent’s creditor can no longer recover what he has given based on equity and moral justice.
Forms of obligation
1. Oral 2. In writing
3. Partly oral and partly in writing
1. Real obligation (obligation to give) – the subject matter is the thing which the obligor must deliver to the obligee
Example. A bounds himself to deliver to B 10 sacks of rice
2. Personal obligation (obligation to do or not to do) – the subject matter is the act to be done or not to be done
o Positive personal obligation – obligation to do or to render service Example: A bounds himself to paint the house of B
o Negative personal obligation – obligation not to do ( which naturally includes “not to give”)
Example: X binds himself not to construct a fence on a portion of his lot in favor of W who is entitled to right of way.
Sources of Obligation
1. Law - Obligations arising from law are not presumed. Those expressly determined in the code or in special laws, etc., are the only demandable ones. We cannot presume existence of an obligation if no express provision is stated in our laws.
Examples: obligation to pay taxes under the National Internal Revenue Code; obligation to render personal military or civil service in the fulfillment of this duty all citizens may be required by law under Section 2, Article II of the Constitution of the Philippines; obligation to give mutual support between husband and wife.
2. Contracts – meeting of minds between two persons/parties whereby one binds himself, with respect to the other, to give something or to render some service. Obligations arising from contracts have legal force between the contracting parties and must be fulfilled in accordance with their stipulations. (Arts. 1090 and 1091.)
Examples: contract of sale, contract of lease, contract for piece of work, simple loan, deposits, mortgages, etc.
3. Quasi-contracts– Certain lawful, voluntary and unilateral acts done by a person giving rise to a juridical relation to the end that no one shall be unjustly enriched by another (Art.2142).
Kinds of Quasi-contracts:
1. Negotiorum Gestio – voluntary administration of the property, business, or affairs of another without the latter’s consent or authority. It is a type of spontaneous agency or interference by a person, called a negotiorum gestor, in the affairs of another, in his absence. The gestor is only entitled to reimbursement for expenses and not to remuneration.
For example, while X is traveling abroad, a typhoon hits his home town and the roofing of his house is in danger. To avoid the catastrophic situation, his neighbor A does something urgently necessary. X is the 'principal' and A here is the 'gestor". The act of which saved X’s house is the 'negotiorum gestio.” X must reimburse A for such expense.
2. Solutio Indebiti – refers to the juridical relation which arises whenever a person unduly delivers a thing through mistake to another who has no right to demand it.
If something is received when there is no right to demand it, and it was unduly delivered through mistake, the obligation to return it arises. (Art. 2154, NCC)
Example: C, a Filipino resident of the US sent to his father D in Manila $500 through ABC Bank. Due to mistake of the employees of the Bank, D was paid $5,000 instead. Upon discovery of the mistake, the Bank demanded from D the return of $4,500. D refused and the Bank sued him. Is the Bank entitled to recover from D?
Answer: YES, the Bank is entitled to recover the $4,500 from D. We have in this case an example of a quasi-contract of solutio indebiti which arises whenever a person unduly delivers a thing through mistake to another who has no right to demand
4. Delicts – also known as crimes or felonies. These are act or omissions punishable by law. According to the Revised Penal Code, the commission of a crime makes the offender also civilly liable.
Article 100 of the Revised Penal code provides, “Every person criminally liable for a felony is also civilly liable”. Article 104. The civil liability of this Code includes:
1. Restitution;
2. Reparation of the damage caused;
3. Indemnification for consequential damages.
Example: The obligation of the thief to return the stolen car. The obligation of the killer to indemnify the heirs of the victim.
5. Quasi-delicts – also known as “tort” or “culpa aquiliana”. These are acts or omissions that cause damage to another, there being no contractual relation between the parties (Art.2176). It refers to a negligent act or omission which causes harm or damage to the person or property of another, and thus exposes a person to civil liability as if the act or omission was intentional
Requisites of Quasi-Delict:
b. There must be fault, negligence or imprudence not legally excusable c. There must be damage caused
d. There is a direct relation between of cause and effect between the act or omission and the damage; and
e. There is no pre-existing contractual relations between the parties
Example: X and Y were playing baseball near the house of A. X hit the ball and it breaks A’s windows. X and Y are liable for damages to A.
Distinction between Crime and Quasi-Delict
Crime Quasi-Delict
There is malicious intent There is negligence
Purpose is punishment Purpose is indemnification of parties Affects public interest Affects private interest
2 liabilities – criminal and civil Only civil liability
Criminal liability cannot be compromised Liability can be the subject of compromise Guilt of the accused must be prove beyond
reasonable doubt
Negligence need to be proved only by preponderance of evidence
NATURE AND EFECT OF OBLIGATION Determinate thing and generic thing
1. Determinate or specific thing - a thing is determinate when it is particularly designated or physically segregated from all others of the same class (Article 1460). A thing is determinate or specific when it is distinct from all others of the same class. A determinate thing is distinct because of its individuality.
Examples of a determinate thing are: the laptop you are viewing this website on, your car (if you own only one), the lot on 443 Sto. Cristo, Guagua, Pampanga.
2. Indeterminate or generic thing – a thing is indeterminate when it is not particularly designated or particularly segregated from all others of the same class. Examples are car, watch, sacks of rice, P100,000.
Importance of knowing whether the thing is determinate or indeterminate
Loss of indeterminate things due does not extinguish the obligation. While loss of determinate things when due, extinguishes the obligation.
