2009 civil law volume 1 reviewer

Copyright Page

Copyright and all other relevant rights over this material are owned jointly by

the University of the Philippines College of Law, the Faculty Editor and the

Student Editorial Team.

The ownership of the work belongs to the University of the Philippines College

of Law. No part of this book shall be reproduced or distributed without the

consent of the UP College of Law.

All rights are reserved.

REVIEWER IN TAXATION LAW Table of Contents

i

OBLIGATIONS

Chapter I. GENERAL PROVISIONSI. ObligationsII. Sources of Obligations

A. LawB. ContractsC. Quasi-ContractsD. DelictsE. Quasi-Delicts

33333344

Chapter II. NATURE AND EFFECTS OFOBLIGATIONSI. Breach of Obligations

A. VoluntaryB. InvoluntaryTypes of BreachA. FraudB. NegligenceC. Delay

II. Fortuitous EventsA. Act of GodB. Act of Man/Force Majeure

III. RemediesA. Primary RemediesB. Subsidiary Remedies of Creditor

IV. Usurious Transactions

5666666788899910

Chapter III. DIFFERENT KINDS OFOBLIGATIONSI. Pure & Conditional Obligations

A. Pure ObligationB. Conditional Obligation

II. Reciprocal ObligationsIII. Obligations with a PeriodIV. Alternative & Facultative Obligations

A. Alternative ObligationsB. Facultative Obligations

V. Joint & Solidary ObligationsA. Joint ObligationB. Solidary Obligation

VI. Divisible & Indivisible ObligationsA. Divisible ObligationB. Indivisible Obligation

VII.Obligations with a Penal Clause

11111111131314151516161719191919

Chapter IV. EXTINGUISHMENT OFOBLIGATIONSI. Payment or Performance

A. Application of PaymentB. Payment by CessionC. Dation in PaymentD. Tender of Payment and Consignation

II. Loss of the Thing Due or Impossibilityof PerformanceA. LossB. Impossibility of Performance

III. Condonation or Remission of theDebt

IV. Confusion or Merger of RightsV. CompensationVI. Novation

A. Objective NovationB. Subjective Novation

VII.Charts on Payment and Performance

212121212121

232323

24242425262628


ii

CONTRACTS

Chapter I. GENERAL PROVISIONSI. ClassificationII. ElementsIII. StagesIV. Characteristics

A. MutualityB. AutonomyC. RelativityD. ConsensualityE. Obligatory Force

35353636363636363737

Chapter II. ESSENTIAL REQUISITESOF CONTRACTSI. Consent

A. ConcurrenceB. CapacityC. Vices of Consent

II. ObjectIII. Cause

38383838394040

Chapter III. FORMS OF CONTRACTSI. RulesII. Kinds of Formalities

A. Contracts Which Must Appear inWriting

B. Contracts Which Must Appear in aPublic Document

424242

42

42

Chapter IV. REFORMATION OFCONTRACTS

Chapter V. INTERPRETATION OFCONTRACTS

43

43

Chapter VI. DEFECTIVE CONTRACTSVIII. RescissibleIX. VoidableX. UnenforceableXI. Void or Inexistent

4444454546

SALES

Chapter I. THE CONTRACT OF SALEA. Essential RequisitesB. StagesC. CharacteristicsD. KindsE. FormF. Sale Distinguished from Other

ContractsG. Contract to SellH. Bilateral Promise to Buy and SellI. Option ContractJ. Right of First RefusalK. AssignmentL. Document of Title

494949494950

50515151525253

Chapter II. ELEMENTS OF A VALIDSALEA. Consent

1. Absolute Incapacity2. Relative Incapacity3. Offer and Acceptance

B. Subject Matter1. Licit2. Actual or Possible3. Determinate

C. Price1. Requisites2. Gross Inadequacy of Price

545454545555555556565656

Chapter III. TRANSFER OFOWNERSHIPI. General Rule: Ownership Transfers

upon DeliveryII. When Delivery Does Not Transfer

Ownership

57

57

57

A. Sale on ReturnB. Sale on Approval, Trial or

SatisfactionC. Executory SalesD. Sale by Description or SampleE. In an Invalid SaleF. When Seller is Not Owner

III. Kinds of DeliveryIV. Double SalesV. Risk of Loss or Deterioration

57

5757575858586061

Chapter IV. OBLIGATIONS OF THESELLER AND THE BUYERA. Obligations of the Seller

1. Preservation2. Delivery3. Warranty

B. Obligations of the Buyer1. Acceptance2. Payment

6262626264666667

Chapter V. REMEDIES OF THESELLER AND THE BUYERA. General RemediesB. Remedies of the Seller

1. For non-acceptance of payment2. For non-payment

a. In sale of Movablesb. In sale of immovables

C. Remedies of the Buyer1. For breach of obligation to

preserve2. For breach of obligation to deliver3. For breach of warranty

6868686869697172

727273


iii

Chapter VI. EXTINGUISHMENT OFSALEA. CausesB. Conventional Redemption

1. Definition2. Conventional Redemption vs.

Equitable Mortgage3. Right of Redemption

C. Legal Redemption1. Definition2. Period to redeem3. Instances

D. Under the Public Land ActE. Under Special Laws

1. Foreclosure and execution sales2. Under the Agrarian Land Reform

Code

75757575

757677777777787878

79

Chapter VII. THE BULK SALES LAW 80

CREDIT TRANSACTIONS

Chapter I. GENERAL PRINCIPLESI. Credit Transactions DefinedII. Security DefinedIII. Bailment Defined

83838383

Chapter II. LOANI. CharacteristicsII. Kinds of LoanIII. Commodatum and Mutuum

DistinguishedIV. Kinds of CommodatumV. CommodatumVI. Obligations of the BaileeVII.Obligations of the BailorVIII. Simple LoanIX. Interest

848484

84848485858686

Chapter III. REAL MORTGAGEI. Real Mortgage DefinedII. Objects of Real MortgageIII. Kinds of Real MortgageIV. Essential RequisitesV. Effect of Invalidity of Mortgage on

Principal ObligationVI. Effect of MortgageVII.Extent of MortgageVIII. Foreclosure of MortgageIX. Right of Mortgagee to Recover

DeficiencyX. Nature of Judicial Foreclosure

ProceedingsXI. Waiver of Security by CreditorXII. Redemption

8888888888

89898989

90

909090

Chapter IV. CHATTEL MORTGAGEI. DefinitionII. Applicability of the Provisions on

PledgeIII. Subject Matter of Chattel MortgageIV. Registration in the Chattel

9191

9191

Mortgage RegisterV. Right of RedemptionVI. Right of Mortgagee to PossessionVII.Foreclosure of Chattel MortgageVIII. Civil Action to Recover CreditIX. Right of Mortgagee to Recover

DeficiencyX. Application of Proceeds of Sale

9292939393

9393

Chapter V. PLEDGEI. Provisions Common to Pledge and

MortgageII. Provisions Applicable only to Pledge

94

94

95

Chapter VI. ANTICHRESISI. Definition of AntichresisII. CharacteristicsIII. Special RequisitesIV. Application of the FruitsV. Obligations of the CreditorVI. Remedies of Creditor in Case of Non-

Payment of Debt

989898989898

99

Chapter VII. DEPOSITI. General Provisions

A. DefinitionB. CharacteristicsC. Principal PurposeD. Distinctions from Mutuum and

CommodatumE. Creation of a DepositF. Extinguishment of a DepositG. Kinds of DepositH. Subject Matter of Deposit

II. Voluntary DepositA. General ProvisionsB. Obligations of the DepositaryC. Obligations of the Depositor

III. Necessary Deposit

100100100100100

100101101101101101101102106106


iv

A. DefinitionB. Liability of the Hotel-Keeper

IV. Judicial Deposit

106106107

Chapter VIII. GUARANTYI. Guaranty in General – Its Nature

and ExtentA. CharacteristicsB. Classification of GuarantyC. Guaranty Distinguished from

WarrantyD. Guaranty Distinguished from

SuretyshipE. Rules Governing Guaranty

II. Effects of GuarantyA. Between Guarantor and CreditorB. Between Debtor and GuarantorC. As Between Co-Guarantors

III. Extinguishment of Guaranty

108

108108108

108

108109112112114115115

Chapter IX. SURETYI. Nature of Surety’s UndertakingII. Applicability of Strictissimi Juris

Rule

117117

117

Chapter X. CONCURRENCE ANDPREFERENCE OF CREDITSI. Concurrence of Credits DefinedII. Preference of Credit DefinedIII. General ProvisionsIV. Classification of CreditsV. Order of Preference of Credits

118118118118118118118

Chapter XI. SPECIAL LAWSI. Warehouse Receipts LawII. Insolvency Law

119119124

AGENCY

Chapter I. NATURE, FORM ANDKINDS OF AGENCYM. DefinitionN. PurposeO. CharacteristicsP. Essential ElementsQ. Determination of ExistenceR. Agency vs. Similar ContractsS. Kinds

Chapter II. OBLIGATIONS OF THEAGENTA. To Carry Out the AgencyB. To Act Within the Scope of His

AuthorityC. To Advance Necessary FundsD. To Act in Accordance with

InstructionsE. To Prefer Principal’s Interest over

Personal InterestF. Not to Loan to Himself without

Principal’s ConsentG. To Render Account and Deliver

Things Received by Virtue ofAgency

H. To be Responsible for SubstitutesI. To Pay InterestJ. To Answer for His Fraud/

NegligenceK. Special Obligations of Factor/

Commission Agents

134134134134134135135137

141141

141142

142

142

142

143143143

143

143

Chapter III. LIABILITIES OF THEAGENTA. Liability to Third PersonsB. Liability to the PrincipalC. Liability of Two or More Agents

Chapter IV. OBLIGATIONS OF THEPRINCIPALA. To Comply with the Obligations

Contracted by the AgentB. To Advance Necessary Sums and

Reimburse the AgentC. To Indemnify Agent for DamagesD. To Pay the Agent’s CompensationE. Be Solidarily Liable

Chapter V. EXTINGUISHMENT OFAGENCYA. Expiration of the Period for which

It was ConstitutedB. Death, Civil Interdiction,

Insanity, InsolvencyC. Withdrawal of the AgentD. Accomplishment of the Object of

the AgencyE. RevocationF. Dissolution of the Firm/Corp.

which Entrusted/Accepted theAgency

145145145146

147

147

148148148149

150

150

150150

150150

151


v

PARTNERSHIP

Chapter I. NATURE, CREATION,KINDS OF PARTNERSHIPA. Essential FeaturesB. CharacteristicsC. DistinctionsD. Rules to Determine ExistenceE. How Partnership is FormedF. Partnership TermG. Classes of PartnersH. Kinds of Partnerships

Chapter II. OBLIGATIONS OF THEPARTNERSHIP/PARTNERS AMONGTHEMSELVESA. To Make the Contributions as

PromisedB. Pay Damages Due to Partner’s

FaultC. Bear Risk of LossD. Manage the PartnershipE. Render Full InformationF. Liability for Partnership

ContractsG. Solidary Liability with

PartnershipH. Reimbursement

Chapter III. OBLIGATIONS OFPARTNERSHIP/PARTNERS AS TOTHIRD PERSONSA. Operate under a Firm NameB. Bound by Partnership AdmissionC. Bound by Notice to PartnerD. Liable for Acts of the Partnership

Chapter IV. RIGHTS OF PARTNERSA. Share in Losses and ProfitsB. Associate Another in His ShareC. Access Partnership BooksD. Obtain Formal AccountE. Property RightsF. Convey Real Property

Chapter V. RIGHTS OFPARTNERSHIP

Chapter VI. DISSOLUTION ANDWINDING UPA. DefinitionsB. Causes for DissolutionC. Consequences of DissolutionD. Partner's Liability

Chapter VII. RIGHTS OF PARTNERSUPON DISSOLUTIONA. Right to Wind UpB. Right to Damages for/to Continue

Business on Wrongful Dissolution

154154154154155155156156157

158158

159159159160

160

161161

162162162162162

163163163163163163165

165

166166166166167

168168

168

C. Right to Lien or Retention, ToStand in Place of Creditor, To BeIndemnified

D. Right of Retiring/DeceasedPartner

E. Right to Account

Chapter VIII. RULES ONSETTLEMENT

Chapter IX. LIMITED PARTNERSHIPI. DefinitionII. Forming/Amending a Limited

PartnershipIII. Limited Partner

A. ContributionB. Liabilities of a Limited Partner

1. To the Partnership2. As Trustee for the

Partnership3. Liabilities to Partnership

Creditors & Other Partnersa. Contributes Servicesb. Surname in Firm Namec. False Statementd. Control of Businesse. Prohibited Transactionsf. Non-Compliance with

Requisites for Formation4. Liabilities to Separate

CreditorsC. Rights of Limited Partners

1. Common Rights of Limited &General Partners

2. Loan Money & TransactBusiness

3. Return of Contribution4. Share of Profits5. Assign Interests6. Effect of Death of a Limited

Partner7. Person Erroneously Believing

He’s a Limited PartnerIV. General PartnerV. DissolutionVI. Settling of Accounts After

Dissolution

168

169169

170

171171

172173173173173

173

173173173173174174

174

174174

174

174174175175

176

176176176

177

REVIEWER IN CIVIL LAW Table of Contents

Page 2 of 177

OB

LIG

AT

ION

SOBLIGATIONS

Chapter I. GENERAL PROVISIONSI. ObligationsII. Sources of Obligations

A. LawB. ContractsC. Quasi-ContractsD. DelictsE. Quasi-Delicts

33333344

Chapter II. NATURE AND EFFECTS OFOBLIGATIONSI. Breach of Obligations

A. VoluntaryB. InvoluntaryTypes of BreachA. FraudB. NegligenceC. Delay

II. Fortuitous EventsA. Act of GodB. Act of Man/Force Majeure

III. RemediesA. Primary RemediesB. Subsidiary Remedies of Creditor

IV. Usurious Transactions

5666666788899910

Chapter III. DIFFERENT KINDS OFOBLIGATIONSI. Pure & Conditional Obligations

A. Pure ObligationB. Conditional Obligation

II. Reciprocal ObligationsIII. Obligations with a PeriodIV. Alternative & Facultative Obligations

A. Alternative ObligationsB. Facultative Obligations

V. Joint & Solidary ObligationsA. Joint ObligationB. Solidary Obligation

VI. Divisible & Indivisible ObligationsA. Divisible ObligationB. Indivisible Obligation

VII.Obligations with a Penal Clause

11111111131314151516161719191919

Chapter IV. EXTINGUISHMENT OFOBLIGATIONSI. Payment or Performance

A. Application of PaymentB. Payment by CessionC. Dation in PaymentD. Tender of Payment and Consignation

II. Loss of the Thing Due or Impossibilityof PerformanceA. LossB. Impossibility of Performance

III. Condonation or Remission of theDebt

IV. Confusion or Merger of RightsV. CompensationVI. Novation

A. Objective NovationB. Subjective Novation

VII.Charts on Payment and Performance

212121212121

232323

24242425262628

REVIEWER IN CIVIL LAW Chapter I. General Provisions

Page 3 of 177

OB

LIG

AT

ION

S

ObligationsFACULTY-STUDENT EDITORIAL BOARD AND LECTURES COMMITTEE

Prof. Rommel CasisFACULTY EDITOR

ACADEMICS COMMITTEE

Samantha PoblacionDIRECTOR FOR ACADEMICS

EDITOR-IN-CHIEF

Rania JoyaDEPUTY DIRECTOR FOR ACADEMICS

LAYOUT HEAD

CIVIL LAW

Cez VillavertMichelle Dy

SUBJECT EDITORS

OBLIGATIONS and CONTRACTS

Rory LambinoLEAD WRITER

LECTURES

Edel CruzHEAD

--------

Kae GuerreroPRINTING AND DISTRIBUTION

--------

Leo ZuluetaLOGO, COVER AND TEMPLATE DESIGN

Frances DomingoPauline Alejandre

Angelica Paglicawan

Michelle AriasAlexandria MarotoNathan Marasigan

Diane BonillaWRITERS

Chapter I. General Provisions

I. OBLIGATIONSII. SOURCES OF OBLIGATIONS

A. LAWB. CONTRACTSC. QUASI-CONTRACTSD. DELICTSE. QUASI-DELICTS

OBLIGATION

Art. 1156. An obligation is a juridical necessityto give, to do or not to do.

The legal relation established between one party andanother, whereby the latter is bound to the fulfillmentof a prestation, which the former may demand ofhim. (MANRESA).

I. OBLIGATIONS

A. Active Subject (Obligee/Creditor): Theone in whose favor the obligation isconstituted the person who has theright or power to demand the prestation

B. Passive Subject (Obligor/Debtor): Theone bound to the performance of theprestation (to give, to do or not to do)

C. Prestation (Object): The conduct orduties which has to be observed by thedebtor/obligor. Requisites: (PLED) Possible, physically and judicially Licit Possible Equivalent in money Determinate or determinable

D. Vinculum Juris (Juridical or LegalTie; Efficient Cause): That which bindsor connects the parties to the obligation.

II. SOURCES OF OBLIGATIONS

A. Law: does not require concurrence of anyact of the creditor or debtor, nor is theobligation necessarily in accord with theirintention; obligations are imposed by thelaw itself

Art. 1158. Obligations derived from law are notpresumed. Only those expressly determined in thisCode or in special laws are demandable, and shall beregulated by the precepts of the law whichestablishes them; and as to what has not beenforeseen, by the provisions of this Book.

B. Contracts

Art. 1305. A contract is a meeting of the minds betweentwo persons whereby one binds himself, with respect totheother, to give something or to render someservice

Art. 1159. Has the Force of Law Between Parties.Obligations arising from contracts have the force of lawbetween the contracting parties and should be compliedwith in good faith

Art. 1306. The contracting parties may establish suchstipulations, clauses, term and conditions as they maydeem convenient provided they are not contrary to Law,Morals,Good customs,PublicOrderand PublicPolicy.

Parties may freely enter into any stipulation notcontrary to law, morals, good customs, publicorder and public policy

Neither party may unilaterally evade hisobligation in the contract unless: a) the contractauthorizes it, or b) the other party assents.

C. QUASI-CONTRACTS

Art. 2142. It is the juridical relation resulting fromlawful, voluntary and unilateral acts by virtue ofwhich the parties become bound to each other to theend that no one shall be unjustly enriched orbenefited at the expense of another.

No previous agreement exists; designed toavoid unjust enrichment, and have thecharacter of reimbursements


Page 4 of 177

OB

LIG

AT

ION

S

Lawful Distinguished from crimesVoluntary Distininguished from quasi-delict,

which are based on fault andnegligence

Unilateral Distinguished from contract whichis based on agreement

Kinds of Quasi-Contracts Negotiorum Gestio: officious or voluntary

management of the property or affairs ofanother without the knowledge or consentof the owner

Solutio Indebiti: undue payment. Thejuridical relation arises when:

o a thing is received without any righto it is unduly delivered by mistake

Others: See Arts. 2163-2175

D. DELICTS: voluntary but punishable acts,including criminal negligence. Remediesinclude:1. Restitution2. Reparation of damages caused3. Indemnity for consequential

damages

Enforcement of Civil Liability1. INDEPENDENT: Criminal and civil action

arising from the same offense may beinstituted separately.

2. SUSPENDED: However, after criminalaction has been commenced prosecutionfor civil action is SUSPENDED in whateverstage it may be found, until final judgmentin the criminal proceeding is rendered;

3. IMPLIEDLY INSTITUTED: Civil action isimpliedly instituted with the criminalaction, when:

when offended party expressly waives thecivil action or reserves the right to institutea separate civil action; or

when the law provides for an independentcivil action

Barredo v. Garcia, (1942): The same negligent act maygive rise to an action based on delict or quasi-delictand the injured party is free to choose which remedyto enforce.

Mendoza vs. Arrieta, (1979): If the civil action is basedon quasi-delict, there is no need to reserve theright to file a civil action in the criminal case.

Effect of Acquittal on Civil Actions

Barred No Effect it is based on the very

same facts on whichthe criminal actionwhich ended inacquittal was based

the facts alleged in thecivil case has beenfound to be non-existent in the criminal

an independent civilaction is allowed bylaw

acquittal is due to lackof proof beyondreasonable doubt

action (res judicata) judgment of acquittal

contained adeclaration that nonegligence can beattributed to theaccused and that thefact from which civilaction might arise didnot exist

E. QUASI-DELICTS: a voluntary act oromission with fault or negligencecausing damage to another; not a crimenor a contract

Quasi-Delict CrimesPrivate, againstindividual

Public, against theState

Criminal intent is notnecessary

Criminal intent isnecessary for criminalliability

Present in any act oromission where faultor negligenceintervenes

An act can is onlypunishable when thereis a law penalizing it

Gives rise to liabilityfor damages to theinjured party

There are crimes fromwhich no civil liabilityarises

Reparation,compensation orindemnification of theinjury suffered by theinjured party

Fine or imprisonmentor both, to publictreasury

Preponderance ofevidence

Proof of guilt beyondreasonable doubt

Can be compromised Can never becompromised

Requisites of Liability (DWD)1. Wrongful act or omission by fault or

negligence2. Damage or injury proven by the person

claiming recovery3. Direct causal connection between the fault or

negligence and the damage or injury

Liability for Quasi-Delict (Art. 2180,

NCC)

Liability for Crimes(Art. 103, RPC)

Primary, can bedirectly sued by theinjured party

Subsidiary, employeemust first beconvicted andsentenced to pay civilindemnity

All employers,whether engaged insome enterprise ornot, are liable for actsof employees, evenhousehold helpers

Employer is onlyliable when he isengaged in some kindof business orindustry

Avoid civil liability byproving exercise ofdiligence of a goodfather of a family

Subsidiary liability isabsolute and cannotbe avoided by anyproof of diligence

REVIEWER IN CIVIL LAW Chapter II. Nature and Effects of Obligations

Page 5 of 177

OB

LIG

AT

ION

SChapter II. Nature and Effects of

Obligations

I. Breach of ObligationsII. Fortuitous EventsIII. RemediesIV. Usurious Transactions

KINDS OF PRESTATION

A. Obligation to Give: to deliver a movable orimmovable thing

B. Obligation to Do: includes all kinds of workor services

C. Obligation Not to Do: to abstain from someact; includes the obligation not to give

Personal Obligation Real Obligationto do (positive)not to do (negative): to bedone or not to be done

to give: a thing which theobligor must deliver tothe oblige

Accessories: those joined to or included withthe principal for the latter’s completion, betteruse, perfection or enjoyment

Accessions: additions to or improvement upona thing, either naturally or artificially

OBLIGATION TO GIVE

SPECIFICTHING

GENERICTHING

LIMITEDGENERICTHING

Particularlydesignated orphysicallysegregated fromall other of thesame class;identified byindividuality.

Object isdesignated onlyby its class/genus/ species.Debtor can giveanything of thesame class aslong as it is of thesamekind.

When the genericobjects areconfined to aparticularclass.

Cannot besubstituted.

Can besubstituted byany of the sameclass and samekind.

PersonalRight Real RightVested beforedelivery Vested afterdeliveryJus ad rem / Jus inpersonam – a rightenforceable only againstthedebtor

Jus in re – a rightenforceable against theworld

Right of the creditor todemand from the debtor,the fulfillment of aprestation to give, to do ornot todo

Right pertaining to aperson over a specificthing, without a passivesubject individuallydetermined against whomsuch right may bepersonally enforced

Duties of the Debtor Rights of the creditorTo GiveSpecificThing(Askedin ’83,’84, ’85and ’86)

To preserve or take care of the thing due To deliver the thing itself To deliver the fruits of the thing To deliver the accessions and accessories To pay for damages in case of breach

To compel specific performance To recover damages in case of breach of the

obligation, exclusive or in addition to specificperformance

Entitlement to fruits and interests from the time theobligation todeliver arises

To GiveGenericThing

To deliver a thing of the quality intended bythe parties taking into consideration thepurpose of the obligation and othercircumstances

Creditor cannot demand a thing of superiorquality neither can the debtor deliver a thing ofinferiorquality

To be liable for damages in case of breach

Toask forperformanceof theobligation To ask that the obligation be complied with by a

third person at the expenseof thedebtor To recoverdamages in caseof breach of obligation

To Do To do it To shoulder the cost of having someone else

do it To undo what has been poorly done To pay for damages in case of breach

To compel performance To recover damages where personal

qualifications of the debtor are involved

Not ToDo

Not to do what should not be done To shoulder the cost of undoing what

should not have been done To pay for damages in case of breach

To ask to undo what should not be done To recover damages, where it would be

physically or legally impossible to undo whathas been undone, because of :o the very nature of the act itself;o rights acquired by third persons who acted

in good faith;o when the effects of the acts prohibited are

definite in character and will not cease evenif the thing prohibited be undone.


Page 6 of 177

OB

LIG

AT

ION

SI. BREACH OF OBLIGATION

A. Voluntary – the debtor, in the performanceof the obligation is guilty of fraud,negligence, delay or contravention oftenor of the obligation

B. Involuntary – debtor is unable to complywith his obligation because of a fortuitousevent

TYPES OF BREACH

SUBSTANTIALBREACH

SLIGHT/CASUALBREACH

Total breachAmounts to Non-Performance;Basis for rescissionunder Art. 1191 andpayment of damages

Partial breachObligation is partiallyperformed;Gives rise to liability fordamages only

A. FRAUD (DOLO): deliberate or intentionalevasion of the normal fulfillment of anobligation. Demandable in all obligations(fraud in the performance of a pre-existingobligation)

1. FUTURE FRAUD: Waiver of action forfuture fraud is void for being contrary tolaw and public policy (Art. 1171) becausethe advance renunciation of the creditorwould practically leave the obligationwithout effect.

2. PAST FRAUD: Past fraud can be validlyrenounced because it is deemed an act ofgenerosity of the creditor. What isrenounced is the effect of fraud, particularlythe right to indemnity.

KINDS OF FRAUD

Dolo Causante (Causal Fraud): fraudemployed, makes the contract voidable

Dolo Incidente (Incidental Fraud): fraudin the performance of the obligation, doesnot affect the validity of the obligation butonly gives rise to damages

Fraud in thePerformance(Art. 1170)

Fraud in the ExecutionCausalFraud/ DoloCausante(Art. 1338)

IncidentalFraud/ DoloIncidente(Art. 1344)

Presentduring theperformanceof a pre-existingobligation

Present during the perfectionof the contract

Purpose is toevade thenormalfulfillment ofthe obligation

Purpose is tosecure theconsent ofanother toenter into thecontract

Purpose is tosecure theconsent of heother partybut the fraudwas not theprincipalinducementin making thecontract

Results in thebreach of anobligation

Results invitiation ofconsent;makes thecontractvoidable

Does notaffect thevalidity of theobligation, novitiation ofconsent

Gives rise to aliability fordamages, acrime, or aquasi-delict(Prof. Labitag)

Gives rise to aright in favorof aninnocentperson toannul thecontract

Gives rise to aright of aninnocentparty to claimfor damages

Woodhouse vs. Halili, (1953): In order that fraud mayvitiate consent, it must be the dolo causante and notmerely the dolo incidente, inducement to the makingof the contract. The false representation was used byplaintiff to get from defendant a bigger share of netprofits. This is just incidental to the matter inagreement. Because despite plaintiff’s deceit,respondent would have still entered into the contract.

B. NEGLIGENCE: Culpa, omission of thatdiligence which is required by the nature ofthe obligation and corresponds with thecircumstances of the person, of the timeand of the place.

Effect of Contributory Negligence: Reducesor mitigates the recoverable damages, UNLESS,the negligent act or omission of the creditor isthe proximate cause of the event which led tothe damage or injury complained of. In thiscase, he cannot recover.

Diligence Required:1. That agreed upon by the parties (by

stipulation)2. In the absence of stipulation, that required

by law in the particular case (by law)3. If both the contract and law are silent,

diligence of a good father of a family, i.e.,that reasonable diligence which an ordinaryprudent person would have had under thesame circumstances. (diligence of a goodfather of a family)

FUTURE NEGLIGENCE: May be waived exceptin cases where the nature of the obligation orthe public requires another standard of care (ie.extraordinary diligence as for a commoncarrier)


Page 7 of 177

OB

LIG

AT

ION

SFRAUD NEGLIGENCE

There is deliberateintention to causedamage

There is no deliberateintention to cause damage

Liability cannot bemitigated

Liability may be mitigated

Waiver for future fraudis void

Waiver for futurenegligence may be allowedin certain cases: gross – can NEVER

be excused inadvance; amounts towanton attitude;rules on fraud shallapply

simple – may beexcused in certaincases

Mandarin Villa Inc. v. CA (1996): Test of Negligence:Did the defendant in doing the alleged negligent actuse the reasonable care and caution which anordinary and prudent person would have used in thesame situation? If not, then he is guilty of negligence.

EXTENT OF DAMAGES TO BE AWARDED

BAD FAITH GOOD FAITHDebtor is liable for alldamages which can bereasonably attributed tothe non-performance ofthe obligation. Any waiveror renunciation made inanticipation of suchliability is null and void

Debtor is liable only forthe natural andprobable consequencesof the breach ofobligation and fortuitousevents

NELIGENCE IN CULPA CONTRACTUAL ANDCULPA AQUILIANA

CULPACONTRACTUAL CULPA AQUILANA(Asked in ’83, ’84, and

’86)Negligence is merelyincidental in theperformance of anobligation

Negligence is substantiveand independent

There is always a pre-existing contractualrelation

There may or may not bea pre-existingcontractual obligation

The source of obligationof defendant to paydamages is the breach ornon-fulfillment of thecontract

The source of obligationis the defendant’snegligence itself

Proof of the existence ofthe contract and of itsbreach or non-fulfillmentis sufficient prima facieto warrant recovery

The negligence of thedefendant must beproved

Proof of diligence in theselection and supervisionof the employees is NOTavailable as defense

Proof of diligence in theselection and supervisionof the employee is adefense

Culpa Criminal: wrong or negligence in thecommission of a crime

C. DELAY: Default or Mora, the non-fulfillment of an obligation with respect totime

1. Mora Solvendi: delay on the part of thedebtor to fulfill his obligation (to give or todo);Kinds: Ex Re (To Give), Ex Persona (To Do).(Asked in ’83, ’84, ’85, and ’86)No Mora Solvendi in: Negative Obligations, because one

can never be late in not doing or notgiving something

Natural Obligations, because theperformance is optional or voluntaryon the part of the debtor

2. Mora Accipiendi: delay on the part of thecreditor to accept the performance of theobligation

3. Compensatio Morae: delay of the partiesin reciprocal obligations; Effect: As if thereis no default.

Mora Solvendi (Debtordelays)

Mora Accipiendi(Creditor delays)

Requisites:1. The obligation must

be Liquidated, dueand demandable

2. The debtor is guilty ofNon-performance(delay)

3. There was Demandmade judicially orextra-judicially

Requisites:1. Offer of

performance by thedebtor who has therequired Capacity

2. Offer must be tocomply with theprestation as itshould beperformed.Prestation offeredmust be preciselythe one due as tocontent, time andplace

3. Creditor Refusesthe performancewithout just cause

Effects:1. The debtor is liable

for damages2. The debtor is liable

even if the loss is dueto fortuitous events

3. For determinateobjects, the debtorshall bear the risk ofloss

Effects:1. The responsibility of

the debtor isreduced to fraudand grossnegligence

2. The debtor isexempted from riskof loss of the thingwhich is borne bythe creditor

3. The expensesincurred by thedebtor for thepreservation of thething after the morashall be chargeableto the creditor


Page 8 of 177

OB

LIG

AT

ION

S4. If the obligation

bears interest, thedebtor does nothave to pay fromthe time of delay

5. The creditor isliable for damages

6. The debtor mayrelieve himself ofobligation byconsigning thething

RULES ON MORA, DELAY OR DEFAULT

UNILATERALOBLIGATIONS

RECIPROCALOBLIGATIONS

General Rule:“No demand – No delay”.The mere expiration of theperiod fixed by the partiesis not enough in order thatthe debtor may incur indelay

Note: Delay occurs fromthe time of creditor’sjudicial or extra-judicialdemand

General Rule:In reciprocal obligations,delay happens from themoment one party fulfillshis undertaking, while hehimself does not comply oris not ready to comply in aproper manner with whatis incumbent upon him.Fulfillment by both partiesshould be simultaneous.(Art. 1169). If neither partyperforms his undertaking,neither incurs delay. Delayof one is compensated bythedelay of theother.

Exception:1. when theobligation or

lawexpressly declares2. when time is the

controlling motive3. when thedemand

would beuseless4. when thedebtor

acknowledged thatheis in default

Exception:when different dates for theperformance of theobligation is fixed by theparties

NOTE: It is not enoughthat there is a specific dateof performance, eg “on Jan.30, 2010,” the words “noneed of further demand”must appear in the face ofthe instrument

NOTE: In reciprocalobligations, demand is stillnecessary only when therespective obligations are tobe performed on separatedates

When there is delay, the injured party mayask for damages. But this benefit arisingfrom Mora, default or delay may ceaseupon:o renunciation of the creditoro prescription of actiono extension of time for the fulfillment of

the obligation

D. Contravention of the Tenor: violation ofthe terms and conditions stipulated in theobligation, which must not be due to afortuitous event or force majeure.

“In any manner contravenes the tenor”means any illicit act, which impairs thestrict and faithful fulfillment of theobligation, or every kind of defectiveperformance.

II. FORTUITOUS EVENT

Events which could not be foreseen, orwhich though foreseen are inevitable (Art.1174)

An extraordinary circumstanceindependent of the will of the obligor or hisemployee

A. Act of God: An accident, due directly orexclusively to natural causes withouthuman intervention, which by no amountof foresight, pains or care, reasonably tohave been expected, cold have beenprevented.

B. Act of Man/Force Majeure: Force majeureis a superior or irresistible force, which isessentially an act of man; Includesunavoidable accidents, even if there hasbeen an intervention of human element,provided that no fault or negligence can beimputed to the debtor(Asked in ’81, ’87 and ’88)

Liability in case of Fortuitous Event: Noperson shall be responsible for fortuitousevents, UNLESS:1. expressly specified by law (Arts. 552(2),

1942, 2147, 2148, 2159)2. liability specified by stipulation3. the nature of the obligations requires

assumption of risk (Art. 1174)4. when debtor is guilty of concurrent or

contributory negligence5. debtor has promised to deliver the same

thing to two or more persons who do nothave the same interests (Art. 1165 par. 3)

6. the thing is lost due to the obligor’s fraud,negligence, delay or contravention of thetenor of the obligation (Art. 1170)

7. the obligation to deliver a specific thingarises from a crime (Art. 1268)

8. the object is a generic thing, i.e. the genusnever perishes

Requisites for Exemption1. The event must be independent of the

debtor’s will (fraud or negligence)2. The event must be unforeseeable or

inevitable3. The event renders it impossible for debtor

to fulfill his obligation in a normalmanner


Page 9 of 177

OB

LIG

AT

ION

S4. The debtor must be free from any

participation in the aggravation of theinjury to the creditor

5. It must be the ONLY and SOLE cause, notmerely a proximate cause.

III. REMEDIES TO CREDITORS

Art. 1170. Those who in the performance of theirobligations are guilty of fraud, negligence, or delayand those who in any manner contravene the tenorthereof, are liable for damages.

Transmissibility of Rights (Art. 1178): Rightsacquired by virtue of an obligation aretransmissible in character, UNLESS:1. by their very nature (Obligation is personal)2. by stipulation of the parties3. by operation of Law

A. Primary Remedies: (Art. 1165-1168)(PRESS)1. Specific Performance – performance

by the debtor of the prestation itself2. Substituted Performance – someone

else performs or something else isperformed at the debtor’s expense

3. Equivalent Performance – right toclaim damages (in either performanceor rescission)

4. Rescission – right to rescind or cancelthe contract

5. Pursue the Leviable – to attach theproperties of the debtor, except thoseexempt by law from execution

B. Subsidiary Remedies of Creditor

General Rule: Contracts are binding only betweenthe parties thereto, and their heirs, assignees, andthe estate, UNLESS: Accion Subrogatoria andAccion Pauliana

1. Accion Subrogatoria: right of creditor toexercise all of the rights and bring all of theactions which his debtor may have againstthird persons; Novation by change of debtor(Art. 1291, par.3).

Requisites:1. Debtor to whom the right of action

properly pertains must be indebted tothe creditor

2. The debt is due and demandable3. The creditor must be prejudiced by the

failure of the debtor to collect his owndebt from 3rd persons either throughmalice or negligence

4. The debtor’s assets are insufficient(debtor is insolvent)

5. The right of action is not purelypersonal to the debtor

2. Accion Pauliana: Rescission, whichinvolves the right of the creditor to attack orimpugn by means of a rescissory actionany act of the debtor which is in fraud andto the prejudice of his rights as creditor.

Requisites: (CASAL)1. There is a credit in favor of plaintiff

prior to alienation2. The debtor has performed a

subsequent contract conveying apatrimonial benefit to third persons

3. The creditor has no other legalremedy to satisfy his claim

4. The debtor’s acts are fraudulent to theprejudice of the creditor

5. The third person who received theproperty is an accomplice in the fraud

ACCIONSUBROGATORIA

ACCION PAULIANA

Not necessary thatcreditor’s claim is prior tothe acquisition of theright by the debtor

Credit must exist beforethe fraudulent act

No need for fraudulentintent

Fraudulent intent isrequired if the contractrescinded is onerous

No period for prescription Prescribes in 4 yearsfrom the discovery of thefraud

3. Accion Directa (Art. 1729, 1652, 1608,1893): the right of lessor to go directly to asublessee for unpaid rents of the lessee

4. the right of laborers or persons who furnishmaterials for a piece of work undertaken bya contractor to go directly to the owner forany unpaid claim due to the contractor

5. the right of vendor against every possessorwhose right is derived from the vendee

6. right of a principal against a substitutionappropriated by an agent

Siguan vs. Lim, (1999): Petitioner cannot invoke thecredit of a different creditor to justify the rescission ofthe subject deed of donation, because the onlycreditor who may benefit from the rescission is thecreditor who brought the action; those who arestrangers to the action cannot benefit from its effects.


Page 10 of 177

OB

LIG

AT

ION

SIV. USURIOUS TRANSACTIONS and

RULES ON INTEREST

USURY, defined: contracting for or receivingsomething in excess of the amount allowed bylaw for the loan or forbearance of money, goods,or chattels.

There is no longer any ceiling in interest rates onloans. CB Circular No. 224, Dec. 1, 1982.

INTEREST: the income produced by money inrelation to its amount and to the time it cannotbe used by its owner.

There shall be no interest, UNLESS, there is awritten stipulation of interest for the use ofmoney, goods or chattels.

There shall be no interest (without delay).

Kinds of Interest:

1. Moratory – those paid in contractualobligations (ie for the use of money)

2. Compensatory – those which arise fromquasi-delicts or delicts

Presumption on Payment of Interest andPrior Installments

Art. 1176. Receipt of the principal without reservationas to the interest shall give rise to a disputablepresumption that the interest has been paid. Receiptof the latter installment without reservation as toprior installments shall likewise give rise to adisputable presumption that such prior installmentshave been paid.

Determination of Interests

IMPORTANT:As stated in the case of Eastern Shipping Linesv. CA (1961)

Stage 1For loan or forbearanceof money, goods orcredit, the interest rateis 12%

NOT for loan orforbearance of money,goods or credit, theinterest rate is 6%

a) Interest = interestrate stipulated inwriting + 12% legalinterest, computedfrom date of judicialdemand (filing ofcomplaint)

a) If date of demand iscertain, compute fromthe date when demandis made (judicial orextra-judicial)

b) If there is nostipulated interest rate,the interest rate is 12%computed from date ofdefault or demand(judicial or extra-judicial)

b) If date of demand isNOT certain, computefrom the date of trialcourt decision (judicialdemand)

Stage 2Add 12% interest from finality of SC decisionuntil fully paid (equivalent to a forbearance ofcredit)

REVIEWER IN CIVIL LAW Chapter III. Different Kinds of Obligations

Page 11 of 177

OB

LIG

AT

ION

SChapter III. Different Kinds of

Obligations

I. PURE & CONDITIONAL OBLIGATIONSII. RECIPROCAL OBLIGATIONSIII. OBLIGATIONS WITH A PERIODIV. ALTERNATIVE & FACULTATIVE OBLIGATIONSV. JOINT & SOLIDARY OBLIGATIONSVI. DIVISIBLE & INDIVISIBLE OBLIGATIONSVII. OBLIGATIONS WITH A PENAL CLAUSE

I. PURE & CONDITIONALOBLIGATIONS

A. Pure Obligation (Art.1179): Effectivityor extinguishment does not dependupon the fulfillment or non-fulfillmentof a condition or upon the expiration ofa term or period and characterized bythe quality of its being IMMEDIATELYDEMANDABLE.

