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Section 5.DIVISIBLE AND INDIVISIBLE OBLIGATIONS

Article 1223. The divisibility or indivisibility of the things that are the object of obligations in which there is only one debtor and only one creditor does not alter or modify the provisions of Chapter 2 of this Title. * [Chapter 2 - Nature and Effect of Obligations]

(a) DIVISIBLE OBLIGATION - one capable of partial performance

(b) INDIVISIBLE OBLIGATION - one NOT capable of partial performance

SOLIDARITY INDIVISIBILITY

(a) refers to the tie between the parties

(a) refers to nature of obligation

(b) needs at least two debtors or creditors

(b) may exist even if there is only one debtor and only one creditor

(c) the fault of one is the fault of the others

(c) the fault of one is not the fault of the others

CLASSES OR KINDS OF INDIVISIBILITY(a) Conventional indivisibility (by common

agreement)

(b) Natural or Absolute indivisibility (because of the nature of the object of undertaking)

(c) Legal indivisibility (if so provided for by law)

KINDS OF DIVISION

(a) Quantitative division (depends on quantity)

(b) Qualitative division (depends on quality)

(c) Intellectual or moral division (one that exists merely in the mind, and not in physical reality)

Examples:Divisible:

1. A agreed to pay B P2,000 in four equal monthly payments. The obligation of A is a divisible one because it is capable of partial performance.

2. A agreed to pay B P2,000 on May, 24, 2014. The obligation now becomes indivisible on the sense that even though money is a divisible thing, the parties intended for the indivisible performance of the whole amount of P 2,000 on the agreed upon date.

Indivisible:1. A obliged himself to deliver to B a specific car on May 24, 2014. The obligation is an indivisible one because it is not capable of partial performance. The car must be delivered at one time and as a whole.2. Supposed that the agreement is that A will deliver half the car on May 1, 2014 and the other half on May 24, 2014. Even if it would be inconceivable that B would agree to the stipulation, let us just assume that he did, will the obligation be divisible or indivisible?Answer:The obligation is still indivisible and A must deliver the car on May 1 or May 24, 2014, a definite thing like the car cannot be severed into parts without altering its essence or destroying its value.

1 Section 1-E, UC College of Law2nd Semester, SY 2013-2014

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

(1) The object is indivisible and yet the parties are merely bound jointly(2) In non- compliance, the obligation is converted into a monetary one for indemnity

Related Article: (Art. 1209) If the division is impossible, the right of

the creditors may be prejudiced only by their collective acts, and the debt can be enforced only by proceeding against all the debtors. If one of the latter should be insolvent, the others shall not be liable for his share

Example: A1 and A2 obliged themselves to give a specific car to B valued at P20,000.00. If on the due date, A1 is ready to comply while A2 is not ready because he is insolvent, B can only ask for the share of A1 which is P10,000. He cannot ask for more because the rule states that if one debtor is insolvent, the other shall not be liable for his share. However, B can ask from A2 P10,000 plus damages when his financial condition improves.

Article 1225. For the purposes of the preceding articles, obligations to give definite things and those which are not susceptible of partial performance shall be deemed to be indivisible. When the obligation has for its object the execution of a certain number of days of work,

the accomplishment of work by metrical units, or analogous things which by their nature are susceptible of partial performance, it shall be divisible. However, even though the object or service may be physically divisible, an obligation is indivisible if so provided by law or intended by the parties. In obligations not to do, divisibility or indivisibility shall be determined by the character of the prestation in each particular case.

(1) Obligations that are deemed INDIVISIBLE

(a) Obligations to give definite things (b) Those which are not susceptible of partial performance(c) Even if the thing is physically divisible, it may be indivisible if so provided by law(d) Even if the thing is physically divisible, it may be indivisible if such was the intention of the parties concerned

(2) Obligations that are deemed DIVISIBLE

(a) when the object of the obligation is the execution of a certain number of days of work(b) when the object of the obligation is the accomplishment of work by metrical units(c) when the purpose of the obligation is to pay a certain amount in installments(d) when the object of the obligation is the accomplishment of work susceptible of partial performance

(3) In case of a divisible contract, if the illegal terms can be separated from the legal ones, the latter may be enforced

Principle of “Quantum Meriut” In divisible obligation – obligation is

divisible but only partially performed, the obligor can enforce his right in proportion to the services performed


In indivisible obligation – obligation is indivisible, and the obligor fails to perform the work completely, he cannot recover on the quantum meriut theory because in indivisible obligation, partial performance is equivalent to non-performance.

Quantum Meriut allows recovery of the reasonable value of the work done regardless of any agreement as to value. It entitles the party to “as much as he reasonably deserves” as distinguished from quantum valebrant or to “as much as what is reasonably worth”. The settlement of claim under the quantum meriut principle requires application of judgment and discretion and cannot be adjusted by simple arithmetical process. (F.F. Manocop v Court of Appeals, et.al. GR 122196, January 15, 1997).

Related Article: (Art. 1225)

When the purpose of the obligation is to pay a certain amount in installment – an obligation is presumed to be divisible.

Section 6.OBLIGATIONS WITH A PENAL CLAUSE

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

(1) PENAL CLAUSE

(a) a coercive means to obtain from the debtor compliance from the debtor [Georg].

(b) an accessory undertaking to assume greater liability in case of breach, attached to obligations in order to insure their performance [Manresa].