Obligation of the obligor to give determinate thing
1. Every person obliged to give something is also obliged to take care of it with the proper diligence of a good father of a family, unless the law or the stipulation of the parties requires another standard of care. ( Art. 1163)
Diligence of a good father of a family or ordinary diligence means the ordinary
and attention that is expected from and is ordinarily exercised by a reasonable and prudent person under the circumstances.
Extra-ordinary diligence represents that extreme measure of care and caution
which persons of unusual prudence and circumspection use for securing and preserving their own property or rights.
2. To deliver the thing. Delivery involves the transfer of possession and/or control of
property, real or personal, from the obligor to the oblige, either actual or constructive. 3. To deliver the fruits of the thing. The fruits may be (Art. 442) -
a. Natural fruits – refers to the spontaneous products of the soil and the young
and other products of animals. There must be no human intervention in the production of the said fruits. Examples are the trees and shrubs that grow without intervention of human labor, the calf of the cow, and the young of farm animals are natural fruits.
b. Industrial fruits – refers to those produced by land of any king through
cultivation of labor. Examples are the grapes that are harvested from vineyards, rice, corn and other crops produced through human cultivation are industrial fruits.
c. Civil fruits – are those which are the result of a juridical relation such as the
rent of a building, price of lease of land and other property and the amount of perpetual life annuities.
When creditor has a right to the fruits of determinate thing
Under Art. 1164, the creditor has a right to the fruits of the thing from the time the obligation to deliver it arises. However, he shall acquire no real right over it until the same has been delivered to him.
When obligation to deliver the thing arises
1. Without period or condition – upon perfection of the obligation
2. With period or condition – upon arrival of the term or upon perfection of the condition Example: “D promise to deliver to E a red Honda car after E passes the CPA board exams. The obligation to deliver the thing arises only upon passing of CPA exams by E.
Rights of the creditor
1. Personal right – the right of a legal subject specified in an agreement or contract. This refers to the right that may be enforced by one person on another, such as the right of the creditor to demand delivery of the things, together with all its fruits from the debtor.
2. Real right – refers to the right of the owner over the specific thing, such as possession
and ownership. This right is enforceable against the whole world. Real right over the thing is acquired by the creditor when it is delivered to him by the debtor
4. To deliver its accessions and accessories even if they have not been mentioned (Art. 1166)
Accessions – include everything that is produced by a thing or is incorporated or
attached thereto, either naturally or artificially. (Art. 440), such as
alluvium, the soil gradually deposited by current of a river on a river
bank, or whatever planted or sown on a parcel of land.
For example, a person who owns property along a river also takes ownership of any additional land that builds up along the riverbank. This right may extend to additions that result from the work or skill of another person. The buyer of a car who fails to make scheduled payments cannot get back his new spark plugs after the car is repossessed because they have become a part of the whole car
Accessories – are those joined to or included with the principal thing for the latter’s
better use, perfection or enjoyment. Examples are the keys to the house, the bracelet of a wristwatch, the stereo in a car).
Remedies of the creditor
1. If the debtor fails to perform his obligation to deliver a determinate thing a. The creditor may compel delivery from the debtor (Art. 1165) b. Demand for damages from the debtor
Example: D obliged himself to deliver to E a 2012 model Honda City white car with Plate No. LUV 143 on June 31, 2013.” On due date, D can only compel E to deliver the said specific car. If E still fails to deliver despite demand, D can ask for damages from E.
2. If the debtor fails to perform his obligation to deliver an indeterminate thing a. Ask that the obligation be complied with at the expense of the debtor b. To demand for damages from the debtor
Example: A promises to deliver to B 10 bags of cement. On due date, A failed to deliver the thing. Here, B can ask another person to deliver the 10 bags of cement at the expense of A. B can likewise demand damages from A.
3. If the debtor fails to perform his obligation in obligation to do
If the debtor fails to perform the obligations or perform it in contravention of the tenor thereof
a. The creditor may have the obligation executed at the expense of the debtor
Example: X contracted Y to build his residential house. The contract stipulates the design of the house, the materials to be used, and the construction period of 120-days from signing of the contract by the parties. If Y does not perform the obligation, X may himself, or ask another contractor to build the house at Y’s expense. X may likewise demand damages from Y.
The same is true if Y performs his obligation in contravention of the tenor of their agreement.
Note: X cannot compel Y to perform the obligation against the latter’s will, as
this will be in violation of constitutional prohibition against involuntary servitude.
If the debtor performs the obligation but does it poorly
a. The creditor may have the same be undone at the expense of the debtor b. The creditor may also demand damages from the debtor
Example: in the above example, if Y uses sub-standard materials in building X’s house, X can have it undone by another person or even himself at the expense of Y. X can also claim for damages from Y.
4. If the debtor does what has been forbidden to him
a. The creditor may demand that what has been done be undone b. He may also demand damages from the debtor
Example: D bought a portion of parcel of land from E. D likewise paid E a certain amount for the right of way, with the condition that E would not construct a fence or any improvement on the said right of way. Sometimes thereafter, however, E constructed a fence in the said right of way thereby blocking the free access of D to the provincial road. D can demand from E to remove the fence, or he may ask other person or even himself, to remove the fence at the expense of E. D can also demand damages from E.
When is the debtor/obligor liable for damages?
Under Art. 1170, liability for damages shall be demanded from those who in the performance of their obligations are guilty of
a. fraud (dolo)
b. negligence (culpa)
c. delay (mora)
d. those who in any manner contravene the tenor thereof.