B. Conditional Obligation (Art.1181):Effectivity is subject to the fulfillment ornon-fulfillment of a condition, which ischaracterized to be a FUTURE andUNCERTAIN event.(Asked in ’79, ’88, ’00, ’03)

Effects of Conditions

1. Suspensive Condition: Obligation shallonly be effective upon the fulfillment ofthe condition (Art.1181). What isacquired by the obligee upon theconstitution of the obligation is merehope or expectancy, but is protected bylaw.

Before Fulfillment After FulfillmentThe demandability& acquisition oreffectivity of therights arising fromthe obligation issuspended.Anything paid bymistake duringsuch time may berecovered.

The obligationarises or becomeseffective.The obligor can becompelled to complywith what isincumbent uponhim.

DOCTRINE OF CONSTRUCTIVEFULFILLMENT OF SUSPENSIVECONDITIONS (Art.1186):The condition shall be deemed fulfilledwhen the obligor actually prevented theobligee from complying with thecondition, and that such preventionmust have been voluntary or willful incharacter. Applied to suspensive conditions

and not to resolutory conditions.

The article can have no applicationto an external contingency which islawfully within the control of theobligor.

The mere intention of the debtor toprevent, without actuallypreventing fulfillment is notsufficient. Constructive fulfillmentwill not hold when the debtor actspursuant to a right.

PRINCIPLE OF RETROACTIVITY INSUSPENSIVE CONDITIONS (Art.1187par.1) Once the condition is fulfilled itseffects must logically retroact to themoment when the essential elements,which gave birth to the obligation havetaken place. The condition which isimposed is only accidental, not anessential element of the obligation. Applied only to consensual

contracts. No application to realcontracts which can only beperfected by delivery.

To Give To Do/Not To DoIf reciprocal, thefruits and interestsshall be deemed tohave been mutuallycompensated as amatter of justice andconvenience

In obligations to door not to do, thecourt shalldetermine theretroactive effect ofthe condition thathas been compliedwith.

If unilateral, thedebtor shallappropriate thefruits and interestsreceived, unless fromthe nature andcircumstance itshould be inferredthat the intention ofthe personsconstituting thesame was different.

The power of thecourt includes thedeterminationwhether or not therewill be anyretroactive effects.This rule shalllikewise apply inobligations with aresolutory condition(Art.1190 par.3)

PRESERVATION OF CREDITOR’SRIGHTS (Art.1188 par.1): The creditormay, before the fulfillment of thecondition, bring the appropriate actionfor the preservation of his rights.However, this does not grant anypreference of credit but only allows thebringing of the proper action for thepreservation of the creditor’s rights.

2. Resolutory Condition: Obligationbecomes demandable immediately afterits establishment or constitution. Therights are immediately vested to the


Page 12 of 177

OB

LIG

AT

ION

Sobligee, but always subject to the threator danger of extinction

Before Fulfillment After FulfillmentPreservation ofcreditor’s rights(Art.1188 par.1) alsoapplies to obligationswith a resolutorycondition

Whatever may havebeen paid ordelivered by one orboth of the partiesupon theconstitution of theobligation shall haveto be returned uponthe fulfillment of thecondition. There isno return to thestatus quo. However,when condition isnot fulfilled, rightsare consolidated andthey becomeabsolute incharacter

3. Potestative Condition

Exclusivelyupon theCreditor’s

Will

Exclusivelyupon theDebtor’s

Will in caseof a

SuspensiveCondition

Exclusivelyupon theDebtor’s

Will in caseof a

ResolutoryCondition

Conditionandobligation isvalid

Conditionandobligationare voidbecause toallow suchconditionwould beequivalent tosanctioningobligationswhich areillusory. Italsoconstitutes adirectcontravention of theprinciple ofmutuality ofcontracts.

Conditionandobligation isvalidbecause insuchsituation,the positionof the debtoris exactly thesame as theposition ofthe creditorwhen thecondition issuspensive.It does notrender theobligationillusory.

4. Casual Condition: The fulfillment of thecondition depends upon chance and/orupon the will of a third person

5. Mixed Condition: The fulfillment of thecondition depends partly upon the willof a party to the obligation and partlyupon chance and/or will of a thirdperson

Osmena v. Rama: Defendant executed anendorsement saying that she’ll pay her debtif the house in which she lives is sold. Suchcondition depended upon her exclusive willthus it is void.

Hermosa v. Longara: The condition thatpayment should be made by Hermosa assoon as he receives funds from the sale ofhis property in Spain is a mixed condition.The condition implies that the obligoralready decided to sell the house and allthat was needed to make the obligationdemandable is that the sale beconsummated and the price thereof remittedto the islands. There were still otherconditions that had to concur to effect thesale, mainly that of the presence of a buyer,ready, able and willing to purchase theproperty under the conditions set by theintestate.

6. Impossible Condition: Conditionswhich are impossible, contrary to goodcustoms, or public policy and thoseprohibited by law shall annul theobligations which depend upon them(Art.1183) If pre-existing obligation, only the

impossible condition is void, but notthe obligation

If divisible obligation, that partwhich is not affected by theimpossible or unlawful conditionshall be valid

If the condition is not to do animpossible thing, it shall beconsidered as not having beenagreed upon. Consequently, itbecomes pure and immediatelydemandable

If attached to a simple orremuneratory donation, ortestamentary disposition, conditionis considered as not imposed whilethe obligation is valid.

7. Positive Condition: Obligation shall beextinguished as soon as the timeexpires or if it becomes indubitable thatthe event will not take place (Art.1184)

8. Negative Condition: Obligation shallbe rendered effective from the momentthe time indicated has lapsed, or if ithas become evident that the event willnot occur (Art.1185)


Page 13 of 177

OB

LIG

AT

ION

SEffects of Loss, Deterioration, andImprovement in Real ObligationsPending the Condition

With Debtor’sFault/Act

WithoutDebtor’s

Fault/ActLoss Obligation is

extinguishedObligation isconverted intoone ofindemnity fordamages

Deterioration Impairment tobe borne bythe creditor

Creditor maychoosebetweenbringing anaction forrescission ofthe obligationOR bringingan action forspecificperformancewith damagesin either case.

Improvement Improvementat the debtor’sexpense, thedebtor shallONLY haveusufructuaryrights

Improvementby the thing’snature or bytime shallinure to thebenefit of thecreditor

Loss, defined: when the thing perishes;goes out of commerce; disappears in such away that its existence is unknown or itcannot be recovered

II. RECIPROCAL OBLIGATIONS:

Obligations which are established fromsame cause, such that one obligation iscorrelative to the other. It results in mutualrelationship between the creditor and thedebtor. It is performed simultaneously, sothat the performance of one is conditionedupon the simultaneous fulfillment of theother.

Tacit Resolutory Condition: if one of theparties fail to comply with what isincumbent upon him, there is a right on thepart of the other to rescind the obligation.The power to rescind is given to theinjured party.

RESCISSION OF RECIPROCALOBLIGATIONS (Art.1191) Right to rescind is implied in reciprocal

obligations thus where one party fails tocomply with this obligation under a

contact, the other party has the right toeither demand the performance or askfor the resolution of the contract.

Based on the breach of faith committedby the person who is supposed tocomply with the obligation as comparedto the rescission referred to in Art.1308which involves the damage or lesion, orinjury to the economic interest of aperson.

Where both parties have committed abreach of obligation, the liability will beshouldered by the first infractor. Thisshall be determined by the courts.However, if it cannot be determined whowas the first infractor, the contractshall be deemed extinguished and eachshall bear his own damages. (Art.1192)

UP v. Delos Angeles, 1970. The injuredparty may extra-judicially rescind thecontract on account of the breach of theother party. However, this is withoutprejudice to the option of the other party toresort to the courts in order to determine ifthe rescission made is valid, if not, the partywho rescinded the contract will besentenced to pay damages.

Where the other party does not opposethe extra-judicial declaration ofrescission, such declaration shallproduce legal effect.

Effect is retroactive thereforeinvalidating and unmaking the juridicaltie between the contracting parties.

III.TERM/PERIOD

(Asked in ’84, ’86 and ’91): Interval of time,which either suspends demandability orproduces extinguishment. The periodshould be: future, certain, and possible(legally or physically) Fortuitous event does not interrupt the

running of the period. It only relievesthe contracting parties from thefulfillment of their respective obligationsduring the period.

Art. 1180. When the debtor binds himself to paywhen his means permit him to do so, theobligation shall be deemed to be one with aperiod xxx.


Page 14 of 177

OB

LIG

AT

ION

STerm/Period and ConditionDistinguished

Term/Period ConditionInterval of time whichis future and certain

Fact or event which isfuture and uncertain

Must necessarilycome, although it maynot be known when

May or may nothappen

Exerts an influenceupon the time ofdemandability orextinguishment of anobligation

Exerts an influenceupon the veryexistence of theobligation itself

No retroactive effectunless there is anagreement to thecontrary

Has retroactive effect

When it is leftexclusively to the willof the debtor, theexistence of theobligation is notaffected

When it is leftexclusively to the willof the debtor, the veryexistence of theobligation is affected

PERIOD FOR WHOSE BENEFIT (Art.1196)Presumption: Period in an obligation ispresumed to be established for the benefitof both the creditor and debtor,UNLESS: If from the tenor of the obligationor other circumstances, it shall appear thatthe period has been established in favor ofeither the creditor or debtor

Period for the Benefit of either Creditoror Debtor

Creditor DebtorCreditor may demandthe fulfillment orperformance of theobligation at any timebut the obligorcannot compel him toaccept paymentbefore the expirationof the period

Debtor may opposeany prematuredemand on the part ofthe oblige for theperformance of theobligation, of if he sodesires, he mayrenounce the benefit ofthe period byperforming hisobligation in advance

WHEN COURT MAY FIX PERIODArt.1197)

Araneta v. Phil. Sugar Estates, provides:First, the Court shall determine: If the obligation does not fix a period,

but from its nature and circumstances,it can be inferred that a period wasintended

If the period is void, such as when itdepends upon the will of the debtor

If the debtor binds himself when hismeans permit him to do so.

Second, it must decide what period was“probably contemplated by the parties”.

The only action that can be maintainedunder Art.1197 is the action to ask thecourts to fix the term within which thedebtor must comply with his obligation.The fulfillment of the obligation itselfcannot be demanded until after thecourt has fixed the period forcompliance, therewith, and such periodhas arrived.

Art.1197 does not apply to contract ofservices and to pure obligations.

WHEN DEBTOR LOSES RIGHT TO MAKEUSE OF PERIOD (Art.1198)(I GIV A LA)

1. Debtor becomes Insolvent, unless hegives a guaranty or security for hisdebt, after obligation is contracted

2. Debtor fails to furnish the Guarantiesor securities promised

3. Debtor by his own acts Impaired saidguaranties or securities after theirestablishment, and when through afortuitous event they disappear, unlesshe immediately gives new ones equallysatisfactory

4. Debtor Violates any undertaking, inconsideration of which the creditoragreed to the period

5. Debtor attempts to Abscond6. By Law or stipulation7. Parties stipulate an Acceleration Clause

IV.ALTERNATIVE & FACULTATIVEOBLIGATIONS

AlternativeObligations

FacultativeObligations

Several objects are due Only one object is dueMay be complied withby delivery of one of theobjects or byperformance of one ofthe prestations whichare alternatively due

May be complied withby the delivery ofanother object or bythe performance ofanother presation insubstitution of thatwhich is due

Choice may pertain todebtor, creditor, orthird person

Choice pertains onlyto the debtor

Loss/impossibility of allobjects/prestations dueto fortuitous event shallextinguish theobligation

Loss/impossibility ofthe object/prestationdue to fortuitousevent is sufficient toextinguish theobligation

Culpable loss of any ofthe objects alternativelydue before the choice ismade may give rise toliability on the part ofthe debtor

Culpable loss of theobject which thedebtor may deliver insubstitution beforethe substitution iseffected does not giverise to any liability onthe part of the debtor


Page 15 of 177

OB

LIG

AT

ION

SA. Alternative Obligations: Several objectsare due but the fulfillment of one issufficient. It is determined by the choice ofthe debtor who generally has the right ofelection.

RIGHT OF CHOICE IN ALTERNATIVEOBLIGATION (Art.1200): The right of choicebelongs to the debtor, UNLESS:1. when it is expressly granted to the

creditor2. when it is expressly granted to a third

person

Limitations: The debtor cannot chooseprestations which are1. impossible prestations2. unlawful prestations3. those which could not have been the

object of the obligation

WHEN CHOICE SHALL PRODUCEEFFECT (Art.1201): Choice shallproduce no effect except from the time ithas been communicated. The effect ofthe notice is to limit the obligation ofthe object or prestation selected. Noticeof selection or choice may be in anyform provided it is sufficient to makethe other party know that the selectionhas been made. It can be:o oralo in writingo tacito any other equivocal means

Choice of the debtor whencommunicated to the creditor does notrequire the latter’s concurrence.

When the choice is rendered impossiblethrough the creditor’s fault, the debtormay bring an action to rescind thecontract with damages (Art.1203).

Obligation is converted into a simpleobligation when:o When the person who has the right

of choice has communicated hischoice

o When only one prestation ispracticable (Art.1202)

EFFECT OF LOSS OF OBJECTS OFALTERNATIVE OBLIGATION

Debtor’s Choice

FortuitousEvent

Debtor’s Fault

All Lost Debtor isreleased fromthe obligation

Creditor shallhave a right toindemnity fordamages basedon the value ofthe last thingwhichdisappeared orservice whichbecomeimpossible

Some Debtor todeliver thatwhich he shallchoose fromamong theremainder

Debtor to deliverthat which thecreditor shallchoose fromamong theremainderwithout damages

OneRemains

Debtor todeliver thatwhich remains

Debtor to deliverthat whichremains

Creditor’s Choice

FortuitousEvent

Debtor’s Fault

All Lost Debtor isreleased fromthe obligation

Creditor mayclaim theprice/value of anyof them withindemnity fordamages

Some Debtor todeliver thatwhich he shallchoose fromamong theremainder

creditor mayclaim any of thosesubsistingwithout a right todamages ORprice/value of thething lost withright to damages

OneRemains

Creditor mayclaim any ofthosesubsistingwithout a rightto damages ORprice/value ofthe thing lostwith right todamages

Creditor mayclaim theremaining thingwithout a right todamages OR theprice/value of thething lost withright to damages

B. Facultative Obligation: only one thingis due, but the debtor has reserved theright to substitute it with another. It maybe complied with by the delivery of thething or the performance of anotherprestation in substitution


Page 16 of 177

OB

LIG

AT

ION

SEFFECT OF LOSS OF SUBSTITUTE INFACULTATIVE OBLIGATION

Before Substitution isMade

After Substitutionis Made

If due to bad faith orfraud of obligor:obligor is liableIf due to thenegligence of theobligor: obligor is notliable

The loss ordeterioration of thesubstitute onaccount of theobligor’s delay,negligence or fraudobligor is liablebecause oncesubstitution is made,the obligation isconverted into asimple one with thesubstituted thing asthe object of theobligation.

V. JOINT & SOLIDARY OBLIGATIONS

A. Joint Obligation: One where aconcurrence of several creditors, or ofseveral debtors, or of several creditors anddebtors, by virtue of which, each of thecreditors has a right to demand, and eachof the debtors is bound to rendercompliance with his proportionate part ofthe prestation which constitute the object ofthe obligation (Obligacion Mancomunada)

Presumption: Obligation is presumed joint ifthere is a concurrence of several creditors, ofseveral debtors, or of several creditors anddebtors in one and the same obligation.

Exceptions:1. When the obligation expressly stated

that there is solidarity2. When the law requires the solidarity3. When the nature of the obligation

requires solidarity4. When the nature or condition is

imposed upon heirs or legatees, and thetestament expressly makes the chargeor condition in solidum

5. When the solidary responsibility isimputed by a final judgment uponseveral defendants

Principal Effects of Joint Liability1. Demand by one creditor upon the

debtor, produces the effects of defaultonly with respect to the creditor whodemanded and the debtor on whom thedemand was made, but not with respectto others

2. Interruption of prescription by thejudicial demand of one creditor upon a

debtor, does not benefit the othercreditors nor interrupt the prescriptionas to other debtors

3. Vices of each obligation arising from thepersonal defect of a particular debtor orcreditor does not affect the obligation orright of the others

4. Insolvency of a debtor does not increasethe responsibility of his co-debtors, nordoes it authorize a creditor to demandanything from his co-debtors

5. Defense of res judicata is not extendedfrom one debtor to another

JOINT DIVISIBLE OBLIGATION(Art.1208): Each creditor can demand onlyfor the payment of his proportionate shareof the credit, while each debtor can beliable only for the payment of hisproportionate share of the debit

Presumption: Credit or debt shall be presumedto be divided into as many equal shares as thereare creditors or debtors.

Joint creditor cannot act inrepresentation of the others, neithercan a joint debtor be compelled toanswer for the liability of others

JOINT INDIVISIBLE OBLIGATION(Art.1209): no creditor can act inrepresentation of the other; no debtor canbe compelled to answer for the liability ofthe others If there are two or more debtors, the

fulfillment of or compliance with theobligation requires the concurrence ofall the debtors, although each for hisown share and for the enforcement ofthe obligation

In case of breach where one of the jointdebtors fails to comply with hisundertaking, the obligation can nolonger be fulfilled or performed.Consequently, it is converted into one ofindemnity for damages.

In case of insolvency of one of thedebtors, the others shall not be liablefor his shares. To hold otherwise woulddestroy the joint character of theobligation.


Page 17 of 177

OB

LIG

AT

ION

SJoint Divisible

ObligationsJoint Indivisible

ObligationsIn case of breach ofobligation by one ofthe debtors, damagesdue must be borne byhim alone

In case of breachwhere one of the jointdebtors fails to complywith his undertaking,the obligation can nolonger be fulfilled orperformed. Thusaction must beconverted intoindemnity fordamages.

B. Solidary Obligation: An obligationwhere there is concurrence of severalcreditors, or of several debtors, or of severalcreditors and several debtors, by virtue ofwhich, each of the creditors has the right todemand, and each of the debtors is boundto render, entire compliance with theprestation which constitutes the object ofthe obligation (Obligacion Solidaria)

Indivisibility SolidarityRefers to the prestationwhich constitutes theobject of the obligation

Refers to the legal tieor vinculum, andconsequently to thesubjects or parties ofthe obligation

Plurality of subjects isnot required

Plurality of subjectsis indispensable

In case of breach,obligation is convertedinto indemnity fordamages because theindivisibility of theobligation is terminated

When there isliability on the part ofthe debtors becauseof the breach, thesolidarity among thedebtors remains

Kinds of Solidary Obligations1. Active (solidarity among creditors):

Each creditor has the authority to claimand enforce the rights of all, with theresulting obligation of paying everyoneof what belongs to him. Creation of a relationship of mutual

agency among co-creditors. Each debtor may pay to any solidary

creditor, but if a judicial demand ismade on him, he must pay only tothe plaintiff (Art.1214)

2. Passive (solidarity among debtors):Each debtor can be made to answer forthe others, with the right on the part ofthe debtor-payor to recover from theothers their respective shares. Creation of a relationship of mutual

guaranty among co-debtors The total remission of the debt in

favor of a debtor releases all thedebtors

All the debtors are liable for the lossof the thing due, even if such loss iscaused by the fault of only one ofthem and for delay, even if it iscaused by just one of them

The interruption of prescriptionas to one debtor affects all theothers; but the renunciation by onedebtor of prescription already haddoes not prejudice the others

3. Mixed: Solidarity among creditors anddebtors Solidarity is not destroyed by the

fact that the obligation of eachdebtor is subject to differentconditions or periods. The creditorcan commence an action againstanyone of the debtors for thecompliance with the entireobligation minus the portion orshare which corresponds to thedebtor affected by the condition orperiod.


Page 18 of 177

OB

LIG

AT

ION

SEffects of Modes of Extinguishment

Assignment ofRights in Solidary

ObligationsNovation

Compensation &Confusion

RemissionLoss or

Impossibility

The solidarycreditor cannotassign his rightbecause it ispredicatedupon mutualconfidence,UNLESS, the(1) theassignment isto a co-creditor;(2) assignmentis with consentof co-creditor

If prejudicial,the solidarycreditor whoeffected thenovation shallreimburse theothers fordamagesincurred bythem;

If beneficialand secured byone, h shall beliable to theothers for theshare(obligation &benefits) whichcorresponds tothem

If bysubstitutingthe debtor, thesolidary creditorwho effected thenovation isliable for theacts of the newdebtor indeficiency ordamages

If bysubrogating athird person increditor’srights, theobligation is notin realityextinguished asthe relationbetween theother creditorsand thedebtor/s ismaintained.

If is partial, therules regardingapplication ofpayment shallapply (w/o)prejudice to theright of othercreditors whohave not causedthe confusion orcompensation tobe reimbursedto the extentthat their rightsare diminishedor affected

If total, theobligation isextinguished,what is left isthe ensuingliability forreimbursement

If entireobligation,obligation istotallyextinguished.

If for thebenefit of oneof the debtorscovering hisentire share, heis completelyreleased fromthe creditor/s.

If for thebenefit of oneof the debtorsand it coversonly part of hisshare, hischaracter as asolidary debtoris not affected.

If not debtors’fault, theobligation isextinguished

If thru debtors’OR fortuitousevent afterdelay, theobligation isconverted intoindemnity fordamages but thesolidarycharacter of theobligationremains.

EFFECTS OF PREJUDICIAL ANDBENEFICIAL ACTS (Art.1212)1. Each one of the solidary creditors may

do whatever may be useful or beneficialto the others, but not anything whichmay be prejudicial to the latter

2. As far as the debtors are concerned, aprejudicial act performed by a solidarycreditor is binding

3. As between the solidary creditors, thecreditor who performed such act shallincur the obligation of indemnifying theothers for damages

DEFENSES AVAILABLE TO A SOLIDARYDEBTOR (Art.1222)1. Those derived from the nature of the

obligation2. Those personal to him3. Those pertaining to his own share4. Those personally belonging to other co-

debtors but only as regards that part ofthe debt for which the latter areresponsible.


Page 19 of 177

OB

LIG

AT

ION

SEFFECTS:

Demand Upon aSolidary Debtor

Payment by a Debtor

The demand madeagainst one of themshall not be anobstacle to thosewhich maysubsequently bedirected against theothers so long as thedebt has not been fullycollected

Full payment made byone of the solidarydebtors extinguishesthe obligation

The creditor mayproceed against anyone of the solidarydebtors or allsimultaneously

If two or more solidarydebtors offer to pay,the creditor maychoose which offer toaccept

A creditor’s right toproceed against thesurety existsindependently of hisright to proceedagainst the principal

The solidary debtorwho made thepayment shall have theright to claim from hisco-debtors the sharewhich corresponds tothem with interest,UNLESS barred byprescription orillegality.

In reimbursement of the solidarydebtor,

If payment was made before the debtbecame due, no interest during theintervening period may be demanded

When one of the solidary debtors cannotreimburse his share to the debtorpaying the obligation due to insolvency,such share shall be borne by all his co-debtors, in proportion to the debt ofeach.

Inchausti v. Yulo, (1914): Debtors obligatedthemselves solidarily, so creditor can bring itsaction against any of them. Remission of anypart o fthe debt, made by the creditor in favor ofone of the solidary debtors, inures to the benefitof the rest of them.

VI.DIVISIBLE & INDIVISIBLEOBLIGATIONS

A. Divisible Obligation: one which issusceptible of partial performance; thatis, the debtor can legally perform theobligation by parts and the creditorcannot demand a single performance ofthe entire obligation.

B. Indivisible Obligation: one whichcannot be validly performed in parts. Divisibility/indivisibility refers to the

performance of the prestation and

not to the thing which is the objectthereof. The thing may be divisible,yet the obligation may be indivisible.

When the obligation has for itsobject the execution of a certainnumber of days of work, theaccomplishment of work by metricalunits, or analogous things which bytheir nature are susceptible ofpartial performance, it shall bedivisible (Art.1225 par.2).

When there is plurality of debtorsand creditors, the effect ofdivisibility/indivisibility of theobligation depend upon whether theobligation is joint or solidary.

EFFECT OF DIVISIBLE OR INDIVISIBLEOBLIGATIONS (Art.1223):Creditor cannot be compelled partially toreceive the prestation in which theobligation consists; neither may the debtorbe required to make the partial payment,

UNLESS: The obligation expressly stipulates the

contrary The different prestations constituting

the objects of the obligation are subjectto different terms and conditions

The obligation is in part liquidated andin part unliquidated

VII. OBLIGATIONS WITH A PENALCLAUSE

PENAL CLAUSE: An accessory undertakingto assume greater liability in case ofbreach. It is attached to an obligation inorder to ensure performance. Theenforcement of the penalty can bedemanded by the creditor only when thenon-performance is due to the fault orfraud of the debtor. If the principal obligation is void, penal

clause shall also be void. However, thenullity of the penal clause does notcarry with it the nullity of the principalobligation (Art.1230).

PURPOSES OF PENALTY1. Funcion coercitiva de garantia- to

insure the performance of the obligation2. Funcion liquidatoria- to liquidate the

amount of damages to be awarded tothe injured party in case of breach ofthe principal obligation (compensatory)

3. Function estrictamente penal- topunish the obligor in case of breach ofthe principal obligation (punitive)


Page 20 of 177

OB

LIG

AT

ION

SEFFECT OF PENALTY:1. The penalty shall substitute the

indemnity for damages and paymentof interest in case of non-compliance(Art.1226), UNLESS:a. There is a stipulation to the contraryb. The obligor refuses to pay the

penaltyc. The obligor is guilty of fraud

2. Debtor cannot exempt himself from theperformance of the principal obligationby paying the stipulated penalty unlessthis right has been expressly reservedfor him (Art.1227).

3. Creditor cannot demand the fulfillmentof the principal obligation anddemanding the satisfaction of thepenalty at the same time unless theright has been clearly granted to him(Art.1227). Tacit/implied grant isadmissible.a. If creditor has chosen fulfillment of

the principal obligation andperformance thereof becomeimpossible without his fault, he maystill demand the satisfaction of thepenalty.

b. If there was fault on the part of thedebtor, creditor may demand notonly satisfaction of penalty but alsothe payment of damages.

c. If creditor chooses to demand thesatisfaction of the penalty, hecannot afterwards demand thefulfillment of the obligation.

PROOF OF ACTUAL DAMAGE (Art.1228):Proof of actual damages is not necessary isapplicable only to the general rule stated inArt.1226 and not to the exceptions. Thepenalty is exactly identical with what isknown as “liquidated damages” in Art.2226.

WHEN PENALTY MAY BE REDUCED (Art.1229)1. If the principal obligation has been

partly complied with2. If the principal obligation has been

irregularly complied with3. If the penalty is iniquitous or

unsconscionable even if there has beenno performance

REVIEWER IN CIVIL LAW Chapter IV. Extinguishment of Obligations

Page 21 of 177

OB

LIG

AT

ION

SChapter IV. Extinguishment of

Obligations

I. PAYMENT OR PERFORMANCEII. LOSS OF THE THING DUE OR IMPOSSIBILITY

OF PERFORMANCEIII. CONDONATION OR REMISSION OF THE DEBTIV. CONFUSION OR MERGER OF RIGHTSV. COMPENSATIONVI. NOVATION

I. PAYMENT OR PERFORMANCE(Art. 1232)

Payment means not only delivery of moneybut also performance in any manner of theobligation.

(See Diagrams of Prof. Labitag at the endsection of the Chapter on Obligations.)

Special Forms of Payment

A. Application of Payment (Art. 1252):Designation of the debt to which shouldbe applied a payment made by a debtorwho owes several debts to the samecreditor

Rules on Application:1. Preferential right of debtor— debtor has

the right to select which of his debts heis paying.

2. The debtor makes the designation at thetime he makes the payment

3. If not, the creditor makes theapplication, by so stating in the receiptthat he issues, unless there is cause forinvalidating the contract.

4. If neither the creditor nor debtorexercises the right to apply, or if theapplication is not valid, the applicationis made by operation of law.

5. If debt produces interest—payment notdeemed applied to the principal unlessinterests are covered.

6. When no application can be inferredfrom the circumstances of payment, it isapplied to: To the most onerous debt ofthe debtor; or if debts due are of thesame nature and burden, to all thedebts in proportion

7. Rules of application of payment may notbe invoked by a surety or solidaryguarantor.

Reparations Commission vs. Universal Deep SeaFishing Corp. (1978):Rules on application of payment cannot be madeapplicable to a person whose obligation as amere surety is both contingent and singular.There must be full and faithful compliance withthe terms of the contract.

B. Payment by Cession (Art. 1255): Actwhereby a debtor abandons all hisproperty to his creditors, so that thelatter may apply the proceeds (of itssale) to their credits.

C. Dation in payment (Art. 1245):Delivery and transmission of ownershipof a thing by the debtor to the creditoras an accepted equivalent of theperformance of the obligation.

Dation in payment Payment by cession

In favor of only onecreditor

There are variouscreditors

Payment extinguishesthe obligation to theextent of the value ofthe thing delivered,unless the parties agreethat the obligation betotally extinguished

Extinguishes creditsonly up to the extentof proceeds from saleof assigned property,unless otherwiseagreed upon

Transfer of ownershipof thing alienated tocreditor

Only possession andadministration withauthorization toconvert property tocash with which thedebts shall be paid

Not necessarily in stateof financial difficulty

Assignmentpresupposesinsolvency of debtor.

Assignment of onlysome specific thing

Assignment involvesall the property ofthe debtor.

D. Tender of payment and consignation

1. Tender of payment: Manifestationmade by debtor to creditor of his desireto comply with his obligation, with offerof immediate performance Preparatory act to consignation Extrajudicial in character

2. Consignation: Deposit of the object ofobligation in a competent court inaccordance to the rules prescribed bylaw, whenever the creditor unjustlyrefuses payment or because of somecircumstances which render directpayment to the creditor impossible orinadvisable. Principal act which constitutes a

form of payment. Judicial in character.

When tender and refusal not required(Art. 1259)1. Creditor is absent or unknown, or does

not appear at the place of payment2. Creditor is incapacitated to receive the

thing due at time of payment


Page 22 of 177

OB

LIG

AT

ION

S3. Without just cause, creditor refuses to

give receipt4. Two or more persons claim the same

right to collect5. Title of the obligation has been lost

Effects of withdrawal by debtor (Arts.1260- 1261)1. Before approval of the court—Obligation

remains in force2. After approval of the court or

acceptance by the creditor, with theconsent of the latter— Obligationremains in force, but guarantors and

co- debtors are liberated. Preference ofthe creditor over the thing is lost.

3. After approval of the court oracceptance by the creditor, and withoutcreditor’s consent—Obligation subsists,without change in the liability ofguarantors and co- debtors, or thecreditor’s right of preference.

Expenses of consignation: When properlymade, shall be charged against the creditor(Art. 1259)

Requisites and Effects

Application ofPayment

Cession Dation Tender and Consignation

Requisites1. Plurality of

debts2. Debts are of the

same kind3. Debts are owed

to the samecreditor and bythe samedebtor

4. All debts mustbe due

5. Payment madeis not sufficientto cover alldebts

Requisites1. Plurality of debts2. Plurality of

creditors3. Partial insolvency

of the debtor4. Abandonment of

the totality of thedebtor’sproperties for thebenefit of thecreditors

5. Acceptance bythe creditors

Requisites1. Should not be

prejudicial toother creditors

2. Should notconstitute apactumcommissorium

Requisites1. There is a debt due2. consignation is made because

of some legal cause3. previous notice of consignation

was given to those personsinterested in the performanceof the obligation

4. amount or thing due wasplaced at the disposal of thecourt

5. after the consignation has beenmade, the persons interestedwere notified thereof

EffectsPayment of debtdesignated as tocorrespondingamount

EffectsAssignment liberatesdebtor up to theamount of the netproceeds of the saleof his assetsAssignment does notvets title to theproperty in thecreditors,who are onlyauthorized to sell it.

EffectsExtinguishment ofdebt from as anequivalent of theperformance of theobligation

EffectsIf accepted by the creditor ordeclared properly made by theCourt:1. Debtor is released in same

manner as if he had performedthe obligation at the time ofconsignation

2. Accrual of interest issuspended from the moment ofconsignation.

3. Deterioration or loss of thething or amount consigned,occurring without the fault ofdebtor, must be borne bycreditor from the moment ofdeposit

4. Any increment or increase inthe value of the thing afterconsignation inures to thebenefit of the creditor


Page 23 of 177

OB

LIG

AT

ION

SII. LOSS OR IMPOSSIBILITY

(Asked in ’83, ’84, ’85, and ’94)

A. LOSS: A thing is lost when it: (Art 1189) Perishes Goes out of commerce Disappears in such a way that its

existence is unknown Cannot be recovered

Requisites: (Art. 1262)1. Without the fault of debtor2. Before the debtors incurs delay3. After the obligation has been

constituted

Effects of Loss

Obligation to Delivera Specific Thing

Obligation to Delivera Generic Thing

Extinguishment of theobligation if the thingwas destroyed w/ofault of the debtor andbefore he has incurreddelay.

Loss of a generic thingdoes not extinguish anobligation, UNLESS,Delimited genericthings: kind or classis limited itself, andthe whole classperishes

Action against 3rd persons—Creditor shallhave all the rights of action the debtor mayhave against 3rd persons by reason of theloss.

Presumption: The loss was due to thedebtor’s fault, UNLESS:1. Law provides that the debtor shall be

liable even if the loss is due tofortuitous events (Arts. 1942, 1979,2147, 2159)

2. Obligor is made liable by expressstipulation

3. Nature of the obligation requires anassumption of risk

4. Fault or negligence concurs with thefortuitous event

5. Loss occurs after delay6. Debtor has promised to deliver the same

thing to two or more different parties7. Obligation arises from a criminal act8. Borrower in commodatum: saves his

own things and not the thing of thecreditor during a fortuitous event

In Reciprocal ObligationsExtinguishment of the obligation due toloss of the thing or impossibility ofperformance affects both the creditor anddebtor; the entire juridical relation isextinguished.

Partial loss (Art. 1264)Partial loss due to a fortuitous event doesnot extinguish the obligation; thing dueshall be delivered in its present condition,without any liability on the part of thedebtor, UNLESS, the obligation isextinguished when the part lost was of suchextent as to make the thing useless.

Loss of the thing when in possession ofthe debtor: Loss was due to the debtor’sfault. Burden of explaining the loss of thething falls upon him, UNLESS, due to anatural calamity: earthquake, flood,storm, etc.

Subjective impossibility: Where there is nophysical or legal loss, but the thing belongs toanother, the performance by the debtor becomesimpossible. The debtor must indemnify thecreditor for damages.

B. IMPOSSIBILITY OF PERFORMANCE(Arts. 1266- 1267): When prestationbecomes legally or physically impossible(by fortuitous event or force majeure),the debtor is released.Impossibilitymust have occurred without fault ofdebtor, and after the obligation hasbeen constituted.

PARTIAL IMPOSSIBILITY1. Courts shall determine whether it is so

important as to extinguish theobligation.

2. If debtor has performed part of theobligation when impossibility occurred,creditor must pay the part done as longas he benefits from it.

3. If debtor received full payment fromcreditor, he must return excess amountcorresponding to part which wasimpossible to perform.

DOCTRINE OF UNFORESEEN EVENTS:When the service has become so difficult asto be manifestly beyond the contemplationof all the parties, the obligor may bereleased in whole or in part. The intentionof parties should govern and the courtsmay release debtor partially or wholly, butit cannot revise, remake, or modify thecontract.

Requisites:1. Event could not have been foreseen at

the time of the constitution of thecontract

2. Event makes performance extremelydifficult but not impossible

3. Event not due to any act of the parties4. Contract is for future prestation


Page 24 of 177

OB

LIG

AT

ION

SIII.CONDONATION OR REMISSION

OF THE DEBT

CONDONATION: An act of liberality, byvirtue of which, without receiving anyequivalent, creditor renounces theenforcement of the obligation. Theobligation is extinguished either in whole orin such part of the same which to remissionrefers.

Requisites:1. Debt must be existing and demandable2. Renunciation must be gratuitous;

without any consideration3. Debtor must accept the remission

Effect (Art. 1273): Renunciation of theprincipal debt shall extinguish theaccessory obligations, but remission of thelatter leaves the principal obligation inforce.

Presumptions: (Arts. 1271, 1272, 1274) Whenever the private document in

which the debt is found in thepossession of the debtor, it shall bepresumed that the creditor delivered itvoluntarily, unless contrary is proved.

Delivery of a private documentevidencing credit, made voluntarily bythe creditor to the debtor, implies therenunciation of the action of creditoragainst the latter.

Kinds:1. As to form (Art. 1270)

Express: made formally; inaccordance with forms of ordinarydonations

Implied: inferred from the act of theparties

2. As to extent Total: entire obligation Partial: may refer only to amount of

indebtedness, or to an accessoryobligation, or to some other aspectof the obligation

3. As to constitution Inter vivos: effective during the

lifetime of the creditor Mortis causa: effective upon death of

the creditor; must be contained in awill or testament

IV.CONFUSION OR MERGER OFRIGHTS

CONFUSION: The meeting in one person ofthe qualities of creditor and debtor of thesame obligation.

Requisites:1. It should take place between principal

debtor and creditor2. It must be complete and definite-

Parties must meet all the qualities ofcreditor and debtor in the obligation/ inthe part affected.

Effects: (Art. 1275- 1277)1. The obligation is extinguished from the

time the characters of the debtor andcreditor are merged in the same person.

2. In joint obligations, confusion does notextinguish the obligation except asregards the corresponding share of thecreditor or debtor in whom the twocharacters concur.

3. In solidary obligations, confusion in oneof the solidary debtors extinguishes theentire obligation.

4. Obligation is not extinguished whenconfusion takes place in the person ofsubsidiary debtor (e.g. guarantor), butmerger in the person of the principaldebtor shall benefit the former.

V. COMPENSATION (Art. 1278)

COMPENSATION: Offsetting of twoobligations which are reciprocallyextinguished if they are of the same value,or extinguished to the concurrent amount ifof different values. (Asked in ’80, ’81, ’98,and ’02)

Compensation Confusion

There must always be 2obligations

Involves only oneobligation

There are 2 persons whoare mutually debtors andcreditors of each other in 2separate obligations, eacharising from the samecause.

There is only oneperson whom thecharacters of thecreditor anddebtor meet

Kinds:1. As to extent

Total: Debts are of the same amount Partial: Amounts are not equal


Page 25 of 177

OB

LIG

AT

ION

S2. As to origin

Legal: takes place by operation oflaw

Conventional: parties agree tocompensate their mutual obligationseven when some requisite in Art.1279 is lacking (Art. 1282)

Judicial: decreed by court whenthere is counterclaim; effective uponfinal judgment (Art. 1283)

Facultative: when it can be claimedby one of the parties who, however,has the right to object to it

Requisites Effects1. Each obligor is

bound principally,and at the sametime a principalcreditor of theother

2. Both debts mustconsist in a sum ofmoney, or if thethings due areFUNGIBLE, of thesame kind &quality

3. Both debts are due4. Debts are

liquidated anddemandable

5. There must be noretention orcontroversy overeither of the debts,commenced by 3rd

persons andcommunicated indue time to thedebtor

6. Compensation isnot prohibited bylaw

1. Effects rise fromthe moment all therequisites concur.

2. Debtor claiming itsbenefits mustprovecompensation;once proven,effects retroactfrom the momentwhen therequisitesconcurred.