(2) KINDS OF PENAL CLAUSES

First classification(a) Legal Penal Clause - one that is imposed by the law

(b) Conventional Penal Clause - that which has been agreed upon by the parties

Second classification(a) subsidiary - when only the penalty may be asked

(b) joint - when both the principal contract and the penal clause can be enforced

(3) Difference between Condition and Penal Clause :

CONDITION PENAL CLAUSE

- Not an accessory - Constitutes an accessory obligation

- Never demandable - May become demandable in default of the unperformed principal obligation and sometimes jointly with it

(4) Principal purpose of the penal clause


(a) To insure the performance of an obligation

(b) Also to substitute for damages and the payment of interest in case of non compliance

(5) Exceptions to the general rule (additional damages may be recovered)

(a) when there is express stipulation to the effect that damages or interest may still be recovered, despite the presence of the penalty clause

(b) when the debtor refuses to pay the penalty imposed in the obligation

(c) when the debtor is guilty of fraud or dolo in the fulfillment of the obligation

Examples:1. A obliges himself to pay B P20,000 with

a penalty of P2,000 if he cannot comply on time. If A failed to comply as stated, B can demand from A the principal of P20,000 plus P2,000 penalty. He cannot demand payment of interest plus damages because the penalty is the substitute for interest and damages unless otherwise stipulated.

2. A obliged himself to give B a specific car on May 24, and if A fails to do so, A will pay P450,000. If A failed to deliver after demand, he is liable to pay the penalty, and B cannot ask for the car and the penalty at the same time because the penalty is subsidiary or alternative.

3. A obliged himself to give B a specific car on May 24, and he fails to do so, B in addition to the car must pay B P15,000 penalty. If A failed to deliver after

demand, B is entitled to ask for the delivery of the car AND payment of P15,000, because the penalty is joint or cumulative.

4. A1 and A2 obliged themselves to give a specific car to B on May 24, and upon failure, to pay B P300,000. In this case, if they failed to comply with their obligation on time, each can only be held liable for P150,000 because the obligation is joint.

5. A1 and A2 obliged themselves SOLIDARILY to give B a specific car on May 24, and upon failure to pay B P300,000, as penalty. In this case, if they failed to comply with their obligation when due, each of them can be held liable to answer the entire penalty that is P300,000.

Article 1227. The debtor cannot exempt himself from the performance of the obligation by paying the penalty, save in the case where this right has been expressly reserved for him. Neither can the creditor demand the fulfillment of the obligation and the satisfaction of the penalty at the same time, unless this right has been clearly granted him. However, if after the creditor has decided to require the fulfillment of the obligation, the performance thereof should become impossible without his fault, the penalty may be enforced.

(1) GENERAL RULES: A. Debtor cannot substitute penalty for the principal obligationB. Creditor cannot demand both fulfillment

and the penalty at the same time, EXCEPT:(a) Upon agreement of the parties(b) When fulfillment is possible due to the

fault of the debtor, then the penalty can be demanded.


Examples:A obliges himself to repaint the car of B and to finish it within a month, otherwise A is going to pay C P3,000 as penalty. What are the rights and obligations of the parties?

1. A cannot just pay P3,000 and refuse to repaint the car of B. Unless of course, if there is an agreement giving him the option.

2. B cannot demand from A that the latter will repaint the car and at the same time pay P3,000 unless agreed upon.

3. If B demanded fulfillment, but the performance became impossible due to A’s fault, B can ask the payment of the penalty.

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

(1) No necessity of proving actual damages. In legal parlance, this is liquidated damages.

Article 1229. The judge shall equitably reduce the penalty when the principal obligation has been partly or irregularly complied with by the debtor. Even if there has been performance, the penalty may also be reduced by the courts if is iniquitous or unconscionable.

(1) When penalty may be reduced by the court

(a) When the obligation has been partly complied with by the debtor (partial performance)

(b)When the obligation has been irregularly complied with by the debtor (irregular performance)

(c) When the penalty is iniquitous or unconscionable, even if there has been no

performance at all

Examples:1. A promises to deliver to B 20 pairs of

running shoes, or upon failure, to pay a penalty of P6,000. If on the date agreed, A was able to deliver only 18 pairs of the 20 pairs of shoes promised, B cannot demand the P6,000 penalty. Instead, it will be reduced because there was partial or irregular compliance.

2. A obliges himself to pay B P20,000 PLUS a penalty of P25,000 in case of noncompliance. If A cannot comply, B cannot demand the P25,000 because it is iniquitous or unreasonable. Instead, it will be reduced by the court. Take note that the penalty is more than the principal obligation.

Article 1230. The nullity of the penal clause does not carry with it that of the principal obligation. The nullity of the principal obligation carries with it that of the penal clause.

(1) Effect of nullity of the penalty clause(a) If the principal obligation is null and void, the penal clause will have no more use for existence and is therefore also considered null and void.

Example:A obligated himself to sell B a specific horse then pregnant, after giving birth to an offspring, or in default thereof to pay P5,000 as penalty. However, the horse died while giving birth. May B sue A for the recovery of the penalty of P5,000? Why?

Answer: No more, because when the principal obligation is extinguished, accessory will follow.


CHAPTER 4EXTINGUISHMENT OF OBLIGATIONS

GENERAL PROVISIONS:

Modes of extinguishing an obligation.a. By payment or performance.b. Loss of the thing due.c. Condonation or remission of the debt.d. Confusion or merger.e. Compensation.f. Novation.

In addition:g. Annulment.h. Rescission.i. Fulfillment of a resolutory condition.j. Prescription.k. Death of a party in case the obligation is

personal.l. Mutual desistance.m. Compromise.n. Impossibility of performance.o. Happening of fortuitous event.

Article 1231. Obligations are extinguished:1.By payment or performance;2.By the loss of the thing due;3.By the condonation or remission of the

debt;4.By the confusion or merger of the rights

of creditor and debtor;5.By compensation;By novation.

Other causes of extinguishment of obligations, such as annulment, rescission, fulfillment of a resolutory condition, and prescription, are governed elsewhere in this Code.