Damages refer to the harm done. This requires compensation for causing loss or injury through negligence or a deliberate act, or a court's estimate or award of a sum as a fine for breach of a contract or of a statutory duty.
Injury refers to the wrongful, unlawful and tortuous act. It is the legal wrong to be redressed.
Kinds of damages ( M-E-N-T-A-L)
1. Moral damages – include physical suffering, mental anguish, fright, serious anxiety, besmirched reputation, wounded feelings, moral shock, social humiliation, and similar injury. Though incapable of pecuniary computation, moral damages may be recovered if they are the proximate result of the defendant's wrongful act for omission (Art. 2217) 2. Exemplary damages or corrective damages - are imposed, by way of example or
correction for the public good, in addition to the moral, temperate, liquidated or compensatory damages (Art. 2229)
3. Nominal damages - are adjudicated in order that a right of the plaintiff, which has been violated or invaded by the defendant, may be vindicated or recognized, and not for the purpose of indemnifying the plaintiff for any loss suffered by him (Art.2221)
4. Temperate damages or moderate damages - are more than nominal but less than compensatory damages, may be recovered when the court finds that some pecuniary loss has been suffered but its amount cannot, from the nature of the case, be provided with certainty (Art. 2224)
Temperate damages must be reasonable under the circumstances (Art.2225) 5. Actual damages – these refers to pecuniary loss (such as loss in business or profession) that may be recovered. It includes loss of possible earnings. Indemnification for damages shall comprehend not only the value of the loss suffered, but also that of the profits which the obligee failed to obtain (Art. 2200)
Note: proof of pecuniary loss is required unless provided by law or stipulation
6. Liquidated damages - are those agreed upon by the parties to a contract, to be paid in case of breach thereof (Art.2226)
Important: proof is NOT required in order that moral, nominal, temperate or liquidated or exemplary damages may be adjudicated. The assessment of such damages, except liquidated ones, is left to the discretion of the court, according to the circumstances of each case.
Fraud is the deliberate or intentional evasion by the debtor/obligor of the fulfillment of his obligation in a normal manner. The commission of fraud gives rise to liability to pay damages to the aggrieved party.
Kinds of fraud
a. Causal fraud and incidental fraud
1. Causal fraud (dolo causante) - is the fraud committed to obtain the consent of another party, without which consent would not have been given. This type of fraud renders the contract voidable.
Example: A bought a pair of “diamond” earrings to B, who told him that the diamonds are genuine. A is a long time jeweler and B honestly accept the representation of A that it is indeed a true diamond, when A knew all along that it was fake. Here, B’s consent was obtained through fraudulent representation made by A. The contract is thus voidable.
2. Incidental fraud (dolo incidente) – refers to fraud where consent would still be given but the person giving it would have agreed on a different terms. The resulting contract is valid but the party employing the fraud shall be liable for damages.
Example: A agreed to buy from to B sacks of well-milled rice at P1,500 per sack. However, the rice B is selling is actually regular-milled rice at P1,200 per sack. Had A known the said fact, A would still agree to buy from B anyway but for a reduced price. The fraud here is incidental and B only liable for damages. b. Past fraud and future fraud
1. Past fraud – fraud already committed by one of the parties. A waiver of an action for past fraud may be made, since the commission of fraud can no longer be encouraged. Such waiver is an act of liberality on the part of the creditor.
2. Future fraud – fraud which a party intends to commit in the future. A waiver of an action for future fraud cannot be made. Agreement made for waiver of future fraud is void. It is thus held that the debtor/obligor will still be liable for damages if he commits fraud in the performance of his obligation despite of waiver previously agreed upon by both parties.
Negligence, defined
Negligence is the omission of that diligence required by the nature of the obligation and corresponds with the circumstances of the person, time and place. (Art. 1173)
The required degree of diligence to be observed by the debtor is provided by law or stipulation of parties.
If the law or contract does not state the diligence which is o be observed in the performance of the obligation, the debtor must exercise the diligence of a good father of a family.
Examples:
1. Required by law – the owner of a public utility transport is required by law to observe extra-ordinary diligence in transporting its passengers from point of embarkation until disembarkation. Thus, when passengers are injured because of vehicular accident, regardless of which vehicles is/are at fault, the owner is guilty of negligence.
2. Required by circumstance – if the obligation is to deliver highly flammable materials, the obligor shall observe extra-ordinary diligence of care. Any slightest fault that results to damage to the product or to any third person will held the obligor guilty of negligence 3. If a driver drive’s without or with expired driver’s license, drives at night without
headlight, or driving while texting in his cellular phone, will be considered guilty of negligence under the circumstances
Kinds of negligence
1. Contractual negligence (culpa contractual) – refers to the negligence in the performance of a contract. A common example is the contract of carriage between the owner of public utility jeepneys and its passenger. Thus, when negligence is committed by the driver, causing death or injury to its passenger, the owner of the said PUJ is liable for damages.
In contractual negligence, the master-servant rule applies. The master (owner) is liable for the negligent acts of his servant (driver). The defense of diligence of good father of family (as when the owner employed strict procedures in selection and supervision of drivers) is not a valid defense of the owner to escape liability, but this can mitigate the liability min some instances.
2. Civil negligence (culpa aquiliana, tort, quasi-delict or culpa ex-contractual) – these are acts or omission that cause damage to another, there being no contractual relation between the parties.