3. Both debts areextinguished to theconcurrentamount,eventhough thecreditors anddebtors are notaware of thecompensation.

4. Accessoryobligations arealso extinguished.

Compensation is prohibited in:1. Contracts of depositum2. Contracts of commodatum3. Future support due by gratuitous title4. Civil liability arising from a penal

offense5. Obligations due to the government6. Damage caused to the partnership by a

partner

ASSIGNMENT OF CREDIT (Art. 1285):No effect and does not bind the debtorunless and until the latter is notified of theassignment or learns of it.

With Debtor’sConsent

WithDebtor’s

Knowledge

WithoutDebtor’sKnowlege

Debtor’sconsent toassignment ofcreditconstitutes awaiver ofcompensation,unless hereserved hisright tocompensation.

Debtor mayset upcompensationof debts(maturing)before theassignment ofcredit but notof subsequentones

Debtor maysetupcompensationof all credits(maturing)prior to theassignmentand also latterones until hehadknowledge oftheassignment.

Facultative compensation: Compensationwhich can only be set up at the option of acreditor, when legal compensation cannot takeplace because some legal requisites in favor ofthe creditor are lacking. Creditor may renouncehis right to compensation, and he himself mayset it up.As opposed to conventionalcompensation, facultative compensation isunilateral and does not depend upon theagreement of the parties.

VI.NOVATION (Art. 1291)

NOVATION: Extinguishment of anobligation by the substitution or change ofthe obligation by a subsequent one whichextinguishes or modifies the first either bychanging the object or principal conditions,or by substituting the person of the debtor,or by subrogating a third person in therights of the creditor. A juridical act of dualfunction—it extinguishes an obligation, andat the same time, it creates a new one inlieu of the old. (Asked in ’78, ’88, ’94 and’01)

Requisites:1. A previous valid obligation2. Agreement of all the parties to the new

obligation3. Extinguishment of the old obligation4. Validity of the new obligation

Novation is not presumed.

Express novation: Parties mustexpressly disclose their intent toextinguish the old obligation by creatinga new one.


Page 26 of 177

OB

LIG

AT

ION

S Implied novation: No specific form is

required. There must be incompatibilitybetween the old and new obligation orcontract.(Asked in ’79, ’82, ’88, and ’94)

California Bus Line v. State Investment (2003):In the absence of an unequivocal declaration ofextinguishment of the pre-existing obligation,only proof of incompatibility between the old andnew obligation would warrant a novation byimplication. The restructuring agreement merelyprovided for a new schedule of payments andauthority giving Delta to take over managementand operations of CBLI in case it fails to payinstallments. There was no change in the objectof prior obligations.

TEST OF INCOMPATIBILITY: Whether ornot the old and new obligation can standtogether, each one having an independentexistence. No incompatibility exists whenthey can stand together. Hence, there is nonovation. Incompatibility exists when theycannot stand together. Hence, there isnovation.

Effects

In General If OriginalObligation isVoid

If NewObligation isVoid

1. Oldobligationisextinguished andreplacedby thenew onestipulated.

Novation isvoid if theoriginalobligation wasvoid, exceptwhenannulmentmay beclaimed onlyby the debtor,or whenratificationvalidates actsthat arevoidable. (Art.1298)1. Originalobligation isvoid: Nonovation2. Originalobligationvoidable:Effective ifcontract isratified beforenovation

New obligationis void, the oldobligationsubsists,unless thepartiesintended thatthe formerrealationsshall beextinguishedin any event.(Art. 1297)1. Newobligationvoid: Nonovation2. Newobligationvoidable:Novation iseffective

Accessory obligations also extinguished, butmay subsist only insofar as they may benefit 3rd

persons who did not give their consent to thenovation OR may not be affected uponagreement between the parties.

Original or new obligation withsuspensive or resolutory condition: Iforiginal obligation was subject to asuspensive/ resolutory condition, the newobligation shall be under the samecondition, unless it is otherwise stipulated.(Art. 1299)

CompatibleConditions

IncompatibleConditions

Fulfillment of bothconditions: newobligation becomesdemandable

Fulfillment ofconditionconcerning theoriginal obligation:old obligation isrevived; newobligation losesforce

Fulfillment ofconditionconcerning thenew obligation: nonovation; requisiteof a previous validand effectiveobligation lacking

Original obligationis extinguished,while newobligation exists

Demandabilityshall be subject tofulfillment/nonfulfillment ofthe conditionaffecting it

A. OBJECTIVE NOVATION

1. Change of the subject matter2. Change of causa or consideration3. Change of the principal conditions

or terms

B. SUBJECTIVE NOVATION

1. Substitution of the Debtor:Consent of creditor is anindispensable requirement both inexpromision and delegacion.

Expromision DelegacionInitiative for changedoes not emanate fromthe debtor, and mayEven be made withouthis knowledge.

Debtor (delegante)offers or initiates thechange, and thecreditor (delegatorio)accepts 3rd person(delegado) asconsenting to thesubstitution

Requisites1. Consent of the

creditor and thenew debtor

2. Knowledge orconsent of the olddebtor is notrequired

Requisites1. Consent of old

debtor, newdebtor, andcreditor

Effects1. Old debtor is

released

Effects1. Insolvency of the

new debtor revives


Page 27 of 177

OB

LIG

AT

ION

S2. Insolvency of the

new debtor doesnot revive the oldobligation in casethe old debtor didnot agree toexpromision

3. If with knowledgeand consent of olddebtor, new debtorcan demandreimbursement theentire amount paidand w/subrogation ofcreditor’s rights

4. If withoutknowledge of theold debtor, newdebtor candemandreimbursementonly up to theextent that thelatter has beenbenefited w/osubrogation ofcreditor’s rights

the obligation ofthe old debtor if itwas anterior andpublic, and knownto the old debtor.

2. New debtor candemandreimbursement ofthe entire amounthe has paid, fromthe original debtor.He may compelcreditor tosubrogate him toall of his rights.

2. Subrogation of a 3rd person in therights of the creditor

a. Conventional subrogation: byagreement of the parties;

Requisites: the consent of the 3rd

person, and of the original parties(debtor and old creditor) (Art. 1301)

Conventionalsubrogation

Assignment of credit

Debtor’s consent isnecessary

Debtor’s consent is notrequired

Extinguishes anobligation and givesrise to a new one

Refers to the same rightwhich passes from oneperson to another,without modifying orextinguishing theobligation

Defects/ vices inthe old obligationare cured

Defects/ vices in the oldobligation are not cured

b. Legal subrogation: by operation oflaw

Legal subrogation is not presumed,except in the followingcircumstances:1. When creditor pays another

creditor who is preferred, evenwithout the debtor’s knowledge

2. When a 3rd person not interestedin the obligation pays with the

express or tacit approval of thedebtor

3. When, even without theknowledge of the debtor, aperson interested in thefulfillment of the obligationwithout prejudice to the effectsof confusion as to the latter’sshare effects of confusion as tothe latter’s share

Effects

Total Partial1. Transfers to the

person subrogatedthe credit with allthe rights theretoappertaining,either against thedebtor or 3rd

persons.2. Obligation is not

extinguished, evenif the intention isto pay it.

3. Defenses againstthe old creditor areretained, unlesswaived by thedebtor

1. A creditor, towhom partialpayment has beenmade, mayexercise his rightfor the remainder,and shall bepreferred to theperson subrogatedin his place invirtue of thepartial payment.


Page 28 of 177

OB

LIG

AT

ION

S

PAYMENT & PERFORMANCEby Professor Eduardo A. Labitag

UP College of Law(Asked in ’75, ’84, ’88, ’95, and ’98)

28

WHO CAN PAY?

In GENERAL1. Debtor or his:2. Authorized Agent3. Heir4. Successor-in- interest

3rd PERSON

Interested in obligation(creditor cannot refuse

to accept valid payment)

Payment w/ orw/o debtor’sknowledge

Effects:1. Valid payment;obligation extinguished2. Debtor to reimbursefully 3rd person interestedin obligation3. 3rd person subrogatedto rights of creditor

Not interested in obligation(creditor may refuse to accept

payment [1236])

Payment withdebtor’s consent(express/tacit)

Payment withoutdebtor’s knowledge

or against the will of D

Effects:1. 3rd person is entitledto full reimbursement2. Legal subrogation(novation) – 3rd personis subrogated/step intothe shoes of creditor

Effects:3rd person can only bereimbursed only insofar aspayment has been beneficial todebtor(1236, 2nd. par.)burden of proof on 3rd personcannot compel C to subrogatehim (1237)

3rd person (whether or notinterested in obligation) does notintend to be reimbursed (1238)

Debtor must giveconsent

Effects:1. Payment is deemedas a donation/offer ofdonation2. Donation must be inproper form (if aboveP5Th must be inwriting

In Obligation to Give, ifPAYOR has

No free disposal & nocapacity to alienate

Minor who enteredcontract w/o consent ofparent or guardian

Effects: Payment is invalid w/o prejudice tonatural obligations

Effects: No right to recover fungiblething delivered to creditor who spentor consumed it in good faith

Legend:G = General Rule = ExceptionC = CreditorD = Debtor


Page 29 of 177

OB

LIG

AT

ION

S

29

TO WHOM PAYMENT MAY BE MADE

In GENERAL

• Creditor /person in whose favor obligationwas constituted, or

• His successor in interest, or

• Any person authorized to received payment(1240)

Payment to IncapacitatedCreditor (1241)

G – NOT valid

1) If C has kept the thing delivered2) Insofar as payment benefited C

Payment to 3rd

PERSON (1241,2nd par.)

G VALID if 3rd

person provesthat itredounded toC’s benefit

Exception to proof of benefit:.3rd person acquires C’s rights after payment.C ratifies payment.C’s conduct leads D to believe that 3rd

person had authority to receive payment.Assignment of credit without notice to D

In Case ofACTIVE

SOLIDARITY

If no demand is made, D may pay to ANY ofsolidary creditors

If any judicial/extrajudicial demand is made by anyone of the creditors who made the demand (1214)

If payment is madeto a WRONGPARTY

Effect:No extinguishment

Extinguishment if fault ornegligence can be imputedto creditor

Payment in good faith to person inpossession of credit = debtor released(1242)

If debtor pays creditor after beingjudicially ordered to retain debt =payment not valid (1243)

Payment made in good faith to anyperson in possession of creditEffect: D released (1242)


Page 30 of 177

OB

LIG

AT

ION

S

WHAT IS TO BE PAID? IDENTITY

In GENERALThe very prestation (thing or service

Obligation to give aSPECIFIC thing

Give:1. Specific thing itself2. Accessions & accessories3. If with loss, improvements,

deterioration Apply Art.1189

Debtor cannot compel Cto receive a differentspecific thing even latterhas same value or morevaluable than that due(1244)

Obligation to give aGENERIC thing

G:C cannot demand a thing of superior quality;can demand inferiorD cannot deliver a thing of inferior quality

Unless quality & circumstances have beenstated (1246) purpose and other circumstancesof obligation considered

Obligation to pay sum of money, if D alienatesproperty to C = DACION EN PAGO governed bylaw on SALES (1245)

Obligation to DO orNOT to DO

Identity: The very same act promised to be doneor not to be done Substitution cannot be done against C’s will(1244, 2nd par.)

Payment ofMONEY

1. Payment of domestic obligations in Phil.Currency

Exceptions under R.A. 4100; R.A. 8183 –Foreign currency if agreed to by parties

2. In case of extraordinary inflation/deflation,basis

of payment is value of currency at the time ofobligation was established (1250)

Payment ofINTEREST

No interest (i.e., for the use of someone’s money)shall be due unless expressly stipulated in writing


Page 31 of 177

OB

LIG

AT

ION

S

In Case of SUBSTANTIALPERFORMANCE INGOOD FAITH (1234)

D may recover as if there hadbeen complete fulfillment- Less damages suffered by C

PRESUMPTIONSin payment ofINTERESTS &

INSTALLMENTS

INTEREST – If principal amount isreceived w/o reservation as tointerest interest is presumed tohave been paid (1176; 1253)

INSTALLMENTS If a latterinstallment of a debt is receivedw/o reservation to priorinstallments Prior installments arepresumed paid (1176, 2nd par.)

HOW IS PAYMENT TO BE MADE INTEGRITY

In GENERAL1233 – Complete delivery or rendering1248 – C cannot be compelled toreceived partial prestations; D cannotbe compelled to give partial payments

Exceptions:1. Contrary stipulation2. When debt is in part liquidated & in partunliquidated3. When there are several subjects/partiesare bound under different terms/conditions

Effect if C accepts incompleteperformance (1235): WAIVER

- May be express or impliedIf C knows the incompleteness/irregularity of the payment, and hestill accepts it w/o objection, thenobligation is deemed extinguished(estoppel)* There must be intent to waive

Except if C has no knowledge ofthe incompleteness


Page 32 of 177

OB

LIG

AT

ION

S

WHEN PAYMENT IS TO BE MADE?

When obligation is due anddemandable but D may pay beforedue date if period is for benefit of D

In GENERALPayment to be made when the creditormakes a demand(judicially/extrajudicially)

Exceptions wherein demand of creditor is notnecessary for delay to exist:1. When obligation/law expressly declares2. Nature & circumstances of the obligationdesignation of time is controlling motive orestablishment of contract3. When demand would be useless

WHY SHOULD PAYMENT BE MADE?

Because C may compel D to pay, andfailure to pay will allow C to satisfy creditfrom properties of D that are not exemptfrom execution

WHERE PAYMENT IS TO BE MADE (ART. 1251)

In GENERALIn the place designated in the obligation

If no place is designated

If obligation is to deliver aSPECIFIC thing Place of performance iswherever the thing was atthe moment obligation wasconstituted Unless there is acontrary expressstipulation

In any other case Domicile of debtor

If D changes his domicilein bad faith or after he hasincurred in delay Additional expensesshall be borne by D

Expenses of MakingPayment

In GENERALExtrajudicial expensesrequired by the paymentshall be borne by DEBTOR

Unless otherwisestipulated

As to JUDICIAL expenses Rules of Court shallgovern

- end of Obligations -


Page 34 of 177

CO

NT

RA

CT

SCONTRACTS

Chapter I. GENERAL PROVISIONSI. ClassificationII. ElementsIII. StagesIV. Characteristics


35353636363636363737

Chapter II. ESSENTIAL REQUISITESOF CONTRACTSI. Consent

A. ConcurrenceB. CapacityC. Vices of Consent

II. ObjectIII. Cause

38383838394040

Chapter III. FORMS OF CONTRACTSI. RulesII. Kinds of Formalities

A. Contracts Which Must Appear inWriting

B. Contracts Which Must Appear in aPublic Document

424242

42

42

Chapter IV. REFORMATION OFCONTRACTS

Chapter V. INTERPRETATION OFCONTRACTS

43

43

Chapter VI. DEFECTIVE CONTRACTSI. RescissibleII. VoidableIII. UnenforceableIV. Void or Inexistent

4444454546


Page 35 of 177

CO

NT

RA

CT

S

ContractsFACULTY-STUDENT EDITORIAL BOARD AND LECTURES COMMITTEE


ACADEMICS COMMITTEE


EDITOR-IN-CHIEF


LAYOUT HEAD

CIVIL LAW


SUBJECT EDITORS

OBLIGATIONS and CONTRACTS

Rory LambinoLEAD WRITER

LECTURES

Edel CruzHEAD

--------


--------


Frances DomingoPauline Alejandre

Angelica Paglicawan

Michelle AriasAlexandria MarotoNathan Marasigan

Diane BonillaWRITERS

Chapter I. General Provisions

I. CLASSIFICATIONII. ELEMENTSIII. STAGESIV. CHARACTERISTICS

CONTRACT: A juridical convention manifestedin legal form whereby two parties agree toperform a prestation to give, to do, or not to do.(Sanchez-Roman)

Art. 1305. A contract is a meeting of minds,between two persons whereby one binds himself,with respect to the other, to give something or torender some service.

I. CLASSIFICATION OF CONTRACTS

A. To formation:1. Consensual: consent is enough;

e.g.sale2. Real: consent and delivery is

required; e.g. deposit, pledge3. Solemn or formal: special formalities

are required for perfection e.g.donation of realty

B. To relation to other contracts:1. Principal: may exist alone e.g. lease2. Accessory: depends on another

contract for its existence; e.g.guaranty

3. Preparatory: a preliminary steptowards the celebration of asubsequent contract e.g. agency

C. To nature of vinculum1. Unilateral: only one party is bound

by the prestation e.g. commodatum2. Bilateral (synallagmatic): where both

parties are bound by reciprocalprestations e.g. sale

D. To fulfillment of prestations1. Commutative: fulfillment is

determined in advance2. Aleatory: fulfillment is determined

by chance

E. By equivalence of prestations1. Gratuitous: no correlative prestation

is received by a party2. Onerous: there is an exchange of

correlative prestations3. Remuneratory: the prestation is

based on services or benefits alreadyreceived

F. By the time of fulfillment1. Executed: obligation is fulfilled at

the time contract is entered into2. Executory: fulfillment does not take

place at the time the contract ismade

G. To their purpose1. Transfer of ownership e.g. sale2. Conveyance of Use e.g.

Commodatum3. Rendition of Service e.g. agency

H. To their subject matter1. Things e.g. sale, deposit2. Services e.g. agency

I. To their designation1. Nominate: the law gives the contract

a special designation or particularname e.g. deposit

2. Innominate: the contract has nospecial name

Art. 1307. INNOMINATE CONTRACTSshall be regulated by the stipulations ofthe parties, by the general provisions of


Page 36 of 177

CO

NT

RA

CT

STitles I and II of [the Civil Code], by therules governing the most analogousnominate contracts, and by the customsof the place.

Classes of Innominate Contracts1. Do ut des: I give so that you may

give2. Do ut facias: I give so that you may

do3. Facio ut facias: I do so that you may

do4. Facio ut des: I do so that you may

give

II. ELEMENTS OF CONTRACTS

A. Essential: Those without which thecontract would not exist (consent,object, causa).

B. Natural: Those which are derived fromthe nature of the contract and ordinarilyaccompany the same-they are presumedto exist unless the contrary is stipulatede.g. warranty in sales

C. Accidental: Those which exist only ifstipulated

Solemn Real ConsensualCommonElements

Consent, subject matter, causa

SpecialElements

Formality Delivery None

Example Donationofpersonalpropertymorethan P5K

Loan,pledge

Others

III.STAGES OF CONTRACTS

A. Preparation, conception or generation:period of negotiation and bargaining,ending at the moment of agreement

B. Perfection or birth: the moment whenthe parties come to agree on the termsof the contract

C. Consummation or death: the fulfillmentor performance of the terms agreedupon

Auto Contract: A contract made by oneperson acting in the name of another in onecapacity and in his own name or that of a

different person in another capacity.(Tolentino)

The validity of auto contracts in our law isgenerally accepted. The existence of a contract isnot determined by the number of persons whointervene in it, but by the number of partiesthereto; not by the number of individual will, butby the number of declarations of will. (Tolentino)

Collective Contracts: The law authorizesthe will of the majority to bind a minority toan agreement, notwithstanding theopposition of the latter. (Tolentino)

IV.CHARACTERISTICS OFCONTRACTS


A. MUTUALITY: The contract must bindboth contracting parties; its validity orcompliance cannot be left to the will ofone of them (Art.1308).

Taylor v. Uy Teng Piao, 1922: [BUT] a contractmay expressly confer upon one party the right tocancel the contract because the exercise of thatright is a fulfillment of the provisions of thecontract itself

The release must be binding on bothparties.

The determination of the performancemay be left to a 3rd person, whosedecision shall NOT be binding if:o It is evidently inequitable (the courts

will decide)o The decision had not been made

known to both parties (Art.1309)

B. AUTONOMY: The contracting partiesmay establish such stipulations,clauses, terms and conditions as theymay deem convenient, provided they arenot contrary to law, morals, goodcustoms, public order, or public policy(Art. 1306).

C. RELATIVITY: Contracts take effect onlybetween parties, their assigns and heirsUNLESS, obligations arising from thecontract are not transmissible by their(1) nature, (2) by stipulation or (3) byprovision of law. The heir is not liablebeyond the value of the property hereceived from the decedent. (Art. 1311)


Page 37 of 177

CO

NT

RA

CT

SException: Strangers may enforce thecontract in their favor in the ff. cases:

1. STIPULATIONS POUR AUTRUI: If acontract should contain somestipulation in favor of a third person, hemay demand its fulfilment provided hecommunicated his acceptance to theobligor before its revocation. A mereincidental benefit or interest of a personis not sufficient. The contracting partiesmust have clearly and deliberatelyconferred a favour upon a third person(Art.1311).

Requisites:a. There must be a stipulation in favor

of a third personb. The stipulation must be part, not

the whole of the contractc. The contracting parties must have

clearly and deliberately conferred afavor upon a third person, NOT amere incidental benefit or interest.

d. The third person must havecommunicated his acceptance to theobligor before its revocation

e. No relation of agency exists betweenany of the parties and the thirdperson favored

Florentino v. Encarnacion, 1977:1. Contracts to perform personal acts which

cannot be as well performed by others aredischarged by the death of the promissor.Conversely, where the service or act is ofsuch a character that it may as well beperformed by another, or where the contract,by its terms, shows that performance byothers was contemplated, death does notterminate the contract or excusenonperformance.

2. In this case the stipulation is a stipulationpour atrui because the true intent of theparties is to confer a direct and material

benefit upon a third party.

ACCION DIRECTA: Where the statuteauthorizes the creditor to sue on his debtor’scontract, e.g. lessor v. sub-lessee (Art.1651,1652) (J.B.L. Reyes)

2. THIRD PERSON IN POSSESSION:When the third person comes intopossession of the object of a contractcreating real rights (Art 1312)

3. FRAUD: Where the contract is enteredinto in order to defraud a person (Art.1313);

4. TORTUOUS INTERFERENCE: Wherethe third person induces a contractingparty to violate his contract (Art.1314).

Requisites:a. Existence of a valid contractb. Knowledge of the third person of the

existence of the contract; andc. Interference by third person without

legal justification or excuse

D. CONSENSUALITY: Contracts areperfected by mere consent and fromthat moment, the parties are bound notonly to the fulfillment of what has beenexpressly stipulated but also to allconsequences which, according to theirnature, may be in keeping with goodfaith, usage and law, (Art.1315)UNLESS, real contracts, such asdeposit, pledge and commodatum, arenot perfected until the delivery of theobject of the obligation. (Tolentino)

E. OBLIGATORY FORCE

Art. 1159. Obligations arising from contractshave the force of law between the contractingparties and should be complied with in goodfaith.

Art. 1308. The contract must bind bothcontracting parties; its validity or compliancecannot be left to the will of one of them.

Art. 1315. Contracts are perfected by mereconsent, and from that moment the parties arebound not only to the fulfillment of what hasbeen expressly stipulated but also to all theconsequences which, according to their nature,may be in keeping with good faith, usage andlaw.

Art. 1356. Contracts shall be obligatory, inwhatever form they may have been entered into,provided all the essential requisites for theirvalidity are present. However, when the lawrequires that a contract be in some form in orderthat it may be valid or enforceable, or that acontract be proved in a certain way, thatrequirement is absolute and indispensable. Insuch cases, the right of the parties stated in thefollowing article cannot be exercised.

REVIEWER IN CIVIL LAW Chapter II. Essential Requisites

Page 38 of 177

CO

NT

RA

CT

SChapter II. Essential Requisites of

Contracts

I. CONSENTII. OBJECTIII. CAUSE

I. CONSENT:

Conformity of the parties to the terms of thecontract; the acceptance by one of the offermade by the other. (Manresa)

Requisites:1. It must be manifested by the

concurrence of the offer and acceptance(Arts. 1319-1326)

2. The contracting parties must possessthe necessary legal capacity (Arts. 1327-1329)

3. It must be intelligent, free,spontaneous, and real (not vitiated)(Arts. 1330-1346)

A. CONCURRENCE

1. OFFER: a unilateral proposition whichone party makes to the other for thecelebration of the contract. (Tolentino)

Requisites:a. Definiteb. Intentionalc. Complete

Invitations to make offers(advertisements) Business advertisements of things

for sale, are NOT definite offers, justinvitations to make an offer,UNLESS the contrary appears (Art.1325)

Advertisements for bidders areinvitations to make proposals,advertiser is NOT bound to acceptlowest or highest bid, UNLESScontrary appears; the bidder is theofferor (Art. 1326).

Statements of intention: no contractresults even if accepted

Rosenstock v. Burke, 1924:FACTS: Elser, in a letter, informed Burke that hewas ‘in a position and is willing to entertain’ thepurchase of the yacht under some terms.HELD: The word “entertain” applied to an actdoes not mean the resolution to perform saidact, but simply a position to deliberate fordeciding to perform or not to perform said act. Itwas merely a position to deliberate whether ornot he would purchase the yacht and invitation

to a proposal being made to him, which might beaccepted by him or not.

OFFER TERMINATES upon:a. Rejection by the offereeb. Incapacity (death, civil interdiction,

insanity, or insolvency) of the offereror offeree before acceptance isconveyed

c. Counter-offerd. Lapse of the time stated in the offer

without acceptance being conveyede. Revocation of the offer before

learning of acceptancef. Supervening illegality before

acceptance(J.B.L. Reyes)

2. ACCEPTANCE.

Requisites:a. Unqualified and Unconditional, i.e.

it must conform with all the terms ofthe offer, otherwise it is a counter-offer (Art. 1319)

b. Communicated to the offerer andlearned by him (Arts. 1319, 1322). Ifmade through an agent, the offer isaccepted from the time theacceptance is communicated tosuch agent.

c. Express/Implied, but is notpresumed

OPTION CONTRACT: A preparatorycontract in which one party grants tothe other, for a fixed period, the optionto decide whether or not to enter into aprincipal contract. (Art. 1324)

With consideration Without considerationOfferor cannotunilaterally withdrawhis offer

Offeror may withdrawby communicatingwithdrawal to theofferee beforeacceptance

B. CAPACITY

1. Incapacitated to Give Consent

a. Minors, UNLESS, the minor’sconsent is operative in contracts: For necessaries (Art.1427) Where the minor actively

misrepresents his age (estoppel)

Mercado v. Espiritu, 1917: Minors held inestoppel through active misrepresentation.

Bambalan v. Maramba, 1928: There is noestoppel if the minority was known.


Page 39 of 177

CO

NT

RA

CT

Sb. Insane or demented persons,

UNLESS, they contract during alucid interval

c. Deaf-mutes who do not know howto read and write.

2. Disqualified to Contract (Art. 1329):a. Those under Civil interdiction for

transactions inter vivos (RPC Art. 34)b. Undischarged insolvents (Insolvency

Law, Sec.24)c. Husband and wife: cannot donate

(Art. 123 FC) to each other, nor sellif the marriage is under ACP(Art.1490)

d. The ff. cannot purchase (Art. 1491): The guardian: his ward’s

property The agent: the principal’s

property Executors and administrators:

property under administration Public officers-state property

under their administration Justices, judges, prosecutors,

clerks of court, lawyers-propertyattached in litigation.

e. Members of Ethnic Minorities: theircontracts (excluding sale of personalproperty or personal servicecontracts) must be approved by theGovernor or his representative.(Public Land Act)

Incapacity to GiveConsent (Art. 1327)

Disqualification toContract (Art.1329)

Restrains the exerciseof the right to contract

Restrains the veryright itself

Based on subjectivecircumstances ofcertain persons

Based on publicpolicy and morality

Voidable Void

C. VICES OF CONSENT (Art. 1330)(MIVUF)

1. Mistake2. Intimidation3. Violence4. Undue Influence5. Fraud

1. MISTAKE:Inadvertent and excusable disregard ofa circumstance material to the contract.(J.B.L. Reyes) In order that mistake may invalidate

consent, it should refer to thesubstance of the thing which is theobject of the contract, or to those

conditions which have principallymoved one or both parties to enterinto the contract (Art.1331)

Mistake ofFact

Mistake ofLaw

MutualMistake

When one orbothcontractingpartiesbelieve that afact existswhen inreality it doesnot, or viceversa

When one orboth partiesarrive at anerroneousconclusion ontheinterpretationof a questionof law or thelegal effects

Must be asto the legaleffect of anagreement

Must bemutual

Real purposeof the partiesmust havebeenfrustrated

2. INTIMIDATION:When one of the contracting parties iscompelled by a reasonable and well-grounded fear of an imminent and graveevil upon his person or property, orupon the person or property of hisspouse, descendants or ascendants, togive his consent (Art. 1335).

Martinez v. HSBC, 1910: The conveyance ofseveral properties by to her husband’s creditors,though reluctant is still consent. She assentedto the requirements of the defendants, the civiland criminal actions against them would bedropped. A contract is valid even though one ofthe parties entered into it against his wishes anddesires, or even against his better judgment.Contracts are also valid even though they areentered into by one of the parties without hopeof advantage or profit.

3. VIOLENCE:Irresistible force used to extort consent(J.B.L. Reyes)

4. UNDUE INFLUENCE:When a person takes improperadvantage of his power over the will ofanother, depriving the latter of areasonable freedom of choice (Art.1337).

Circumstances: Relationship of the parties (family,

spiritual, confidential etc.) That the person unduly influenced

was suffering from infirmity (mentalweakness, ignorance etc.)(Art.1337)


Page 40 of 177

CO

NT

RA

CT

S5. FRAUD:

When through insidious words ormachinations of one of the contractingparties, the other is induced to enterinto a contract which, without them, hewould not have agreed to (Art. 1338).

Art. 1339. Failure to disclose facts, when thereis a duty to reveal them, as when the parties arebound by confidential relations, constitutesfraud.

Art. 1340. The usual exaggerations in trade,when the other party had an opportunity toknow the facts, are not in themselvesfraudulent.

Art. 1341. A mere expression of an opinion doesnot signify fraud, unless made by an expert andthe other party has relied on the former's specialknowledge.

Art. 1342. Misrepresentation by a third persondoes not vitiate consent, unless, suchmisrepresentation has created substantialmistake and the same is mutual.

Art. 1343. Misrepresentation made in good faithis not fraudulent but may constitute error.

SIMULATION OF CONTRACTS (Art. 1345-1346): Declaration of a non-existent willmade deliberately for the purpose ofproducing the appearance of a transactionthat does not exist, or which is differentfrom the one which actually arose. (J.B.L.Reyes)

Absolute RelativeNo real transactionis intended

Real transaction ishidden

Fictitious contract Disguised contractVoid Bound as to hidden

agreement, so long as itdoes not prejudice athird person and is notcontrary to law, morals,good customs, publicorder or public policy

II. OBJECT:

The thing right or service which is thesubject matter of the obligation arising fromthe contract.

Requisites:a. Lawful: Not contrary to law, morals,

good customs, public order or publicpolicy.

b. Actual or possible

c. Transmissible: Within the commerce ofman

d. Determinate or determinable

All things or services may be the objectof contracts, EXCEPT: Things which are outside the commerce

of men Intransmissible rights Future inheritance except in cases

authorized by law Impossible things or services Objects which are indeterminable as to

their kind, the genus should beexpressed

In order that a thing, right or service maybe the object of a contract, it should be inexistence at the moment of the celebrationof the contract, or at least, it can existsubsequently or in the future.

A FUTURE THING may be the object of acontract, such contract may be interpretedas a: Conditional contract: where its efficacy

should depend upon the futureexistence of the thing

Aleatory contract: where one of thecontracting parties assumes the riskthat the thing will never come intoexistence, e.g. insurance

III. CAUSE:

It is the impelling reason for which a partyassumes an obligation under a contract.

Requisites:a. Existingb. Licit or Lawfulc. True

Cause in:

OnerousContracts

RenumeratoryContracts

PureBeneficence

As to each ofthecontractingparties isunderstoodto be theundertakingor thepromise ofthe thing orservice by theother party

The service orbenefit which isremunerated

Mereliberality ofthebenefactor


Page 41 of 177

CO

NT

RA

CT

SIn Villaroel v. Estrada (1940), where a moralobligation is based upon a previous civilobligation, which has already been barred by thestatute of limitations at the time the contract isentered into, it constitutes a sufficient cause orconsideration to support a contract (NaturalObligation).

BUT,In Fisher v. Robb (1939), if the moral obligationarises wholly from ethical consideration, itcannot constitute a sufficient cause to supportan onerous contract, as when the promise ismade on the erroneous belief that one wasmorally responsible for the failure of anenterprise (Moral Obligation).

Cause Defined EffectLack ofCause

Absence ortotal lack ofcause

The contractconfers no rightand has no legaleffect

Illegality ofCause

Contrary tolaw, morals,good customs,public policyand publicorder

Null and Void

Falsity ofcause

Cause isstated but isuntrue

Void if it shouldnot be provedthat it wasfounded uponanother causewhich was trueand lawful

Lesion orinadequacyof cause

Cause is notproportionateto object

Shall notinvalidate thecontract exceptwhena)there is fraud,mistake, undueinfluenceb)when partiesintended adonation

Liguez v. CA (1957): In making the donation inquestion, Lopez was not moved exclusively bythe desire to benefit Liguez, but also to secureher cohabiting with him, so that he could gratifyhis sexual impulses. The donation was anonerous transaction and clearly predicated uponan illicit causa.

REVIEWER IN CIVIL LAW Chapter III. Forms of Contracts

Page 42 of 177

CO

NT

RA

CT

SChapter III. Forms of Contracts

I. RULESII. KINDS OF FORMALITIES

I. RULES:

Contracts shall be obligatory, in whateverform they may have been entered into,provided all the essential requisites for theirvalidity are present. (Art. 1356)

Spiritual System of the Spanish Code: The lawlooks more on the spirit rather than the form ofcontracts.

Exceptions: When the law requires that a contract

be in some form for validity (Arts. 1357-1358)

When the law requires that contract bein some form to be enforceable (Statuteof Frauds)

II. KINDS OF FORMALITIES

A. Contracts Which Must Appear inWriting:1. Donation of personal property

whose value exceeds five hundredpesos (Art 748)

2. Sale of a piece of land or anyinterest therein through an agent(Art 1874)

3. Antichresis (Art 2134)4. Agreements regarding payment of

interests in contracts of loans (Art.2314)

B. Contracts Which Must Appear in aPublic Document1. Art. 1358:

a. Acts and contracts which havefor their object the creation,transmission, modification orextinguishment of real rightsover immovable property; salesof real property or of an interesttherein a governed by Articles1403, No. 2, and 1405;

b. The cession, repudiation orrenunciation of hereditary rightsor of those of the conjugalpartnership of gains;

c. The power to administerproperty, or any other powerwhich has for its object an actappearing or which should

appear in a public document, orshould prejudice a third person;

d. The cession of actions or rightsproceeding from an actappearing in a public document.

e. All other contracts where theamount involved exceeds fivehundred pesos must appear inwriting, even a private one. Butsales of goods, chattels or thingsin action are governed byArticles, 1403, No. 2 and 1405.

2. Donation of immovable properties(Art. 749)

3. Partnership where immovableproperty or real rights arecontributed to the common fund(Arts.1771 and 1773)

BF Corporation v. CA, 1998: A contract may beencompassed in several instruments eventhough every instrument is not signed by theparties since it is sufficient if the unsignedinstruments are clearly identified or referred toand made part of the signed instruments.

REVIEWER IN CIVIL LAW Chapter IV. Reformation of ContractsChapter V. Interpretation of Contracts

Page 43 of 177

CO

NT

RA

CT

S

Chapter IV. Reformation ofContracts

REFORMATION: is that remedy in equityby means of which a written instrument ismade or construed so as to express orconform to the real intention of the partieswhen some error or mistake has beencommitted. (J.B.L. Reyes)

Requisites:1. There must be a meeting of the minds of

the contracting parties;2. Their true intention is not expressed in

the instrument;3. Such failure to express their true

intention is due to mistake, fraud,inequitable conduct, or accident; and

4. There is clear and convincing proof ofmistake, fraud, inequitable conduct, oraccident.(J.B.L. Reyes)

If the mistake, fraud, inequitable conduct, oraccident has prevented the meeting of the mindsof the parties, the proper remedy is notreformation but annulment of the contract.

Who May Ask for Reformation (Art. 1368):1. Either party or his successors in

interest, if the mistake was mutual;otherwise,

2. Upon petition of the injured party, orhis heirs and assigns.

NO REFORMATION in (Art. 1366):1. Simple donations inter vivos wherein no

condition is imposed;2. Wills;3. When the real agreement is void.

Implied Ratification (Art. 1367): Theaction to enforce bars subsequent action toreform when one of the parties has broughtan action to enforce the instrument, hecannot subsequently ask for itsreformation.

Chapter V. Interpretation ofContracts

(Arts 1370-1379)

RULES ON DOUBTS (Art. 1378)

PrincipalObjects

GratuitousContracts

OnerousContracts

Doubtswhere itcannot beknown whatmay havebeen theintention orwill of theparties, thecontractshall be nulland void.

Absolutelyimpossible tosettle doubtsby the rulesand only referto incidentalcircumstancesthe leasttransmissionof rights andinterestsshall prevail.

Absolutelyimpossible tosettle doubts bythe rules andonly refer toincidentalcircumstancesthe doubt shallbe settled infavor of thegreatestreciprocity ofinterests.

REVIEWER IN CIVIL LAW Chapter VI. Defective Contracts

Page 44 of 177

CO

NT

RA

CT

SChapter VI. Defective Contracts

I. RESCISSIBLEII. VOIDABLEIII. UNENFORCEABLEIV. VOID OR INEXISTENT

I. RESCISSIBLE CONTRACTS (Arts. 1380-1389)

Contracts ofguardians

Contracts inrepresentationof absentees

Contracts areentered into todefraud existing

creditors

Contracts referto things inlitigation

What makes itdefective?

Acts ofadministrationcause LESION ordamage to theWARD theyrepresent, > 25%of the value of thething

Acts ofadministrationcause LESIONor damage to theABSENTEE theyrepresent, >25% of the valueof the thing

*Prior to thealienation (the actionis called ACCIONPAULIANA)

Entered intowithout theknowledge &approval oflitigants orcompetent judicialauthority

Effect on theContract

Valid until rescinded

How to rescind? Direct Action

NO rescission if:1. Injured party has other legal

means to obtain reparation.2. Plaintiff cannot return his part of

the obligation3. Object of the contract is in the

hands of third person, onerouslyacquired by him in good faith

4. If court does not approve it(article 1386)

Direct Accion (Accion Pauliana, forContracts in Fraud of Creditors)

NO rescission if:1. Injured party has other legal means to

obtain reparation.2. Plaintiff cannot return his part of the

obligation3. Object of the contract is in the hands

of third person, onerously acquired byhim in good faith

Who can rescind? In general, byinjured party

By ward, or byguardian ad litemof ward duringincapacity of wardin an actionagainst theoriginal guardian

By absentee By creditor(s) By party litigant

When? Within four yearsfrom [re-] gainingcapacity

Within 4 yearsfrom knowledgeof domicile ofabsentee

Within 4 years fromknowledge offraudulent contract

Within 4 yearsfrom knowledge offraudulentcontract

How to curedefect?

Ratification byinjured party(ward), within fouryears from gainingcapacity

Ratification byinjured party(absentee),within fouryears fromknowledge ofdomicile ofabsentee orknowledge offraudulentcontract

Ratification by injured party (defraudedcreditor), within four years from knowledgeof fraudulent contractSame as contracts in fraud of creditors


Page 45 of 177

CO

NT

RA

CT

SII. VOIDABLE CONTRACTS (Arts. 1390-1402)


Incapacity of one party to thecontract

Consent vitiated by mistake, violence,intimidation, undue influence or fraud


Valid until annulled by competent court

How to annul? 1. Directly, by an action for annulment2. Indirectly, by counterclaim asking for positive action of the court to set aside the

contractAnnulment cannot proceed when object of the contract is lost through fraud ordeceit of person with right to institute proceedings (art 1401); if lost by party withno right to file action, he should pay the value of the thing and its fruits, plusinterest (art 1402)

Who can annul? 1. Parties who are obliged principally or subsidiarily2. Party who has knowledge of the defect CANNOT file for annulment

When? Within four years after guardianship ofminors or incapacitated persons ceases

Within four years1. After intimidation, violence or undue

influence ceases2. From the time of discovery of mistake

or fraudEffect ofAnnulment

1. Mutual restitution of the things delivered, along with fruits and price paid withinterest

2. Damages to be paid by party who caused defect of the contract, by virtue ofArticle 20 and 21 of the Civil Code

How to CureDefect?