SECTION 1PAYMENT OR PERFORMANCE

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

(1) Payment is that mode of extinguishing obligations which consists of

(a) delivery of money(b) the performance in any other

manner of an obligation (doing or not doing something)

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

(1) Completeness Of Payment

(a) The very thing or service contemplated must be paid – identity of what is agreed upon is what is rendered, EXCEPT:

* In facultative obligations* In cases of dation in payment and

novation* Waiver by the creditor

(b) Fulfillment must be complete

(2)How Payment Or Performance Is Made

(a) if the debt is a monetary obligation, by delivery of the money

(b) if the debt is the delivery of a thing or things, by delivery of the thing or things

(c) if the debt is the doing of a personal undertaking, by the performance of said personal undertaking

(d) if the debt is not doing of something, by refraining from doing the action


(3) Burden Of Proof:(a) An alleged creditor has the burden

of showing that a valid debt exists

(b) Once he does this, the debtor has the burden of proving that he has paid the same

(4) Means Of Proving Payment – one good proof is the presentation of receipt.

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

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

(1) Estoppel on the creditor's part in view of his acceptance

(2) Qualified acceptance – the possibility that protest or objection can be made

Related Article: (Art. 1191) The right to rescind under Article 1191

DOES NOT apply in this case because there is only a slight breach in the obligation. The court may even grant a term or period for the performance of the obligation (Art. 1191, Paragraph 3).

Example for Articles 1234 and 1235:A obliges himself to give B 20 sacks of Indian long-grained rice valued at P20,000 (20 sacks at P1,000 per sack). Despite the diligent efforts of A to deliver the 20 sacks of rice, he cannot do

so. Instead, he delivered only 18 sacks. B did NOT object. The obligation of A is deemed fully complied with. Of course, B can demand the equivalent of the undelivered 2 sacks of rice, because the law states minus or less the damages suffered by the obligee.

Article 1236. The creditor is not bound to accept payment or performance by a third person who has no interest in the fulfillment of the obligation, unless there is a stipulation to the contrary.

Whoever pays for another may demand from the debtor what he has paid, except that if he paid without the knowledge or against the will of the debtor, he can recover only insofar as the payment has been beneficial to the debtor.

(1) EXCEPTIONS- Right of creditor to refuse payment by third person

(a) if there is a stipulation allowing this

(b) or if said person has an interest in the fulfillment of the obligation (co-debtor, guarantor, even a joint debtor)

(2) Payment by a third person

(a) With the knowledge and consent of the debtor – payor is entitled to reimbursement and subrogation to such rights as guaranty, penalty clause, or mortgage

(b) Without the debtor's knowledge or against his will – payor is allowed only beneficial reimbursement

Other instances when recovery can be had from the creditor and not from the innocent debtor:

(a) when the debt had prescribed


(b) when the debt had been completely remitted

(c) when the debt has already been paid(d) when legal compensation had

already taken place

Example:A owes B P20,000 payable on May 24, 2014. C, a third person, pays B without the consent of A. In here, C can ask reimbursement from A P20,000 because he (A) was benefitted by the payment. In short, whether the payment is made with or without the consent of A, the latter is liable to C.

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

SUBROGATION – the act of putting somebody into the shoes of the creditor, hence enabling the former to exercise all the rights and actions that could have been exercised by the latter.

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

Some rights which may be exercised by the person subrogated in the place of the creditor, the rights arising from

(a) mortgage(b) guaranty(c) penalty or penal clause

Difference between Subrogation and Reimbursement:

SUBROGATION REIMBURSEMENTRecourse can be had to the mortgage or guaranty or pledge

No recourse

Debt is extinguished in one sense, a new creditor, with exactly the same rights as the old one, appears on the scene

The new creditor has different rights so as if it is as there has indeed been an extinguishment of the obligation

There is something more than a personal action of recovery

Only a personal action to recover the amount

Examples:1. A borrowed from B P20,000

payable on May 24, 2014. C is the guarantor of A. On due date, D paid B P20,000 without the consent of A. If later, A cannot reimburse D, can the latter ask B to subrogate him in his right so that B can proceed against C, under the rule of subrogation?Answer: No, because D paid without the consent of A. If payment was made without the knowledge or against the will of the debtor, the payor cannot compel the creditor to subrogate him in his right, such as those arising from mortgage, guaranty or penalty.

2. On May 1, A borrowed from B P50,000 and mortgaged his land, payable on May 25. However, on May 10, C, a third person paid B P50,000 without the knowledge of A. When the obligation falls due, A is already insolvent. He cannot reimburse C of what the latter paid B. a. Can C foreclose the mortgaged

property?


Answer: No. Because he paid without A’s knowledge, he cannot compel the creditor, B, to subrogate him in his right as a mortgagee. In short, there is no legal subrogation.

b. Supposing C paid B with A’s consent?Answer: Yes, because he paid with A’s consent. C is subrogated to the right of the creditor-mortgagee.

Article 1238. Payment made by a third person who does not intend to be reimbursed by the debtor is deemed to be a donation, which requires the debtor's consent. But the payment is in any case valid as to the creditor who has accepted it.

Example:A borrowed from B P20,000 payable on May 24, 2014. C offered to pay B telling A that after payment, A need not reimburse C, and B accepted payment, can C ask reimbursement from A?

Answer: It depends, if A refused the generosity of C, the latter can still ask reimbursement because A just the same was benefited by the payment. However, if A accepted the generosity of C, the latter cannot ask reimbursement because the payment is considered as a donation.

Article 1239. In obligation to give, payment made by one who does not have the free disposal of the thing due and capacity to alienate it shall not be valid, without prejudice to the provisions of Art 1427 under the Title on “Natural Obligations”.

Payment by an incapacitated person (if person has no capacity to give)

(a) payment is not valid – if accepted(b) creditor cannot even be compelled to accept it(c) the remedy of consignation would not be proper

Related Article: (Art. 1427) When a minor between eighteen and

twenty-one years of age, who has entered into a contract without the consent of the parent or guardian, voluntarily pays a sum of money or delivers a fungible thing in fulfillment of the obligation, there shall be no right to recover the same from the oblige who has spent or consumed it in good faith. (Amended by Republic Act No. 6809, lowering the age of majority from twenty-one to eighteen years old)

Article 1240. Payment shall be made to the person in whose favor the obligation has been constituted, or his successor in interest, or any person authorized to receive it.