Civil negligence arise from acts which a prudent man expected to observe, has failed to do so resulting to damage to another person, such as when a person is throwing a stone in a busy street, resulting to damaging the window or causing physical injury to a passenger in a passing vehicle, is liable for culpa aquiliana.
The master-servant rule does not apply here. Thus, when a pedestrian is hit by a bus because of his reckless driver, the negligence of the servant (driver) is not the negligence of the master (owner). The defense of ordinary diligence in the careful selection and supervision of its driver is a valid defense by the owner to escape liability.
3. Criminal negligence (culpa criminal) – refers o negligence that results to a commission of a crime. Examples are reckless imprudence resulting to homicide, physical injuries and/or damage to properties.
Defense of diligence of good father of a family will not prosper because when the driver is held guilty of criminal negligence, it automatically makes the owner civilly liable when the said driver is insolvent.
Thus, it has been held in vehicular accidents that:
The passenger of the public transport may bring action of culpa contractual against the owner by reason of breach of contract of carriage. He may also bring an action for culpa criminal against the driver for physical injuries resulting from reckless imprudence.
The pedestrian may bring action for culpa aquiliana against the owner to recover damages. He may likewise file a case for culpa criminal against the driver for injuries sustained because of the latter’s reckless driving. When the driver is held guilty, but declared insolvent, the owner is automatically held liable for damages by reasonof
culpa aquiliana,
Delay, defined
Delay, default or mora is the non-fulfillment of an obligation with respect to time
Kinds of default
1. Mora solvendi, mora accipiendi and compensatio morae
a. Mora solvendi – delay on the part of the debtor, as when the debtor fails to deliver the thing when it is due and after the demand made by the creditor. b. Mora accipiendi – delay on the part of the creditor, as when the creditor
refuses to accept delivery of the thing due without justifiable reason.
c. Compensatio morae – delay by both parties in reciprocal obligations, as when in a contract of sale, the buyer delays in payment while the seller was also in delay in the delivery of the thing due. Here, it is as if there is no delay.
2. Mora ex re and mora ex persona
a. Ex re – delay in real obligation (obligation to give)
b. Ex persona – delay in personal obligation (obligation to do)
Note: there is no delay in obligation not to do as one cannot be held in delay for
doing nothing.
General rule: (NO DEMAND, NO DELAY) The debtor incurs delay from the time the
creditor demands fulfillment of the obligation but the debtor fails to comply with such demand. Thus, the requisites of delay are:
a. The debtor does not perform his obligation on the date it is due b. The creditor demands the performance of the obligation
c. The debtor does not comply with the creditor’s demand
Example: D promised to pay E the amount of P100,000 on June 31, 2013. On due date, D failed to comply his obligation. E was a busy businessman and he only noticed that the obligation has already matured on July 15, 2013, and immediately demand payment from D on the said date. If despite the demand made, D still fails to perform his obligation, he is considered in delay only after the demand made on July 15, 2013.
Exceptions: the debtor is considered in delay even without demand from creditor in the
following cases:
1. When the law so provides
Thus, demand from the government is not necessary for the taxpayer (debtor) be considered in delay for non-payment of income tax due on or before April 15 of the year following the close of the taxable period.
2. When the obligation expressly stipulates that demand in not necessary to put the obligor in delay.
Example: “A promises to pay B the amount of P10,000 on December 31, 2013. Notice of demand waived.” Here, the parties expressly stipulate that no demand is necessary on maturity date to put the debtor in delay.
3. When time is of the essence of the contract
Example: “X obliged himself to deliver a wedding cake for Y’s wedding reception on September 8, 2013 at Casablanca Hotel in Legazpi City.” If on the said date, X failed to deliver the wedding cake, demand is not necessary to put X on delay since time is the controlling motive of the obligation.
4. When demand would be useless
A debtor is considered in delay even without demand from the creditor if the thing he is obliged to deliver has been destroyed through his fault or he has delivered it to another person.
5. In reciprocal obligations, here the obligations arise out of the same cause and must be fulfilled at the same time. From the moment one of the parties fulfills his obligation, the other party becomes in delay notwithstanding the absence of a demand.
Fortuitous event, defined
Events that cannot be foreseen, or which though foreseen, are inevitable (Art.1174)
1. Natural calamities or acts of God – such as lightning, earthquakes, typhoon, flashfloods and similar catastrophe
2. Acts of man – such as war and armed robbery
Characteristics of fortuitous event
a. The cause must be independent of the debtor’s will
b. The event must be impossible to foresee, or even can be foreseen, it is inevitable
c. The occurrence of the event must be of such character as to render it impossible for the debtor to perform his obligation in a normal manner.
Liabilities for fortuitous event
General rule: No person shall be liable for fortuitous event, thus the obligation is
extinguished.
Exceptions: Under Art.1174 of the New Civil Code, the debtor is still liable even in case
of fortuitous event in the following circumstances:
1. When the law expressly provides for liability even in case of fortuitous event, as when the obligor is liable for fortuitous event if he delays or has promised to deliver the same thing to two or more persons who do not have the same interest.
2. When the parties stipulate that the obligor is liable even in case of fortuitous event. 3. When the nature of the obligation requires the assumption of risk such as the obligation
of the insurer to indemnify the policy holder or his beneficiary even if the loss is through fortuitous event is the caused thereof is the risk insured against.