Express (written or oralmanifestation) or tacit ratification(acts or conduct) by injured party,or guardian of incapacitated person.

No need for other party who has noright to bring action to conform

Either through express (written or oralmanifestation) or tacit ratification (actsor conduct) by injured party

No need for other party who has noright to bring action to conform

III.UNENFORCEABLE CONTRACTS (Arts. 1403-1408)


Contract entered intowithout authority of, orin excess of authoritygiven by owner

Contracts covered byStatute of Frauds whichdid not comply with thewritten memorandumrequirement

Contract where bothparties incapable ofgiving consent tocontract


No effect unless ratified. Cannot be enforced by a proper action in court.

How to assail? Not by direct action.1. As a defense, by motion

to dismiss complaint onthe ground that thecontract isunenforceable

Cannot be assailed bydirect action

Not by direct action.1. As a defense, by motion to

dismiss complaint on theground that the contractis unenforceable;

2. Objection to thepresentation of oralevidence to prove an oralcontract

Not by direct action.1. As a defense, by

motion to dismisscomplaint on theground that thecontract isunenforceable

Who can assail? By person whose name thecontract was entered into.By owner of property.

By party against whom thecontract is being enforced; orhis privies.

By party against whomthe contract is beingenforced; or his privies;or parents or guardianspersons, as it is apersonal defense

NOTE: Cannot be assailed by third persons, as it is a personal defenseWhen? When a party asks the court to enforce the contractHow to CureDefect?

1. Ratification by personwhose name thecontract was enteredinto

1. Ratification by partyagainst whom thecontract is being enforced

2. By failure to object to thepresentation of oralevidence to prove an oralcontract

1. By ratification ofparty against whomthe contract is beingenforced; or hisprivies; or parents orguardians

The ratification byone party convertsthe contract into avoidable contract


Page 46 of 177

CO

NT

RA

CT

SIV.VOID OR INEXISSTENT CONTRACTS (Arts. 1409-1422)


Contract’s Cause, Objectof Purpose is contrary tomorals, good customs,public order or publicpolicy

Inexistent contracts, orcontracts whose essentialelements are absent

Contracts expresslyprohibited or declaredvoid by law (Art 1409);contracts which aredirect results of aprevious illegalcontract (art 1422)


No effect: does not create, modify or extinguish juridical relation to which it refers

How to assail? File for action for declaration of inexistence or nullity of contract Contract is null ipso jure, hence judgment of nullity merely declaratory Also, nullity may be filed as a defense during trial. Such defense not available to

third persons not directly affected by contract In pari delicto applies when cause or object of contract constitutes a criminal

offenseWho can assail? 1. Innocent party

2. Less-guilty party,upon court discretion

3. Incapacitated personwho is a party to anillegal contract, uponcourt discretion

4. Any person whoseinterests are directlyaffected by thecontract

1. Any of the parties2. Any person whose

interests are directlyaffected by the contract

1. Any person whoseinterests aredirectly affected bythe contract

2. By party for whoseprotection theprohibition of thelaw is designed.

When? Does not prescribe

- end of Contracts -


SA

LE

S

Page 48 of 177

SALES

Chapter I. THE CONTRACT OF SALEA. Essential RequisitesB. StagesC. CharacteristicsD. KindsE. FormF. Sale Distinguished from Other

ContractsG. Contract to SellH. Bilateral Promise to Buy and SellI. Option ContractJ. Right of First RefusalK. AssignmentL. Document of Title

494949494950

50515151525253

Chapter II. ELEMENTS OF A VALIDSALEA. Consent

1. Absolute Incapacity2. Relative Incapacity3. Offer and Acceptance


C. Price1. Requisites2. Gross Inadequacy of Price

545454545555555556565656

Chapter III. TRANSFER OFOWNERSHIPI. General Rule: Ownership Transfers

upon DeliveryII. When Delivery Does Not Transfer

OwnershipA. Sale on ReturnB. Sale on Approval, Trial or

SatisfactionC. Executory SalesD. Sale by Description or SampleE. In an Invalid SaleF. When Seller is Not Owner

III. Kinds of DeliveryIV. Double SalesV. Risk of Loss or Deterioration

57

57

5757

5757575858586061

Chapter IV. OBLIGATIONS OF THESELLER AND THE BUYERA. Obligations of the Seller

1. Preservation2. Delivery3. Warranty

B. Obligations of the Buyer1. Acceptance2. Payment

6262626264666667

Chapter V. REMEDIES OF THESELLER AND THE BUYERA. General RemediesB. Remedies of the Seller

1. For non-acceptance of payment2. For non-payment

a. In sale of Movablesb. In sale of immovables

C. Remedies of the Buyer1. For breach of obligation to

preserve2. For breach of obligation to deliver3. For breach of warranty

6868686869697172

727273

Chapter VI. EXTINGUISHMENT OFSALEA. CausesB. Conventional Redemption

1. Definition2. Conventional Redemption vs.

Equitable Mortgage3. Right of Redemption

C. Legal Redemption1. Definition2. Period to redeem3. Instances

D. Under the Public Land ActE. Under Special Laws

1. Foreclosure and execution sales2. Under the Agrarian Land Reform

Code

75757575

757677777777787878

79

Chapter VII. THE BULK SALES LAW 80

REVIEWER IN CIVIL LAW Chapter I. The Contract of Sale

Page 49 of 177

SA

LE

S

SalesFACULTY-STUDENT EDITORIAL BOARD AND LECTURES COMMITTEE

Prof. Concepcion JardelezaFACULTY EDITOR

ACADEMICS COMMITTEE


EDITOR-IN-CHIEF


LAYOUT HEAD

CIVIL LAW


SUBJECT EDITORS

SALES

Donna ArevaloLEAD WRITER

Jeric CruzRich Sta.LuciaCaloy MendozaThea CunananDarwin Angeles

WRITERS

LECTURES

Edel CruzHEAD

--------


--------


Chapter I. The Contract of Sale

This chapter gives a general overview of thecontract of sale.

M. Essential RequisitesN. StagesO. CharacteristicsP. KindsQ. FormR. Sale Distinguished from Other ContractsS. Contract to SellT. Bilateral Promise to Buy and SellU. Option ContractV. Right of First RefusalW. AssignmentX. Document of Title

1458. A contract of sale is a contract where oneof the parties obligates himself to transferownership of and to deliver a determinate thing,and the other to pay therefor a price certain inmoney or its equivalent.

A. ESSENTIAL REQUISITES(ConObCa)

1. Consent: Meeting of the minds as to theoffer and acceptance as to the offer andacceptance thereof on the price, subjectmatter, and terms and conditions ofpayment

2. Object: Must be a determinate thing3. Cause:

For seller: Payment of price For buyer: Transfer of ownership

and delivery of the thing

B. STAGES

1. Negotiation: From the time the partiesindicate interest in the contract up tothe time said contract is perfected

2. Perfection: Upon concurrence of theessential elements of the sale (Asked in’88 and ’91) At the time of the meeting of the

minds of the parties as to the objectof the contract and the price

3. Consummation: Begins when theparties perform their respectiveundertakings under the sale Culminates in the extinguishment of

the sale

C. CHARACTERISTICS

1. Nominate2. Consensual: Founded upon and

perfected by mere consent of thecontracting parties

3. Commutative: Each party gives a thingof value and receives an equivalent

4. Bilateral: Each is bound to fulfillreciprocal obligations

5. Onerous: Thing is sold in considerationof the price and vice versa

6. Principal7. Real obligation

D. KINDS(Asked in 97, 00)

1. Absolute: Sale is not subject to anycondition whatsoever; title passes to thebuyer upon delivery of thing sold

2. Conditional: Contract is subject tocertain conditions (usually the paymentof the purchase price); title will onlypass once the conditions have beenfulfilled


Page 50 of 177

SA

LE

SE. FORM

General rule: No form required.

May be:

Written Oral Partly written and partly oral Inferred from the conduct of the parties

(Art.1483)

Rationale: Sale is perfected by consent ofthe parties.

Exceptions:1) Statute of Frauds (1403) What are under the Statute of Frauds:

o Sale of real property or an interesttherein

o Sale of goods, chattels, or things inaction at a price not less than P500

o Sale not to be performed within 1year

Contract or some memorandum thereofmust be in writing and subscribed bythe party or his agent, otherwisecontract is unenforceableo Unless ratified by failure to object to

oral evidence or acceptance ofbenefits under the contract

Applies only to executory contracts, notto contracts either totally or partiallyperformed. (Iñigo v. Estate of Maloto,1967)

2) Sale of realty by an agentAgent’s authority must be in writing Otherwise the sale is void (Art.1874)

3) Sale of large cattleTo be valid, transfer of large cattle mustbe registered with the municipaltreasurer (Sec.529, RevisedAdministrative Code)

4) Electronic Commerce ActElectronic documents have the legaleffect, validity or enforceability of anyother document or legal writing

As long as electronicdocument maintains its integrityand liability and is capable of beingdisplayed to the person to whom itis to be presented, containing theelectronic signature of the personsending it

F. SALE DISTINGUISHED FROMOTHER CONTRACTS

1. Sale vs. Contract for a Piece of Work(Art.1467)

SALE CONTRACT FOR APIECE OF WORK

Goods aremanufactured orprocured in theordinary course ofbusiness

Goods aremanufactured forcustomer upon hisspecial order

For the general market Specifically forcustomer

Contract for a piece of work: Contractorbinds himself to execute a piece of workfor the employer in consideration of acertain price or compensation

If the article ordered by the purchaser isexactly such as the plaintiff makes andkeeps on hand for sale to anyone, andno change or modification of it is madeat the defendant’s request, it is acontract of sale, even though it may beentirely made after and in consequenceof the defendant’s order for it.

If the essence is the object, it is a sale. Ifthe object is the skill, knowledge orreputation, then it is a contract for apiece of work.

2. Sale vs. Lease of Things

SALE LEASE OF THINGSOwnership istransferred

Ownership is nottransferred

3. Sale vs. Agency to Buy or Sell(Asked in 99, 00)

SALE AGENCY TO BUY ORSELL

Buyer pays the price Agent does not pay theprice but delivers theprice Buyer pays theprice he obtains fromthe sale to the principalIf agent cannot sell thething, he must returnit to the principal.

In construing a contract as a sale or anagency to sell, the essential clauses ofthe whole instrument shall beconsidered. (Art.1466)

4. Sale vs. Barter/Exchange(ART.1638)

SALE BARTERConsideration is pricein money or itsequivalent

Consideration is anotherthing


Page 51 of 177

SA

LE

S Barter is a contract where one of the

parties binds himself to give one thingin consideration of the other’s promiseto give another thing (Art.1638)

If consideration consists partly inmoney and partly in another thing:transaction characterized by themanifest intention of the parties.o If manifest intention is not clear:

Barter if value of thing > amountof money or its equivalent

Otherwise, sale. (Art.1468) The intention of the parties must be

manifested by ostensible signs.

5. Sale vs. Donation

SALE DONATIONOnerous Gratuitous

When the price of the contract of sale issimulated, the sale may be void but theact may be shown to have been inreality a donation or some othercontract. (Art.1471)

6. Sale vs. Dacion en Pago

SALE DACION EN PAGONo pre-existing debt Pre-existing debtCreates an obligation Extinguishes the

obligation (mode ofpayment)

Price is more freelyagreed upon, fixed bythe parties

Price is value of thething given

There is a novation of the contract ofloan into a contract of sale when thecreditor agrees to accept a thing inpayment of the debt.

G. CONTRACT TO SELL/EXECUTORY CONTRACT OF SALE(Asked in 97, 01, 03)

McCullough & Co. vs. Berger, (1922): Asale is an executory contract if the sellermerely promises to transfer the property atsome future date, or when the agreementcontemplates the performance of some actor condition necessary to complete thetransfer.

No title passes to the buyer until the act isperformed or the condition fulfilled which isnecessary to convert the executory contractinto an executed contract.

No need for judicial rescission: Failureby one of the parties to abide by thecondition in a contract to sell will resultto rescission.

H. BILATERAL PROMISE TO BUYAND SELL(Asked in 80, 91)

A promise to buy and sell a determinatething for a price certain is reciprocallydemandable. (1479)

Like a sale, the thing must bedeterminate and the price certain.

SALE BILATERALPROMISE TOBUY ANDSELL

CONSIDERATION For buyer:thingFor seller:price

Promise madeby one partyis theconsiderationfor thepromise madeby the other(Baviera)

TRANSFER OFTITLE

Titlepasses tobuyer

No transfer

I. OPTION CONTRACT/ACCEPTEDUNILATERAL PROMISE TO BUYOR SELL A DETERMINATE THING(Asked in 75, 77, 80, 93, 02)

Art. 1324. When the offerer has allowed the offereea certain period to accept, the offer may bewithdrawn at any time before acceptance bycommunicating such withdrawal, except when theoption is founded upon a consideration, assomething paid or promised.

Art. 1479. A promise to buy and sell a determinatething for a price certain is reciprocally demandable.

An accepted unilateral promise to buy or to sell adeterminate thing for a price certain is bindingupon the promissor if the promise is supported bya consideration distinct from the price.

De la Cavada vs. Diaz, (1918): Anoptional contract is a privilege existing inone person for which he had paid aconsideration which gives him the right tobuy, for example, certain merchandise orcertain specified property, if he chooses, atany time within the agreed period, at a fixedprice.

SALE OPTION CONTRACTBilateral Unilateral: gives a right to

buy or to sell, but imposes noobligation on the part of theoption-holder, aside from theconsideration for the offer

Sale of property Sale of right to purchase


Page 52 of 177

SA

LE

S An option is not of itself a purchase, but

merely secures the privilege to buy.

Southwestern Sugar & Molasses Co. vs.Atlantic Gulf & Co., (1955): The promiseto sell, to be valid, must be supported by aconsideration distinct from the price.Therefore, the option can still bewithdrawn, even if accepted, if it is notsupported by a consideration.

Option Money vs. Earnest Money

Art. 1482. Whenever earnest money is given ina contract of sale, it shall be considered as partof the price and as proof of the perfection of thecontract.

Earnest money is paid in advance of thepurchase price agreed upon by theparties in a contract of sale, given bythe buyer to the seller, to bind the latterto the bargain. (Asked in 93, 02)

Limson vs. Ca, (2001):OPTION MONEY EARNEST MONEYSeparate anddistinctconsideration fromthe purchase price

Part of purchase price

Given when sale isnot yet perfected

Given only when there isalready a sale

When given, thewould-be-buyer isnot required to buy,but may even forfeitit depending on theterms of the option

When given, the buyer isbound to pay the balance

(Baviera) Grantee ofoption is stillundecided whetheror not to buy or sellthe property

Buyer manifests hisearnest desire to buy theproperty

J. RIGHT OF FIRST REFUSAL(Asked in 93, 96, 98, 02, 08)

Usually an integral part of contracts oflease; the consideration is built into thereciprocal obligations of the parties.(Baviera)

Illustrations: Equatorial Realty Development vs.

Mayfair, (1996): “If the lessor shoulddesire to sell the leased premises, thelessee should be given 30-daysexclusive option to purchase the same.”

Paranaque Kings vs. CA, (1997): Onlyafter the grantee fails to exercise itsright of 1st priority under the sameterms and conditions within the periodagreed upon, could the grantor

validly offer to sell the property to a3rd person under the same terms asoffered to the grantee.

A sale made in violation of a right offirst refusal is valid but rescissible,and may be the subject of an action forspecific performance.

o However, before the sale to the 3rd

person may be rescinded, he musthave been actually orconstructively aware of the rightof 1st refusal at the time he boughtit.

SALE RIGHT OF 1ST REFUSALBilateral UnilateralPrice and otherterms of paymentare certain

Price and other terms areyet to be agreed upon

In both sale and right of 1st refusal, thething to be sold must be determinate.

OPTIONCONTRACT

RIGHT OF 1ST REFUSAL

Separateconsideration isnecessary

No need for a separateconsideration

Grantee has theright to buy or sell

No right to buy or sell, onlya right to the 1st offershould the grantor decideto sell

K. ASSIGNMENT

A sale of credit and other incorporealrightso Because things in action are

involved, Statute of Frauds applies ifprice is not less than 500.

Project Builders, Inc. et.al. vs. CA &IFC, (2001): An assignment of credit isan act of transferring, eithergratuitously or onerously, the right ofthe assignor, to an assignee who wouldthen be capable of proceeding againstthe debtor for enforcement orsatisfaction of the credit.o Transfer of rights takes place upon

perfection of contracto Assignee becomes owner of the right

including all appurtenances andaccessory rights (Ex. Guaranty,Mortgage, Preference, etc.)

Perfected at the moment there is ameeting of the minds upon the objectand the price (Baviera)


Page 53 of 177

SA

LE

S Debtor must be notified of the

assignment so that he would beinformed that, from the date of theassignment, payment should be madeto the assignee.o Debtor who pays creditor before

having knowledge of the assignmentshall be released from theobligation.

To bind 3rd persons: must appear inpublic instrumento If real property is involved: must be

recorded in Registry of Deeds

L. DOCUMENT OF TITLE

Document of Title – a document used inthe ordinary course of business in the saleor transfer of goods, as proof of thepossession or control of the goods, orauthorizing or purporting to authorize thepossessor of the document to transfer orreceive, either by endorsement or bydelivery, goods represented by suchdocument. (Art. 1636)

Examples: bill of lading, quedan,warehouse receipts

Function: Evidence of possession or control of

goods described therein Medium of transferring title and

possession over the goods describedtherein without having to effect actualdelivery thereof (Villanueva)

1. Negotiable Documents of Title Document of title which states that

the goods referred to therein will bedelivered to the bearer, or to theorder of any person named in suchdocument.

TERMS OF THEDOCUMENT

HOW NEGOTIATED

Goods are deliverableto bearer

Endorsed in blank bythe person to whoseorder the goods weredeliverable

By delivery of thedocument to another

Goods are deliverableto the order of aspecified person

By indorsement ofsuch person

Who may negotiate it? Owner Person to whom the possession or

custody of the document has beenentrusted by the owner

o If bailee undertakes to deliver thegoods to such person

o If document is in such form that itmay be negotiated by delivery

A person to whom a document has beennegotiated acquires: Rights of the vendor Rights of the original consignee

A person who negotiates a document of titlewarrants: Genuineness of document Legal right to negotiate or transfer No knowledge of fact which would impair

the validity or worth of the document Right to transfer the title to the goods and

merchantability or fitness for a particularpurpose, whenever such warranties wouldhave been implied had the contract beentransfer the goods without a document

He does not warrant that: Common carrier will fulfill its obligation to

deliver the gods Previous indorsers will fulfill their

obligation

Goods in the hands of the carrier covered bya negotiable document cannot be attached orlevied upon, UNLESS Document is first surrendered to the

carrier; or Impounded by the court; or Its negotiation is enjoined.

2. Non-negotiable Documents of Title

Goods described in a non-negotiabledocument of title are deliverable only to aspecified person Carrier will not deliver the goods to any

holder of the document or to whom suchdocument may have been endorsed by theconsignee

Must present the deed of sale or donationin his favor

“Negotiation” [negotiable document of title]VS. “Transfer” [non-negotiable document oftitle]:

Transfer the assignment of rights of the consignee

of a non-negotiable document of title toanother

Order document of title was sold orassigned, without indorsement

Transferee does not acquire a better titlethan his transferor [unlike in a negotiabledocument of title, where the buyer mayacquire a better title].

REVIEWER IN CIVIL LAW Chapter II. Elements of a Valid Sale

Page 54 of 177

SA

LE

SChapter II. Elements of a

Valid Sale

A. Consent1. Absolute Incapacity2. Relative Incapacity3. Offer and Acceptance


C. Price1. Requisites

a. Certainb. In money or Its Equivalentc. Reald. True

2. Gross Inadequacy of Price

A. CONSENT

Consent: meeting of offer and acceptanceon the thing sold and price

Consent must not be vitiated, otherwisesale is voidable. Vices of Consent: FIMVU

Fraud Intimidation Mistake Violence Undue Influence

Buyer and Seller must have capacity toenter into the contract of sale.

1. Absolute Incapacity: Cannot validlygive consent to contracts (MINDCI) Minors Insane or Demented Deaf-Mute who do know how to read

or write Civil Interdiction Juridically-declared Incompetent

Prodigals Hospitalized Lepers

Persons not of unsound mindbut by reason of age, disease,weak mind, and other similarcauses, cannot take care ofthemselves and manage theirproperty without outside aid(Easy prey for deceit andexploitation)

If both parties are incapacitated:UNENFORCABLE

If only 1 party is incapacitated:VOIDABLE

If necessaries are sold and delivered toan incapacitated person: must pay areasonable price thereforo “Necessaries” – those which are

indispensable for his support,according to the social position ofthe family

2. Relative Incapacity (HWiG-APE-JuLA)

a. Husband and Wife(Asked in 75, 76, 00, 02, 06) General Rule: Cannot sell property

to each othero Exception: Separation of

property in marriage settlement,OR judicial separation ofproperty

Rationale: To protect 3rd personswho may have contracted with thespouse

Art. 96/124. The administration and enjoymentof the community property/ conjugalpartnership shall belong to both spouses jointly.In case of disagreement, the husband's decisionshall prevail, subject to recourse to the court bythe wife for proper remedy, which must beavailed of within five years from the date of thecontract implementing such decision.

In the event that one spouse is incapacitated orotherwise unable to participate in theadministration of the common properties, theother spouse may assume sole powers ofadministration. These powers do not includedisposition or encumbrance without authority ofthe court or the written consent of the otherspouse. In the absence of such authority orconsent, the disposition or encumbrance shallbe void. However, the transaction shall beconstrued as a continuing offer on the part ofthe consenting spouse and the third person, andmay be perfected as a binding contract upon theacceptance by the other spouse or authorizationby the court before the offer is withdrawn byeither or both offerors. (Family Code)

b. Guardian Cannot purchase property of person

under his guardianship

c. Agents Property whose administration or

sale was given to themo Except if principal gives consent

d. Public Officers and Employees Property of State/any of its

subdivisions/GOCC, theadministration of which wasentrusted to them


Page 55 of 177

SA

LE

Se. Executors and Administrators

Property of estate under theiradministration

f. Justices, Judges, prosecuting attorneys,clerks Property or rights in litigation or

levied upon on execution Rationale: to prevent fraud and to

surround their profession withprestige

g. Lawyers Property or rights in litigation in

which they take part because oftheir profession

Rationale: Lawyer may have undueinfluence over client

h. Aliens or private corporations orassociations Lands located in the Philippines Except natural-born Filipinos

allowed to acquire residential lands

For persons under (a)-(g): Have fiduciaryrelationship with the owners; prohibition isto prevent them from taking advantage ofsuch

Ancestral domains of indigenous culturalcommunities belong to all their generationsand cannot be sold or disposed of except toor among the members, subject to theircustomary laws and traditions.

3. Offer and Acceptance

Offer must be certain as to the objectand priceo Business advertisements of things

for sale are not offers

Mere invitations to make an offer Exception: If otherwise provided

o Advertisements for bidders aresimply invitations to make proposals(Asked in 80)

Advertiser not bound to acceptthe highest or lowest bid

Exception: Unless the contraryappears

Acceptance must be absoluteo Plain and unconditional; Qualified

acceptance = counter- offero May be express or implied

Beaumont vs. Prieto, (1916): Where theacceptance was not in accordance with theterms and conditions of the offer, the offerlapsed even though the offeree later on waswilling to accept the terms and conditionsof the offer.

B. SUBJECT MATTER

Thing sold must be: (LAD)

1. Licit

Not contrary to law, morals, goodcustoms, public order or public policyo Examples of illicit: dangerous drugs,

dynamited fish, wild bird or mammal

Within the commerce of mano Examples of illicit: properties

belonging to the State or its politicalsubdivisions, intended for public useor public service

2. Actual or Possible

Actual: Existing

Possible: Has a potential existenceo VALID:

Sale of future goods (goods to bemanufactured, raised, or acquiredby seller after the perfection of thesale)

Sale of undivided interest in athing Buyer becomes co-owner of

the entire mass, in proportionto the amount he bought

Co-owner cannot sell morethan his share (Asked in 01,02)

Sale of things subject to aresolutory condition (Asked in 99)

Sale of MERE hopeor expectancy

Sale of VAIN hopeor expectancy

ValidBUTSubject to conditionthat the thing willcome into existence

Example: “Nextcatch” of a fisherman

Void

Emptio ReiSperatei

Emptio Spei

Valid VoidParties make thecontract dependupon the existence ofa thing, If the thing doesnot come intoexistence: contract isconsidered as notmade and there is noobligation to pay theprice

Parties intend thecontract to exist atall events Buyer will have topay the price even ifthe thing does notactually came intoexistence

(Tolentino)


Page 56 of 177

SA

LE

So VOID: Sale of future inheritance (But

heir may sell his hereditary rights)

o RESCISSIBLE: Sale of things underlitigation entered into by defendant,without the approval of the litigants orthe court NO RESCISSION where the thing

is legally in the possession of 3rd

persons who did not act in badfaith

3. Determinate

Particularly designated Physically segregated Capable of being made determinate

without the necessity of a new orfurther agreement between the parties

“Determinate” also covers genericthings, future goods, and undividedinterests. (Baviera)

C. PRICE

A contract of sale is null and void andproduces no effect whatsoever if: Without cause or consideration Price which appears to have been paid

was in fact never paid (Baviera)

Toyota Shaw vs. CA, (1995): Manner ofpayment goes into the price such that adisagreement on the manner of payment istantamount to a failure to agree on theprice.

1. Requisites

Price must be: Certain

o Considered certain if the price agreedupon is that which the thing soldwould have on a definite day, or in aparticular exchange or market, orcould be determined with reference toa thing certain.

o Price is fixed by agreement of theparties Fixing of price cannot be left to

discretion of one of the parties,BUT if such is accepted by theother, sale is perfected.

o May be fixed by a 3rd person If unable or unwilling: Sale is

inefficacious Unless parties subsequently

agree about the price If in bad faith/by mistake: Courts

may fix price If 3rd person is prevented from

fixing price by fault of seller or

buyer: Innocent party may avail ofremedies

o If price cannot be determined: (Askedin 76) Sale is inefficacious

But if thing or part thereofhas been delivered andappropriated by the buyer, hemust pay a reasonable pricetherefor

What is reasonable price?Question of fact dependent oncircumstances

In money or its equivalento Example: Letters of credito If price is partly in money and partly in

another thing: Determine manifestintention of the parties to see whetherit was barter or sale

Realo “Real”—when buyer has an intention

to pay and the seller has anexpectation to receive the price

o Not simulated If simulated: Sale is VOID

But act may be shown to havebeen a donation or some otheract or contract

Trueo Price is false when the real

consideration is not the same as thatstated in the contract

o If false price is stated:Sale is void, unless proved to befounded on another true and lawfulprice (1353)

2. Gross Inadequacy of Price

Does not affect a contract of sale, exceptthat:o It may indicate a defect in consent

such as fraud, mistake, or undueinfluence

o It may indicate that the contract wasin reality a donation or some other actor contract

Sale is rescissible if:o Sale is entered into by a guardian or

representative of an absenteeo Ward or absentee suffers lesion by

more than ¼ of the thing soldo Sale is not approved by the court

When there is right to redeem,inadequacy of price is not materialo Judgment debtor may reacquire his

property or else sell his right toredeem so he may recover the losseshe claims to have suffered

o The lesser the price, the easier it is forthe owner to redeem the property(Baviera)

REVIEWER IN CIVIL LAW Chapter III. Transfer of Ownership

Page 57 of 177

SA

LE

SChapter III. Transfer of Ownership(Asked in 84, 98, 99, 03)

I. GENERAL RULE: OWNERSHIPTRANSFERS UPON DELIVERY

II. WHEN DELIVERY DOES NOT TRANSFEROWNERSHIPA. SALE ON RETURNB. SALE ON APPROVAL, TRIAL OR

SATISFACTIONC. EXECUTORY SALESD. SALE BY DESCRIPTION OR SAMPLEE. IN AN INVALID SALEF. WHEN SELLER IS NOT OWNER

III. KINDS OF DELIVERYIV. DOUBLE SALESV. RISK OF LOSS OR DETERIORATION

I. GENERAL RULE

Ownership of the thing shall transfer to thevendee upon:

A. Actual or Constructive Delivery DELIVERY is the method of

accomplishing the transfer oracquisition of ownership in a sale.

Kuenzle v. Macke, (1909): Sale withoutdelivery gives the purchaser only therights of a creditor.

Essential Elements of Tradition:1. Property under the control of the

seller2. Intention to deliver or transfer3. Seller places the buyer in control

B. Any manner signifying an agreementthat possession is transferred fromvendor to vendee

II. EXCEPTIONS

When Delivery Does NOT TransferOwnership

A. Sale on Return - Goods delivered tobuyer on “sale or return” Ownership passes upon delivery,

but buyer may revest ownership inthe seller by returning or tenderingthe goods within the time fixed inthe contract.

Buyer remains liable for the priceeven if it becomes impossible toreturn the goods.

Non-exercise of the privilege ofreturn rendered the sale absoluteand the buyer becomes liable for theprice.

Sale providing that the buyer wouldbe permitted to return them unlessthey measured up to the descriptionwas a sale with option to returnand NOT a sale on approval

Sale w/ Privilege ofReturn

Conditional Sale

WHEN TITLEPASSES:Upon payment ofprice

WHEN TITLEPASSES:Upon delivery

B. Sale on approval, trial, or satisfaction- Goods delivered to the buyer subjectto his approval or “on trial” or “onsatisfaction” Ownership passes to the buyer

when:1. He signifies his approval or

acceptance to the seller or doesany other act adopting thetransaction, OR

2. He retains the goods withoutgiving notice of rejection on theexpiration of the time fixed forthe return of the goods, OR

3. On the expiration of areasonable time, if no period hasbeen fixed.

C. Executory Sales1. Ownership in the thing shall not

pass to the purchaser until he hasfully paid the price.

2. Seller reserves the right ofpossession or ownership in thegoods until certain conditions havebeen fulfilled notwithstandingdelivery to the buyer/carrier/bailee.

Luzon Brokerage v. Maritime Bldg.,(1972): Where the buyer failed tocomply with the condition precedent tothe transfer of ownership or possessionof the thing sold, the seller may recoverpossession or extrajudicially terminatethe operation of the contract, refuseconveyance, and retain sums alreadyreceived, where such rights areexpressly provided for in the contract. Neither does the buyer’s creditor

have a right to attach the goods.

D. Sale by Description and/or Sample –Contract may be rescinded:1. If the bulk of the goods delivered

does not correspond with thedescription or sample

2. Contract is by sample ANDdescription – not sufficient that the


Page 58 of 177

SA

LE

Sbulk of goods correspond with thesample if they do not alsocorrespond with the description

E. In an Invalid Sale

F. When Seller is NOT the Owner(Asked in 77, 78, 86, 87) Gen. Rule: One cannot give what

one does not have Aznar vs. Yapdiangco (1965):

When the owner has lost or hasbeen unlawfully deprived of amovable, he may recover it evenfrom a buyer in good faith.o Limitation: if buyer in good faith

acquired it in a public sale, theowner must reimburse the pricepaid therefor

Art. 559. The possession of movable propertyacquired in good faith is equivalent to a title.Nevertheless, one who has lost any movable orhas been unlawfully deprived thereof mayrecover it from the person in possession of thesame.

If the possessor of a movable lost or which theowner has been unlawfully deprived, hasacquired it in good faith at a public sale, theowner cannot obtain its return withoutreimbursing the price paid therefor. (464a)

Exceptions:a. Estoppel: Owner is by his

conduct precluded from denyingthe seller’s authority to sell

b. Sale under court ordero In execution sale, the buyer

merely steps into the shoesof the judgment debtor (Rule39, sec. 33, ROC)

c. When goods are purchased in ao Merchant’ store,o Fair, oro Market

d. Registered land bought in goodfaitho General rule: Buyer need not

go beyond the Torrens titleo Exception: When he has

actual knowledge of factsand circumstances thatwould impel a reasonablycautious man to makefurther inquiry

III.KINDS OF DELIVERY(Asked in 77)

1. Real Delivery – thing sold is deliveredwhen it is placed in the control andpossession of the vendee

Ocejo v. International Bank, (1918): Thefact that the price of the property has notbeen paid in full yet is not an obstacle to theacquisition of ownership by the buyer. Thisis without prejudice to the right of the sellerto claim payment of the price. Even if thebuyer is subsequently declared insolvent,seller cannot institute an action forreplevin, as rescission did not ipso factotake place by the mere fact of insolvencyof the buyer.

Bean v. Cadwallader, (1908): A merecontract for the sale of goods, wherenothing remains to be done by the sellerbefore making the delivery, transfers theright of property, although the price hasnot been paid, nor the thing soldactually delivered to the purchaser.

2. Constructive Deliveryi. Symbolic Delivery

Delivery by Public Instrument– Execution thereof shall beequivalent to delivery of thething which is the object of thecontract, IF from the deed, thecontrary does not appear orcannot be clearly inferred.

A person must be in ACTUALpossession to be able to transferCONSTRUCTIVE possessionthrough a public instrument.

When NOT equivalent to delivery: Theintention of the parties is otherwise.

Phil. Suburban v. Auditor General,(1975): Material delivery could NOT havebeen made in the ff. cases:2. When a certain date is fixed for the

purchaser to take possession of theobject of the conveyance, OR

3. Where, in a case of sale by installment,it is stipulated that until the lastinstallment is paid, title to the propertyremains with the vendor, OR

4. When the vendor reserves the right touse and enjoy the property, OR

5. Where the vendor has no control overthe thing sold, at the moment of thesale.

ii. Tradition Longa Manu – TheMOVABLE is placed in the sight ofthe purchaser so that he can takepossession of it at pleasure.


Page 59 of 177

SA

LE

S Delivery effected by the delivery

of the keys of the place ordepositary where it is stored orkept.

Where quedans were issued tothe purchaser for goods locatedin the seller’s warehouse “placedat the disposal of the buyer”,delivery was effected upon theexecution of the quedans, andthe seller became only adepositary of the goods sold.

Board of Liquidators v. Floro, (1960): In acontract for the salvage of surplusproperty, whereby the employer assigned allits rights and title to all surplus propertysalvaged by the contractor, and payment isto be made monthly on the basis of propertysalvaged during the preceding month,tradition longa manu takes place andownership passed as soon as theproperty was salvaged.

iii. Tradition Brevi Manu – MOVABLEis delivered when the vendee hadthe thing already in his possessionbefore the sale took place, not asowner but as lessee, borrower, ordepositary.

iv. Tradition ConstitutumPossessorium – Vendor remains inpossession of the property sold, byvirtue of a lease contract agreementwith the vendee.

Even if the vendor sells theproperty again to another, thesecond purchaser cannotacquire ownership.

v. Delivery to a Common Carrier –Title passed to the buyer at thepoint of shipment, UNLESS: Seller reserved title by the form

of the bill of lading, with intentto remain the owner, not merelyfor the purpose of securingpayment, OR

Contrary intent appears in thecontract (i.e. seller is required todeliver goods to buyer at thepoint of destination)

F.O.B.: “Free on Board” – Sellerbears the expenses oftransportation up to the F.O.B.point.

C.I.F.: “Cost, Insurance,Freight” – Price quoted includesthe costs of the goods,insurance, and freight chargeson the goods up to the point ofdestination.

F.A.S.: “Free Alongside” –Seller bears the expenses oftransportation until he deliversthe goods alongside a vessel at anamed port.

The best indication of theintention of the parties as to theplace of delivery is the mannerand place of payment.

Kind How Made Applies to1. Symbolic o By execution of public

instrument evidencing saleEXCEPT: if contrary appears orcan be clearly inferred

real or personal property;incorporeal property

o delivery of keys wherestored/kept

personal property

2. Traditio longa manu By mere agreement of the buyerand seller if possession cannot betransferred at the time of the sale

personal property

3. Traditio brevi manu By mere agreement of the buyerand seller if the buyer alreadyhad possession for any otherreason

personal property

4. Traditio constitutumpossessorium

Seller remains in possession ofthe property in a differentcapacity e.g. as lessee

real or personal property

5. Quasi-tradition Placing of the titles of ownershipin the possession of the buyer orallowing the buyer to use hisrights

incorporeal property

6. Tradition by operation of law(Art.1434)

When a non-owner who sells athing later acquires title thereto

real or personal property

7. Delivery to a carrier delivery to a carrier fortransmission to the buyer

goods


Page 60 of 177

SA

LE

S Effect of Form of Bill of Lading

Ownership is retained:By the form of the bill of lading,seller may consign the goods tohimself or to his agent and thusprevent title from passing to thebuyer until the latter pays the price

Mere possession is retained:He may consign the goods to theorder of the buyer or to the latter’sagent BUT by retaining the bill oflading, he prevents buyer fromobtaining goods from the carrieruntil price is paid.

IV.DOUBLE SALES(Asked in 77, 87, 89, 98, 01, 04)

A. Requisites:1. 2 or more valid sales;2. Same subject matter;3. 2 or more buyers with conflicting

interests at odds over the rightfulownership of the thing sold;

4. Same seller When not all requisites for the

application of Art. 1544 arepresent, the principle of priortempore, potior jure (“he who isfirst in time is preferred inright”) applies. The onlyessential requisite of this rule ispriority in time; in other words,the only one who can invoke thisis the first vendee.Undisputedly, he is a purchaserin good faith because at the timehe bought the real property,there was still no sale to asecond vendee.

B. Rules Governing Sale of MOVABLES If the same thing is sold to different

vendees, ownership shall betransferred to the person who mayhave first taken possession in goodfaith.

C. Rule Governing Sale of IMMOVABLES– Registered Land If the same immovable is sold to

different buyers, ownership belongsto the person who:o In good faith first recorded in

the Registry of Property;o If there is no inscription,

ownership passes to the personwho in good faith was first inpossession; AND

o In the absence thereof, to theperson who presents the oldest

title, PROVIDED there is goodfaith.

The 2 transactions must both besales involving the same subjectmatter.

Cheng v. Genato, (1998):Registration includes any entrymade in the books of the registry,including both registration in itsordinary and strict sense andcancellation, annotation, and evenmarginal notes.

D. Must Be in Good Faith Purchaser in good faith for value

(Asked in 76, 86, 08) – one whobuys the property of anotherwithout notice that some otherperson has a right to or interest insuch property and pays a full andfair price for the sale, at the time ofthe purchase or before he has noticeof the claim/interest of some otherperson in the property.

Good faith – an honest intention toabstain from taking anyunconscious advantage of another.

1st buyer: ALWAYS in good faithbecause there is no sale prior to histransaction

2nd buyer: must continue to be ingood faith until his contract ripensinto ownership by tradition orrecording

Annotation of adverse claim:o Places any subsequent buyer of

the registered land in bad faith Annotation of Lis Pendens:

o Buyer cannot be considered aninnocent purchaser for valuewhere it ignored the lis pendenson the title.

E. Sale by Virtue of Execution andAttachment General Rule:

Carumba v. CA, (1970): Art. 1544does NOT apply to the sale ofunregistered land at an executionsale because a buyer of unregisteredland at a execution sale only stepsinto the shoes of the judgmentdebtor, and merely acquires thelatter's interest in the property soldas of the time the property waslevied upon.

F. Unregistered Land Instrument or deeds establishing,

transmitting, acknowledging,modifying or extinguishing rights


Page 61 of 177

SA

LE

Swith respect to lands not registeredunder the Land Registration Act orthe Spanish Mortgage Law, arerequired to be registered in theRegistry of Property to prejudice 3rd

persons, although such registrationis understood to be “w/o prejudiceto a 3rd party with a better right”.