To whom payment must be made:

(a) To the person in whose favor the obligation has been constituted (creditor)this refers to the creditor at the time of payment, not the original creditor at the time the obligation was constituted

(b) To the successor in interest (like heirs)

(c) To any person authorized to receive it (authorization may be by agreement or by law)

Examples:A owes B P50,000 which became due and payable last February 1, 2014. On that date, C, a third person, offered B P45,000, the only money he then had. But B refused to accept


the payment. C thereafter met D, B’s 25-year-old daughter, to whom he gave P45,000 with a request that he turn the money over to B, her mother. However, the money was stolen while in D’s possession.

1. Was B justified in refusing to accept the tendered payment from C?Answer: Yes, because under Art. 1248, unless otherwise stipulated, the creditor cannot be compelled partially to receive the prestations in which the obligation consists. Neither may the debtor be required to make partial payments.

2. May B still recover the full amount from A?Answer: Yes, because the daughter of C is not the creditor of A. The tendered payment made by C to D is not valid, unless she (D) is authorized to receive payment, or if the payment made to D redounded to the benefit of B.

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

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

(1) If after the payment, the third person acquires the creditor's rights;

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

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

Payment to a person who is incapacitated to administer his property is not a valid payment except:

(a) If he has kept the thing delivered i.e. valid if paid to a minor if said minor kept the thing

(b) Insofar as the payment is beneficial to the creditor

Example:A is indebted to B P500,000. When A paid B, the latter is already of unsound mind. Since B does not appreciate what he was doing, he all the P500,000 as give-aways to all his friends. In here, the obligation of is A is not extinguished. However if B deposited the P300,000 to his account at BPI, and gave the P200,000 as cash gifts to his neighbors, the obligation is extinguished partially for P300,000 because this is the amount beneficial to B.

Payment to a third person is not valid, except:(a) When the third person is authorized

to receive it(b) When the payment to the third

person has redounded to the benefit of the creditor

(c) When the third person is in possession of the credit and payment was in good faith

When proof of benefit on the part of the creditor is not required:

(a) If after payment, the third person acquires the creditor’s right

(b) If the creditor ratifies the payment to the third person (consents to the payment)

(c) If by the creditor’s conduct, the debtor has been led to believe that the third person has authority to receive payment


ESTOPPEL – act or statement made to a third person; relies on the authority of the third person(d) Art. 1242 – credit itself, not a mere

instrument

Related Article: (Art. 1242) Payment made in good faith to any

person in possession of the credit shall release the debtor.

Article 1242. Payment made in good faith to any person in possession of the credit shall release the debtor.

REQUISITES – another instance of valid payment(a) Payment by payor must be in good faith (presumed but payee may be in good or bad faith)

(b) Payee must be in possession of the credit itself (not just merely the document evidencing the credit)when one possesses the credit, there is color of title to it

Example:A found a negotiable promissory note payable to bearer. If B, the maker, pays in good faith to A, the obligation is extinguished.

Article 1243. Payment made to the creditor by the debtor after the latter has been judicially ordered to retain the debt shall not be valid.

Payment made after judicial order to retain: - the judicial order may have been

prompted by an order of attachment, injunction, or garnishment

GARNISHMENT – the proceeding by which a debtor's creditor is subjected to the payment of his own debt to another. It consists in the citation of some stranger to the litigation, who is the debtor of one of the parties to the action.

INTERPLEADER – the technical name of the action in which a certain person in possession of certain property wants claimants to litigate among themselves for the same [Sec 1 Rule 63 Rules of Court].

INJUNCTION – a judicial process by virtue of which a person is generally ordered to refrain from doing something. It is called preliminary injunction if the prohibition is during the pendency of certain proceedings

Example:A owes B P20,000. B, on the other hand, is indebted to C for P20,000. C filed an action against, who is now insolvent, but claims and admit that A is indebted to him (B) for P20,000. A was summoned to the proceedings and was ordered by the judge to retain the debt in the meantime. In this case, if A continues to pay B, the payment is not valid because he was judicially ordered to retain the debt.

Article 1244. The debtor of a thing cannot compel the creditor to receive a different one, although the latter may be of the same value as, or more valuable than that which is due.

In obligations to do or not to do, an act or forbearance cannot be substituted by another act or forbearance against the obligee's will.

Instances when Art 1244 does not apply:(a) in case of facultative obligations(b) in case there is another agreement

resulting in either (c) waiver by the creditor


(1) Dation in payment [Art 1245 Civil Code](2) Novation [Art 1291 Civil Code]

Related Articles: (Art. 1245) (Art. 1291) Art. 1245. Dation in payment, whereby

property is alienated to the creditor in satisfaction of a debt in money, shall be governed by the law of sales.

Art. 1291. (Novation) Obligations may be modified by:

(1) Changing their object or principal conditions;

(2) Substituting the person of the debtor;

(3) Subrogating a third person in the rights of the creditor.

Example:A obliges himself to deliver a Mitsubishi car to B. For not having a Mitsubishi car, A wants B to accept a Ferrari car, but B refused to accept. Is B justified in refusing to accept?

Answer: Yes, even if it is more valuable because the contract of the parties is the law between themselves.

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

DATION IN PAYMENT – that mode of extinguishing an obligation whereby the debtor alienates in favor of the creditor, property for the satisfaction of monetary debt.