Presumption on receipt of principal or later installment, concept
1. The receipt of the principal without reservation as to interest shall gives rise to the presumption that the interests have already been paid.
Thus, if A obtained a loan from B the amount of P100,000 with interest rate of 15% per annum, and with maturity date on December 31, 2013. On maturity date, B issued an official receipt in the name of A for P100,000, it is presumed that the interests has also been paid, unless there is a reservation to the contrary that the payment does not include the interests.
2. The receipt of a later installment without reservation as to prior installment/s shall give rise to a presumption that such prior installments have been paid.
The above presumptions are disputable; hence, they may be rebutted by contrary evidence.
1. Conclusive presumption – no evidence may be admitted to dispute the presumption. 2. Disputable presumption (prima facie) – assumed to be true unless a contrary evidence is
presented and admitted
Remedies of creditor to enforce payment of his claims against debtor (Art. 1177)
1. Pursue the property in possession of the debtor, except those exempt by law
This remedy allows the creditor to protect his interest by filing an action for attachment before the court. Attachment is a legal process by which a court of law, at the request of a creditor, designates specific property owned by the debtor to be transferred to the creditor, or sold for the benefit of the creditor. The property attached can be sold to a public auction and the proceeds thereof will be applied as payment for the obligation. 2. Exercise all the rights and ring action of the debtor except those personal to him (accion
subrogatoria)
Example: D owes C a sum of money. Meanwhile A is indebted to D. C can file an action to collect from D, and likewise include in his prayer that the court to order A not to pay D the amount he owed to the latter. The court may further required A to pay directly to C as a consequence of accion subrogatoria.
3. Impugn the acts which the debtor may have done to defraud his creditors (accion
pauliana)
Example: A is indebted to B for the amount of P100,000. To defraud B, A “sold” the only parcel of land to his cousin X, who knows the intention of A. here, B can ask the court to rescind the fraudulent sale between A and X.
Rules on transmissibility of rights
General rule: all rights acquired by virtue of an obligation are transmissible. Thus, a
creditor may assign his credit to a third person, or such right is transmitted to his heirs upon his death.
Exception: the following rights are intransmissible
1. If the law prohibits the transmission of rights
Examples: The rights of a general partner in a partnership are not transmitted to the heirs upon his death.
2. If the parties stipulates that the right in not transmissible.
The parties may freely stipulates that the rights and obligations between them shall not be transmitted to their heirs, assigns or any third person.
Examples: the right to scholarship grant is not transmissible. Personal rights such as the right to vote, right to run for public office, marital and parental rights, and hereditary rights are not transmissible.
DIFFERENT KINDS OF OBLIGATIONS Classification of obligations
1. Pure obligation 2. Conditional obligation 3. Obligation with a period 4. Alternative obligation 5. Facultative obligation 6. Joint obligation 7. Solidary obligation 8. Divisible obligation 9. Indivisible obligation
10. Obligation with a penal clause
Pure and conditional obligations Pure obligation, defined
A pure obligation is a debt which is not subject to any conditions and no specific date is mentioned for its fulfillment. A pure obligation is immediately demandable.
Example: D obliges himself to pay C P 1,000,000. The obligation is immediately demandable because there is no condition & no date is mentioned for its fulfillment.
Conditional obligation, defined
A conditional obligation is one whose demandability or extinguishment depends upon the happening of a condition. The execution of which is suspended by a condition which has not been accomplished and subject to which it has been contracted.
Example: “I will support your studies in college if Mr. A dies.” The obligation becomes demandable only after Mr. A dies. When the condition happens, it gives rise to an obligation. This condition is referred to as suspensive condition.
“I will support your studies in college until Mr. A dies.” Here, the obligation is demandable at once. When the condition happens, it extinguishes the obligation. This condition is referred to as resolutory condition.
Condition, defined
Condition is a future event, which may or may not happen. It is a future and uncertain event, fact, or circumstance whose existence or occurrence is necessary for the existence or determining the extent of an obligation or liability
Classification of condition
1. Suspensive and resolutory
a. Suspensive condition – a future event, the happening of which will give rise to the obligation. This is also known as condition antecedent or precedent. (example: I oblige myself to deliver a red car to A if she passes the CPA board exam)
b. Resolutory condition – a future event, the happening of which extinguishes the obligation. It is demandable at once but upon happening of the condition, it shall be extinguished. This is also referred to as condition subsequent. (example: I oblige myself to give P2,000 monthly to B until he passes the CPA board exams)
2. Potestative, casual and mixed
a. Potestative – depends upon the will of one of the contracting parties a.1. Potestative on the part of the debtor –
If suspensive - the obligation is void. Even if the condition is fulfilled, it will not cure the defect. (example: M promise to pay X the sum of P10,000 if M will marry this year)
If resolutory – the obligation is valid. (example: M promise to pay X P10,000 as monthly allowance until M marries this year)
a.2. Potestative on the part of the creditor – the obligation is valid whether the condition is suspensive or resolutory. (examples: “M promise to pay X the sum of P10,000 if X marries this year,” “M promise to pay X P10,000 as monthly allowance until X marries this year)
b. Casual – depends upon chance or upon the will of a third person. (example: X will deliver a Honda car to B, if Ms. Philippines will be crowned as Ms. Universe 2013)
c. Mixed – depends upon the will of one of the contracting parties and partly upon the chance of the will of a third person. (example: X will give P100,000 to A, if A marries B this year)
3. Possible and impossible
a. Possible – capable of fulfillment by its nature and by law
b. Impossible – not capable of fulfillment because of its nature or due to operation of law. In this case, the obligation and the conditions are void. (example: “I will give you my condo unit if you can bring to me the Eiffel Tower”, “I will pay you P100,000 if you will deliver to X 10 grams of shabu”)
Note: if the condition is not to do an impossible thing, it shall be deemed as
not having been agreed upon (Art.1183 NCC). Hence, the obligation is valid and demandable. (example: “I will give you P500 if you will not bring me an internal organ of a dinosaur,” “I will pay you P10,000 if you will not deliver me 10 grams of shabu”)
4. Positive and negative
a. Positive – the condition that some future event will happen. The obligation is extinguished if after the lapse of the future event, the condition did not happen, or it has indubitable that the event will not happen. (examples: “F obliges to give C P100,000 if C will marry M this year”. The obligation to give is extinguish if (a) C does not marry M this year, or (b) if M dies, or marries anther than C, thus C cannot anymore marry her. The obligation is extinguish on such date since the condition to marry will not take place anymore.