Art. 1544 applies to unregisteredland subject to a conventional salebut NOT to unregistered landsubject to judicial sale.

G. First in Possession in Good Faith If neither the vendee registered the

sale in his favor nor any registrationwas done in good faith, vendee whowas first in possession in good faithacquired ownership of the land.

Quimson v. Rosete, (1950):Possession under Art. 1544 fordetermining who had better rightwhen the piece of land has beensold several times by the sameseller includes not only materialbut also symbolic possession.

H. Oldest Title If neither of the vendees registered

their deeds of sale nor acquiredpossession of the land sold, the onewho can present the oldest title,PROVIDED there is good faith, has abetter right.

“Oldest Title” – any documentshowing acquisition of the land ingood faitho Examples: Deed of sale, receipt

for the price Does not include a public

document, UNLESS it can beinferred therefrom that delivery wasNOT effected by the executionthereof.

V. RISK OF LOSS ORDETERIORATION(Asked in 81, 85, 90)

A. Of Generic Things

An obligation to deliver a generic thing isnot extinguished by loss. (1263)

B. Of Specific Things

1. When loss occurs before perfection Borne by seller (ownership is still

with him)

2. When loss occurs at time of perfection Loss must have occurred before the

contract was entered into, withoutthe knowledge of both parties

TOTAL LOSS PARTIAL LOSS (Orloss which results insubstantial change incharacter)

Contract isineffective.

Because therecan be nocontract withoutan object

Buyer may withdrawfrom the contractORBuy the remainder at aproportionate price

3. When loss occurs after perfection butbefore delivery Seller bears risk of loss Buyer does not bear risk of loss

until goods are delivered to him

When Ownership is TransferredGeneral Rules: Owner bears risk of loss Ownership is not transferred until

delivery

Exceptions: Contrary stipulation

Sun Brothers Appliances vs. Perez,(1963): The law allows an agreement whichstipulates that:(1) where goods are sold and delivered to

the buyer, the title is to remain in theseller until full payment, [but]

(2) the loss or destruction of the propertywhile in the possession of the buyerbefore payment, does not relieve himfrom the obligation to pay the price; inwhich case, the buyer suffers the loss.

The reasons for its validity are: First, theabsolute and unconditional nature of thevendee’s promise to pay for the goods.Second, the vendor has fully performed hiscontract and the vendee received what hebargained for. Third, the policy of providingan incentive to care properly for the goods,which is under the control and dominion ofthe vendee.

Security title: Goods are delivered butseller retains ownership merely tosecure paymento Buyer, as beneficial owner, bears

risk of loss at time of delivery Delay through fault of the buyer or

seller—risk is on party at fault

REVIEWER IN CIVIL LAW Chapter IV. Obligations of the Seller and the Buyer

Page 62 of 177

SA

LE

SChapter IV. Obligations of the

Seller and the Buyer

A. Obligations of the Seller (WPD)1. Preservation2. Delivery

a. General Conceptsb. Actual & Constructive Deliveryc. Completeness of Delivery

3. Warrantya. Express Warrantyb. Implied Warrantyc. Other Warranties

B. Obligations of the Buyer (AP)1. Acceptance2. Payment

A. OBLIGATIONS OF THE SELLER

1. Preservation (Art. 1163)

Duration: from the perfection of saleuntil delivery (Art 1480)

Default standard of care: diligence of agood father of a family

General rule: seller is liable for loss ordeterioration except for fortuitous event(Art. 1174)o Exception to exception: seller is

still liable for fortuitous eventi. Law provides (e.g. delay or

promising to deliver the samething to 2 or more persons withdifferent interests – Art. 1165)

ii. By stipulationiii. Nature of obligation requires

assumption of risk Fungibles sold for a price fixed

according to weight, number ormeasure: duty to preserve begins onlyafter the things are weighed, counted ormeasured except when seller is alreadyin delay.

2. Delivery (Art. 1495)

a. General Concepts

Delivery comprises 2 obligations in Art.1495:o Actual duty to delivero Transfer of ownership – can only be

accomplished via delivery What to deliver:

o Thing sold (Art. 1495)o Fruits (Art. 1164 & 1537)o Accessions and accessories (Art.

1166 & 1537) Where to deliver: (STOR)

o A hierarchy is followed:i. Stipulation

ii. Usage of tradeiii. Seller’s place of business (office)iv. Seller’s residence

o In case of specific goods, which theparties knew to be at some otherplace when the contract wasperfected, that place is the place ofdelivery

o If goods are at the time of salepossessed by a third person, thenthere is no delivery until heacknowledges to the buyer that heholds the goods for buyer.

When to deliver: Absent a stipulationas to time, delivery must be madewithin a reasonable time; demand ortender of delivery shall be made at areasonable hour.

Improvements by seller at his expensegrants him a usufructuary righto No indemnificationo But he may remove it to the extent

that there is no damage (Art. 1538)

b. Actual & Constructive Delivery

Execution of public instrument has theeffect of actual or physical deliveryo Except

1. When stipulated otherwise – e.g.fixed date or ownership reserved(Art. 1503)

2. When thing sold was not subjectto the control of the seller duringexecution of instrument

3. “Sale or Return” option where abuyer may choose to returninstead of paying – ownership isinitially transferred but may bereverted. (Art. 1502)

4. “Sale on Acceptance” optionwhere goods are delivered onapproval or trial – ownership istransferred only when the buyerexpressly or impliedly accepts orapproves the goods

o Control over thing sold must besuch that seller is capable ofphysically transferring it to buyer;and

o This control must also extend for areasonable time after delivery(Pasagui v Villablanca, 1975)

Unless otherwise agreed, when symbolicdelivery has been made, the seller is notobliged to remove tenants to place thebuyer in actual possession of theproperty as he has already compliedwith his obligation to transferownership of and deliver the thing sold.


Page 63 of 177

SA

LE

S(Power Commercial and Industrial Corp.v. CA, 1997; Sabio v. The InternationalCorporate Bank, Inc., 2001)

c. Completeness of Delivery

When may the seller refuse todeliver:1. No payment yet or no period for

payment has been fixed in thecontract (Art.1524);

2. The buyer loses the right to makeuse of the term, as when:a. He becomes insolvent UNLESS

he gives a guaranty or securityfor the debt;

b. He does not does not furnishthe seller the guaranties orsecurities he promised;

c. He impairs the guaranties orsecurities or they disappearfortuitously UNLESS heimmediately gives new onesequally satisfactory;

d. He violates any undertaking, inconsideration of which the selleragreed to the period;

e. He attempts to abscond.(Art.1536)

Rules on Sales of Goodso Quantity less than expected

a. Buyer may reject allb. Buyer accepts with knowledge of

seller’s inability to deliver therest – buyer pays at contractprice

c. Buyer has used or disposedprior to knowing seller’s inabilityto deliver the rest – buyer paysfair value

o Quantity more than expecteda. If divisible, buyer may reject

excessb. If indivisible, buyer may reject

allo Quality different or different

goodsa. If divisible, buyer may accept the

goods compliant with contractand reject those that are not

b. If indivisible, buyer may rejectall (Art. 1522)

o Sale of specific mass of goodsIn the sale of fungibles where themeasure or weight has not beenagreed upon nor is there a fixed ratebased upon a measurement, thesubject matter of the sale is adeterminate object – the specific

mass; seller is merely required todeliver such mass even if actualquantity falls short of parties’estimate (Art. 1480)

o Delivery by installmentsa. By default, buyer is not bound

to accept delivery of goods byinstalments

b. In a contract of delivery byinstallment to be paid for viainstallment as well, delay orbreach may not necessarilymean breach of the entirecontract; depending on thecircumstances, breach may beseverable and the aggrievedparty is entitled to damages andnot rescission. (Art. 1583)

Rules on Sales of Immovableso Sale at a fixed rate per unit of

measurea. Seller bound to deliver entire

landb. If the area is less than that

stated, buyer may rescind ordemand a proportionatereduction in price

c. If a part of the land is not of thequality stated in the contract,buyer may rescind or demand aproportionate reduction in price

d. Buyer may only avail ofrescission if the area deficiencyis 10% or more of total area or ifthe inferior value of the part ofthe land exceeds 10% of theprice agreed upon. (Art. 1539)

e. If the area turns out to begreater than that stated, buyermay accept area included andreject the excess or accept alland pay a proportionate increasein price (Art. 1540)

o Sale for lump suma. Follows the same rule as the

sale of a specific mass which isexplained above

b. There is no change in price evenif area or number turns out tobe greater or lesser than thatstated (Art. 1542)

c. Exception: when the excess ordeficiency is no longerreasonable; in Asian vJalandoni, 1923, 644 sq m wasfound to be unreasonable.

d. Exception to the exception:when buyer expressly assumes


Page 64 of 177

SA

LE

Srisk on actual area of the land.(Garcia v Veloso, 1941)

e. If the price per unit or measureis not provided for in thecontract, then the rules of lumpsum sale should prevail. (Sta.Ana v Hernandez, 1966)

d. Effect of Delivery

Delivery, generally, results in transfer ofownership from seller to buyer.

As such, it also transfers the risk of lossof the thing sold to the buyer.

Acceptance is not a condition for thecompleteness of delivery; even withsuch refusal of acceptance, delivery willbe deemed completed and produce itslegal effects.

By default, expenses of and incidentalto putting the goods into a deliverablestate must be borne by seller. (Art.1521)

Delivery through carrier

F.O.B.(Free onboard)

Shippingpoint

Delivery tocarrier isequivalent todelivery tobuyer

Destinationpoint

Delivery tobuyer is uponarrival at thepoint ofdestination;risk of loss isseller’s prior tothat

F.A.S.(Freealongside)

Seller bears the expenses oftransportation until he deliversthe goods alongside a vessel at anamed port.

C.I.F.(Cost,insurance &freight)

Price quoted includes the costsof the goods, insurance, andfreight charges on the goods upto the place of destination to bepaid by seller.

3. Warranty (Art. 1495)

May be express or implied Condition vs. Warranty

Condition WarrantyPertains to and affectsthe existence of theobligation

Goes into theperformance of anobligation and may, initself, be an obligation

Non-happening doesnot amount to breachof contract

Non-fulfillmentconstitutes breach ofcontract

Must be stipulated Stipulation oroperation of law

May attach to either tothe seller’s duty todeliver thing or someother circumstance

Always relates to thesubject matter or theseller’s obligations asto the subject matter

If seller has promised that the conditionshould happen or be performed, thebuyer may treat the nonperformance ofthe condition as a breach of warranty.(Art.1545)

a. Express Warranty (APIR)

For there to be express warranty, thefollowing requisites must concur:1. An affirmation of fact or any

promise relating to the thing sold;2. The natural tendency of such

affirmation or promise is to inducethe buyer to buy;

3. The buyer buys the thing relyingthereon. (Art. 1546)o Made before the sale not upon

delivery or any other point

Affirmation of the value of thething or statement of the seller’sopinion only is not a warrantyunless:o The seller made it as an expert;o It was relied upon by the buyer.

(Art.1546) Ordinarily, what does not appear on

the face of the written instrumentshould be regarded as dealer's ortrader's talk; conversely, what isspecifically represented as true insaid document cannot beconsidered as mere dealer's talk.(Moles v. IAC, 1989)

An express warranty can be madeby and also be binding on the sellereven in the sale of a secondhandarticle. (Moles v. IAC, 1989)

Concealment of facts does notnecessarily amount to falserepresentation unless there was anactive misstatement of fact or apartial statement of fact such thatwithholding of that unsaid portionmakes that which is statedabsolutely false.

Buyer who fails to inspect conditionof property despite ampleopportunity to do so and noopposition on the part of sellercannot later on allege falserepresentation. (Phil Mftg Co. v GoJucco, 1926)


Page 65 of 177

SA

LE

Sb. Implied Warranty

1. Enumeration of implied warranties:o Implied Warranty of Titleo Implied Warranty against

Encumbrance / Non-ApparentServitudes

o Implied Warranty against HiddenDefects (Art. 1547)a. Redhibitory Defects of Animalsb. Implied Warranty as to

Merchantable Quality andFitness of Goods in Sale bySample or Description

Implied Warranty of Titleo Warranty of Seller’s Right to Sell:

seller warrants his right to sell atthe time the ownership is to pass. Inapplicable to a sheriff,

auctioneer, mortgagee, pledge,or other person professing to sellby virtue of authority in fact orlaw. (Art. 1547)

o Warranty against Eviction: sellerwarrants that buyer, from the timeownership passes, shall have andenjoy legal and peaceful possessionof the thing. Its requisites are: Buyer is deprived of the whole

or a part of the thing sold; Eviction is by final judgment Final judgment based on a right

prior to the sale or an actimputable to the vendor

Seller is summoned and madeco-defendant in the suit foreviction at the instance of thebuyer. (Power Commercial andIndustrial Corp. v. CA, 1997)

Implied Warranty againstEncumbrance / Non-ApparentServitudeso Requisites for breach:

a. Thing sold is an immovableb. Burden or servitude

encumbering the thing sold is Non-apparent Not mentioned in the

agreement Of such nature that it must

be presumed that the buyerwould not have bought it hadhe been aware thereof

Not recorded in the Registryof Property unless there isan express warranty that thething is free from all burdens

and encumbrances(Art.1560)

Implied warranty against HiddenDefectso Requisites for breach:

a. The defect renders the thingsold unfit for the use for whichit was intended OR diminishesits fitness for such use to suchan extent that had the buyerbeen aware thereof, he wouldnot have bought it or wouldhave paid a lower price;

b. The defect is not patent orvisible;

c. The buyer is not an expert who,by reason of his trade orprofession, should have knownthe defect

d. The seller is aware of the hiddenfault or defect, OR even he isnot aware thereof if there is nostipulation to the contrary(Arts.1561 &1566)

Implied warranty as to MerchantableQuality and Fitness of Goodsb. Merchantable Quality:

1) Where the goods are brought bydescription from a seller whodeals in goods of thatdescription (Art.1562)

2) In a sale by sample, if the selleris a dealer in goods of that kindand the defect is not apparenton reasonable examination ofthe sample (Art.1566)

c. Fitness for a particular purpose:Where the buyer expressly orimpliedly makes known to the sellerthe particular purpose for which thegoods are acquired AND it appearsthat the buyer relies on the seller’sskill or judgment (Art.1562(1))

Implied warranty againstRedhibitory Defect in the Sale ofAnimals Redhibitory defect- a hidden defect

of animals of such nature thatexpert knowledge is not sufficient todiscover it, even in case aprofessional inspection has beenmade

No warranty in case of:a. Animals sold at fairs or public

auctionsb. Livestock sold as condemned

The following sales are void:


Page 66 of 177

SA

LE

Sa. Sale of animals suffering from

contagious diseasesb. Sale of animals unfit for the

purpose for which they areacquired as stated in thecontract

Veterinarian liable if he fails todiscover or disclose the hiddendefect through ignorance or badfaith

Seller liable if animal dies within 3days after its purchase due to adisease that existed at the time ofsale.

d. Other Warranties

Warranty in Sale of Consumer Goodso Consumer goods – goods primarily

for personal, family, household oragricultural purposes, which shallinclude but not limited to food,drugs, cosmetics, and devices(Sec.4(q), RA 7493: Consumer Act ofthe Phil)

o Kinds of express warranty:

1. “Full warranty”- if the writtenwarranty meets the minimumstandards

2. “Limited warranty- if the writtenwarranty does not meet theminimum standards (Sec.6(c),RA7394)

o Minimum standard for warrantiesthat the warrantor shall:

1. Remedy such consumer productwithin a reasonable time andwithout charge in case of adefect, malfunction or failure toconform to such writtenwarranty;

2. Permit the consumer to electwhether to ask for a refund orreplacement without charge ofsuch product or part, as thecase may be, where afterreasonable number of attemptsto remedy the defect ormalfunction, the productcontinues to have the defect orto malfunction

o The warrantor will not be requiredto perform the above duties if he canshow that the defect, malfunction orfailure to conform to a writtenwarranty was caused by damagedue to unreasonable use thereof.(Sec.68(d), RA 7394)

Warranty in sale of Subdivision Lotor Condominium Unitso The owner or developer shall be

answerable and liable for thefacilities, improvements,infrastructures or other forms ofdevelopment represented orpromised in brochures,advertisements and other salespropaganda disseminated by theowner or developer or his agentsand the same shall form part of thesales warranties enforceable againstsaid owner or developer, jointly andseverally. (Sec.19, PD 957: TheSubdivision and CondominiumBuyers’ Protective Decree)

B. OBLIGATIONS OF THE BUYER

1. Acceptance (Art. 1582) Express: buyer intimates acceptance Implied:

o Goods delivered to the buyer andhe does any act in relation tothem that is inconsistent withthe ownership of the seller.

o After the lapse of a reasonabletime, the buyer retains the goodswithout intimating to the sellerthat he has rejected them.(Art.1585)

Right of Inspection: reasonableopportunity to examine the goodsupon delivery . If there is astipulation that delivery ispreconditioned on payment, thenbuyer has no right of inspectionuntil he has paid. (Art.1584)

If buyer refuses to accept goods,having the right to do so, he is notbound to return them to the seller;it being sufficient that he notifiesthe seller of his refusal to accept.o If he voluntarily constitutes

himself a depositary of thegoods, he shall be liable as such.(Art.1587)

Unjust refusal to accept still resultsto transfer of ownership; title to thegoods passes to the buyer from themoment they are placed at hisdisposal, except if ownership hasbeen reserved by the seller(Art.1588)


Page 67 of 177

SA

LE

S2. Payment (Art. 1582)

Buyer is liable for interest when: (SFD)1. Interest is stipulated;2. Thing sold produces fruits or

income;3. Buyer is in default - interest accrues

from the time of judicial orextrajudicial demand for payment

Buyer may suspend payment when:o his ownership or possession of the

thing is disturbed oro he has reasonable grounds to fear

such disturbance by a vindicatoryaction or a foreclosure of mortgage

Exception: buyer cannot suspendpayment when:o seller gives security for the return of

the price in a proper caseo it has been stipulated that,

notwithstanding any suchcontingency, the buyer shall bebound to pay (Art. 1590)

Suspension may continue until theseller has caused the disturbance ordanger to cease

A mere act of trespass shall notauthorize the suspension of thepayment. (Art.1590)

In the sale of immovable property, buyermay pay even beyond the expiration ofthe period agreed upon, as long as nodemand for rescission of the contracthas been made upon him eitherjudicially or by a notarial act,o despite a stipulation providing for

ipso jure rescission (Art.1592)(Asked in 88, 00)

o After demand, court may not granthim a new term

R.A. 6552 – applies to sale or financingof real estate on installmento Buyer is awarded a grace period of 1

month per year of installments paidor 60 days, whichever is higher,within which he may pay withoutadditional interesta) may be used once every 5 years

of the life of the contract or anyof its extensions

o If contract is to be cancelled, sellermust first:a) give 30 day notice of

cancellation, and

b) refund cash surrender value tobuyer; amount is equivalent to50% of total payments madeincluding deposits, options anddown-payments plus 5% forevery year in excess of 5 years ofthe life of the contract or any ofits extensions

REVIEWER IN CIVIL LAW Chapter V. Remedies of the Seller and the Buyer

Page 68 of 177

SA

LE

SChapter V. Remedies of the Seller

and the Buyer

A. GENERAL REMEDIES1. Specific Performance2. Rescission3. Damages

B. REMEDIES OF THE SELLER1. For non-acceptance of payment

a. Damagesb. Rescissionc. Action for the Price

2. For non-paymenta. In sale of Movables

1) Self-help Remediesi. Lienii. Stoppage in Transituiii. Resaleiv. Rescission

2) Recto Lawi. Specific performanceii. Cancellation of Saleiii. Foreclosure of Chattel

Mortgageb. In sale of immovables

1) Rescission for anticipatorybreach

2) Specific performance3) Rescission

i. Maceda LawC. REMEDIES OF THE BUYER

1. For breach of obligation to preserve2. For breach of obligation to deliver3. For breach of warranty

A. GENERAL REMEDIES(1191)

1. Specific performance (Asked in 02)2. Rescission (Asked in 03, 08)3. Damages

Song Fo & Co. vs. Hawaiian-Philippine Co., (1925): General rule isthat rescission of a contract will not bepermitted for a slight or casual breach,but only for such substantial andfundamental breach as would defeatthe very object of the parties inmaking the agreement.

Neither party incurs in delay if the otherdoes not comply or is not ready tocomply in a proper manner with what isincumbent upon him (1169)

Prescriptive periods:

10 years if based on written contract 6 years if based on oral contract

B. REMEDIES OF THE SELLER

1. For non-acceptance of goods

a. Damages for non-acceptance, if buyerwrongfully neglects or refuses to acceptand pay for the goods (1596) Measure of damages: Estimated

loss directly and naturally resultingin the ordinary course of eventsfrom the buyer’s breach Where there is available market

for goods: Difference between thecontract price and the marketprice at the time the goods oughtto have been accepted or if notime was fixed, at the time ofrefusal to accept

If the resale was made withdiligence, resale price is evidenceof market value, taking intoaccount whether or not thegoods could be readily sold

Where labor/expense wasnecessary for seller to fulfill hisobligation: Labor performed andexpenses made by seller beforereceiving notice of buyer’srepudiation or countermand

Profit that the seller would havemade if sale had been fullyperformed

b. Rescission by giving the buyer notice ofelection to rescind (1597) Under this rule, rescission would

bar an action on the contractbecause it means cancellation of thecontractual obligations between theparties. (Baviera)

c. Action for the price (specificperformance) (1595)Only in the following cases:i. Ownership of the goods has passed

to the buyerii. Price is payable on a certain day,

irrespective of delivery of the goodsiii. Buyer can set up the defense that

seller could not or did not intend todeliver the goods

iv. Seller was notified by the buyer ofhis repudiation of the contract afterthe seller has completed themanufacture of the goods/hadprocured the goods to be deliveredand the goods could not readily beresold for a reasonable price


Page 69 of 177

SA

LE

S2. For non-payment

“Unpaid seller”—Whole price has not beenpaid or tendered, or when check receivedas conditional payment was dishonored bynon-payment or insolvency of the buyer Includes agent of seller to whom bill of

lading was indorsed, or consignor whois responsible for the price, or any otherperson in the position of a seller

a. In sale of movables

1. Self-help remedies – LSRR No need to resort to the courts

i. Lienii. Stoppage in Transituiii. Resaleiv. Rescission

i. Right of Lien: Right to retainpossession of goods until payment ortender of the whole price, or unless heagrees to sell on credit

When available:

Goods are sold without stipulationas to credit

Goods are sold on credit, but term ofcredit has expired

Buyer becomes insolvent

When lost:

Seller delivers goods to carrier orother bailee for transmission to thebuyer under a straight or non-negotiable bill of lading

Buyer/his agent lawfully obtainspossession of goods

Seller waives it Not lost in remainder of goods

when only partial delivery ismade (unless such is symbolicdelivery of the whole)

Not lost by mere fact that sellerobtained a judgment for theprice

When revived:

Goods are returned by the buyer ina wrongful repudiation of thecontract

ii. Stoppage in transitu: An extension ofthe lien for the price; entitles unpaidseller to resume possession of the goodswhile they are in transit before thegoods come in possession of the vendee(Baviera)

Available when:Vendee becomes insolvent

When are goods in transit?

From time of delivery to thecarrier or other bailee by the seller,for the purpose of transmission tothe buyer, until the buyer or hisagent takes such delivery from thecarrier.

Even when goods have reached theirultimate destination, if buyer rejectsthem and carrier retains possession To terminate transit by delivery

to a middleman, delivery mustbe to keep, not to transport.

When are goods no longer in transit?

Buyer obtained delivery of the goodsbefore such have reached theirultimate destination

Goods have arrived at ultimatedestination, but carrier refuses todeliver

Carrier enters into a new contractwith the buyer upon arrival of thegoods at their ultimate destination

How exercised?

By obtaining actual possession ofthe goods

By giving notice of his claim to thecarrier/other bailee who haspossession of the goodso Carrier must redeliver goods to

seller, or according to hisinstructions

o Carrier not obliged to redeliveruntil the negotiable document oftitle, if any, has beensurrendered for cancellation

Seller’s right to stoppage in transitunot affected even if buyer has soldor disposed of the goods

Unless the seller assented

iii. Resale: Available to unpaid seller whohas a right of lien or who has stoppedthe goods in transitu

Purpose:For seller to liquidate his damages. He must do so within a reasonable

time and in such manner as toobtain the best price possible.

Resale = fair sale if in accordancewith established business practices,with no attempt to take advantage ofthe original buyer.


Page 70 of 177

SA

LE

S Resale may be in a private or public

sale, but seller cannot buy indirectlyor directly.

For resale to be valid, buyer neednot be notified of an intention toresell or the time and place of theresale.

When available:

Goods are of perishable nature Seller expressly reserves right of

resale in case buyer defaults

Buyer defaults in payment for anunreasonable time

Effects:

Seller is no longer liable to theoriginal buyer upon the contract ofsale or for any profit made by theresale

Buyer at resale acquires good titleas against the original owner

In case resale is at a loss, sellerentitled to recover the differencefrom the original buyer

Seller may recover damages fromoriginal buyer for breach of contract

iv. Rescission: Return of the title over theundelivered goods to the seller, andright to recover damages for breach ofcontract Available to unpaid seller who has a

right of lien or who has stopped thegoods in transitu

When available:

Seller expressly reserved right torescind in case buyer defaults

Buyer has been in default inpayment for an unreasonable time

Transfer of title shall not be held tohave been rescinded by the unpaidseller until he manifests by notice tothe buyer or some other overt act anintention to rescind.

Action for the price (1595)Only in the following cases: Ownership of the goods has

passed to the buyer Price is payable on a certain day,

irrespective of delivery of thegoods

Buyer can set up the defensethat seller could not or did notintend to deliver the goods

Seller was notified by the buyerof his repudiation of the contract

after the seller has completedthe manufacture of thegoods/had procured the goodsto be delivered and the goodscould not readily be resold for areasonable price

2. Recto Law (1484,1485)(Asked in 99)

Applies in cases of:i. Sale of movables in installment

Levy Hermanos vs. Gervacio, (1939):The rule is intended to apply to sales ofmovables, the price of which is payablein 2 or more installments, but not tostraight-term sales where the price ispayable in full, after making a downpayment because the law aims toprotect improvident buyers who may betempted to buy beyond their means.

ii. Lease of personal property With option to buy When lessor has deprived the lessee

of the possession or enjoyment ofthe thing (Ex. When lessor files acomplaint for replevin againstlessee) Also applies when seller assigns

his credit to someone else

Alternative Remedies under Recto Law –SCF Remedies are alternative, not

cumulative: Exercise of one barsexercise of the others

i. Specific Performanceii. Cancellation of Saleiii. Foreclosure of Chattel Mortgage

i. Specific Performance: In case vendeefails to pay

Tajanlangit vs. Southern Motors,Inc., (1957): It is true that there was achattel mortgage on the goods sold, butSouthern Motors elected to sue the noteexclusively – to exact fulfillment of theobligation to pay. It had the right toselect among the three remediesestablished in Art 1484. In choosing tosue on the note, it was not therebylimited to the proceeds of the sale, onexecution, of the mortgaged good.

ii. Cancellation of sale: If vendee fails topay 2 or more installments


Page 71 of 177

SA

LE

SWhen the seller cancels the sale byrepossessing the property sold, he isbarred from exacting payment for itsprice.

iii. Foreclosure of Chattel Mortgage: Ifvendee fails to pay 2 or moreinstallments

If seller chooses this remedy, he shallhave no further action to recover anyunpaid balance, and any stipulation tothe contrary shall be void

Northern Motors vs. Sapinoso, (1970):What Art 1484 (3) prohibits is “furtheraction against the purchaser to recoverany unpaid balance of the price;” andalthough this Court has construed theword “action” to mean “any judicial orextrajudicial proceeding by virtue ofwhich the vendor may lawfully beenabled to exact recovery of thesupposed unsatisfied balance of thepurchase price from the purchaser orhis privy,” there is no occasion at thisstage to apply the restrictive provision ofthe said article because there has notyet been a foreclosure sale resulting in adeficiency. The payment of the sum ofP1,250 of Sapinoso was a voluntary acton his part and did not result from a“further action” instituted by NorthernMotors.

Bachrach Motor Co., Inc. v. Millan,(1935): Purpose of the law is to remedythe abuses committed in foreclosure ofchattel mortgages. It preventsmortgagees from seizing the mortgagedproperty, buying it at foreclosure salefor a low price and then bringing thesuit against the mortgagor for adeficiency judgment. The almostinvariable result of this procedure wasthat the mortgagor found himself minusthe property and still owing practicallythe full amount of his originalindebtedness.

b. In sale of immovables

1. Rescission for Anticipatory Breach(1591) Available when seller has reasonable

grounds to fear the loss of theimmovable property sold and itsprice

Example: Buyer destroys thebuilding sold, there being no

security therefor, and buyerbecomes insolvent

Court has no discretion to compelthe seller to wait for the expirationof the period to pay, or to grant thebuyer more time to pay

2) Specific Performance + Damages (1191) Seller may choose between specific

performance and rescission, withdamages in either case

Court has discretion, for a justcause, to give the buyer more timeto pay even if the seller choserescission

3) Rescission + Damages (1191) If seller chose specific performance,

and such becomes impossible, hemay still avail of rescission

If absolute sale, seller must make ademand for rescission

Judicially, OR By a notarial act

Necessary even if automaticrescission is stipulated

Effect of lack of demand: Buyer canstill pay

Effect of demand: Court may notgrant buyer a new term

i. RA 6552: Realty Installment BuyerProtection Act (Maceda Law)(Asked in 77, 89, 99, 00) Imposes additional requirements for

a valid rescission

If buyer has paid at least 2 years ofinstallments: GRN1. Grace period: 1 month per year

of installment payments made.BUT buyer may only avail of itonly once in every 5 years

2. Refund of Cash Surrender Value(CSV): 50% of total amount paid+ 5% for every year after the 1st

5 years of installments

BUT not greater than 90% oftotal amount paid

3. Notice of cancellation of demandfor rescission by notarial act,effective 30 days from thebuyer’s receipt thereof and uponfull payment of CSV

If buyer has paid less than 2 years:GN1. Grace period: at least 60 days2. Notice of cancellation or demand

for rescission by notarial act,


Page 72 of 177

SA

LE

Seffective 30 days upon receiptthereof

Down payments, deposits, oroptions on the contract shall beincluded in the total number ofinstallments made

Seller may go to court for judicialrescission in lieu of a notarial act ofrescission

During the grace period, buyer shallhave the right:1. To sell or assign his rights, to be

evidenced in a notarialinstrument

2. To update his account3. To pay in advance any

installment, or the full unpaidbalance of the price, without anyinterest

RA 6552 does not apply to:1. Industrial lots2. Commercial buildings3. Sale to tenants under

Agricultural Reform Code(RA3844)

C. REMEDIES OF THE BUYER

General rule: Courts will refuse todecree specific performance with respectto chattels, because damages are asufficient remedy

Exception: Buyer is entitled to thespecific thing which to him has specialvalue and which he cannot readilyobtain in the market

OR where damages would notfurnish a complete and adequateremedy (Baviera)

1. For breach of obligation to preserve

If thing is lost:

WITHOUT FAULT OFSELLER

THROUGH FAULT OFSELLER (Or throughfortuitous event, ifseller is liable)

No breach Obligation isextinguished

Damages

A thing is lost when it:

Perishes Goes out of commerce Disappears in such a way that its

existence is unknown or it cannot berecovered

If thing deteriorates:

WITHOUT FAULT OFSELLER

THROUGH FAULT OFSELLER

No breach Impairment shall beborne by buyer

Rescission + damagesOrSpecific performance +damages

2. For breach of obligation to deliver

Delivery of wrong quantity (1522)

Goods are less than whatwas contracted

More

Reject the goodsORAccept and pay At contract rate if buyeraccepts knowing thatseller won’t perform in full At fair value: If goodswere used before knowingthat seller won’t be able toperform in full

Reject the excess(Or the whole, ifindivisible)ORAccept the wholeand pay at contractrate

1464. In the sale of an undivided share of aspecific mass of fungible goods, if the masscontains less than the number, weight, ormeasure bought, the buyer becomes the ownerof the whole mass and the seller is bound tomake good the deficiency from goods of thesame kind and quality, UNLESS a contraryintent appears.

Real Estate (1539-1543)If at the rate of a certain price per unit ofmeasure or number:

Less (in area or quality)than what was agreedupon:

More

Proportional reduction ofpriceORRescission, if: Lack in area is at least1/10 of what is stated, orinferior value of thing soldexceeds 1/10 of price Buyer would not havebought the property has hebeen aware of the inferiorquality or smaller area

Reject the excessORAccept the wholeand pay atcontract rate

Also applies to judicial sales (1541)


Page 73 of 177

SA

LE

SIf for a lump sum:

Everything is withinboundaries, even if less ormore than stated area

Not everything iswithin boundaries

No remedyRudolf Lietz, Inc. v. CA,(2005): Where both thearea and the boundaries ofthe immovable aredeclared, the area coveredwithin the boundaries ofthe immovable prevails overthe stated area.

Proportionalreduction in priceORRescission

Prescriptive period:6 months, counted from date of delivery

3. For breach of warranty

Express Warranty

Prescriptive period:Period specified in express warranty OR 4years, if no period is specified (following thegeneral rule on rescission of contracts)

Remedies:1. Accept goods + demand

diminution/extinction of price2. Accept goods + damages3. Refuse to accept goods + damages4. Rescind (Refuse to accept or return or

offer to return) + recover price paid

Rescission not available when buyer:

Knew of breach of warranty when heaccepted the goods without protest

Fails to notify the seller about electionto rescind within a reasonable period oftime

Fails to return or offer to return thegoods to the seller in substantially agood condition as they were whendelivered, unless deterioration was dueto breach of warranty

Measure of damages: Differencebetween value of goods at time ofdelivery and the value they would havehad if they had answered to thewarranty

Effects of rescission:

Buyer no longer liable for priceo Entitled to return of any part of

price paid, concurrently with orimmediately after an offer to returnthe goods

If seller refuses to accept offer to returngoods: buyer deemed bailee for seller

and has right of lien to secure paymentof part of price paid

Implied warranty against eviction(1555,1556)

TOTAL EVICTION PARTIALEVICTION

Enforce liability foreviction- Demand from seller:VICED Value of thing sold at

time of eviction Income or fruits, if he

has been ordered todeliver them to theparty who won theeviction suit

Costs of eviction suitand in a proper case,suit against seller forwarranty

Expenses of thecontract, if buyer haspaid them

Damages andinterests, andornamental expenses,IF sale was made inbad faith

Enforce liability(demand VICED)ORRescind If he would nothave bought thething sold withoutthe part lost BUThe must return thething without otherencumbrancesthan those which ithad when heacquired it

Rules:2. Buyer need not appeal from decision to

hold seller liable for eviction3. When adverse possession commenced

before sale, but prescription periodcompleted after transfer: seller is notliable

4. If property sold for nonpayment of taxesdue and not made known to the buyerbefore the sale: seller liable

5. Judgment debtor also responsible foreviction in judicial sales, unless it isotherwise decreed in the judgment

If there is waiver of warranty:

Seller acted in bad faith: Waiver is void,seller liable for eviction

Buyer made waiver without knowledgeof risks of eviction: Seller liable only forthe value of thing sold at time ofeviction

Buyer made waiver with knowledge ofrisks: Seller not liable, buyer assumedthe consequences


Page 74 of 177

SA

LE

SImplied warranty against encumbrances(1560)

1. Rescission: Within 1 year fromexecution of deed of sale OR

2. Damages: Within 1 year from executionof deed of sale or discovery of theburden or servitude

Implied warranty against hidden defects(1567-1571)

If thing is not lost:1. Withdraw from contract (accion

redhibitoria) + damages2. Demand a proportionate reduction of

the price (accion quanti minoris) +damages

If thing is lost:

DUE TO HIDDENFAULT

DUE TOFORTUITOUSEVENT OR FAULTOF BUYER

If seller aware ofdefect, buyer maydemand:- Return of price- Refund of expenses ofcontract- Damages

If seller not aware ofdefect:Buyer may demandprice and expenses BUTNOT damages

Demand:- Price paid minusvalue of thing when itwas lost- Damages, if selleracted in bad faith

Prescriptive period:6 months from delivery

Implied warranty against redhibitorydefects of animals

1. Withdraw from contract + damages2. Demand a proportionate reduction of

the price + damages

If sale is rescinded: Buyer must return animal in condition

in which it was sold and delivered Buyer shall be liable for injury due to

his negligence.

Prescriptive period:40 days from delivery

Warranty in sale of consumer goods (RA7394, Sec68)

If implied warranty accompanies expresswarranty, both will be of equal duration.

EXPRESS WARRANTY IMPLIEDWARRANTY

1. Demand repairwithin 30 days Extendible forcauses beyond thecontrol of thewarrantor

2. Demand refund ofprice minus amountdirectly attributableto the use of theconsumer prior tothe discovery of thenon-conformity

1. Retain the goodsand recoverdamagesOR

2. Reject the goods,cancel contractand recover fromseller so much ofthe purchaseprice as has beenpaid + damages

REVIEWER IN CIVIL LAW Chapter VI. Extinguishment of Sale

Page 75 of 177

SA

LE

SChapter VI. Extinguishment

of Sale

A. CAUSESB. CONVENTIONAL REDEMPTION

1. DEFINITION2. CONVENTIONAL REDEMPTION VS.

EQUITABLE MORTGAGE3. RIGHT OF REDEMPTION

C. LEGAL REDEMPTION1.DEFINITION2.PERIOD TO REDEEM3. INSTANCES

D. UNDER THE PUBLIC LAND ACTE. UNDER SPECIAL LAWS

1. FORECLOSURE AND EXECUTIONSALES

2. UNDER THE AGRARIAN LANDREFORM CODE

A. CAUSES

1. Generally, by the same causes as allother obligations (Arts.1600 &1231)

(P-PLAN-CCC-RRR) Payment/performance Prescription Loss of thing due Annulment Novation Condonation/remission Confusion/merger Compensation Rescission Resolutory condition fulfilled Redemption (Conventional or Legal)

2. Conventional redemption Sale is extinguished by the exercise

of the right to repurchase theproperty

3. Legal Redemption Sale is extinguished if the person to

whom the law grants the right oflegal redemption exercises suchright

B. CONVENTIONAL REDEMPTION(Arts.1601-1618)

1. Definition

Art. 1601. Conventional redemption shall takeplace when the vendor reserves the right torepurchase the thing sold, with the obligation tocomply with the provisions of Article 1616 andother stipulations which may have been agreedupon.

Villarica v CA, 1968: Available when theseller reserves the right to repurchase thething sold in the same instrument of sale asone of the stipulations of the contract

2. Conventional Redemption vs.Equitable Mortgage(Asked in 79, 80, 82, 84, 86, 89, 91, 05)

a. Definition

Molina v. CA, 2003: An equitable mortgageis defined as one which, although lacking insome formality, or form or words, or otherrequisites demanded by a statute,nevertheless reveals the intention of theparties to charge real property as securityfor a debt, and contains nothing impossibleor contrary to law.

b. Presumption that a contract is anequitable mortgage arises when:

(5P-R)1. Price unusually inadequate;3. Possession retained by the seller as

lessee or otherwise;4. Period of redemption extended (or

granted anew) upon or after theexpiration of the right to repurchase;

5. Part of the purchase price retained bythe seller;

6. Payment of taxes on the thing soldborne by the seller;

7. Any other case where it may be fairlyinferred that the real intention of theparties is for the transaction to secure adebt or other obligation.

For the presumption of an equitablemortgage to arise under Art. 1602, 2requisites must concur:

(a) That the parties entered into acontract denominated as a contractof sale, and

(b) That their intention was to securean existing debt by way of amortgage.