(a) Datio in solutum(b) Adjudicacion en pago(c) Payment in kind

Difference Between Sales And Dation In Payment:

SALES DATION IN PAYMENT(a) there is no pre existing credit(b) this gives rise to obligation(c) the cause or consideration here is the price (seller) or the obtaining of the object (buyer)(d) there is greater freedom in the determination of the price(e) the giving of the price may generally end the obligation of the buyer

(a) there is pre existing credit

(b) this extinguishes obligations

(c) the cause or consideration here of the debtor in dation in payment is the extinguishment of his debt, it is the acquisition of the object offered in credit

(d) There is less freedom in the determination of the price

(e) The giving of the object in lieu of the credit may extinguish completely or only partially the credit depending on the agreement

Conditions under which a dation in payment would be valid:

(a) if the creditor consents, for a sale presupposes the consent of both parties

(b) if the dation in payment will not prejudice the other creditors

(c) if the debtor is not judicially declared insolvent

Article 1246. When the obligation consists in the delivery of an indeterminate or generic


thing, whose quality and circumstances have not been stated, the creditor cannot demand a thing of superior quality. Neither can the debtor deliver a thing of inferior quality. The purpose of the obligation and other circumstances shall be taken into consideration.

Rules if the contract does not specify the quality of the object to be delivered:

a. Creditor cannot demand a thing of superior quality, unless of course, he wishes to accept one and the debtor agrees to it.

b. Debtor cannot deliver a thing of inferior quality, unless he wants to deliver one of superior quality, but creditor cannot be compelled to receive a thing of superior quality.

Rule is only on quality not quantity. The superior or inferior rule is applicable only on generic or indeterminate thing as to their quality, and not to quantity. If the question is quantity, and it cannot be determined without the need of a new contract between the parties, the contract is void under Article 1409, No. 6.

Related Article: (Art. 1409, No. 6) The following contracts are inexistent

and void from the beginning: XXX (6) Those where the intention of the parties relative to the principal object of the contract cannot be ascertained;

Examples:1. If the creditor is delivering a thing of

superior quality, can the creditor refuse to accept?Answer: Yes, under Article 1244. (Art. 1244 The debtor of a thing cannot compel the creditor to receive a different one, although the latter may

be of the same value as, or more valuable than that which is due.

2. In obligations to do or not to do, an act or forbearance cannot be substituted by another act or forbearance against the obligee's will.

Article 1247. Unless it is otherwise stipulated, the extrajudicial expenses required by the payment shall be for the account of the debtor. With regard to judicial costs, the Rules of Court shall govern [Rule 142 Rules of Court].

The extrajudicial expenses incurred during the payment must be borne by the debtor, unless otherwise stipulated. The judicial expenses, if any, shall be governed by Sec. 1, Rule 142, Rules of Court.

Sec. 1, Rule 142, Rules of Court: Section 1. Cost ordinarily follow

results of suit. — Unless otherwise provided in these rules, cost shall be allowed to the prevailing party as a matter of course, but the court shall have power, for special reasons, to adjudge that either party shall pay the costs of an action, or that the same be divided, as may be equitable. No costs shall be allowed against the Republic of the Philippines unless otherwise provided by law.

Article 1248. Unless there is an express stipulation to that effect, the creditor cannot be compelled partially to receive the prestations in which the obligation consists. Neither may the debtor be required to make partial payments.

However, when the debt is in part liquidated and in part unliquidated, the creditor may demand and the debtor may effect the payment of the former without waiting for the liquidation of the latter.


(1) GENERAL RULE: Performance should be COMPLETE [Art 1233 Civil Code]

(2) EXCEPTIONS(a) When there is stipulation to this effect(b) When the different prestations are subject to different conditions or different terms(c) When a debt is in part liquidated and in part unliquidated, in which case performance of the liquidated part may be insisted upon either by the debtor or the creditor (d) When a joint debtor pays his share or the creditor demands the same(e) When a solidary debtor pays only the part demandable because the rest are not yet demandable on account of their being subject to different terms and conditions(f) In case of compensation, when one debt is larger than the other, it follows that a balance is left [Art 1290 Civil Code](g) When work is to be done by parts [Art 1720 Civil Code]

Related Articles: (Art. 1233) (Art. 1279) (Art. 1290) (Art. 1720)

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

Art. 1279 In order that compensation may be proper, it is necessary:

(1) That each one of the obligors be bound principally, and that he be at the same time a principal creditor of the other;

(2) That both debts consist in a sum of money, or if the things due are consumable, they be of the same kind, and also of the same quality if the latter has been stated;

(3) That the two debts be due;

(4) That they be liquidated and demandable;

(5) That over neither of them there be any retention or controversy, commenced by third persons and communicated in due time to the debtor.

Art. 1290 When all the requisites mentioned in Article 1279 are present, compensation takes effect by operation of law, and extinguishes both debts of the concurrent amount, even though the creditors and debtors are not aware of the compensation.

Art. 1720 The price or compensation shall be paid at the time and place of delivery of the work, unless there is a stipulation to the contrary. If the work is to be delivered partially, the price or compensation for each part having been fixed, the sum shall be paid at the time and place of delivery, in the absence of stipulation.

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

The delivery of promissory notes payable to order, or bills of exchange or other mercantile documents shall produce the effect of payment only when they have been cashed, or when through the fault of the creditor they have been impaired.

In the meantime, the action derived from the original obligation shall be held in abeyance.

LEGAL TENDER – that which a debtor may compel a creditor to accept in payment of the debt (whether public or private). Legal tender is currency which a debtor can compel a creditor to accept as payment of debt in money, when tendered by the debtor in the right


amount. All notes and coins issued by the Bangko Sentral shall be fully guaranteed by the Government of the Republic of the Philippines for all debts, both public and private (Sec. 52, R.A. 7653, The New Central Bank Act).

Sec. 52, R.A. 7653, The New Central Bank Act:

Unless otherwise fixed by the Monetary Board, coins shall be legal tender in amounts not exceeding Fifty Pesos (P50.00) or denominations of Twenty-five centavos (0.25) and above, and in amounts not exceeding Twenty pesos (P20.00) for denominations of Ten centavos (0.10) or less.All bills are valid legal tender for any

amount.

Republic Act No. 8183 (amends Article 1249): An Act to Assure Uniform Value of Philippine Coin and Currency:

Sec. 1 – All monetary obligations shall be settled in the Philippine Currency which is legal tender in the Philippines. However, the parties may agree that the obligation or transaction shall be settled in any other currency at the time of payment.