b. Negative – the condition that some event will not happen at a determinate time. The obligation becomes effective as soon as the time indicated has elapsed or it has become evident that the event will not occur. (example: F oblige to give C P100,000 if C will not marry M this year. The obligation becomes effective if (a) C does not marry M this year, (b) C marries another this year, or (c) M dies, or marries another than C. The obligation becomes effective on that date since the condition to marry will not be fulfilled anymore. 5. Divisible and indivisible
a. Divisible – when capable of partial performance. The law provides (Art. 1183 NCC) that, if the obligation is divisible, the part thereof which is not affected by the impossible or unlawful condition shall be valid. Thus, if B obliges himself to give C a car if C graduated cum laude or higher in college, and P50,000 if C can forged his school records and make it appear that it is the school records of B. The obligation to deliver the car arises when C graduated cum laude or higher in college. The condition to forged school records is unlawful. Hence, even C complied such condition, he cannot demand the payment of P50,000.
b. Indivisible – not capable of partial performance by its nature or by law or by agreement of the parties. (example: B promise to give C a car if C graduated cum laude or higher, and passes the CPA board exams. C must comply both conditions – graduating cum laude or higher AND passing the CPA board exam, before he can ask for the delivery of the car.
Effects of fulfillment of suspensive condition (Art. 1187)
General Rule: The effect of the fulfillment of the suspensive condition retroacts to the
B passes the CPA exams. B passes the CPA exam on May 2014. Upon fulfillment of the condition, B is considered the owner of the car since June 1, 2013.
Exceptions: there shall be no retroactive effect with respect to the fruits and interests as
follows:
1. In reciprocal obligations, the fruits and interests shall be deemed to have mutually compensated, i.e., each party shall keep the fruits and interests received by him prior to the fulfillment of the condition.
Example: On June 1, 2010, A agreed to sell his land to B, and B likewise agreed to pay the price of P500,000 to A, on the condition that B would marry X. it was only on June 1, 2012, or two years later, that B marries X. From June 1, 2010 to May 31, 2012, A is entitled to keep the fruits and/or produce of the land, while B is likewise entitled to keep the interests on the price.
2. In unilateral obligation, the debtor keeps the fruits and interests received before the fulfillment of the condition. Thus, if on June 1, 2010, A promise to give B a parcel of land if B would marry X. it was only on July 1, 2012 that the condition was fulfilled. Duringthe pendency of the condition, A can keep the fruits and produce of the said land.
Rights of the parties before the fulfillment of the condition (Art. 1188)
1. Creditor – he may bring the appropriate actions for the preservation of his right. A creditor
may register his claim with the Registry of Deeds (in case of land), if appropriate, or notify third persons of his claim.
2. Debtor - he may recover what during the same time he has paid by mistake in case of a
suspensive condition.
Rules in case of loss, deterioration or improvement of determinate thing before the fulfillment of the suspensive condition (Art. 1189)
1. Loss of the thing
a. Without debtor’s fault – the obligation is extinguished b. With debtor’s fault – debtor is obliged to pay damages.
It is understood that the thing is lost when it perishes, or goes out of commerce, or disappears in such a way that its existence is unknown or it cannot be recovered;
Examples:
(a) thing perishes – A promises to give C a house if C marries this year. During the pendency of the condition, a fire broke out in the neighborhood, and houses were burned and turned to ashes, including the subject house.
(b) goes out of commerce – A promised to deliver to B a pair of Philippine eagle if B passes the veterinary exams. During the pendency of the condition, a law was passed prohibiting the sale, private breeding, and domestication of Philippine eagle.
(c) disappears or cannot be recovered – A promised to give B a certain diamond ring soon as A disembarks to a Philippine port. During A’s travel, the said diamond ring was dropped and sank on the Pacific ocean, that it’s recovery would be impossible. Note: to exempt from liability, the debtor/obligor must not be at fault. Thus in the first example, if A places inflammable materials to his house which causes the fire, then A must pay C damages if C marries this year.
2. Deterioration of the thing
a. Without the fault of the debtor - the impairment is to be borne by the creditor; b. With debtor’s fault - the creditor may choose between the (a) rescission of the
obligation and (b) its fulfillment, with indemnity for damages in either case; Deterioration is the decline in the quality of equipment or structures over a period of time due to the chemical or physical action of the environment. It includes the physical wear and tear of the thing, and damages that do not result to a total loss of the thing.