(Molina v. CA, 2003)

In case of doubt, a contract purportingto be a sale with right to repurchaseshall be construed as an equitablemortgage (Art. 1603)

Remedies of apparent vendor:1. If the instrument does not reflect

the true agreement, the remedy isreformation

2. If decreed to be an equitable


Page 76 of 177

SA

LE

Smortgage, then any money, fruits orother benefit to be received by thebuyer as rent or otherwiseconsidered as interest.

3. If decreed as a true sale with rightto purchase- seller may redeemw/in 30 days from finality ofjudgment, even if the period forredemption has expired.

3. Right of Redemption

a. Period (Asked in 77)

Gen. Rule: Follow period stipulated incontract, but should not exceed 10years. If no period stipulated, then it shall be

four years from the execution of thecontract

But vendor may still exercise the rightto repurchase within thirty daysfrom the time final judgment wasrendered in a civil action on thebasis that the contract was a truesale with right to repurchase

b. By whom exercisedi. Vendorii.His heirs, assigns or agentsiii. Creditor, if he has exhausted the

property of the vendoriv. Co-owners of an immovable, if they

sold their interests to the sameperson, may only redeem theirrespective shares Vendee cannot be compelled to

agree to a partial redemption If the co-owners sold their

interest to the same person whopreviously bought the share of aco-owner subject to a right ofredemption, then the latter maybe compelled to redeem thewhole property

c. From whom to redeemi. Vendee a retroii. His heirs, assigns or agentsiii. Subsequent purchaser of property,

even if the right to redeem was notmentioned in the subsequentcontract; except if registered land,where the right to redeem must beannotated in the title

iv. If several heirs, then the right ofredemption can be exercised againsteach heir for his share of theproperty

d. How exercisedi. Returning the ff. to the buyer: (PEN)

1) Price of the sale;2) Expenses of the contract and

other legitimate payments madeby reason of the sale;

3) Necessary and useful expensesmade on the thing sold

ii. Complying with any otherstipulation agreed upon, if any.

BPI Family Savings Bank, Inc. v. Veloso,(2004): The general rule in redemption isthat it is not sufficient that a personoffering to redeem manifests his desire todo so. The statement of intention must beaccompanied by an actual andsimultaneous tender of payment for the fullamount of the repurchase price.

Paez v. Magno, (1949):Tender of paymentis enough (i.e., consignation is notnecessary), if made on time, as a basis foraction against the buyer to compel him toresell. But that tender does not in itselfrelieve the buyer from his obligation to paythe price when redemption is allowed by thecourt.

e. Effect of redemptioni. The seller shall receive the thing free

from all charges or mortgagesconstituted by the buyer BUT heshall respect leases executed by thebuyer in good faith and inaccordance with local custom.

ii. If there are growing fruits at thetime of sale and at the time ofredemption: no reimbursement orprorating if the buyer did not payindemnity at the time of sale

iii. If there were no growing fruits at thetime of sale, but some exist at thetime of redemption: fruits prorated(buyer entitled to part correspondingto time he possessed the land in thelast year, counted from theanniversary of the date of sale)

f. Effect of non-redemption Ownership is consolidated in the

buyer BUT the consolidation shallnot be recorded in the Registry ofproperty w/o a judicial order, afterthe vendor has been duly heard.

Heirs of Arches v. Diaz, (1973): If thecourt declares the contract as an equitablemortgage, the right of action to foreclose themortgage or to collect the indebtednessarises from the judgment, even if it is notalternatively prayed for.


Page 77 of 177

SA

LE

SC. LEGAL REDEMPTION

(Arts. 1619-1623)

1. Definition

Art. 1619. Legal redemption is the right to besubrogated, upon the same terms andconditions stipulated in the contract, in theplace of one who acquires a thing by purchase ordation in payment, or by any other transactionwhereby ownership is transmitted by oneroustitle.

Applies to transfers of ownership byonerous title where subrogation ispossible. Hence, it cannot apply tobarter or to transfer by gratuitous titleor hereditary succession.

Applies to sales with pacto de retro(BAVIERA citing MANRESA)

How exercised:by either a formal offer to redeem or thefiling of an action in court together withthe consignation of the redemption pricewithin the reglementary period.

2. Period to Redeem

To whom granted Perioda. Co-owner (Art 1620)

b. Adjoining owner ofRural Land (Article1621)

c. Adjoining owner ofurban land (Art. 1622)

30 days from notice- In writing- By the seller- Of the actualexecution and deliveryof the deed of sale

Doromal v. CA: Actualknowledge of the saleis immaterial

Debtor in case acredit orincorporeal right inlitigation is sold(Art.1634)

30 days from the datethe assignee demandspayment from debtor

Applicant or his widowor legal heirs in case ofsale of homestead(Sec.119, PublicLand Act)

5 yrs. from date ofconveyance

Taxpayer in case of taxsale (Sec. 215,NIRC)

1 year from date offorfeiture

Judgment debtor,successor–in- interest,or creditor withsubsequent lien, incase of execution sale(Rule 39, Sec.27,ROC)

1 year from the date ofregistration of thecertificate of sale

Debtor-mortgagor,successors-in-interest,judicial/judgmentcreditor, any personhaving a lien on theproperty, in case ofextrajudicialforeclosure of mortgage(Act No.3135. Sec. 6. )

1 year from the date ofthe sale

Debtor-mortgagor incase of judicialforeclosure of realestate mortgage IF themortgagee is a bank ora banking institution.(TheGeneral BankingLaw of 2000)

90 days from finality ofjudgment

Agricultural lessee w/oknowledge of sale oflandholding(Agrarian LandReform Code,Sec.12)

2 years from theregistration of the sale

3. Instances of Legal Redemption

a. Redemption by co-owners(Article 1620) A co-owner may exercise the right of

redemption in case the shares of allthe co-owners or any of them aresold to a third persono “Third person” refers to all

person who are not heirs of thevendor, by will or intestatesuccession

o The right is available not only tooriginal co-owners, but to thosewho had later acquired the shareof the co-owner

o But the right is not available ifthe share of the co-owner wasmerely mortgaged, or the shareof the co-owner was sold toanother co-owner

If the price of the alienation isgrossly excessive, the redemptionershall pay only a reasonable one

Should two or more co-ownersdesire to exercise the right, theymay also do so in proportion to theshare they may respectively have inthe thing owned in common

Basis of the law: Public Policy, sinceco-ownership is a hindrance to thedevelopment and administration ofthe property (BAVIERA)


Page 78 of 177

SA

LE

Sb. Redemption by Adjoining Land-

owners of rural land(Art. 1621) Owners of adjoining land shall have

the right of redemption when:o A piece of rural land is alienatedo Area does not exceed one

hectare When not applicable:

o The grantee does not own anyrural land

o Adjacent lands are separated bybrooks, drains, roads and otherapparent servitudes for thebenefit of other estates

Order of preference if two or morewish to exercise the righto Owner with smaller land areao If same land area, then the one

who first requested theredemption

Ortega v. Orcine, (1971): What constitutes“rural” or “urban” is to be determined fromthe character of the community or vicinityin which it is found, and NOT from thenature of the land itself nor the purpose towhich it is devoted

c. Redemption by adjoining land-ownersof urban land(Art. 1622)1) Right of Pre-emption

Owner of any adjoining land hasa right of pre-emption at areasonable price when:o Urban land is so small and

so situated that a majorportion of it cannot be usedfor any practical purposew/in a reasonable time;

o Was bought merely forspeculation;

o Was resold.2) Right of Redemption

If the resale has been perfected,the owner of the adjoining landshall have a right of redemption,also at a reasonable price

Priority if 2 or more adjoiningowners want to redeem: ownerwhose intended use of the landappears to be best justified

d. Redemption of Credit Available when it is sold while in

litigation(From the time the complaint isanswered)

NOT available when the assignmentin favor of:

o Co-heir/co-owner of rightassigned

o Creditor in payment of his credito Possessor of a tenement or piece

of land which is subject to theright assigned

How exercised: reimburse theassignee for the:o Price paido Judicial expenses incurredo Interest on the price from date of

payment

D. UNDER THE PUBLIC LAND ACT

1. What transactions are coveredo Every conveyance of land acquired

under a free patent or homesteado The ownership of the land must

have been transferred to another. Ifthe transaction is a mere promise tosell, there is no right yet to redeem

o This refers to conveyances madeafter the prohibited 5 years from theissuance of the patent or grant

2. Periodo Within 5 years from the date of

conveyanceo If pacto de retro sale, the period to

redeem cannot be less than 5 years

3. Who may redeemo Applicant, widow, or heirso NOT available if the land is sold to

another member of the family of theapplicant, or his direct descendantor heir

4. From whom can it be redeemedo Subsequent purchasers

E. UNDER SPECIAL LAWS

1. Foreclosure and Execution Sales

Who may redeema. In extra judicial foreclosure

i. Debtorii. Successor in interestiii. Judicial or judgment creditor

of said debtoriv. Junior encumbrancer

b. In execution salesi. Judgment debtorii. Successor in interestiii. Creditor having a lien on the

property sold by attachment,


Page 79 of 177

SA

LE

Sjudgment or mortgage on theproperty subsequent to thejudgment

Period to redeema. Extra judicial foreclosure

within 1 year from the dateof the sale

b. Execution sale within 12 months after the

salec. If land is mortgaged in favor of a

bank within 1 year after the sale

Amount of redemptiono Amount of the purchaseo Interest at 1% per month from

the time of the sale up to thetime of redemption

o Any assessment or taxes whichthe purchaser may have paid

2. Under the Agrarian Land ReformCode

Lessee’s right of pre-emptiono The agricultural lessee shall

have the preferential right to buyunder the same reasonableterms and conditions, in casethe lessor decides to hold thelandholding

o Conditions:

The landholding must bepre-empted by the DAR

When two or more lessees,each shall have preferentialright only to the extent of thearea cultivated by him

o Period: 180 days from notice inwriting

Lessee’s right of redemptiono In case landholding is sold to 3rd

person without the knowledge ofthe lessee, the latter shall havethe right to redeem the same ata reasonable price andconsideration

o Period: within 180 days fromnotice in writing

REVIEWER IN CIVIL LAW Chapter VII. The Bulk Sales Law

Page 80 of 177

SA

LE

SChapter VII. The Bulk Sales Law

Applies to sales and transfers inbulk, including any sale, transfer,mortgage or assignment of:

A stock of goods, wares,merchandise, provisions ormaterials NOT in the ordinarycourse of trade and the regularprosecution of the business of theseller, transferor, mortgagor, orassignor

All, or substantially all, of thebusiness or trade theretoforeconducted by the seller, transferor,mortgagor, or assignor

All, or substantially all, of thefixtures and equipment used in andabout the business of the seller,transferor, mortgagor, or assignor

When not applicable:

Waiver by vendor, transferor,mortgagor or assignor, as shown byverified statements

To executors, administrators,receivers, assignees in insolvency, orpublic officers, acting under judicialprocess.

REQUIREMENTS: SPIN-C1. Sworn statement of list of creditors

Contents:o Names + addresses of all

creditorso Amount of indebtedness due

or owing

When delivered: Before any partof the purchase price is received,or any promissory note orevidence of indebtednesstherefor

Delivered to:o Buyer, mortgagee or agento If corporation: president,

vice-president, treasurer orsecretary

o If partnership firm: amember thereof

2. Pro-rata application of the purchaseor mortgage money to the paymentof listed creditors

3. Inventory of the goods, wares,merchandise, provisions ormaterials

When made: at least 10 daysbefore sale or mortgage

Contents:o Quantityo Cost price of each article (as

far as possible)4. Notice to listed creditors

When made: at least 10 daysbefore transfer of possession

How: personally or by registeredmail

Contents: Price, terms andconditions of sale, transfer,mortgage or assignment

5. Consideration for the sale, transfer,mortgage or assignment Must not be nominal

Effect of non-compliance:

Criminal liability: 6 months to 5years imprisonment, or fine of P5Kor less, or both.

If the purchase or mortgage moneyis not applied pro-rata to the bonafide claims of listed creditors: Sale,transfer or mortgage shall beFRAUDULENT and VOID.

- end of Sales -


Page 82 of 177

CR

ED

ITT

RA

NSA

CT

ION

SCREDIT TRANSACTIONS

Chapter I. GENERAL PRINCIPLESI. Credit Transactions DefinedII. Security DefinedIII. Bailment Defined

83838383

Chapter II. LOANI. CharacteristicsII. Kinds of LoanIII. Commodatum and Mutuum

DistinguishedIV. Kinds of CommodatumV. CommodatumVI. Obligations of the BaileeVII.Obligations of the BailorVIII. Simple LoanIX. Interest

848484

84848485858686

Chapter III. REAL MORTGAGEI. Real Mortgage DefinedII. Objects of Real MortgageIII. Kinds of Real MortgageIV. Essential RequisitesV. Effect of Invalidity of Mortgage on

Principal ObligationVI. Effect of MortgageVII.Extent of MortgageVIII. Foreclosure of MortgageIX. Right of Mortgagee to Recover

DeficiencyX. Nature of Judicial Foreclosure

ProceedingsXI. Waiver of Security by CreditorXII. Redemption

8888888888

89898989

90

909090

Chapter IV. CHATTEL MORTGAGEI. DefinitionII. Applicability of the Provisions on

PledgeIII. Subject Matter of Chattel MortgageIV. Registration in the Chattel

Mortgage RegisterV. Right of RedemptionVI. Right of Mortgagee to PossessionVII.Foreclosure of Chattel MortgageVIII. Civil Action to Recover CreditIX. Right of Mortgagee to Recover

DeficiencyX. Application of Proceeds of Sale

9191

9191

9292939393

9393

Chapter V. PLEDGEI. Provisions Common to Pledge and

MortgageII. Provisions Applicable only to Pledge

94

94

95

Chapter VI. ANTICHRESISI. Definition of AntichresisII. CharacteristicsIII. Special RequisitesIV. Application of the FruitsV. Obligations of the Creditor

989898989898

VI. Remedies of Creditor in Case of Non-Payment of Debt 99

Chapter VII. DEPOSITI. General Provisions

A. DefinitionB. CharacteristicsC. Principal PurposeD. Distinctions from Mutuum and

CommodatumE. Creation of a DepositF. Extinguishment of a DepositG. Kinds of DepositH. Subject Matter of Deposit

II. Voluntary DepositA. General ProvisionsB. Obligations of the DepositaryC. Obligations of the Depositor

III. Necessary DepositA. DefinitionB. Liability of the Hotel-Keeper

IV. Judicial Deposit

100100100100100

100101101101101101101102106106106106107

Chapter VIII. GUARANTYI. Guaranty in General – Its Nature

and ExtentA. CharacteristicsB. Classification of GuarantyC. Guaranty Distinguished from

WarrantyD. Guaranty Distinguished from

SuretyshipE. Rules Governing Guaranty

II. Effects of GuarantyA. Between Guarantor and CreditorB. Between Debtor and GuarantorC. As Between Co-Guarantors

III. Extinguishment of Guaranty

108

108108108

108

108109112112114115115

Chapter IX. SURETYI. Nature of Surety’s UndertakingII. Applicability of Strictissimi Juris

Rule

117117

117

Chapter X. CONCURRENCE ANDPREFERENCE OF CREDITSI. Concurrence of Credits DefinedII. Preference of Credit DefinedIII. General ProvisionsIV. Classification of CreditsV. Order of Preference of Credits

118118118118118118118

Chapter XI. SPECIAL LAWSI. Warehouse Receipts LawII. Insolvency Law

119119124

REVIEWER IN CIVIL LAW Chapter I. General Principles

Page 83 of 177

CR

ED

ITT

RA

NSA

CT

ION

S

Credit TransactionsFACULTY-STUDENT EDITORIAL BOARD AND LECTURES COMMITTEE


ACADEMICS COMMITTEE


EDITOR-IN-CHIEF


LAYOUT HEAD

CIVIL LAW


SUBJECT EDITORS

CREDIT TRANSACTIONS

Thea CunananLEAD WRITER

LECTURES

Edel CruzHEAD

--------


--------


Jeric CruzSherwin Ebalo

Emmeline EscobilloNikki Mendez

Caloy MendozaDiane SingayanRich Sta. LuciaDonna Arevalo

WRITERS

Chapter I. General Principles

This 1st Chapter is a review of the basic conceptsand principles surrounding credit transactions,securities, and bailments.

There are THREE MAJOR LESSONS in thisChapter:

I. Credit Transactions DefinedII. Security DefinedIII. Bailment Defined

I. CREDIT TRANSACTIONS DEFINED

CREDIT TRANSACTIONS include alltransactions involving the purchase or loanof goods, services or money in the presentwith a promise to pay or deliver in thefuture (contract of security).

2 Types of Credit Transactions1. Secured Transactions – supported by a

collateral or an encumbrance ofproperty

2. Unsecured Transactions – supportedonly by a promise to pay or the personalcommitment of another such as aguarantor or surety

II. SECURITY DEFINED

SECURITY is something given or depositedwhich serves as a means to ensure thefulfillment or enforcement of an obligationor to protect some interest in the property.

2 Types of Security1. Personal - an individual becomes a

surety or a guarantor2. Real or Property – an encumbrance is

made on property

III.BAILMENT DEFINED

BAILMENT is the delivery of property of oneperson to another in trust for a specificpurpose, with a contract, express orimplied, that the trust shall be faithfullyexecuted and the property returned or dulyaccounted for when a special purpose isaccomplished or kept until the bailorreclaims it.

Parties in Bailment1. Bailor – the GIVER, the party who

delivers possession/custody of the thingbailed

2. Bailee – the RECIPIENT, the party whoreceives the possession/custody of thething delivered

REVIEWER IN CIVIL LAW Chapter II. Loan

Page 84 of 177

CR

ED

ITT

RA

NSA

CT

ION

SChapter II. Loan

This 2nd Chapter discusses all the importantconcepts in the subject of Loan as a securitytransaction.

There are NINE MAJOR LESSONS in thisChapter:

I. CharacteristicsII. Kinds of LoanIII. Commodatum and Mutuum DistinguishedIV. Kinds of CommodatumV. CommodatumVI. Obligations of the BaileeVII.Obligations of the BailorVIII. Simple LoanIX. Interest

I. CHARACTERISTICS

1. A real contract—Delivery of the thingloaned is NECESSARY for the perfectionof the contract. An accepted promise to make a

future contract is a consensualcontract, hence, BINDING, but it isonly after delivery when the realcontract of loan arises.

2. A unilateral contract—Once the subjectmatter is delivered, it createsobligations on the part of only one of theparties (borrower).

II. KINDS OF LOAN

1. Commodatum – Bailor/lender gives tothe bailee/borrower a NON-CONSUMABLE thing so that the lattermay use it for a certain time and returnthe IDENTICAL thing

2. Simple Loan or Mutuum – Lenderdelivers to the borrower MONEY orother CONSUMABLE thing upon thecondition that borrower shall pay thesame amount of the same kind andquality

III.COMMODATUM AND MUTUUMDISTINGUISHED

Commodatum MutuumCharacter Purely

personalNOT purelypersonal

Kind ofSubjectMatter

Real orpersonalproperty

Money orotherconsumablething

Commodatum MutuumNature ofSubjectMatter

Ordinarily,somethingNOTconsumable

Money orotherconsumablething

Ownership ofThing Loaned

Retained bylender

Transferred tothe borrower

Nature Gratuitous Gratuitous oronerous (withinterest)

Thing to beReturned

Same thingloaned

Something ofthe same kindand quality

Purpose For use ortemporarypossession

Forconsumption

WhenDemand forReturn Maybe Made

Before theexpiration ofthe term incase of urgentneed

Demand mayNOT be madebefore thelapse of theterm agreedupon

Risk of Loss Bailor, sincehe is theowner

Borrower,even if causedexclusively bya fortuitousevent

IV.KINDS OF COMMODATUM

1. Ordinary commodatum2. Precarium – Bailor may demand the

thing at will

V. COMMODATUM

The purpose of the contract ofcommodatum is the TEMPORARY USEof the thing loaned.

If the bailee is NOT entitled to the use ofthe thing, the contract may be adeposit.

A commodatum and becomes acontract of lease if compensation ispaid by the borrower.

General Rule: Subject matter of acommodatum is generally a non-consumable thing, whether real orpersonal.o EXCEPT: If the purpose is merely for

exhibition, a consumable thingmay be made the subject of acommodatum.

Producer’s Bank v. CA, (2003): A contract ofcommodatum exists in an agreement todeposit a sum of money in the account ofanother where it was clear to the partiesthat the money would not be removed fromthe account and would be returned after aspecified period of time. In such case, even


Page 85 of 177

CR

ED

ITT

RA

NSA

CT

ION

Sif the subject matter involved is aconsumable thing, the purpose of thecontract is not the consumption of theobject but merely for exhibition. The death of a party terminates the

contract UNLESS by stipulation, thecommodatum is transmitted to the heirsof either or both parties.

If there are two or more borrowers, thedeath of one does NOT extinguish thecontract in the absence of stipulation tothe contrary.

In the absence of an agreement to thateffect, a bailee CANNOT lend or leasethe object of the commodatum to a thirdperson.o EXCEPTION: The use of the thing

loaned may extend to the membersof the bailee’s household.EXCEPTION TO THE EXCEPTION:

When there is a stipulation tothe contrary; AND

The nature of the thing forbidssuch use.

The right to use the thing is limited tothe thing loaned but not to its fruitsUNLESS there is a stipulation to thecontrary.o If the enjoyment of the FRUITS and

not of the thing itself is the maincause of the contract, the contract isof usufruct.

VI.OBLIGATIONS OF THE BAILEE[S-C-O-L-De-R]

1. To take Care of the thing loaned withthe diligence of a good father of a family

2. To pay for Ordinary expenses (for theuse and preservation of the thing)

3. Bailee is not liable for Loss or damagedue to fortuitous event since bailorretains ownershipEXCEPTIONS: [P-L-A-P-S]i. If bailee devotes the thing to a

Purpose different from that which ithad been loaned

ii. If bailee keeps it longer than thePeriod stipulated, OR afteraccomplishment of the use forwhich the commodatum has beenconstituted

iii. If the thing is delivered with anAppraisal of its valueUNLESS there is a stipulationexempting the bailee fromresponsibility in case of a fortuitousevent

iv. If he lends or Leases the thing to athird person who is NOT a memberof his household

v. If being able to Save the thingborrowed or his own thing, hechooses his own

4. Bailee does not answer for theDeterioration of the thing loaned dueonly to the use thereof and without hisfault.i. Liable if he is guilty of fault or

negligence5. To Return the thing loaned and has no

right of retention if bailor owes himsomething.EXCEPT: Bailee has right of retentionwhen bailor owes him something for thedamages he suffered due to the defectsof the thing loaned.i. This adverse claim CANNOT ripen

into ownership through acquisitiveprescription.

ii. If bailee has right to retain thething, he CANNOT sell the thing tosatisfy the damages owed him.

6. 2 or more bailees to whom a thing isloaned in the same contract areSolidarily liable.

VII. OBLIGATIONS OF THE BAILOR[H-A-R-E]

1. To Allow the bailee the use of the thingloaned for the duration of the periodstipulated OR until the accomplishmentof the purpose for which thecommodatum was constituted.EXCEPTIONS:i. Precarium – where the bailor may

demand the thing at willii. Acts of Ingratitude:

(1) Bailee commits offense againstthe person, honor, or property ofbailor, his wife, or childrenunder his authority

(2) Bailee imputes to bailor acriminal offense, or act involvingmoral turpitude, even though heshould prove it,UNLESS the crime or the act hasbeen committed against thebailee himself, his wife, orchildren under his authority

(3) Bailee unduly refuses to supportbailor

2. To Refund extraordinary expenses forpreservation of the thing loaned,PROVIDED, he was informed by thebailee before incurring the expenses,


Page 86 of 177

CR

ED

ITT

RA

NSA

CT

ION

Si. EXCEPT when they are so urgent

that the reply to the notificationcannot be awaited without danger.

Note: What can be dispensed with isthe reply, NOT the notification

3. To bear Extraordinary expenses arisingfrom actual use of thing loanedi. only when such expenses are

caused by a FORTUITOUS EVENTii. if it were caused through the fault of

bailee, he alone must bear theexpenses

iii. Parties may stipulate a differentapportionment or that they be borneby bailor or bailee only

4. Liable for Hidden defects5 REQUISITES:i. defect in the thingii. defect is hiddeniii. bailor is aware of such defect

iv. bailor does not advise bailee ofthe samev. bailee suffers damages byRationale of said defect

Expenses NOT necessary for the useand preservation of the thing loanedmust be borne by the borrower. Theseinclude expenses for OSTENTATION.

Bailor cannot exempt himself frompayment of expenses for damages byabandoning the thing to the bailee.

VIII. SIMPLE LOAN

Obligation of the debtor is TO PAY.

Includes accessory duty to payINTEREST

Borrower can dispose of the thingborrowed.

Fungible things – those usually dealtwith by number, weight, or measure, sothat any given unit or portion is treatedas any other unit or portion

Distinguished from Barter – one partybinds himself to give one thing inconsideration of the other’s promise togive another thing

SUBJECT MATTER: non-fungibles/non- consumables

OBLIGATION OF RECEIVER:equivalent thing is given in returnfor what has been received.

NATURE OF CONTRACT: onerous If thing loaned is MONEY—

When there is stipulation: Paymentmust be made in currencystipulated.

When there is a stipulation but NOTpossible: Must be paid in currency

which is the legal tender in thePhils. Legal tender – notes and coins

issued by the Bangko Sentral ngPilipinaso Check is NOT a legal tender

and cannot constitute a validtender of payment.Naguiat v. CA, (2003):Checks shall produce theeffect of payment onlywhen they have beenencashed.

In case of extraordinaryinflation/deflation: Payment shall bethe value of the currency at the timeof the CREATION of obligation.

Cebu Financial v. CA, (1999): The rules onthe modes of payment of loan (Art. 1249)applies to a money-market transaction.A money market transaction involves amarket dealing where the lenders andborrowers deal with each other through amiddleman or dealer in open market.

IX.INTEREST

1. Requisites for an interest to bechargeable:1. Must be expressly stipulated2. Agreement is in writing3. Must be lawful

2. Exceptions to Requirement ofExpress Stipulation1. Interest by way of damages2. Interest accruing from unpaid

interest: Interest due earns interestfrom the time of judicial demand.

3. Rules on InterestConcepts on Payment of Interest:1. Interest for use of money, goods, or

credit for forbearance of money,goods or crediti. NO stipulation re: payment of

interest: NO interestii. There is express stipulation for

payment of interest but NO rateof interest: Interest is 12% p.a.

iii. Stipulation in writing and rate ofinterest is agreed upon: Suchinterest shall not be subject toceiling rates.

2. Interest as damages for breach ordefault for loan or forbearance ofmoneyi. NO stipulation as to interest:

12% p.a. from date of judicial orextrajudicial demand

ii. Rate of interest is stipulated:


Page 87 of 177

CR

ED

ITT

RA

NSA

CT

ION

SLoan + stipulated interest earn12% p.a. from date of judicialdemand.

3. Interest when obligation NOTconsisting of a loan orforbearance of money is breached

i. Interest may be imposed atdiscretion of court at 6% p.a.ii. NO interest on unliquidatedclaims or damages, untildemand can be established withreasonable certainty.

iii. After the former has beenestablished, 6% interest p.a.begins to run from date ofjudicial or extrajudicialdemand

iv. Obligation cannot be establishedwith reasonable certainty at timeof demand, 6% p.a. interest runsonly from date of judgment

When a money judgment (in nos. 1, 2,and 3) becomes final and executory, itshall earn 12% p.a. from finality ofjudgment until full payment—moneyjudgment considered as forbearance ofcredit.

Obligations with a penal clause (in casedebtor fails to pay): Penalty substitutesfor indemnity for damages, if nocontrary stipulation.

Damages on top of penal clause (above):To be paid if obligor refuses to pay.

Ligutan v. CA, (2002): Although the interestrate expressly stipulated by the parties isnot subject to ceiling rates, a stipulatedinterest may be equitably reduced by thecourts if it is iniquitous or unconscionable,or if the principal obligation has been partlyor irregularly complied with.

REVIEWER IN CIVIL LAW Chapter III. Real Mortgage

Page 88 of 177

CR

ED

ITT

RA

NSA

CT

ION

SChapter III. Real Mortgage

(Asked in ’82, ’84, ’85, ’89, ’01, and ’08)

This 3rd Chapter discusses all the importantconcepts in Real Estate Mortgage as a securitytransaction.

There are TWELVE MAJOR LESSONS in thisChapter:

I. Real Mortgage DefinedII. Objects of Real MortgageIII. Kinds of Real MortgageIV. Essential RequisitesV. Effect of Invalidity of Mortgage on

Principal ObligationVI. Effect of MortgageVII.Extent of MortgageVIII. Foreclosure of MortgageIX. Right of Mortgagee to Recover DeficiencyX. Nature of Judicial Foreclosure

ProceedingsXI. Waiver of Security by CreditorXII.Redemption

I. REAL MORTGAGE

A contract where the debtor secures to thecreditor the fulfillment of a principalobligation, specially subjecting to suchsecurity IMMOVABLE property or REALRIGHTS over immovable property in casethe principal obligation is not complied withat the time stipulated. (DE LEON)

II. OBJECTS OF REAL MORTGAGE

A. ImmovablesB. Alienable real rights in accordance with

the laws, imposed upon immovables

Future property cannot be object ofmortgage.

Prudential Bank vs. Alviar (2005): A“blanket mortgage clause” or “dragnetclause” subsumes all debts of past orfuture origins. Such clauses are“carefully scrutinized and strictlyconstrued.” Mortgages of this characterenable the parties to provide continuousdealings and avoid the expense andinconvenience of executing a new securityon each new transaction.

The parties having conformed to the“blanket mortgage clause” or “dragnetclause”, subsequent loans need not besecured by other securities, as thesubsequent loans will be secured by thefirst mortgage. But there is no prohibitionagainst contractually requiring other

securities for the subsequent loans. Thus,when the mortgagor takes another loanfor which another security was given, itcould not be inferred that such loanwas made in reliance solely on theoriginal security with the “dragnetclause”, but rather, on the new securitygiven. This is the “reliance on thesecurity test.”

III.KINDS OF REAL MORTGAGE

A. VoluntaryB. LegalC. Equitable – one which, although

lacking the proper formalities of amortgage, shows the intention of theparties to make the property as asecurity for a debt. Provisions governing equitable

mortgage: Arts. 1365, 1450, 1454,1602, 1603, 1604 and 1607. (DELEON)

IV.ESSENTIAL REQUISITES

A. Constituted to secure the fulfillment ofa principal obligation.

B. Mortgagor must be the absolute ownerof the thing mortgaged.

C. The persons constituting the mortgagehave free disposal of the property; inthe absence thereof, they should belegally authorized for the purpose.

D. Cannot exist without a validobligation.

E. When the principal obligation becomesdue, the thing in which the mortgageconsists may be alienated forpayment to the creditor.

F. Must appear in a public documentduly recorded in the Registry ofProperty, to be validly constituted.

In a legal mortgage, the persons inwhose favor the law establishes amortgage have the right to demand theexecution and recording of a documentformalizing the mortgage.

Samanilla vs. Cajucom, (1960): A mortgage,whether registered or not, is bindingbetween the parties, registration beingnecessary only to make the same validagainst 3rd persons. Registration onlyoperates as a notice of the mortgage toothers, but neither adds to its validitynor convert an invalid mortgage into avalid one between the parties. If the


Page 89 of 177

CR

ED

ITT

RA

NSA

CT

ION

Spurpose of registration is merely to givenotice, the questions regarding the effector invalidity of instruments areexpected to be decided after, not before,registration. Registration must first beallowed and validity or effect litigatedafterwards.

V. EFFECT OF INVALIDITY OFMORTGAGE ON THE PRINCIPALOBLIGATION

A. Principal obligation remains valid.B. Mortgage deed remains as evidence of a

personal obligation. (DE LEON)

VI.EFFECT OF MORTGAGE

Art. 2126. The mortgage directly andimmediately subjects the property upon which itis imposed, whoever the possessor may be, tothe fulfillment of the obligation for whosesecurity it was constituted.

EFFECTSA. Creates real rights, a lien inseparable

from the property mortgaged,enforceable against the whole world.

B. Creates merely an encumbrance. (DELEON)

VII. EXTENT OF MORTGAGE

Mortgage extends to:A. Growing fruitsB. Rents or income not yet receivedC. ImprovementsD. Natural accessionsE. Indemnity from insurers or in virtue of

expropriation for public use

Art. 2130. A stipulation forbidding the ownerfrom alienating the immovable mortgage shall bevoid.

* Also known as pactum non alienando

VIII. FORECLOSURE OF MORTGAGE

Foreclosure is the remedy available tothe mortgagee by which he subjects themortgaged property to the satisfactionof the obligation secured by themortgage. (DE LEON)

A. Kinds of Foreclosure1. Judicial Foreclosure (Rule 68,

Rules of Court)i. Judgment on foreclosure for

payment or sale:Court shall render judgment forthe sum due and order that it bepaid within a period of not lessthan 90 days nor more than120 days from the entry ofjudgment, and in default ofsuch payment the property shallbe sold at public auction.

ii. Effect of sale of mortgagedproperty:When confirmed, it shall operateto divest the rights in theproperty of all parties to theaction and to vest their rights inthe purchaser, subject to right ofredemption.

iii. Upon finality of order ofconfirmation or uponexpiration of period ofredemption, the purchaser orlast redemptioner is entitledto possession unless a 3rd

party is actually holding itadversely to obligor.

iv. Disposition of proceeds of sale:(1) Costs of the sale;(2) Amount due the mortgagee;(3) Claims of junior

encumbrancers or personsholding subsequentmortgages in the order oftheir priority; and

(4) Balance, if any shall be paidto the mortgagor.

2. Extrajudicial Foreclosure(Act No.3135)i. Redemption of property sold:

The debtor may redeem withinone year from and after thedate of sale.

ii. In the case of juridical personsengaged in banking andquasi-banking functions, theymay redeem until, but notafter the registration of thecertificate of foreclosure salewhich in no case shall bemore than 3 months afterforeclosure, whichever isearlier. (RA 8791)


Page 90 of 177

CR

ED

ITT

RA

NSA

CT

ION

Siii. The purchaser may petition that

possession be given to himduring the redemption period bygiving a bond in an amountequivalent to the use of theproperty for 12 months.

IX.RIGHT OF MORTGAGEE TORECOVER DEFICIENCY

A. Mortgagee is entitled to recoverdeficiency- mortgage is merely asecurity, not a satisfaction of anobligation.

B. If the deficiency is embodied in ajudgment, it is referred to as deficiencyjudgment.

C. Action for recovery of deficiency may befiled even during redemption period.

D. Action to recover prescribes after 10years from the time the right ofaction accrues.

X. NATURE OF JUDICIALFORECLOSURE PROCEEDINGS

A. Quasi in rem actionB. Foreclosure is only the result or

incident of the failure to pay debt.C. Survives death of mortgagor

XI.WAIVER OF SECURITY BYCREDITOR

A. Mortgagee may waive right to foreclosehis mortgage and maintain a personalaction for recovery of theindebtedness.

B. Remedy is alternative, notcumulative- mortgagee cannot haveboth remedies.

Caltex Phils., Inc. vs. IAC (1989): Themortgagee has a choice of 1 of 2 remedies,but he cannot have both. The mortgageemay:1. foreclose the mortgage; or2. file an ordinary action to collect the

debt.The mere act of filing a collection suitfor the recovery of a debt secured by amortgage constitutes waiver of the otherremedy of foreclosure.

It is of no moment that the collectionsuit was filed ahead, what isdeterminative is the fact that theforeclosure proceedings ended evenbefore the decision in the collection suitwas rendered.

XII. REDEMPTION

A transaction where mortgagor reacquiresor buys back the property which may havepassed under the mortgage or divests theproperty of the lien which the mortgagemay have created. (DE LEON)

A. Kinds of Redemption1. Equity of redemption: Right of the

mortgagor in case of judicialforeclosure to redeem themortgaged property after his defaultin the performance of the conditionsof the mortgage but before theconfirmation of the sale of themortgaged property.

2. Right of redemption: Right of themortgagor in case of extrajudicialforeclosure to redeem the propertywithin a certain period after itwas sold for the satisfaction of thedebt.

Medida vs. CA (1992): The judgmentdebtor remains in possession of theproperty foreclosed and sold, during theperiod of redemption. After thetermination of the period of redemption andno redemption having been made, thepurchaser is entitled to a deed ofconveyance and to the possession of theproperty. The purchaser of land sold atpublic auction under a writ of executionhas only an inchoate right to theproperty, subject to be defeated andterminated within the period of 12months from the date of sale, by aredemption on the part of the owner.Since the mortgagor remains as theabsolute owner of the property during theredemption period and has the free disposalof his property, he can constitute anothermortgage on the property.

REVIEWER IN CIVIL LAW Chapter IV. Chattel Mortgage

Page 91 of 177

CR

ED

ITT

RA

NSA

CT

ION

SChapter IV. Chattel Mortgage

(Asked in ’82, ’83, ’85, ’92, ’93, and ’99)

This 4th Chapter discusses all the importantconcepts in Chattel Mortgage as a securitytransaction.

There are TEN MAJOR LESSONS in this Chapter

I. DefinitionII. Applicability of the Provisions on PledgeIII. Subject Matter of Chattel MortgageIV. Registration in the Chattel Mortgage

RegisterV. Right of RedemptionVI. Right of Mortgagee to PossessionVII.Foreclosure of Chattel MortgageVIII. Civil Action to Recover CreditIX. Right of Mortgagee to Recover DeficiencyX. Application of Proceeds of Sale

I. DEFINITION

CHATTEL MORTGAGE is a contract byvirtue of which a personal property isrecorded in the Chattel Mortgage Registeras security for the performance of anobligation.

If the movable, instead of beingrecorded, is delivered to the creditor,it is a pledge and not a chattelmortgage.

ChattelMortgage

Pledge

PropertyInvolved

Movableproperty

Movableproperty

Delivery Delivery NOTnecessary.

Delivery isnecessary.

Registration Necessary forvalidity

NOT necessaryfor validity.

Procedure OFFORECLOSURE:Sec. 14 of Act1508, Act 3135for extrajudicialforeclosure

OF SALE:Art. 2112, CC.

Excess AFTERFORECLOSURE:The excess overthe amount duegoes to thedebtor.

AFTER SALE:The debtor isnot entitled tothe excessUNLESSotherwisestipulated or incase of legalpledge.

Deficiency AFTERFORECLOSURE:Creditor isentitled todeficiency fromthe debtorEXCEPT if it is asecurity for the

AFTER SALE:Creditor is notentitled torecoverdeficiencynotwithstandingany stipulationto the contrary.

purchase ofpersonalproperty ininstallments.

Dy v. CA, 1991: Mortgagor still hasthe right to sell it (the propertymortgaged) although he is under theobligation to secure the writtenconsent of the mortgagee or layshimself open to criminal prosecutionunder Art. 319, par.2, RPC.

II. APPLICABILITY OF THEPROVISIONS ON PLEDGE

The provisions on pledge shall apply tochattel mortgage only insofar as theyare not in conflict with any provision ofthe Chattel Mortgage Law

III.SUBJECT MATTER OF CHATTELMORTGAGE

The subject matter of chattel mortgagemust always be personal or movableproperty.

A. Mortgageable properties under theChattel Mortgage Law:1. Shares of stock2. Interest in business3. Machinery treated by the parties as

personal property subsequentlyinstalled on leased land

4. Vessels—but it is essential that themortgage is recorded in the officeof the Philippine Coast Guard tobe effective as to third persons

5. Motor vehicles—but the mortgagemust be registered in the LTO;with respect to vehicles used forpublic service, the mortgage mustalso carry the approval of theLTFRB to make it effective againstthe public and the Board

6. House of mixed materials—which byits very nature is consideredpersonal property and because itwas so expressly designated by theparties

7. House intended to be demolished—for what are really mortgaged arematerials thereof

8. House built on rented land – it didnot form part of the land

Makati Leasing vs. Wearever, (1983):Parties to a contract may by


Page 92 of 177

CR

ED

ITT

RA

NSA

CT

ION

Sagreement treat as personalproperty that which by nature wouldbe real property, as long as nointerest of third parties would beprejudiced thereby.