A check is not a legal tender (even if it is a Manager’s Check). A creditor cannot be compelled to accept a check in payment of the debt in his favor because a check is not a legal tender. But if the creditor decides to accept a check in payment of the obligation in his favor, such payment does not produce the effect of payment until the check is cashed, or though the fault of the creditor, it could not be cashed. (Cuaycong v. Rius, 47 O.G. No. 6125).

Effects of payment by means of instruments of credit:

Promissory notes, checks, bills of exchange, and other commercial documents are

not legal tender and therefore the creditor cannot be compelled to accept them. But he creditor, if he chooses, may accept them without the acceptance producing the effect of payment.

Acceptance of commercial document is equivalent to payment if:

a. The creditor is in estoppel or he had previously promised he would accept a check.

b. When the check has lost its value because of the fault of the creditor, i.e. Stale check, creditor impairs the document

c. When the check has been cashed

Example:A owes B P20,000 on May 24, 2014. A is paying B a check of P20,000.

a. Can B refuse to accept? Yes, because a check is not a cash until it is encashed.

b. Can he accept? Yes, it is his option.c. If he accepts, is that equivalent to

payment? No, until it is encashed.

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

INFLATION – a sharp sudden increase of money or credit or both without a corresponding increase in business transaction (Webster's Dictionary).

What is the basis of payment of an obligation in case of extraordinary inflation or deflation?

In case of extraordinary inflation or deflation of the currency stipulated should supervene, the value of the currency at the time of the


establishment of the obligation shall be the basis of payment, unless there is an agreement to the contrary.

When does extraordinary inflation exist?

Extraordinary inflation exist when there is a decrease or increase in the purchasing power of the Philippine currency which is unusual or beyond the common fluctuation in the value of the said currency, and such increase or decrease could not have been reasonably foreseen or was manifestly beyond the contemplation of the parties at the time of the establishment of the obligation (Hubonhoa v. Court of Appeals, December, 14, 1999)

When are the effects of extraordinary inflation applicable?

The effects of extraordinary inflation are applicable only when there is an official declaration to that effect by competent authorities. (Lantion v. NLRC, 181 SCRA 513)

…the effects of extraordinary inflation are not to be applied without an official declaration thereof by competent authorities. (Singson v. Caltex (Philippines), Inc., 342 SCRA 91 [2000])

Article 1251. Payment shall be made in the place designated in the obligation.

There being no express stipulation and if the undertaking is to deliver a determinate thing, the payment shall be made wherever the thing might be at the moment the obligation was constituted.

In any other case the place of payment shall be the domicile of the debtor.

If the debtor changes his domicile in bad faith or after he has incurred in delay, the additional expenses shall be borne by him.

These provisions are without prejudice to venue under the Rules of Court.

Example:A, tenant of Room No. 1, was being ousted by his landlord on the ground of non-payment of rentals. A alleged in his defense that he cannot be ejected because in previous months, the collector is the one going to his room to collect rentals, bringing with him the receipt of collection. Since A is ready to pay, he cannot be ejected because of non-payment due to the omission or neglect of the landlord. Is the defense of A tenable?

Answer: Yes, because payment in money, considered as generic or indeterminate, the place of payment therefore must be at the domicile of the debtor there being no stipulation to the contrary.

Article 1356. Contracts shall be obligatory, in whatever form they may have been entered into, provided all the essential requisites for their validity are present. However, when the law requires that a contract be in some form in order that it may be valid or enforceable or that a contract be proved in a certain way, that requirement is absolute and indispensable. In such cases, the right of the parties stated in the following article cannot be exercised.

Spiritual system of the Spanish Code – the law looks more at the spirit/intent

rather than at the forms of the contract.

GENERAL RULE: Contracts are valid and binding from their perfection regardless of form, whether they be oral or written.Once the 3 elements exist, the contract is generally valid and obligatory, regardless of the form, oral or written, in which they are couched


EXCEPTIONS:1. When the law requires that the contract must be in a certain form in order to be valid

◦ Must appear in writing▪ donation and acceptance of personal property whose value exceeds P5,000.00▪ sale of a piece of land or any interest therein through an agent▪ agreements regarding payment of interest in contract of loan▪ antichresis

◦ Must appear in public document▪ donations of immovable properties regardless of value▪ partnerships where immovableproperty or real rights are contributed to the common fund

◦ Must be registered▪ chattel mortgages▪ sales or transfer of large cattle

2. When the law requires that the contract must be in a certain form in order to be enforceable.

◦those covered by the old Statute of Frauds, now Art. 1403(2) of the Civil Code

A certain form may be prescribed by law for anyof the following REQUISITES, for:

1. Validity—non-observance renders the contract void and of no effect

2.Enforceability—non-compliance will not permit, upon the objection of a party, the contract, although otherwise valid, to be proved or enforced by action

3. Greater efficacy or convenience or to bind third persons—if not done, would not adversely affect the validity or enforceability of the

contract between the contracting parties themselves

FORM – in some kind of contracts only as contracts are generally consensual; form is a manner in which a contract is executed or manifested

Kinds of Forms:1. Informal – may be entered into whatever form as long as there is consent, object and cause2. Formal – required by law to be in certain specified form such as:a. donation of real propertyb. stipulation to pay interestc. transfer of large cattled. sale of land thru agente. contract of antichresisf. contract of partnershipg. registration of chattel mortgageh. donation of personal property in excess of 5,000

3. Real – creation of real rights over immovable property must be written

Article 1357. If the law requires a document or other special form, as in the acts and contracts enumerated in the following article, thecontracting parties may compel each other to observe that form, one the contract has been perfected. This right may be exercisedsimultaneously with the action upon the contract.