Thus, it has been held that the debtor is not liable for the physical wear and tear of the car pending the fulfillment of the suspensive condition. However, if a car is damaged because of accident due to debtor’s fault or negligence, the creditor may choose between (a) rescission of the contract and ask for damages, or (b) demand delivery of the car in its deteriorated state plus damages.
3. Improvement of the thing
a. By nature or time – the improvement shall inure to the benefit of the creditor. (example: A promised to give C a parcel of land if C passes the CPA board exams. It was only after 5 years that C finally passes the CPA exams. In the meantime, the land was now covered with timber and other vegetation that grows to the said land without any cultivation made by parties. After the fulfillment of the suspensive condition, A must deliver to C the land together with the timber and vegetations.
b. At the expense of the debtor - he shall have no other right than that granted to the usufructuary.
Art. 562. Of the New Civil Code defines usufructuary. Usufruct gives a right to enjoy the property of another with the obligation of preserving its form and substance, unless the title constituting it or the law otherwise provides.
The debtor may remove the improvement f no damage will be caused to the principal thing. If the improvement cannot be removed without damage from the principal thing, he shall deliver the thing together with its improvement to the creditor without any right on the part of the debtor to
indemnity. He may, however, set-off the improvement against any damage to the thing.
Rules in case of fulfillment of resolutory condition (Art. 1190)
1. Upon fulfillment of a resolutory condition, the obligation is extinguished 2. The parties shall return to each other what they have received
3. In case of loss, deterioration or improvement of the thing, the provision of the above rule (Art.1189), which pertain to the debtor shall be applied to the party who is bound to return.
Obligation with a period Obligation with a period, defined
It is an obligation whose demandability or extinguishment is dependent to the occurrence or happening of a future event which must necessarily come.
Examples of obligation with a period:
(a) “X promises to deliver a 6-wheel truck to A on December 10, 2014.” The obligation becomes demandable on December 10, 2014 by reason arrival of the period.
(b) “X obliged himself to give A the sum of P100,000 two years from today.” The obligation becomes demandable only two years from today by reason of expiration of the period. (c) “X delivered a 6-wheel truck to B for the latter’s personal use until December 31, 2014.”
The obligation is demandable at once but will be extinguished on December 14, 2014, upon the arrival of the period.
(d) “X obliged himself to give A P100,000 semi-annually until two years from today.” The obligation is demandable at once but will be extinguished two years from today, after the lapse of the period.
Happening or arrival of the period gives rise to an obligation such as in the above examples (a) and (b). The period with a suspensive effect is known as ex die. Here, the obligation becomes demandable upon the lapse of the period. (Art. 1193)
Concept of period and day certain
Period is a space of time which determines the effectivity or extinguishment of an obligation. If “X promises to pay Y the amount of P10,000 60 days from today,” or “X promises to give P500 to A until 60 days from today,” the lapse of 60-day period will determine whether the obligation will arise or will be extinguished.
A day certain is a future event, which must necessarily come although it may not be known when. (Art. 1193) An example of this is the death of a person, which will sure to come, although the exact date cannot be known.
Period distinguished from condition
As to fulfillment Future event that must necessarily come, at a date known beforehand, or at a time that cannot be determined
Future event which may or may not happen
As to time Always refer to the future May refer to the future or to a past event unknown to the parties
As to influence on the obligation Merely fixes the time for the efficaciousness of an obligation
Cause an obligation to arise or extinguish
Other kinds of period
1. Legal – one that is fixed by law (examples: taxpayers shall file and pay their annual tax due on or before April 15 of the year following the taxable period; within 30 days from notice of tax assessment, the taxpayer must file his protest with the BIR, otherwise , the assessment become final and executor).
2. Voluntary period – one that is fixed by both parties. (example: X obliged himself to finish the construction of the house of Y within 90 days from today)
3. Judicial period – one that is fixed by the court (example: the court may order the parties to submit their respective memoranda or position paper within 30 days after the termination of Pre-trial)
Pay when his means permit him to do so
An obligation which states “I will pay you P100,000 when my means permit me to do
so,” has been held by the court to be an obligation with a period. The creditor has the right to
demand from the debtor to fix the period of payment. Otherwise, the creditor may ask the court to fix the period in accordance with Art. 1180 and 1197 of the Civil Code, and once the court has fixed the period, the parties are bound thereto and they may no longer change it as it becomes part of their agreement.
Art. 1197 provides, If the obligation does not fix a period, but from its nature and the circumstances it can be inferred that a period was intended, the courts may fix the duration thereof. The courts shall also fix the duration of the period when it depends upon the will of the debtor.
Who has the benefit of the period?
Article 1196 of the Civil Code provides, “whenever a period is designated in an obligation, it shall be presumed to have been established for the benefit of both the creditor and the debtor, unless from the tenor of the obligation or other circumstances, it should appear that it has been constituted for the benefit of only one of the parties.
Therefore, the debtor cannot be compelled to perform, and the creditor cannot be compelled to accept performance, before the term expires.
Thus, it has been held that when a debtor borrow money from a creditor, with a stipulations that the loan shall bear interest of 12% per annum, and both the principal and interest payable at maturity two years from the execution of the Promissory Note, the debtor cannot be compelled to pay, and the creditor cannot be compelled to receive payment prior to the maturity date of the Promissory Note. The debtor will be deprive by the use of money until maturity, and the creditor, likewise, will e deprive to earn interest for the remaining term.