Tumalad v. Vicencio, (1971): That theparties to a deed of chattel mortgagemay agree to consider real property aspersonal property is good only insofaras the contracting parties areconcerned. It is based partly upon theprinciple of estoppel. The followingconditions must be present: It must be expressly stipulated that

the contract was a chattel mortgage.

The house should merely stand onrented land.

Sec. 7 of the Chattel Mortgage Law onlyrequires that the description of themortgage property be such as to enablethe parties to the mortgage or any otherperson to identify the same afterreasonable investigation and inquiry.

A pledge, real estate mortgage, orantichresis may exceptionally secureafter-incurred obligations so long asthese future debts are accuratelydescribed.

A chattel mortgage, however, can onlycover obligations existing at the time themortgage is constituted.

Acme v. CA, (1996): Although a promiseexpressed in a chattel mortgage toinclude debts that are yet to becontracted can be a bindingcommitment that can be compelledupon, the security itself, however, doesnot come into existence or arise untilafter a chattel mortgage agreementcovering the newly contracted debt isexecuted.

IV.REGISTRATION IN THE CHATTELMORTGAGE REGISTER

Under the special law, if the property issituated in a different province fromthat in which the mortgagor resides, theregistration must be in both registers;otherwise, the chattel mortgage is void.

Note: If the chattel mortgage is notrecorded, it is nevertheless binding betweenthe parties.

A. Period within which RegistrationShould Be Made The law is substantially and

sufficiently complied with where theregistration is made by themortgagee before the mortgagor hascomplied with his principalobligation and no right of innocentthird persons is prejudiced.

B. Effect of Registration1. Creates real rights.2. Adds nothing to mortgage.

C. Registration of Assignment ofMortgage Not Required A chattel mortgage may be alienated

or assigned to a third person. The debtor is protected if he pays

his creditor without actualknowledge that the debt has beenassigned.

Affidavit of Good Faith RequiredAFFIDAVIT OF GOOD FAITH is anoath in a contract of chattelmortgage wherein the parties“severally swear that the mortgage ismade for the purpose of securingthe obligation specified in theconditions thereof and for no otherpurposes and that the same is a justand valid obligation and one notentered into for the purpose offraud”. (Sec. 5, Act 1508)

This special affidavit transforms analready valid mortgage into a“preferred mortgage”.

A. Effect of Absence It vitiates a mortgage only as

against third persons withoutnotice.

V. RIGHT OF REDEMPTION

A. When the condition of a chattelmortgage is broken the following mayredeem:1. Mortgagor2. Person holding a subsequent

mortgage3. Subsequent attaching creditor

B. An attaching creditor who so redeemsshall be subrogated to the rights of themortgagee and entitled to foreclose themortgage in the same manner as themortgagee.

C. Redemption is made by paying ordelivering to the mortgagee the amountdue on such mortgage and the costsand expenses incurred by such breachof condition before the sale.


Page 93 of 177

CR

ED

ITT

RA

NSA

CT

ION

SD. Rights acquired by the second

mortgagee and subsequent purchaser:1. Before payment of debt – After a

chattel mortgage is executed, thereremains in the mortgagor a mereright of redemption and only thisright passes to the secondmortgagee in case of a secondmortgage. The second mortgageecan only recover the property fromthe first mortgagee by paying himthe mortgage debt.

2. After payment of debt – Thejudgment or attaching creditor whopurchased the property at theexecution sale could only acquirethe right of redemption. He is notentitled to the actual possession anddelivery of the property without firstpaying the mortgage debt.

VI.RIGHT OF MORTGAGEE TOPOSSESSION

After default – Creditor has the right totake possession of the mortgagedproperty.

Before default – Chattel mortgageecannot possess the property, otherwise,the contract becomes a pledge.

Mortgagor refuses to surrenderpossession – Creditor’s remedy:1. action to institute judicial

foreclosure; OR2. action to secure possession as

preliminary to the sale Right of possession is

conceded/evident – An action forreplevin may be initiated against thepossessor of the property.

Right of possession is disputed –Servicewide Specialist, Inc. v. CA,(1999): An adverse possessor, who isnot the mortgagor, cannot just bedeprived of his possession nor be boundby the terms of the chattel mortgagecontract, simply because the mortgageebrings up an action for replevin.

Claimant, the unpaid seller of themortgagor, files a claim against themortgagor’s mortgagee whoforecloses the unpaid goods –i. Ownership of the goods is not

reverted to the unpaid sellerUNLESS sale was invalidated.

ii. The obligation to pay the unpaidseller remains with the mortgagor.

VII. FORECLOSURE OF CHATTELMORTGAGE

A. Manner of Foreclosure1. PUBLIC SALE2. PRIVATE SALE - Mortgagor is

estopped to question it except on theground of fraud or duress.

B. Period to Foreclose The mortgagee may, after at least 30

days, after mortgagor defaults,foreclose the chattel with at least 10days notice to the mortgagor.

After foreclosure sale, the right ofredemption is no longer available tothe mortgagor.

VIII. CIVIL ACTION TO RECOVERCREDIT

When mortgagee institutes a civil actionagainst the mortgagor for the amount ofthe loan, he loses his lien on themortgaged chattel.

IX.RIGHT OF MORTGAGEE TORECOVER DEFICIENCY

Action may be brought within 10 yearsfrom the time the cause of actionaccrues, even if it is not upon a writtencontract.

Mortgaged property is subsequentlyattached and sold—Mortgagee isentitled to deficiency judgment in anaction for specific performance.

California Bus Lines, Inc. v. State InvestmentHouse, Inc., (2003): When creditor-mortgagee assigned his receivables toan assignee, it created an independentand distinct obligation between thedebtor-mortgagor and the assignee.Thus, when mortgagee foreclosed on thechattel mortgage, this did not in any wayaffect debtor-mortgagor’s obligation to paythe assignee. Such foreclosure extinguishedthe debt of the debtor-mortgagor only as tothe creditor.

X. APPLICATION OF PROCEEDS OFSALE(in the following order):

1. Costs and expenses of keeping and sale2. Payment of the obligation secured by

the mortgagee3. Claims of persons holding subsequent

mortgages in their order4. The balance, if any, shall be paid to the

mortgagor, or person holding rightsunder him.

REVIEWER IN CIVIL LAW Chapter V. Pledge

Page 94 of 177

CR

ED

ITT

RA

NSA

CT

ION

SChapter V. Pledge

This 5th Chapter contains all the importantconcepts in Pledge as a security transaction.

There are TWO MAJOR LESSONS in thisChapter:

I. Provisions Common to Pledge andMortgage

II. Provisions Applicable only to Pledge

I. PROVISIONS COMMON TOPLEDGE AND MORTGAGE(Asked in ’77, ’84, ’94, and ’04)

A. Essential Requisites (Art. 2085)1. Constituted to secure the fulfillment

of a principal obligationi) Pledge and mortgage are

accessory contracts. Theycannot exist without a validobligation

ii) They may guarantee a voidable,unenforceable, or a naturalobligation (2086)

2. Pledgor or mortgagor must be theabsolute owner of the thing pledgedor mortgagedi) If not the absolute owner:

pledge is void! It is withoutlegal existence and registrationcannot validate it.

ii) Future property cannot bepledged or mortgaged

iii) If share in a co-ownership:limited to the portion which maybe alienated by him in thedivision upon termination of theco-ownership

3. Persons constituting the pledge ormortgage must have the freedisposal of their property, or arelegally authorized for that purposei) Act of pledging or mortgaging is

an act of strict ownership as itinvolves an alienation ortransmission of real rights inproperty

ii) Free disposal of the property =property must not be subject toany claim of a 3rd person

B. Accommodation Pledge or Mortgage1. Pledgor/mortgagor may be a 3rd

person2. Creditor has the duty to make

proper inquiryHe is negligent if he relies solely onthe representations made by thedebtor.

3. If gratuitous, such contract shouldbe strictly construedContract should be interpreted as toeffect the least transmission ofrights. (Art. 1378)

4. Liability for deficiency:i) If property is not sufficient to

cover the debt, theaccommodationpledgor/mortgagor shall not beliable for the deficiency

ii) No solidary liability!iii) Accommodation

pledgor/mortgagor is not liablefor the payment of the principalobligation. He may redeem themortgaged property by payingonly the winning bid price at thepublic auction sale.

C. Indivisibility (Art. 2089)1. The divisibility of the principal

obligation does not affect theindivisibility of the mortgage orpledge

2. Exceptions:i) Where each one of several things

guarantees determinate portionsof credit

ii) Where only a portion of the loanwas released

iii) Where there was failure ofconsideration

iv) Where there is no debtor-creditor relationship

D. All kinds of obligations, whether pureor conditional, may be a secured by apledge or mortgage. (2091)

E. Thing pledged or mortgaged may bealienated1. Necessarily implied as an inherent

element of the transaction2. Creditor does not automatically

become the owner if the obligation isunfulfilled upon the time stipulated.His only remedy is to have thesecurity sold at public auction, andthe proceeds will be applied to thepayment of the obligation.

F. Prohibition against PactumCommissorium

Art. 2088. The creditor cannot appropriate the thingsgiven by way of pledge or mortgage, or dispose ofthem. Any stipulation to the contrary shall be null andvoid.


Page 95 of 177

CR

ED

ITT

RA

NSA

CT

ION

S1. Pactum Commissorium: a

stipulation whereby the thingpledged or mortgaged or underantichresis shall automaticallybecome the property of thecreditor in the event of non-payment of the debt within the termfixed, even without the public saleor foreclosure required by law.Such a stipulation is null and void!

2. Rationale for prohibition: Amount ofthe loan is usually much less thanthe real value of the thing pledged ormortgaged. Contrary to morals andpublic policy.

3. Elements:i) There is a pledge/ mortgage/

antichresis by way of security forthe payment of the principalobligation

ii) There is a stipulation for theautomatic appropriation by thecreditor of the property in theevent of non-payment of theobligation within the stipulatedperiod (Arenas vs. Raymundo)What is prohibited is theautomatic appropriation!Example: A stipulation providingthat the mortgaged property“shall be considered in fullpayment without further actionin court” in case of non-payment.

4. TEST IF PACTUM COMMISSORIUMEXISTS: WON there is no need forthe creditor to take an extra stepbefore he becomes owner of theproperty

5. Permissible stipulations:i) Subsequent modification of the

original contractii) Subsequent voluntary

concession of the propertyThis amounts to a novation ofthe contract and to a voluntarysale of the mortgaged propertyfor the amount of the debt.

iii) Promise to assign or sellTitle to the property remainswith the debtor.Promise is merely a personalobligation of the mortgagor anddoes not bind the property.

iv) Authority to take possession ofproperty upon foreclosure

G. Debtor bears the risk of loss of theproperty mortgaged or pledged.Principal obligation is not extinguishedeven if the thing is lost.

H. A promise to constitute apledge/mortgage creates no real rightOnly a personal right: Right of action tocompel the fulfillment of the promise.No pledge or mortgage yet.

I. Pledge vs. Mortgage

Pledge MortgageSUBJECT MATTER:

MovablesSUBJECTMATTER:

ImmovablesDELIVERY:

Property must bedelivered to the pledgee

OrBy common consent,

to a 3rd person

DELIVERY:Delivery not

necessary forperfection

REQUISITES TO BIND3RD PERSONS:

Description of thething pledged and ofthe date of the pledge

must appear in apublic instrument

REQUISITES TOBIND 3RD

PERSONS:Must be registered

(Otherwise, notvalid against 3rd

persons)

II. PROVISIONS APPLICABLE ONLYTO PLEDGE(Asked in ’75, ’84, ’86, ’89, ’96, and ’99)

A. Pledge1. Contract by virtue of which the debtor

delivers to the creditor or to a 3rd persona movable or document evidencingcorporeal rightsi) Cause or consideration: The

principal obligation2. Purpose: To secure he fulfillment of an

obligation with the understanding thatwhen the obligation is fulfilled, the thingdelivered shall be returned with all itsfruits and accessories

3. A 3rd person who is not a party to theprincipal obligation may secure suchobligation by pledging his own property.He shall have the rights of a guarantor.

4. Kindsi) Voluntary/Conventional: Created by

agreement of the partiesii) Legal: Created by operation of law

Conventional LegalDebtor not entitledto the excess (after

thing has been sold)unless there is a

contrary stipulation

Remainder of theprice of the saleafter payment of

the debt andexpenses shall bedelivered to the

debtor


Page 96 of 177

CR

ED

ITT

RA

NSA

CT

ION

S5. Characteristics

i) Real contract: Perfected by deliveryof the thing pledged

ii) Accessoryiii) Unilateral: Only the creditor has the

obligation to returniv) Subsidiary: Obligation does not

arise until the non-fulfillment of theprincipal obligation which is secured

6. Subject Matter: Limited to personalpropertyi) Movables which are within

commerce and are susceptible ofpossession (Art. 2094)

ii) Incorporeal rights (Art. 2095)(1) Evidenced by bills of lading,

negotiable instruments,warehouse receipts, shares ofstock, etc.

(2) What must be delivered:instrument proving the rightpledged. If negotiable, must beindorsed.

7. Transfer of possession is essentiali) Pledge is a real contract which

requires delivery for its perfectionii) Delivery may be actual or

constructive, depending on thepeculiar nature of the thing pledged

8. Public instrument is necessary forpledge to bind 3rd personsi) Contents

(1) Description of thing pledged(2) Date of the pledge

ii) Rationale: To forestall fraudiii) A public instrument is one attested

and certified by a public officerauthorized by law to administeroaths, i.e., notary public

B. Rights and Obligations of thePledgee

1. Rightsi) Right to retain the thing pledged

until the debt secured by it is paidii) Right to be reimbursed for the

expenses made for the preservationof the thing pledged

iii) Right to apply the fruits, income,dividends or interests earned by thething pledged to the payment ofinterest, if owing, and then to theprincipal

iv) Right to bring actions which pertainto the owner in order to recover itfrom or defend it against 3rd persons

v) Right to have the thing pledged to besold at a public sale.

(1) If there is danger of destruction,impairment or diminution ofvalue, without fault of the pledge

(2) Proceeds of the auction shall bea security for the principalobligation

vi) Right to claim another thing insubstitution or to demand theimmediate payment of theobligation, if pledge is receivedbased on the substance or quality ofthe thing.The remedies are alternative.

vii) Right to cause sale of the thingpledgedRequisites:(1) Debt is due and unpaid(2) Sale must be at public auction(3) Notice to the pledgor and owner

stating the amount due(4) Sale must be made with the

intervention of a notary publicviii)Right to appropriate the thing

pledged(1) If the thing is not sold after two

public auctions have been held(2) Considered as full payment of

his entire claim; pledgee mustgive an acquittance therefor

(3) Debtor is not entitled to theexcess should the value of thething pledged be more than theprincipal obligation

ix) Right to bid during the publicauction, but not if he is the onlybidder

x) Right to collect and receive theamount due if a credit which hasbeen pledged becomes due before itis redeemed.Such amount will be applied to thepayment of his claim. He mustdeliver the surplus to the pledgor.

xi) Right to choose which of the thingspledged shall be sold, unless thereis a stipulation to the contrary.

2. Obligationsi) Take care of the thing with the

diligence of a good father of thefamily(1) He is liable for loss or

deterioration by fraud,negligence, delay, or violation ofthe terms of the contract

ii) Not to deposit the thing pledgedwith a 3rd person until the debt ispaid Except when stipulated otherwise


Page 97 of 177

CR

ED

ITT

RA

NSA

CT

ION

Siii) Not to use the thing pledged without

the permission of the ownerHowever, if use is necessary in orderto properly care for the thing,pledgee has obligation to use thething.

iv) To promptly advise the pledgor orowner of the results of the publicauction.

C. Rights and Obligations of thePledgor

1. Rightsi) Right to ask that the thing pledged

be deposited:(1) If creditor uses the thing without

authority(2) If he misuses it in any other way(3) If thing is in danger of being lost

or impaired because of pledgee’snegligence or willful act

ii) Right to demand the thing pledgedafter substitution with another thingof the same kind and quality if suchis in danger of destruction orimpairmentRequisites:(1) Pledgor has reasonable grounds

to fear thedestruction/impairment of thething pledged

(2) No fault on the part of thepledgor

(3) Pledgor is offering another thingin pledge, of the same kind andquality

(4) Pledgee does not choose toexercise his right to cause thething pledged to be sold atpublic auction

iii) Right to bid at public auction.Pledgor is preferred if he offers thesame terms as the highest bidder

2. Obligationsi) Liable for damages because of

known hidden flawsRequisites:(a) There is a flaw or defect in the

thing pledged.(b) The flaw or defect is hidden.(c) Pledgor is aware of the flaw.(d) He does not advise the pledgee of

it.(e) Pledgee suffers damage by

Rationale of said flaw or defect.

D. Extinguishment of the Pledge

1. By return of thing pledgedi) Because possession by creditor of

the thing pledged is an essentialrequisite in pledge.

ii) Pledge is extinguished even if thereis a stipulation to the contrary.

iii) Possession by the debtor/owner ofthe thing pledged subsequent to theperfection of the pledge gives rise tothe presumption that the pledge hasbeen extinguished. Thispresumption may be rebutted byevidence to the contrary.

2. By payment of the debti) A 3rd person who has a right in or to

the thing pledged may satisfy theprincipal obligation as soon as itbecomes due and demandable(2117)

3. By renunciation or abandonment of thepledgeNote: Pledge is a personal right of thepledge which may be waived

Must be in writing Waiver transforms the pledge

into a depositary, with the rightsand obligations of one.

Waiver of pledge will not affectthe principal obligation, butwaiver of principal obligationcarries with it that of the pledge

4. By sale of thing pledged at publicauctioni) All bids must be for cashii) Debtor not entitled to the excess if

the price of the sale is more than theamount due to the creditor; unlessthere is a stipulation to thecontrary.

iii) Creditor is not entitled to recoverthe deficiency. A contrarystipulation shall be void.Rationale: To compel creditor tohold an honest public sale

5. Other causes: Prescription, loss ofthing, merger, compensation, novation,condonation, remission of debt, andthose enumerated under the 2nd

paragraph of Art. 1231.

REVIEWER IN CIVIL LAW Chapter VI. Antichresis

Page 98 of 177

CR

ED

ITT

RA

NSA

CT

ION

SChapter VI. Antichresis(Asked in ’89, ’95, ’96, and ’07)

This 6th Chapter contains important concepts inAntichresis as a security transaction.

There are SIX MAJOR LESSONS in this Chapter:

I. Definition of AntichresisII. CharacteristicsIII. Special requisitesIV. Application of the fruitsV. Obligations of the creditorVI. Remedies of creditor in case of non-

payment of debt

I. DEFINITION OF ANTICHRESIS

Art. 2132. By the contract of antichresis thecreditor acquires the right to receive the fruits ofan immovable of his debtor, with the obligationto apply them to the payment of the interest, ifowing, and thereafter to the principal of hiscredit.

Antichresis Pledge

PROPERTYINVOLVED:Real Property

PROPERTY INVOLVED:Personal Property

HOW PERFECTED:Perfected by mereconsent, hence aConsensual contract

HOW PERFECTED:Perfected by delivery ofthe thing pledged, hencea Real contract

Antichresis Real Mortgage



WHO POSSESSESTHE PROPERTY?Property is deliveredto the creditor

WHO POSSESSES THEPROPERTY?Debtor retainspossession over theproperty

RIGHTS OF THECREDITOR:The creditor has noreal rights over theproperty

BUTHe acquires rights toreceive the fruits

RIGHTS OF THECREDITOR:The creditor has a realright over the property

BUTHe does not have theright to receive thefruits

OBLIGATION OFTHE CREDITOR:1. To pay the taxesand chargesUnless otherwisestipulated

2. Creditor shall applyall the fruits to thepayment of interest, ifowing, and thereafterto the principal

OBLIGATION OF THECREDITOR:1.No obligation to paytaxes and charges

2. No such obligation toapply the fruits to thepayment of interest andprincipal

II. CHARACTERISTICS

A. Accessory contract1. It secures the performance of a

principal obligation.B. Formal contract

1. The amount of the principal and ofthe interest shall be specified inwriting;

2. Otherwise, the contract ofantichresis shall be void (Art. 2134)

3. However, even if the antichresis isvoid, principal obligation remainsvalid.

III.SPECIAL REQUISITES

A. It can cover only the fruits of animmovable property.

B. It is perfected by mere consent. Deliveryis not essential as to its perfection, butis necessary for the creditor to receivethe fruits.

C. The amount of principal and interestmust be specified in writing.

D. It is not essential that the loan shouldearn interest in order that it can beguaranteed with a contract ofantichresis. Hence, it can secure payment of

loans with or without interest, pureor conditional.

IV. APPLICATION OF THE FRUITS

To be an antichresis, there has to be anexpress agreement that:1. Debtor will give possession of the

property to creditor2. The creditor will apply the fruits:

a. First, to the interest, if anyb. Thereafter, to the principal of his

credit

Measure of application: fruits must beappraised at their market value at the timeof the application (Art. 2133)

V. OBLIGATIONS OF THE CREDITOR

1. The creditor is obliged to pay taxes andcharges upon the estate, as well as thenecessary expenses for its preservationand repair. (Art. 2135) (Note: the sumsspent shall be deducted from the fruits)

Exception:a. if otherwise stipulated

REVIEWER IN CIVIL LAW Chapter VI. Antichresis

Page 99 of 177

CR

ED

ITT

RA

NSA

CT

ION

Sb. if he compels the creditor to enter

again upon the enjoyment of theproperty, except when there isstipulation to the contrary (Art.2136)

2. The creditor shall render an account ofthe fruits to the debtor.

VI.REMEDIES OF CREDITOR INCASE OF NON-PAYMENT OF DEBT

1. Action for specific performance2. Petition for the sale of the real property

as in a foreclosure of mortgages underRule 68 of the Rules of Courta. The parties, however, may agree on

an extrajudicial foreclosure in thesame manner as they are allowed incontracts of mortgage and pledge(Tavera vs. El Hogar Filipino, Inc.1939)

b. The creditor does not acquireownership for non-payment of thedebt within the period agreed upon.Every stipulation to the contrary isvoid (Art 2137)

NOTE:The antichrectic creditor cannot ordinarilyacquire by prescription the land given tohim. This is because he does not possessthe property in the concept of an owner.

NOTE:Art. 2085 (last paragraph) and 2089-2091apply to the contract of antichresis.

REVIEWER IN CIVIL LAW Chapter VII. Deposit

Page 100 of 177

CR

ED

ITT

RA

NSA

CT

ION

SChapter VII. Deposit

This 7th Chapter discusses the importantconcepts in Deposit as a security transaction.

There are FOUR MAJOR LESSONS in thisChapter:

I. General ProvisionsII. Voluntary DepositIII. Necessary DepositIV. Judicial Deposit

I. GENERAL PROVISIONS

A. Definition

EXAMPLE: A restaurant customer entrustsher car to a valet parking attendant, and acorresponding ticket is issued to her asreceipt for the car. There is a contract ofdeposit. The customer entrusted her car tothe parking attendant expecting the car’ssafe return after her meal [Triple V vs.Filipino Merchants, 2005]

B. Characteristics

The contract of deposit is:1. Real—It is perfected by the delivery of

the subject matter. However, Wherethere is no delivery, there is merely anagreement to deposit which is binding &enforceable upon the parties. Hence, acontract of future deposit isconsensual (see Art. 1934 CC).

2. Unilateral– If it’s gratuitous, becauseonly the depositary has an obligation.

3. Bilateral –If it’s for a compensation;because it gives rise to obligs on boththe depositary & the depositor.

4. Voluntary as a General Rule. Itbecomes necessary in the 3 cases in1996 & 1998 CC and in cases of depositof goods made by travelers/passengersw/ common carriers, which may also beregarded as necessary.

5. Gratuitous as a General RuleExceptions:1. where there is contrary stipulation2. where depositary engaged in the

business of storing goods

3. where property saved fromdestruction w/o knowledge of theowner

C. Principal Purpose:

Safekeeping of the thing delivered.

Art 1962 states: If the safekeeping ofthe thing delivered is not the principalpurpose of the contract, there is nodeposit but some other contract.

D. Distinctions from Mutuum andCommodatum

1. Deposit vs Mutuum

Purpose Safekeepingor merecustody

Consumptionof the SubjectMatter

Demandability Depositor candemand thereturn of thesubjectmatter at will

Lender mustwait until theexpiration ofthe periodgranted tothe debtor

Object May be bothmovable &immovableproperty

Only money& otherfungible thing

EXAMPLE: Debtors borrowed money fromcreditor, with interest, and labeled such asa deposit. When the debtors boundthemselves to refund the amount,notwithstanding the contract being labeleda deposit, there was a real contract of loan.The debtors did not engage to return thesame coins received. They were alsoauthorized to make use of the same.[Javellana vs Lim, 1908]

2. Deposit vs Commodatum

Purpose PurposeSafekeeping

Transfer ofthe Use

Remuneration May begratuitous

Essentially &alwaysgratuitous

Object Inextrajudicialdeposit,movableproperty only

Bothmovable &immovableproperty

DEPOSIT is constituted from the moment aperson receives a thing belonging to another,with the obligation of safely keeping it and ofreturning the same. If the safekeeping of thething delivered is not the principal purpose ofthe contract, there is no deposit but someother contract. (Art. 1962)


Page 101 of 177

CR

ED

ITT

RA

NSA

CT

ION

SE. Creation of a Deposit

A deposit may be created by the will of theparties, or by virtue of a court order or bylaw.

It is essential that the depositary is NOTthe owner of the property. deposited(Art. 1962).

F. Extinguishment of Deposit

A deposit is extinguished:1. Upon the loss or deterioration of a the

thing deposited;2. Upon the death of the depositary (if the

deposit is gratuitous); and3. Through other provisions on

extinguishment of obligations in the CC(novation, merger, etc.)

G. Kinds of Deposit

1. Judicial—when an attachment orseizure of property in litigation isordered (Arts. 2005-2008)

2. Extrajudicial (1967):a. Voluntary deposit—when the

delivery is made by the will of one ofthe parties or by 2 or more personseach of whom believes himselfentitled to the thing deposited (Arts.1968-1955)

b. Necessary—One made in compliancewith a legal obligation, or on theoccasion of any calamity, or bytravelers in hotels and inns, or bytravelers with common carriers

Judicial Extra-judicialCreation Will of the

courtWill of thecontractingparties

Purpose To secureensure theright of aparty toproperty orto recover incase offavorablejudgment

Custody andsafekeeping

SubjectMatter

Generallyimmovables

Movables

Cause Alwaysonerous

May becompensatedbut generallygratuitious

Return of thething

Upon orderof the court/end of

Upondemand ofdepositorlitigation

In whosebehalf held

Person whohas a right

Depositor or3rd persondesignated

H. Subject Matter of Deposit

1. 1966 states that only movable thingsmay be the object of a deposit. Thisexcludes incorporeal or intangibleproperty (such as rights or actions).

2. However, judicial deposit may coverimmovable property as well because itspurpose is to protect the rights ofparties to a suit.

II. VOLUNTARY DEPOSIT

A. General Provisions

Art. 1968. A voluntary deposit is that whereinthe delivery is made by the will of the depositor.A deposit may also be made by two or morepersons each of whom believes himself entitledto the thing deposited with a third person, whoshall deliver it in a proper case to the one towhom it belongs.

1. The main difference between avoluntary deposit & a necessary depositis that in voluntary deposit, thedepositor has complete freedom inchoosing the depositary, whereas in thelatter, there is lack of free choice in thedepositor.

2. As a General Rule, the depositor mustbe the owner of the thing deposited.However, it may belong to anotherperson than the depositor.

EXAMPLE:Two or more persons claiming to be entitledto a thing may deposit the same with athird person. In such case, the third personassumes the obligation to deliver to the oneto whom it belongs. The depositary maybring an action of interpleader to compelthe depositors to settle their conflictingclaims. Here one of the depositors is not theowner.

3. Except for the delivery of the thing,there are no formalities required (1968).


Page 102 of 177

CR

ED

ITT

RA

NSA

CT

ION

S4. EFFECTS OF INCAPACITY

Depositary iscapacitated;Depositor is

incapacitated

Depositary isincapacitated;Depositor iscapacitated

subject to ALL theobligations of adepositary

Depositary does notincur the obligationsof a depositary

Depositary mustreturn theproperty either to:a) the legalrepresentative ofthe incapacitated,ORb) the depositorhimself if he shouldacquirecapacity

Depositary, howeveris liable to:a) return the thingdeposited while stillin his possession;ANDb) pay the depositorthe amount bywhich he may havebenefited himselfwith the thing or itsprice subject to theright of any 3rd

person who acquiresthe thing in goodfaith

B. Obligations of the Depositary(Asked in ’81, ’87, ’92, ’97)‘

TWO PRIMARY OBLIGATIONS:

a. Safekeeping of the object, using as adegree of care the same diligence thatthe depositary would exercise over hisproperty, EXCEPT if such care is lessthan that required by thecircumstances.

RATIONALE:i. Essential requisite of the judicial

relation involves the depositor’sconfidence in the depositary’sgood faith and trustworthiness;

ii. The presumption that thedepositor took into account thediligence which the depositary isaccustomed to with respect to hisown property.

b. Return of the thing when required eventhough a specified term of time for suchmay have been stipulated in thecontract

EXAMPLE:Trustee mixed the trust fund with hisown and deposited such fund in a bankin his personal account. Thegovernment arrested the trustee as apolitical prisoner and the entire deposit

was confiscated. Should he be madeliable for the loss of the money?

NO. Placing the money in the bankwith his personal funds did not makethe trustee assume a liability differentfrom that under which he would havebeen if such deposit had not been madenor did he thereby make himself liableto repay the money at all hazards.[Roman Catholic Bishop of Jaro vs. dela Pena (1913)]

OTHER OBLIGATIONS:

1. Obligation not to transfer deposit(Art. 1973)

a. General Rule. The depositary is notallowed to deposit the thing with a thirdperson.

Rationale. A deposit is founded ontrust and confidence and it can besupposed that the depositor, inchoosing the depositary, has taken intoconsideration the latter’s qualification.

Exception. The depositary isauthorized by express stipulation.

b. Re: Loss of the thing subsequentlydeposited to a third persons:

General Rule. Depositary is liable forloss of the thing deposited when:i. He transfers the deposit with a third

person without authority althoughthere is no negligence on his partand the third person;

ii. He deposits the thing with a thirdperson who is manifestly careless orunfit although authorized, even inthe absence of negligence; or

iii. The thing is lost through thenegligence of his employees whetherthe latter are manifestly careless ornot.

Exception. There is an exemption fromliability when the thing is lost withoutthe negligence of the third person withwhom he was allowed to deposit thething if such third person is not“manifestly careless or unfit.”

2. Obligation not to change the way ofdeposit (Art. 1974)

General Rule. Depositary may notchange the way of the deposit


Page 103 of 177

CR

ED

ITT

RA

NSA

CT

ION

SException. If there are circumstancesindicating that the depositor wouldconsent to the change.

Rationale. This is a situation whereinthe depositary would reasonablypresume that the depositor would agreeto the change if he knows of the facts ofthe situation.

Requisites:a) The depositary must notify the

depositor of such change andb) Must wait for the reply of the

depositor to such change.

Exception: If the delay of the replywould cause danger.

3. Obligation to collect on the choses inaction deposited (Art. 1975)

a) If the thing deposited should earninterest, the depositary is under theobligation to:i. Collect the capital and interest

as they become due;ii. Take such steps as may be

necessary to preserve its valueand the right corresponding toit.

b) A contract for the rent of safetydeposit boxes is not an ordinarycontract of lease of things, but aspecial kind of deposit; hence, it isnot to be strictly governed by theprovisions on deposit [CA-Agro-industrial Dev Corp. vs CA (1993)].

The prevailing rule in the US is that therelation between a bank renting outsafety deposit boxes and its customerwith respect to the contents of the boxis that of bailor and bailee.

EXAMPLE:The contents of a safety deposit boxwere missing. It could be opened by therenters and by the bank. Is the contractone of bailor-bailee or one of lessor-lessee?

The governing relationship is that of aBailor-Bailee. This is not a contract oflease because the full and absolutecontrol of the safety deposit box was notgiven to the renters. This is a specialkind of deposit, which according to theprevailing rule, is one of bailor-bailee[ibid.]

4. Obligation not to commingle things ifstipulated (Art. 1976)

General Rule. The depositary ispermitted to commingle grain or otherarticles of the same kind and quality.

Effects:a) The various depositors of the

mingled goods shall own the entiremass in common.

b) Each depositor shall be entitled tosuch portion of the entire as theamount deposited by him bears thewhole.

Exception. When there is a stipulationto the contrary.

5. Obligation not to make use of thething deposited (Art. 1977)

a) General Rule. Deposit is forsafekeeping of the subject matter andnot for its use

Exceptions:a) Expressly authorized by the

depositor;b) Such use is necessary for its

preservation but limited for thepurpose only.

c) Unauthorized use will result inliability for damages. In addition,unauthorized use will have thefollowing effects:i. If the thing deposited is

nonconsumable:o General Rule. The contract

loses the character of adeposit and acquires that ofa commodatum despite thefact that the parties mayhave denominated it as adeposit.

o Exception. Safekeeping isstill the principal purpose ofthe contract.

ii. Thing deposited is money orother consumable thing:o General Rule. Converts the

contract into a simple loanor mutuum.

o Exception. Safekeeping isstill the principal purpose ofthe contract, but it becomesan irregular deposit. Bankdeposits are in the nature ofirregular deposits but theyare actually loans governedby the law on loans.


Page 104 of 177

CR

ED

ITT

RA

NSA

CT

ION

S6. Liability for loss through fortuitous

events (Art. 1979)

General Rule.If the thing deposited is lost without afortuitous event, the depositary ispresumed at fault. If it was lost througha fortuitous event, the depositary is notliable without his fault.

Exceptions:a) If it is so stipulated;b) If he uses the thing without the

depositor’s permissionc) If he delays in its return;d) If he allows others to use it, even

though he himself may have beenauthorized to use the same.

7. Relation between bank and depositor(Art. 1980)

Fixed, savings, and current deposits ofmoney in banks and similar institutionsshall be governed by the provisionsconcerning simple loan.

CREDIT TRANSACTIONS CIVIL LAW

a) Contract of loan – deposits in banksare actually loans because the bankcan use the same for its ordinarytransactions

b) Relation of creditor and debtor – therelation between a depositor and abank is that of a creditor and adebtor.

8. Obligation when the thing depositedis closed and sealed (Art. 1981)

General Rule. The depositary has theobligation to:a) return the thing deposited when

delivered closed and sealed in thesame condition;

b) pay for damages should the seal orlock be broken through his fault,which is presumed unless provenotherwise;

c) Keep the secret of the deposit whenthe seal or lock is broken, with orwithout his fault.

Exception. The depositary is justified inopening a closed and sealed subjectmattera) When the depositary is presumed

authorized to do so (thepresumption applies if the key hasbeen delivered to him)

b) When the instructions of thedepositor as regards the deposit

cannot be executed without openingthe box or receptacle. (Necessity)

9. Obligation to return products,accessories and accessions (Art.1983)

10.Obligation to pay interest on sumsconverted for personal use (Art.1983)

11.The depositary who receives thething in deposit cannot require thatthe depositor prove his ownershipover the thing (Art. 1984)

12.Where a third person appears to bethe owner. (Art. 1984)

The depositary may be relieved fromliability when:a) He advised the true owner of the

thing of the deposit.b) If the owner, is spite of such

information, does not claim it withinthe period of one month (30 days)

13.Obligation of the depositary whenthere are two or more depositors.(Art. 1985)

a) In cases of a divisible thing and jointdepositors – each one of the depositorscan demand only his shareproportionate thereto.

b) In cases of an Indivisible thing andsolidary depositors – rules on activesolidarity apply.i) General Rule. Each one of the

depositors may do whatever may beuseful to the others. (Art. 1212)o Exception. Each of the

depositors may not do anythingwhich may be prejudicial to theother depositors.

ii) General Rule. The depositary mayreturn the thing to any one of thesolidary depositorso Exception. When a demand,

judicial or extrajudicial, for itsreturn has been made by one ofthem in which case deliveryshould be made to him.

c) In cases where there is a stipulation ofreturn to one of the depositors – if bystipulation, the thing should bereturned to one of the depositors, thedepositary is bound to return it only tothe person designated although he hasnot made any demand for its return.


Page 105 of 177

CR

ED

ITT

RA

NSA

CT

ION

S14.Obligation to return to the person to

whom return must be made. (Art.1986)

a) The depositary is obliged to return thething deposited, when required, to: The depositor; To his heirs or successors; or

To the person who may have beendesignated in the contract.

b) If the depositor was incapacitated at thetime of making the deposit, the propertymust be returned to:

His guardian or administrator; To the person who made the

deposit;

To the depositor himself should heacquire capacity.

REDIT TRANSACTIONS CIVIL LAWc) Even if the depositor had capacity at the

time of making the deposit but hesubsequently loses his capacity duringthe deposit, the thing must be returnedto his legal representative.

15.Obligation to return at the place ofreturn (Art. 1987)

General Rule. At the place agreed uponby the parties, transportation expensesshall be borne by the depositor.

Exception:(In the absence of stipulation) At theplace where the thing deposited mightbe even if it should not be the sameplace where the original deposit wasmade.

16.Obligation to return upon the time ofreturn. (Art. 1988)

General Rule. The thing depositedmust be returned to the depositor upondemand, even though a specified periodor time for such return may have beenfixed.

Exceptions:a) When the thing is judicially attached

while in the depositary’s possessionb) When notified of the opposition of a

third person to the return or theremoval of the thing deposited

17.Right of the depositary to return thething deposited. (Art. 1989)

(NOTE: in this case, it is the depositarywho is returning the deposit WITH OR

WITHOUT THE DEMAND of thedepositor)

General Rule. The depositary mayreturn the thing depositednotwithstanding that a period has beenfixed for the deposit if:a) The deposit is gratuitous;b) The Rationale is justifiable.If the depositor refuses to receive thething, the depositary may deposit thething at the disposal of the judicialauthority.

Exception. When the deposit is for avaluable consideration, the depositaryhas no right to return the thing beforethe expiration of the time designatedeven if he should suffer inconvenienceas a consequence.

18.Depositary’s liability in case of lossby force majeure or governmentorder. (Art. 1990)

The depositary is not liable in cases ofloss by force majeure or by governmentorder. However, he has the duty todeliver to the depositor money oranother thing he receives in place of thething.

19.Liability in case of alienation of thedepositary’s heir. (Art. 1991)

When alienation is done in GOODFAITH:a) Return the value of the thing

depositedb) Assign the right to collect from the

buyer.

The heir does not need to paythe actual price of the thingdeposited.

When alienation is done in BAD FAITH:a) Liable for damages;c) Pay the actual price of the thing

deposited.

EXAMPLE. In good faith, the heir of thedepositary sold the property of thedepositor worth 1000, for 800. The heirof the depositary is bound to return 800only. If the heir acted in bad faith, hewill be liable for 1000 plus damages. Heis also criminally liable for estafa.


Page 106 of 177

CR

ED

ITT

RA

NSA

CT

ION

S20.Depositary may retain the thing in

pledge until the full payment of whatmay be due him by Rationale of thedeposit. (Art. 1994)

The thing retained serves as security forthe payment of what may be due to thedepositary by Rationale of the deposit.(see Art. 1965, 1992, 1993).

Note: The debt must be contracted priorto the deposit.

C. Obligations of the Depositor

The obligations of the depositor are:1. to pay the expenses of preservation2. to pay losses incurred due to character of

thing deposited3. to continue with the deposit after death of

depositary if deposit is compensated

1. Obligation to pay expenses ofpreservation. (Art. 1992)

2. Obligation to pay losses incurred dueto character of thing deposited. (Art.1993)

General Rule. The depositary must bereimbursed for loss suffered by himbecause of the character of the thingdeposited.