A party, who desires to have his contract reduced in the particular form required by law, can file an action to compel the other party to comply with such form


If the requirement of law is directory only and has no bearing on the validity or enforceability of the contract, the parties can enforce the contract and, at the same time, demand that it be reduced in the form required by law

Article 1358. The following must appear in a public document:1) Acts and contracts which have for their object, the creation, transmission, modification or extinguishment of real rights overimmovable property, sales of real property or of an interest therein are governed by articles 1403, No. 2 and 1405

2) The cession, repudiation, or renunciation of hereditary rights or those of the conjugal partnership of gains

3) The power to administer property, or any other power which has for its object an act appearing or which should appear in a publicdocument or should prejudice a third person

4) The cession of actions or rights proceeding from an act appearing in a public documentAll other contracts where the amount involved exceeds five hundred pesos must appear in writing, even a private one. But sales of

goods,chattels or things in action are governed by articles 1403, No.2 and 1405.

Failure to put in a public or private document or writing the transactions or matters herewith will not render the agreement void or invalid

o They shall still be effective as between the parties

o The requirement of this article is only for the purpose of greater efficacy, of convenience or of binding third persons

This article nowhere provides that the absence of written form will make the agreement invalid or unenforceable

Contract of Sale—a consensual contract, which means that the sale is perfected by mere consent

No particular form is required for its validity

Under Art. 1498, when the sale is made through a public instrument, the execution thereof is equivalent to the delivery of the thing

Delivery may either be:

[a] actual (real) or [b] constructive

o The delivery of a parcel of land may be done by placing the vendee in control and possession of the land (real) or by embodying the sale in a public instrument (constructive)

CHAPTER 4:REFORMATION OF INSTRUMENTS

Arctile 1359. When, there having been a meeting of the minds of the parties to a contract, their intention is not expressed in the instrumentpurporting to embody the agreemtn, by reason of mistake, fraud, inequitable conduct or accident, one of the parties may ask for thereformation of the instrument to the end that such true intention may be expressedIf mistake, fraud, inequitable conduct, or accident has prevented a meeting of the minds of th parties, the proper remedy is not reformation ofthe instrument but annulment of the contract.

REFORMATION OF CONTRACTS- remedy by means of which a written instrument is amended or rectified as to express or conform to the real agreement or intention of the parties when by reason of mistake, fraud, inequitable


conduct, or accident, the instrument fails to express such agreement or intention

*it would be unjust and inequitable to allow the enforcement of a written instrument which does not reflect or disclose the real meeting of minds of the parties

Requisites for REFORMATION:1. Meeting of the minds of the parties to the contract;

2. The written instrument does not express the true agreement or intention of the parties;3. The failure to express the true intention is due to mistake, fraud, inequitable conduct, or accident;

4. The facts upon which relief by way of reformation of the instrument is sought are put in issue by the pleadings; and

5. There is a clear and convincing evidence of the mistake, fraud, inequitable conduct, or accident.

Reformation AnnulmentPresupposes a validcontract in which there has already been a meeting of the mind

Based on a defectivecontract in which there has been no meeting of the minds because the consent of one or bothof the contractingparties has beenvitiated.

Not a remedy whenthere has been fraud,mistake, inequitableconduct or accident.

Remedy when there has been no meeting of the minds because of mistake, fraud,inequitable conduct, or accident

Article 1360. The principles of the general law on the reformation of instruments are hereby

adopted insofar as they are not in conflict withthe provisions of this Code.

*The provisions of the New Civil Code prevails over the principles of the general law on reformation. The latter will only have suppletory effect.

Article 1361. When a mutual mistake of the parties causes the failure of the instrument to disclose their real agreement, said instrument maybe reformed.

Requisites to justify reformation by Mutual Mistake:

1. The mistake must be of fact;

2. Such mistake must be proved by clear and convincing evidence;

3. The mistake must be mutual, that is, common to both parties to the instrument; and

4. The mistake must cause the failure of the instrument to express their true intention*if the mutual mistake is of law, the remedy is annulment

Article 1362. If one party was mistaken and the other acted fraudulently or inequitably in such a way that the instrument does not show theirtrue intention, the former may ask for the reformation of the instrument.* the right to ask reformation is granted only to the party who was mistaken in good faith

Article 1363. When one party was mistaken and the other knew or believed that the instrument did not state their real agreement, but concealed that fact from the former, the instrument may be reformed* The remedy of reformation may be availed of the party who acted in good faith. The concealment of mistake by the other party constitutes fraud


Article 1364. When through ignorance, lack of skill, negligence or bad faith on the part of the person drafting the instrument or of the clerk or typist, the instrument does not express the true intention of the parties, the courts may order that the instrument be reformed.*Neither party is responsible for the mistake; thus, either may ask for reformation

Article 1365. If two parties agree upon the mortgage or pledge of real or personal property, but the instrument states that the property is sold absolutely or with a right of repurchase, reformation of the instrument is proper.

*Such true intention must prevail for the contract must be complied with good faith

Article 1366. There shall be no reformation in the following cases:1) Simple donations inter vivos wherein no condition is imposed;2) Wills;3) When the real agreement is void.

Article 1367. When one of the parties has brought an action to enforce the instrument, he cannot subsequently ask for the reformation.

When can one party ask for the reformation ofthe contract: (Art. 1360-1369)

• Mutual mistake of the parties (Art. 1361)• One party was mistaken and the other partyActed fraudulently(Art. 1362)• One party mistaken, the other knew orBelieved that the instrument does not showTheir real intent but concealed that fact toThe former (Art. 1363)• Through the ignorance, lack of skill,Negligence or bad faith on the part of thePerson drafting the instrument or the clerk

Or typist. (Art. 1364)• Parties agree upon the mortgage or pledgeOf a real or personal property, but theInstrument states that the property is soldAbsolutely or with a right of repurchase(Art. 1365)

When there can be no reformation:

• Simple donation inter vivos wherein nocondition is imposed• Wills• When the real agreement is void (Art. 1366)• When one of the parties brought an actionto enforce the instrument (Art. 1367)

Article 1368. Reformation may be ordered at the instance of either party or his successors in interest, if the mistake was mutual; otherwise, upon petition of the injured party, or his heirs and assigns.