When period is for the benefit of one of the parties
1. For the benefit of the debtor – he cannot be compelled to pay or perform his obligation before the expiration of the term. However, he may choose to perform his obligation before such expiration at his option.
Example: “W promises to pay Z the amount of P100,000 on or before December 31, 2014.” W cannot be compelled to pay the amount before December 31, 2014. W, however, has the option to pay his obligation on maturity date or at any time before December 31, 2014.
2. For the benefit of the creditor – he cannot be compelled to accept payment or performance before the expiration of the term. He can, however, choose to demand performance before such expiration at his option.
Example: “W promises to pay Z the amount of P100,000 on or before December 31, 2014, at the option of Z,” or “W borrowed from Z the amount of P100,000 collectible on or before December 31, 2014.” Z may demand payment on December 31, 2014 or at any time before the said date. Z, however, cannot be compelled to accept payment before the maturity date.
When debtor losses his right to make use of the period
When debtor loses the right to make use of the period, the obligation becomes demandable at once, and the creditor may demand performance even before the arrival of the period or the expiration of the term. The following rules shall apply under Art. 1198:
1. When after the obligation has been contracted, he becomes insolvent, unless he gives a
guaranty or security for the debt;
Insolvency refers to the incapacity to pay debts upon the date when they become due in the ordinary course of business. It is the condition of an individual whose property and assets are inadequate to discharge the person's debts.
Thus, if “A oblige himself to pay to B the amount of P20,000 on December 31, 2014. On June 30, 2013, total assets of A is P500,000 while his total liabilities was P800,000, the obligation becomes demandable at once. B may compel payment on June 20, 2013, unless A gives guaranty or security for the debt.
2. When he does not furnish to the creditor the guaranties or securities which he has
promised;
Example: X borrowed money from Y the amount of P50,000 payable on November 10, 2013. To secure the payment of the said loan, X promised to pledge his diamond ring to Y five days after the receipt of amount. X, however, failed to deliver the thing pledged to Y within the period agreed upon. Here, Y can demand immediate payment even before the maturity date of the obligation.
3. When by his own acts he has impaired said guaranties or securities after their
establishment, and when through a fortuitous event they disappear, unless he immediately gives new ones equally satisfactory;
Example: A obtained a loan from B in the amount of P500,000, payable on December 31, 2014, secured with a real estate mortgage over their residential house and lot. On December 1, 2013, the house was burned after B stored inflammable materials in his house. B may demand payment immediately even without waiting for the expiration of term. This is true even if the cause of loss, damage or impairment was not due to the fault of B.
4. When the debtor violates any undertaking, in consideration of which the creditor agreed
to the period;
Example: M obtained a loan of P100,000 from P for purpose of starting up a small business. The loan maturity date is December 31, 2014. However, M spent the money for their family travel in Hongkong. Here, P can demand immediate payment from M for violation of the undertaking in consideration of the loan granted.
5. When the debtor attempts to abscond.
Example: X obtained a loan of P100,000 from A payable 60 days thereafter. After the receipt of the loaned amount, X started to dispose his properties with the intention of leaving his residence or place of business to escape creditors. A can demand payment from X immediately even though the obligation has not yet mature.
Alternative and Facultative Obligations Kinds of obligation according to the number of prestation
1. Simple – where there is only one prestation
2. Compound – when there are several prestation. This may be –
a. Conjunctive – several prestation are due, and ALL must be performed. (example: D obliged himself to deliver a car, a
b. Distributive or disjunctive – maybe either horse and 5 sacks of rice to E. D must deliver all of them) alternative or facultative
Alternative obligation, defined
An obligation is alternative when two things are equally due, under an alternative. The obligor is bound to render only one of two or more items of performance. Under Aricle 1199 of the Civil Code, a person alternatively bound by different prestations shall completely perform one of them, is sufficient to extinguish an obligation.
For example, A agrees to give B, upon a sufficient consideration, a horse, a second-hand car or piano. The delivery of any of the three items will extinguish the obligation.
Who has the right to choose?
Under Art. 1200, the right of choice belongs to the debtor, unless it has been expressly granted to the creditor, subject to the following limitations:
a. The debtor must completely perform the prestation chosen. The creditor cannot be compelled to receive part of one and part of the other undertaking
b. The debtor shall have no right to choose those prestations which are impossible, unlawful or which could not have been the object of the obligation.
When obligation ceases to be an alternative obligation
1. Art. 1201 - When the debtor has communicated his choice to the creditor
2. Art. 1202 – When among the prestations whereby the debtor is alternatively bound, only one prestation is practicable.
3. Art. 1205 – when the creditor has communicated is choice to the debtor, if the creditor has been expressly given the right of choice.
Loss of the things and/or impossibility of services in alternative obligation
Under Article 1204, the creditor shall have a right to indemnity for damages when, through the fault of the debtor, all the things which are alternatively the object of the obligation have been lost, or the compliance of the obligation has become impossible.
The indemnity shall be fixed taking as a basis the value of the last thing which disappeared, or that of the service which last became impossible.
Damages other than the value of the last thing or service may also be awarded.
Example: D obliged himself to deliver to E a specific race horse, a 2008 Toyota corolla model with Plate No. ABA 106, or a specific diamond ring. The obligation does not specify who will have the right to choose. Hence, the law states that the right to choose is granted to D, the obligor.