Party entitled to reformation

1. Either of the parties if the mistake is mutual2. In all other case, the injured party3. The heirs and successors in interest, in lieu of the entitled party*the effect of reformation I retroactive from the time of the execution of the original contract.

Article 1369. The procedure for the reformation of the instruments shall be governed by rules of court to be promulgate by the SupremeCourt.*

The Rules of court governs procedure. The Supreme Court has not as yet promulgated the procedure for the reformation of instruments

Parties imposes a ready made form of contract,which the other party may accept or reject, but


which the latter cannot modify:

– As binding as a mutually executed transaction (Ayala Corp. vs Ray Burton Dev't. Corp.)

– The one who adheres to the contract is in reality free to reject it entirely, if he adheres, he gives his consent. (Ong Yiu vs CA)

– Its enforceability will have to be determinedby the peculiar circumstances obtaining in each case and the situation of the parties concerned

– In case of conflict, the contract will be interpreted against the one who drafted the contract.

Two steps needed to follow(contracts of credit cards) to absolve a card holder from liability forunauthorized purchase made through lost or stolen card:

1. The card holder must give a written noticeto the credit card company2. Credit company must give notice to all itsmember establishments of such lost ortheft.

CHAPTER 5:INTERPRETATION OF CONTRACTS

Article 1370. If the terms of a contract are clear and leave no doubt upon the intention of the contracting parties, the literal meaning of itsstipulations shall control.If the words appear to be contrary to the evident intention of the parties, the latter shall prevail over the former. (1281)

Interpretation of a contract- the determination of the meaning of the terms or words used by the parties in their contract

*contracts should be fulfilled according to the literal sense of their stipulations, if the terms of the contract are clear and unequivocal

* a cardinal rule is that interpretation of the contacting parties should always prevail because their will has the force of law between them.

Article 1371. In order to judge the intention of the contracting parties, their contemporaneous and subsequent acts shall be principally considered. (1282)

***Intention of the contracting parties always prevail because their will has the force of lawbetween them.

***Literal sense of the stipulations shall befollowed.

***Once the intention has been ascertained, itbecomes an integral part of the contract as though it had been originally expressed therein in unequivocal terms.

The character of the transaction between theparties is not determined by the language used in the document but by their intention. (ManilaBanking Corp. vs Teodoro, Jr.)contemporaneous and subsequent acts of theparties must be considered in order to judge the intention of the contracting parties.

Case: Tanguilig vs CA

Article 1372. However general the terms of a contract may be, they shall not be understood to comprehend things that are distinct and casesthat are different from those upon which the parties intended to agree. (1283)*

Latin Maxims:


o Noscitur a sociis—general and unlimited terms are restrained and limited by particular terms that followo Ejusdem generis—a general term joined with a specific one will be deemed to include only things that are like, of the same genus as, the specific one

• However broad may be the terms of a contract, it extends only to those things concerning which it appears the parties intended to contract

• The terms employed are servants, and not masters, of an intent

• They are interpreted so as to subserve, and not to subvert, such intent

HOW TO INTERPRET A CONTRACT:

1. When it contains stipulations that admit of several meanings (Article 1373):

Article 1373. If some stipulation of any contract should admit of several meanings, it shall be understood as bearing that import which is most adequate to render it effectual. (1284)*

When an agreement is susceptible of several meanings, one of which would render it effectual, it should be given that interpretation. (if one interpretation makes it illegal, and the other makes it valid, the latter is warranted)

2. When it contains various stipulations, some of which are doubtful(Article 1374):

Article 1374. The various stipulations of a contract shall be interpreted together, attributing to the doubtful ones that sense which may resultfrom all of them taken jointly. (1285)*

A contract is interpreted as a whole and the intention of the parties is gathered from entire instrument.

3. When it contains words that hace different significations(Article 1375):

Article 1375. Words which may have different significations shall be understood in that which is most in keeping with the nature and object ofthe contract. (1286)*

If a word is susceptible of 2 or more meanings, it is to be understood in that sense which is most in keeping with the nature and object of the contract in line with the cardinal rule that the intention of the parties must prevail.

4. When it contains ambiguities and omissions of stipulations (Article 1376):

Article 1376. The usage or custom of the place shall be borne in mind in the interpretation of the ambiguities of a contract, and shall fill the omission of stipulations which are ordinarily established. (1287) *the usage or custom of the place may explain what is doubtful or ambiguous. It is however, necessary to prove the existence and this burden is upon the party alleging it.

5. With respect to the party who caused the obscurity (Article 1377):

Article 1377. The interpretation of obscure words or stipulations in a contract shall not favor the party who cause the obscurity (1288)*A written agreement should, in case of doubt, be interpreted against the party who has drawn it. Generally, the party who causes the obscurity acts with ulterior motives.

6. When it is absolutely impossible to settle doubts by the rules above (Article 1378,par 1);


Article 1378. When it is absolutely impossible to settle doubts by the rules established in the preceding articles, and the doubts refer to incidental circumstances of a gratuitous contract, the least transmission of rights and interest shall prevail. If the contract is onerous, the doubt shall be settled in favor of the greatest reciprocity of interests.

7. When the doubts are cast upon the principal objects so that the intention cannot be known (Article 1378,par 2):

Article 1378, paragraph 2. If the doubts are cast upon the principal object of the contract in such a way that it cannot be known what may have been the intention or will of the parties, the contract shall be null and void. (1289)

Rules in case doubts impossible to settle

1. Gratuitous contract- interpretation should be made which would result in the least transmission of rights and interests2. Onerous contracts- the doubts shall be settled in favour of the greatest reciprocity of interests3. Principal object of the contract- the contract shall be null and void.

Article 1379. The principles of Interpretation stated in Rule 123 of the Rules of Court shall likewise be observed in the constitution ofcontracts.

Applicability of Rule 12, Rules of Court (now Setions 10-19, Rule 130)

Law in evidence; interpretations of documents


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