Exceptions:a) Depositor was not aware of the

danger;b) Depositor was not expected to know

the dangerous character of thething;

c) Depositor notified the depositary ofsuch dangerous character;

d) Depositary was aware of the dangerwithout advice from the depositor.

REDIT TRANSACTIONS CIVIL LAW3. Effect of death of depositor or

depositary. (Art. 1995)a) When deposit gratuitous – death of

either of the depositor or depositaryextinguishes the deposit (personal innature). By the word “extinguished,”the law really means that thedepositary is not obliged to continuewith the contract of deposit.

b) When deposit for compensation –not extinguished by the death ofeither party.

III.NECESSARY DEPOSITS

A. Definition

A deposit is necessary when:1. It is made in compliance with a legal

obligation, in which case it is governedby the law establishing it, and in case ofdeficiency, the rules on voluntarydeposit applyEXAMPLES: The judicial deposit of a thing the

possession of which is beingdisputed in a litigation (Art. 538)

The deposit with a bank of publicbonds or instruments of creditpayable to order or bearer given inusufruct when the usufructuarydoes not give proper security fortheir conservation (Art 586)

The deposit of a thing pledged whenthe creditor uses the sme withoutauthority of the owner or misuses itin any other way (Art 2104)

Those required in suits as providedby the ROC

Those constituted to guaranteecontracts with the Government.

2. It takes place on the occasion of anycalamity, such as fire, storm, flood,pillage, shipwreck, or other similarevents. There must be a causal relationbetween the calamity and theconstitution of the deposit. In this casethe deposit is governed by the rules onvoluntary deposit and Art. 2168

3. Made by passengers with commoncarriers, as to those baggage thepassengers or their agents carry

4. Made by travelers in hotels or inns (Art.1998)

B. Liability of the Hotel-Keeper.

The hotel-keeper cannot free himself fromresponsibility by posting notices to theeffect that he is not liable for the articlesbrought by the guest. (Art. 2003)

1. Any stipulation between the hotel-keeper and the guest whereby theresponsibility of the former (as set forthin Art. 1998-2001) is suppressed ordiminished shall be VOID.

2. Elements of the liability of keepers ofhotels or inns as depositaries withregard to the effects of their guests:a) Keepers have been previously

informed about the effects broughtby the guests; and


Page 107 of 177

CR

ED

ITT

RA

NSA

CT

ION

Sb) Guests have taken the precautions

prescribed regarding theirsafekeeping.

3. Extent of liability:a) Liability in hotel rooms which come

under the term “baggage” or articlessuch as clothing as are ordinarilyused by travelers

b) Include those lost or damages inc) hotel annexes such as vehicles in

the hotel’s garage.

4. The hotelkeeper is liable REGARDLESSof the amount of care exercised in:a) The loss or injury to personal

property is caused by his servantsor employees as well as bystrangers (Art. 2000).

b) The loss is caused by the act of athief or robber done without the useof arms and irresistible force.(Art. 2001)

5. The hotelkeeper is not liable when:a) The loss or injury is cause by force

majeure, like flood, fire, theft orrobbery by a stranger (not the hotel-keeper’s servant or employee) withthe use of firearms or irresistibleforce.o Exception: Unless the

hotelkeeper is guilty of fault ornegligence in failing to provideagainst the loss or injury fromhis cause.

b) The loss is due to the acts of theguests, his family, servants,visitors.

c) The loss arises from the characterof the things brought into thehotel.

6. Hotel-keeper’s right to retain. The hotel-keeper has a right to retain the thingsbrought into the hotel by the guest, as asecurity for credits on account of:a) lodging;b) supplies usually furnished to hotel

guests.o Rationale: It is given to hotel-

keepers to compensate them forthe liabilities imposed uponthem by law. The right ofretention recognized in thisarticle is in the nature of apledge created by operation oflaw.

IV.JUDICIAL DEPOSITS

A. Definition

Judicial deposit takes place when anattachment or seizure of property inlitigation is ordered by a court. (Art. 2005)

EXAMPLES:1. when properties are attached by the

sheriff upon filing of a complaint (Rule57, ROC)

2. when a receiver is appointed by thecourt to administer and preserve theproperty in litigation (Rule 59, ROC)

3. when personal property is sseized bythe sheriff in a replevin suit (Rule 60,ROC)

B. Nature

Auxiliary to a case pending in court.

C. Purpose.

To maintain the status quo during thependency of the litigation or to insure theright of the parties to the property in case ofa favorable judgment.

D. The depositary of sequesteredproperty is the person appointedby the court. (Art. 2007)

E. Obligations of the depositary:

a) To take care of the property with thediligence of a good father of the family.(Art. 2008)

b) He may not be relieved of hisresponsibility until the litigation isended or the court so orders. (Art. 2007)

F. Applicable Law.

The Rules of Court (Art. 2009)

REVIEWER IN CIVIL LAW Chapter VIII. Guaranty

Page 108 of 177

CR

ED

ITT

RA

NSA

CT

ION

SChapter VIII. Guaranty

This 8th Chapter discusses the importantconcepts in Guaranty as a security transaction.

There are THREE MAJOR LESSONS in thisChapter:

I. Guaranty In General – Its Nature andExtent

II. Effects of GuarantyIII. Extinguishment of Guaranty

I. GUARANTY IN GENERAL –Its Nature and Extent

Art. 2047 By guaranty a person, called theguarantor, binds himself to the creditor to fulfillthe obligation of the principal debtor in case thelatter should fail to do so.

A. Characteristics

1. Accessory – would not have existed if itwasn’t for the principal obligation,which it guarantees

2. Subsidiary & Conditional – takes effectonly when the principal debtor fails inhis obligation, subject to limitations

3. Unilateral –i. Gives rise only to a duty on the part

of the guarantor in relation to thecreditor and not vice versa

ii. May be entered into even withoutthe intervention of the principaldebtor

4. Guarantor must be person distinctfrom the debtor –i. A person cannot be the personal

guarantor of himselfii. But in a real guaranty (i.e., pledge,

mortgage), a person may guaranteehis own obligation with his ownproperty

B. Classification of Guaranty

1. Guaranty in its broad sense:i. Personal – guaranty is the credit

given by a person who guaranteesthe fulfillment of the principalobligation

ii. Real – guaranty is propertyReal mortgage (2124) & Antichresis(2132) – guaranty is immovableChattel mortgage (2140) & Pledge(2093) – guaranty is movable

2. As to its origin:i. Conventional – constituted by

agreement of the parties

ii. Legal – imposed by virtue of aprovision of law

iii. Judicial – required by a court toguarantee the eventual right of oneof the parties in a case

3. As to consideration:i. Gratuitous – guarantor does not

receive any price or remunerationfor acting as such (2048)

ii. Onerous – one where the guarantorreceives valuable consideration forhis guaranty

4. As to person guaranteed:i. Single – constituted solely to secure

the performance of the debtor of theprincipal obligation

ii. Double or Sub-Guaranty –constituted to secure the fulfillmentof the guarantor of a prior guaranty

5. As to its scope and extent:i. Definite – where the guaranty is

limited to the principal obligationonly or to a specific portion thereof

ii. Indefinite or Simple – where theguaranty includes all accessoryobligations of the principal,including judicial costs

C. Guaranty Distinguished fromWarranty

Guaranty WarrantyContract by which aperson is bound toanother for thefulfillment of a promiseor engagement of athird party

An undertaking thatthe title, quality, orquantity of the subjectmatter of a contract isexactly what it hasbeen represented tobe, and relates to someagreement madeordinarily by the partywho makes thewarranty

D. Guaranty Distinguished fromSuretyship

Guaranty SuretyshipGuarantor’s liabilityarises from anindependentagreement to pay theprincipal obligation, ifthe primary debtorfails to do so

Surety’s liability arisesfrom the sameprincipal obligation.He assumes hisliability as a regularparty party to theundertaking.

Engagement is acollateral undertaking

Charged as an originalpromisor


Page 109 of 177

CR

ED

ITT

RA

NSA

CT

ION

SGuaranty Suretyship

Secondarily liable – hecontracts to pay if thedebt cannot be paid bythe principal debtor

Primarily liable –directly undertakes topay the principalobligation once theprincipal debtordefaults, regardless ofthe latter’s solvencyand without any needfor demand by thecreditor to theprincipal debtorwhatsoever or anynotice of default

Only binds himself topay if the principaldebtor cannot or isunable to pay

Undertakes to pay ifthe principal does notpay, regardless of hisability to do so

Insurer of the solvencyof the debtor

Insurer of the debt

Guarantor does notcontract that theprincipal will pay, butsimply that he is ableto do so

Surety contracts topay the creditorwithout qualification, ifthe principal debtordoes not pay. Hence,the responsibility orobligation assumed bythe surety is greater ormore onerous thanthat of a guarantor.

E. Rules Governing Guaranty

1. A guaranty is generally gratuitous

Art. 2048A guaranty is gratuitous, unless there is astipulation to the contrary.

i. General Rule: Guaranty isgratuitous.

ii. Exception: When there is astipulation to the contrary

2. On the cause of a guaranty contracti. Presence of a cause, which

supports the principal obligation –The consideration which supportsthe obligation as to the principaldebtor is sufficient consideration tosupport the obligation of aguarantor or surety.

Severino v. Severino, (1931): A guarantoror surety is bound by the sameconsideration that makes the contracteffective between the principal partiesthereto.

ii. Absence of direct consideration orbenefit to guarantor – Guaranty orsurety agreements are regardedvalid, despite the absence of anydirect consideration received by theguarantor or surety either from the

principal debtor or creditor. Aconsideration moving to theprincipal debtor will suffice.

3. A married woman, who is aguarantor, binds only her separateproperty

Art. 2049A married woman may guarantee anobligation without the husband’s consent,but shall not thereby bind the conjugalpartnership, except in cases provided bylaw.

i. Exceptionso With her husband’s consent,

bind the community or conjugalpartnership property

o Without husband’s consent, incases provided by law, such aswhen the guaranty hasredounded to the benefit of thefamily(70, 71, 94[3], 121[3], 122, 145FC)

4. A guaranty need not be undertakenwith the knowledge of the debtor

Art. 2050If a guaranty is entered into without theknowledge or consent, or against the will ofthe principal debtor, the provisions ofArticles 1236 and 1237 shall apply.

i. Guaranty is unilateral – exists forthe benefit of the creditor and notfor the benefit of the principaldebtor

ii. Creditor has every right to takemeasures to secure the paymentof his credit – guaranty can beconstituted even against the will ofthe principal debtor

iii. However, with regard to paymentmade by a third person:o Payment without the

knowledge or against the willof the debtor – can recover onlyinsofar as the payment has beenbeneficial to the debtor (1236);cannot compel the creditor tosubrogate him in his rights(1237)

o Payment with knowledge orconsent of the debtor –subrogated to all the rightswhich the creditor has againstthe debtor (2067)


Page 110 of 177

CR

ED

ITT

RA

NSA

CT

ION

S5. The guaranty must be founded on a

valid principal obligation

Art. 2052A guaranty cannot exist without a validobligation.

Nevertheless, a guaranty may beconstituted to guarantee the performance ofa voidable or an unenforceable contract. Itmay also guarantee a natural obligation.

i. Guaranty is an accessory contract– it is an indispensable condition forits existence that there is a principalobligation; hence, if the principalobligation is void, it is also void

6. A guaranty may secure theperformance of a voidable,unenforceable, and natural obligationi. Voidable contract – such contract

is binding, unless annulled by aproper court action (1390)

ii. Unenforceable contract – suchcontract is not void (1403)

iii. Natural obligation – the creditormay proceed against the guarantor,although he has no right of actionagainst the principal debtor for theRationale that the latter’s obligationis not civilly enforceable; when thedebtor himself offers a guaranty forhis natural obligation, he impliedlyrecognizes his liability, therebytransforming the obligation from anatural into a civil one (1423)

7. A guarantee may secure a future debt

Art. 2053A guaranty may also be given as security forfuture debts, the amount of which is not yetknown; there can be no claim against theguarantor until the debt is liquidated. Aconditional obligation may also be secured.

Continuing Guaranty or Suretyshipi. Future debts, even if the amount

is not yet known, may beguaranteed – but there can be noclaim against the guarantor untilthe amount of the debt isascertained or fixed anddemandable

ii. Rationale: A contract of guaranty issubsidiary.

iii. To secure the payment of a loanat maturity – guarantor bindshimself to guarantee the punctualpayment of a loan at maturity andall other obligations orindebtedness, which may become

due or owing to the principal by theborrower

iv. To secure payment of any debt tobe subsequently incurred – aguaranty shall be construed ascontinuing in nature when by theterms thereof, it is evident that theobject is to give a standing credit tothe principal debtor to be used fromtime to time either indefinitely oruntil a certain period, especially ifthe right to recall the guaranty isexpressly reserved

v. To secure existing unliquidateddebts – refer to debts existing at thetime of the constitution of theguaranty, but the amount thereof isunknown. The surety agreementitself is valid and binding, evenbefore the principal obligationintended to be secured thereby isborn -- just as obligations which aresubject to a condition precedent arevalid and binding, before theoccurrence of the conditionprecedent.

Dino v. CA, (1992): Under the Civil Code, aguaranty may be given to secure even futuredebts, the amount of which may not beknown at the time the guaranty is executed.This is the basis for contracts denominatedas continuing guaranty or suretyship.

A continuing guaranty is one which is notlimited to a single transaction, but whichcontemplates a future course of dealings,covering a series of transactions, generallyfor an indefinite time or until revoked. It isprospective in its operation and is generallyintended to provide security with respect tofuture transactions within certain limits, andcontemplates a succession of liabilities, forwhich, as they accrue, the guarantorbecomes liable.

A continuing guaranty is one whichcovers all transactions, including thosearising in the future, which are withinthe description or contemplation of thecontract of guaranty, until theexpiration or termination thereof. Aguaranty shall be construed as continuingwhen by the terms thereof, it is evident thatthe object is to give a standing credit to theprincipal debtor to be used from time to timeeither indefinitely or until a certain period,especially if the right to recall the guaranty isexpressly reserved.

Where the contract states that the same is tosecure advances to be made “from time totime”, or obligations “now in force or hereaftermade”, it will be construed to be a continuingone.


Page 111 of 177

CR

ED

ITT

RA

NSA

CT

ION

S8. A guaranty may secure the

performance of a conditionalobligationi. Principal obligation subject to a

suspensive condition – theguarantor is liable only after thefulfillment of the condition (1179)

ii. Principal obligation subject to aresolutory condition – thehappening of the conditionextinguishes both the principalobligation and the guaranty (1180)

9. A guarantor’s liability cannot exceedthe principal obligation

Art. 2054A guarantor may bind himself for less, butnot for more than the principal debtor, bothas regards the amount and the onerousnature of the conditions.

Should he have bound himself for more,his obligations shall be reduced to the limitsof that of the debtor.

i. General Rule: Guaranty is asubsidiary and accessory contract –guarantor cannot bind himself formore than the principal debtor andeven if he does, his liability shall bereduced to the limits of that of thedebtor. But the guarantor may bindhimself for less than that of theprincipal.

ii. Exceptions:Interest, judicial costs, andattorney’s fees as part of damagesmay be recovered – creditors suingon a suretyship bond may recoverfrom the surety the ff: (a) interest atthe legal rate, (b) judicial costs, and(c) attorney’s fees when appropriate,even without stipulation and even ifthe surety would thereby becomeliable to pay more than the totalamount stipulated in the bond. Interest runs from judicial

demand (i.e., filing of thecomplaint) or from extra-judicialdemand (i.e., demand madeupon the surety)

Rationale: Surety is made topay, not by Rationale of thecontract, but by Rationale of hisfailure to pay when demandedand for having compelled thecreditor to resort to the courts toobtain payment.

Penalty may be provided – a suretymay be held liable for the penalty,

provided for in a bond, for violationof the condition therein.Principal’s liability may exceedguarantor’s – The amount specifiedin a surety bond as the surety’sobligation does not limit the extentof the damages that may berecovered from the principal, thelatter’s liability being governed bythe obligations he assumed underhis contract.

10.The existence of a guaranty is notpresumed

Art. 2055A guaranty is not presumed; it must beexpress and cannot extend to more thanwhat is stipulated therein.

If it be simple or indefinite, it shallcompromise not only the principalobligation, but also all its accessories,including the judicial costs, provided withrespect to the latter, that the guarantor shallonly be liable for those costs incurred afterhe has been judicially required to pay.

i. Guaranty requires the expressionof consent on the part of theguarantor – cannot be presumed; toensure that the guarantor had thetrue intention to bind himself; tomake certain that the guarantorproceeded with consciousness ofwhat he was doing

11.A contract of guaranty is covered bythe Statute of Fraudsi. Guaranty must not only be

expressed, but must be reducedinto writing – shall beunenforceable by action, unless thesame be in writing and subscribedby the party charged or his agent;evidence of the agreement cannot bereceived without the writing or asecondary evidence of its contents;need not appear in a publicdocument

12.Guaranty strictly construedi. Has to be strictly interpreted

against the creditor and in favorof the guarantor – not to beextended beyond its terms; still therule has to yield to the intention ofthe contracting parties as revealedby the evidence


Page 112 of 177

CR

ED

ITT

RA

NSA

CT

ION

S13.Acceptance of guaranty by creditor

and notice thereof to guarantori. When necessary – mere offers of

guaranty & conditional guaranties;not a binding obligation untilaccepted and until notice of suchacceptance by the creditor is givento the guarantor or until theguarantor has knowledge that thecreditor has performed the conditionand intends to act upon theguaranty

ii. When not necessary – direct orunconditional promises of guaranty,unless notice of acceptance is madea condition of the guaranty

14.On the guarantor

Art. 2056One who is obliged to furnish a guarantorshall present a person who possessesintegrity, capacity to bind himself, andsufficient property to answer for theobligation which he guarantees. Theguarantor shall be subject to the jurisdictionof the court of the place where thisobligation is to be complied with.

Art. 2057If the guarantor should be convicted in firstinstance of a crime involving dishonesty orshould become insolvent, the creditor maydemand another who has all thequalifications required in the precedingarticle. The case is excepted where thecreditor has required and stipulated that aspecified person should be the guarantor.

i. Requirements: He possesses integrity He has capacity to bind himself He has sufficient property to

answer for the obligation whichhe guarantees

ii. Exception: Creditor waives therequirements

iii. Qualifications above only need tobe present at the time of theperfection of the contract. –Subsequent loss of integrity orproperty or supervening incapacityof the guarantor would not operateto exonerate him of the eventualliability he has contracted. Creditorcan merely demand anotherguarantor with the properqualifications, except that thecreditor may waive such remedy ifhe chooses and hold the guarantorto his bargain.

iv. Selection of Guarantor: Specified person stipulated as

guarantor: substitution ofguarantor may not be demandedo Rationale: It is part of the

agreement and as a party,the creditor is bound by it.

Guarantor selected by theprincipal debtor: debtoranswers for the integrity,capacity, and solvency of theguarantor

Guarantor personallydesignated by the creditor:responsibility of the selectionshould fall upon the creditorbecause he considered theguarantor to have thequalifications for the purpose

II. EFFECTS OF GUARANTY

A. Between Guarantor and Creditor

1. The guarantor has the right tobenefit from excussion/exhaustion

Art. 2058The guarantor cannot be compelled to pay thecreditor unless the latter has exhausted all theproperty of the debtor, and has resorted to allthe legal remedies against the debtor.

a. Guarantor only secondarily liable – ifthe principal debtor fulfills theobligation guaranteed, the guarantor isdischarged from any responsibility

b. All legal remedies against the debtorto be first exhausted – includes thebringing of actions for the rescission offraudulent alienations of property madeby the debtor; not sufficient that thedebtor appears insolvent

Southern Motors Inc. v. Barbosa, (1956):The right of guarantors …to demandexhaustion of the property of the principaldebtor exists only when a pledge or amortgage has not been given as a specialsecurity for the payment of the principalobligation.

Exceptions to the benefit of excussiona. As provided in Art. 2059:

i. If the guarantor has expresslyrenounced it – waiver is valid but itmust be made in express terms

ii. If he has bound himself solidarilywith the debtor – The liabilityassumed is that of a surety. In


Page 113 of 177

CR

ED

ITT

RA

NSA

CT

ION

Seffect, he renounces in the contractitself the benefit of exhaustion

iii. If the debtor becomes insolvent(proven by an unsatisfied writ ofexecution) - Liability of theguarantor arises. But, insolvencymust be actual. It is not sufficientlyestablished by the mere fact that thedebtor has been declared insolventin insolvency proceedings.

iv. If debtor absconds or cannot belocally sued – creditor is notrequired to go after a debtor who ishiding or cannot be sued in ourcourts, and to incur delays andexpenses incident thereto;exception: when debtor has left amanager or representative

v. If resort to all legal remedies is auseless formality – if judicial actionwould not satisfy the obligation, theguarantor can no longer require thecreditor to resort to all such legalremedies against the debtor; notnecessary that the debtor bejudicially declared insolvent

b. If he does not comply with Art. 2060:In order that the guarantor may makeuse of the benefit of excussion, he must:i. Set it up against the creditor upon

the latter’s demand for paymentfrom him

ii. Point out to the creditor: Available property of the debtor –

the guarantor should facilitatethe realization of the excussionsince he is the most interest inits benefit

Within the Philippines –excussion of property locatedabroad would be a lengthy andextremely difficult proceeding;would not conform with thepurpose of a guaranty to providethe creditor the means ofobtaining the fulfillment of theobligation

Sufficient to cover the amount ofthe debt

c. If he is a judicial bondsman and sub-surety (2084)

d. Where a pledge or mortgage has beengiven by him as a special security

e. If he fails to interpose it as a defensebefore judgment is rendered againsthim

2. The creditor has the right to secure ajudgment against the guarantor priorto the excussion

a. General Rule: An ordinary personalguarantor may demand exhaustion ofall the property of the debtor before hecan be compelled to pay

b. Exception: Creditor may, prior thereto,secure a judgment against theguarantor. However, the guarantor shallbe entitled to a deferment of theexecution of the said judgment, untilafter the properties of the principaldebtor have been exhausted.

3. The creditor has the duty to makeprior demand for payment to theguarantor

a. Demand to be made only after judgmenton the debt

b. Joining the guarantor in the suitagainst the principal debtor is not thedemand intended by law. Actualdemand has to be made.

4. The guarantor has the duty to set upthe benefit of excussion

5. The creditor has the duty to resort toall legal remediesa. After the guarantor has fulfilled the

conditions required for making useof the benefit of exhaustion, itbecomes the duty of the creditor to: Exhaust all the property of the

debtor pointed out by theguarantor

b. If he fails to do so, he shall bear theloss but only to the extent of thevalue of the said property. (2061)

6. The creditor has the duty to notifythe guarantor in the action againstthe debtor

Art. 2062In every action by the creditor, which must beagainst the principal debtor alone, except in thecases mentioned in Article 2059, the formershall ask the court to notify the guarantor of theaction. The guarantor may appear so that hemay, if he so desire, set up such defenses as aregranted him by law. The benefit of excussionmentioned in Article2058 shall always beunimpaired, even if judgment should berendered against the principal debtor and theguarantor in case of appearance by the latter.


Page 114 of 177

CR

ED

ITT

RA

NSA

CT

ION

Sa. Notice to the guarantor of the action

against the principal debtor ismandatory – guarantor must benotified so that he may appear, if he sodesires

b. Rationale: The purpose of notificationis to give the guarantor the opportunityto allege and substantiate whateverdefenses he may have against theprincipal obligation.

c. If the guarantor appears – still giventhe benefit of exhaustion even ifjudgment should be rendered againsthim and the principal debtor

d. If the guarantor does not appear - nolonger possible for him to question thevalidity of the judgment renderedagainst the debtor

7. A compromise shall not prejudice theperson not party to it

a. Compromise between creditor andprincipal debtor – benefits theguarantor but does not prejudice him

b. Compromise between guarantor andcreditor – benefits the principal debtorbut does not prejudice him

8. Sub-guarantor has a right toexcussion

a. Sub-guarantor enjoys the benefit ofexcussion – not only with respect to theprincipal debtor but also with respect tothe guarantor

9. Co-guarantors are entitled to thebenefit of division

a. In whose favor applicable - severalguarantors of only one debtor and forthe same debt

b. Extent of liability of severalguarantors – only joint; not liable to thecreditor beyond the shares which theyare respectively bound to pay

c. Exceptions – When solidarity has beenexpressly stipulated; if any of thecircumstances enumerated in Art. 2059should take place

B. Between Debtor and Guarantor

1. The guarantor has the right to besubrogated to the rights of thecreditor

a. Subrogation (1303) – arises byoperation of law upon payment by the

guarantor; necessary to enable theguarantor to enforce the indemnitygiven in Article 2066; if the guarantorpaid a smaller amount to the creditor byvirtue of a compromise, he cannotdemand more than he actually paid

b. When right not available – in caseswhere the guarantor has no right to bereimbursed

Art. 2066The guarantor who pays for a debtor must beindemnified by the latter.

The indemnity comprises:(1) the total amount of the debt;(2) the legal interests thereon from the time the

payment was made known to the debtor,even though it did not earn interest for thecreditor;

(3) the expenses incurred by the guarantor afterhaving notified the debtor that payment hadbeen demanded of him;

(4) damages, if they are due.

2. The guarantor has the duty to notifythe debtor before paying the creditor

a. If guarantor pays without notification– debtor may set up against theguarantor those defenses which hecould have set up against the creditor

b. If guarantor pays withoutnotification, after the debtor hasalready made prior payment – debtorcan set up the defense of previousextinguishment of the obligation bypayment

c. The guarantor cannot make paymentbefore the obligation has become due

d. General Rule: A contract of guarantybeing subsidiary in character, theguarantor is not liable for the debtbefore it becomes due. A guarantor whopays before maturity is not entitled toreimbursement from the debtor, butmay collect from the creditor.

e. Exceptions: Payment made with the debtor’s

consent Payment subsequently ratified by

debtor Creditor becomes insolvent Guarantor was prevented by

fortuitous event to advise the debtorof the payment

Guaranty is gratuitous The guarantor may proceed

against the debtor even beforepayment has been made

General Rule: Guarantor has nocause of action against the debtor


Page 115 of 177

CR

ED

ITT

RA

NSA

CT

ION

Suntil the former has paid theobligation

Exceptionso When he is sued for the paymento In case of insolvency of the

principal debtoro When the debtor has bound

himself to relieve him from theguaranty within a specifiedperiod, and this period hasexpired

o After the lapse of 10 years, whenthe principal obligation has nofixed period for its maturity,unless it be of such nature thatit cannot be extinguished exceptwithin a period longer than 10years

o If there are reasonable groundsto fear that the principal debtorintends to abscond;

o If the principal debtor is inimminent danger of becominginsolvent

f. Rationale: To enable the guarantor totake measures for the protection of hisinterest in view of the probability thathe would be called upon to pay the debt

C. As between Co-Guarantors

1. Right to contribution of guarantorwho pays (2073)

a. Requisites Payment has already been made by

one guarantor Payment was made because of the

insolvency of the debtor or byjudicial demand

Paying guarantor seeks to beindemnified only to the extent of hisproportionate share in the totalobligation

b. Effect of insolvency of any guarantor- Share shall be borne by the othersincluding the paying guarantor in thesame joint proportion

2. Defenses available to co-guarantors –defenses which the debtor would haveinterposed against the creditor but notthose which cannot be transmitted forbeing purely personal to the debtor

3. Liability of sub-guarantor in case ofinsolvency of guarantor – liable to theco-guarantors in the same manner asthe guarantor whom he guaranteed

III.EXTINGUISHMENT OF GUARANTY

A. When the principal obligation isextinguished, the accessory andsubsidiary contract of guaranty isalso extinguished1. Causes of extinguishment of

(principal) obligationi. Payment or performanceii. Loss of the thing dueiii. Condonation of the debtiv. Confusion or merger of rights of

creditor and debtorv. Compensationvi. Novationvii.Annulmentviii. Rescissionix. Fulfillment of a resolutory

conditionx. Prescription

2. Exception – guaranty is directlyextinguished, while principalobligation remains in force (i.e.,release of the guarantor fromliability c/o the creditor)

B. A guarantor is released from liabilityif the creditor accepts immovableproperty or any other thing of value,which the former offered in paymentof the debt, regardless if the lattershould afterwards lose the samethrough eviction – eviction simplyrevives the principal obligation but notthe guaranty

C. If one of many guarantors is releasedfrom liability, co-guarantors shallalso be released to the extent of theproportionate share of the releasedguarantor

D. A guaranty is extinguished if thecreditor extends the time withinwhich the debtor may perform hisobligation, without the consent ofthe guarantor – to protect the interestof the guarantor; to prevent the scenariowherein the debtor becomes insolventduring the period of extension and thusdeprives the guarantor of his right toreimbursement

1. Where release without consent ofguarantori. Payments due to debtor from

third person assigned tocreditor – if the creditorreleased the third person fromhis liability without notifying the


Page 116 of 177

CR

ED

ITT

RA

NSA

CT

ION

Sguarantor, the creditor isdeemed paid and the guaranty isconsequently deemedextinguished; if the creditor stillaccepted the delayed payment ofthe third person without theconsent of the debtor, thecreditor is deemed to haveextended the period of paymentand the guaranty is deemedextinguished

ii. Where obligation payable ininstallments – where aguarantor is liable for a series ofpromissory notes, an extensionof time as to one or more noteswill not affect his liability for theothers; if the whole unpaidbalance has becomeautomatically due for failure topay an installment, the creditorhas actually extended thepayment of the said installmentwithout the guarantor’s consentand thus has released him fromliability

iii. Consent to extension waivedin advance by guarantor – sucha waiver is not contrary to lawnor to public policy

iv. Payment by guarantor aftercreditor’s demand – the benefitof excussion and therequirement of consent toextensions of payment areprotective devices conferred onthe guarantor from anyunwarranted enforcement of theguaranty; guarantor may opt notto avail of these defenses bypaying the obligation once thedemand is made on him by thecreditor

v. Extension not granted bycreditor on the bond – Article2079 is inapplicable

vi. Extension granted to first-tierobligors (principal debtor &surety) – does not prejudicesecond-tier parties (i.e.,indemnitors who boundthemselves jointly and severallyto the surety for the faithfulcompliance of the surety bond)

2. Prejudice to guarantor and periodof extension immaterial – it isunimportant whether the extensiongiven was actually prejudicial to theguarantor or not; it does not even

matter how short or long thepayment period has been extended

3. Extension must be based on a newagreement – the extension of theterm must be based on some newagreement between the creditor andthe principal debtor; mere failure orneglect of the creditor to enforcepayment upon maturity does notconstitute an extension

4. Diligence on the part of thecreditor to enforce his claim – ifthe creditor has done any actwhereby the guaranty was impairedin its value, then the guarantor willbe wholly or partially released fromliability; but in suretyship, thecreditor is under no obligation todisplay any diligence in theenforcement of his rights as acreditor

5. No cause of action againstcreditor for delay – the law doesnot grant the surety the right to suethe creditor for delay

E. Guarantors are released from liabilitywhen by some act of the creditor,they cannot be subrogated to therights, mortgages and preferences ofthe latter.

REVIEWER IN CIVIL LAW Chapter IX. Surety

Page 117 of 177

CR

ED

ITT

RA

NSA

CT

ION

SChapter IX. Surety

This 9th Chapter discusses the importantconcepts in Surety as a security transaction.

There are TWO MAJOR LESSONS in thissection:

I. Nature of Surety’s UndertakingII. Applicability of Strictissimi Juris Rule

I. NATURE OF SURETY’SUNDERTAKING

Agro Conglomerates, Inc. v. CA, (2000):Suretyship may be defined as a relation whichexists where one person (principal or obligor)has undertaken an obligation and anotherperson (surety) is also under a direct andprimary obligation or duty to a third person(obligee), who is entitled to but oneperformance; and as between the two who arebound, the one rather than the other shouldperform.

A. Liability is contractual andaccessory, but direct – the surety isdirectly, primarily and equally boundwith the principal as original promisor,although he possesses no direct orpersonal interest over the latter’sobligations nor does he receive anybenefit therefrom; the surety is boundby the same agreement which binds theprincipal; it not for the creditor to see toit that the principal debtor pays thedebt or fulfills the contract, but for thesurety to see to it that the principaldebtor pays or performs

B. Liability is limited by terms ofcontract – a contract of surety is notpresumed; it cannot extend to morethan what is stipulated

C. Liability arises only if principaldebtor is held liable1. Surety’s undertaking presupposes

that the obligation is to beenforceable against someone else

2. Surety is bound by a judgmentagainst the principal debtor, eventhough he was not a party to theproceedings

3. Except if required by thecontract, a demand or notice ofdefault is not required to fix thesurety’s liability

4. Creditor may sue the principaldebtor and the surety, separatelyor together

D. Surety is not entitled to exhaustion –but when demanded by therequirements of justice, the principaldebtor may be required to pay theinsured obligation if he has thenecessary amount to comply with theterms thereof

E. Undertaking is to creditor, not todebtor – surety makes no covenant withthe principal debtor; surety’sundertaking is that the principal debtorshall fulfill his obligation and that thehe shall be relieved from his liabilitywhen the obligation secured isperformed

F. Surety is not entitled to notice ofprincipal’s default

G. Prior demand by the creditor uponthe principal not required – as soonas the principal is in default, the suretylikewise is in default

H. Surety is not exonerated by neglectof creditor to sue principal – if thesurety is dissatisfied with the degree ofactivity displayed by the creditor in thepursuit of the principal debtor, he maypay the debt himself and becomesubrogated to all the rights andremedies of the creditor

II. APPLICABILITY OF STRICTISSIMIJURIS RULE

A. Accommodation Surety – applicable;an accommodation surety is one whosigned the instrument as maker,drawer, acceptor or indorser withoutreceiving value therefore and for thepurpose of lending his name; should beprotected against unjust pecuniaryimpoverishment by imposing on theprincipal debtor duties akin to those ofa fiduciary

B. Compensated Surety – not applicable;compensated sureties are businessassociations organized for the purposeof assuming classified risks in largenumbers for profit; they are securedfrom all possible losses bycounterbonds or indemnity agreements;rules peculiar to suretyship does notapply.

REVIEWER IN CIVIL LAW Chapter X. Concurrence and Preference of Credits

Page 118 of 177

CR

ED

ITT

RA

NSA

CT

ION

SChapter X. Concurrence and

Preference of Credits

This 10th Chapter discusses the importantprovisions and principles surroundingConcurrence and Preference of Credits.

There are FOUR MAJOR LESSONS in thisChapter:

I. Concurrence of Credits DefinedII. Preference of Credit DefinedIII. General ProvisionsIV. Classification of CreditsV. Order of Preference of Credits

I. CONCURRENCE OF CREDITSpossession by 2 or more creditors ofequal rights or privileges over the sameproperty or all of the property of adebtor

II. PREFERENCE OF CREDITthe right held by a creditor to bepreferred in the payment of his claimabove others out of the debtor’s assets

III.GENERAL PROVISIONS

A. Debtor is liable with all his property,present and future, for the fulfillment ofhis obligations, subject to exemptionsprovided by law.

B. Exempt Property1. Present property:

i. Family home. (Arts. 152, 153and 155, CC)

ii. Right to receive support, as wellas money or property obtainedby such support, shall not belevied upon on attachment orexecution. (Art. 205, CC)

iii. Sec. 13, Rule 39, ROC.iv. Sec 118, Public Land Act. (CA

141, as amended)2. Future property: A debtor who

obtains a discharge from his debtson account of insolvency, is notliable for the unsatisfied claims ofhis creditors with said property.(Sec. 68 and 69, Insolvency Law, Act1956)

3. Property in custodia legis and ofpublic dominion.

C. Insolvency shall be governed by theInsolvency Law

D. Exemption of CPG and ACP, provided:1. Partnership or community subsists.2. Obligations of the insolvent spouse

have not redounded to the benefit ofthe family

E. In a co-ownership, where one of the co-owners is the insolvent debtor, hisundivided share or interest in theproperty shall be possessed by theassignee in insolvency proceedings.

F. Property held by insolvent debtor astrustee of an express or implied trust isexcluded from insolvency proceedings.

IV.CLASSIFICATION OF CREDITS

A. Special preferred credits.a. Considered as mortgages or pledges

of real or personal property or lienswithin the purview of legalprovisions governing insolvency.

b. Taxes due to the State shall first besatisfied.

B. Ordinary preferred credits – preferred inthe order given by law

C. Common credits – Credits of any otherkind or class, or by any other right ortitle not comprised in Arts. 2241-2244enjoy no preference.

V. ORDER OF PREFERENCE OFCREDITS

A. Credits which enjoy preference withrespect to specific movables exclude allothers to the extent of the value of thepersonal property to which thepreference refers.

B. 2 or more credits with respect to thesame specific movable shall be satisfiedpro rata, after payment of duties, taxes,and fees due the State or any of itssubdivision.

C. Credits which enjoy preference inrelation to specific real property or realrights exclude all others to the extent ofthe value of the immovable or real rightto which the preference refers.

D. 2 or more credits with respect to thesame specific real property or real rightsshall be satisfied pro rata, after thepayment of the taxes and assessments.

E. Excess, if any, shall be added to the freeproperty which the debtor may have, forthe payment of other credits.

F. Credits which do not enjoy anypreference with respect to specificproperty, and those which enjoypreference as to the amount paid, shallbe satisfied according to the ff. rules:1. Order established by Art. 22442. Common credits referred to in Art.

2245 shall be paid pro rataregardless of dates.

REVIEWER IN CIVIL LAW Chapter XI. Special Laws

Page 119 of 177

CR

ED

ITT

RA

NSA

CT

ION

SChapter XI. Special Laws

This 11th Chapter discusses the importantprovisions and principles in the WarehouseReceipts Law and the Insolvency law

There are TWO MAJOR LESSONS in thisChapter:

I. Warehouse Receipts LawII. Insolvency Law

I. WAREHOUSE RECEIPTS LAW

SCOPE All warehouses, whether public or

private, bonded or not.

APPLICATION The special law applies to warehouse

receipts issued by a warehouseman asdefined in Sec. 58(a); while the CivilCode, to other cases where receipts arenot issued by a warehouseman.

WHO MAY ISSUE WAREHOUSE RECEIPTS Only a warehouseman; but a duly

authorized officer or agent of awarehouseman may do so.

Warehouseman: Person lawfullyengaged in the business of storinggoods for profit.

Receipts not issued by awarehouseman, although in the form ofwarehouse receipts, are not warehousereceipts

FORM AND CONTENT Need not be in particular form, but

certain essential terms must be present:1. Location of warehouse: Because the

warehouseman may have otherwarehouses.

2. Date of issue and receipt: Indicatesprima facie the date when thecontract of deposit has beenperfected and when the computationof storage charges shall begin.

3. Consecutive number of receipt: Toidentify each receipt with the goodsfor which it was issued.

4. Person to whom goods aredeliverable: Determines the personswho shall prima facie be entitledlawfully to the possession of thegoods deposited.

5. Rate of storage charges:Consideration for the contract fromthe point of view of thewarehouseman.

6. Description of goods or packages: Foridentification purposes.

7. Signature of warehouseman: Bestevidence of the fact that thewarehouseman has received thegoods and has bound himself toassume all obligations connectedtherewith.

8. Warehouseman’s ownership of orinterest in the goods: To preventabuses in the past whenwarehouseman issued receipt ontheir goods.

9. Statement of advances made andliabilities incurred (if present): Topreserve the lien of thewarehouseman over the goods hestores or the proceeds thereof in hishands

Effect of omission of any of the essentialterms:a. Validity and negotiability of receipt

is not affected.b. Warehouseman will be liable for

damages.c. The contract will be converted to an

ordinary deposit. Any other terms or conditions may be

inserted, except:a. Those contrary to this Act (e.g.

exemption from liability formisdelivery in Sec. 10, not givingstatutory notice in case of sale ofgoods in Sec. 33 and 34).

b. Exemption from liability andnegligence.

c. Those contrary to law, morals, goodcustoms, public order or publicpolicy.

DEFINITIONS1) Negotiable receipt: Receipt in which it is

stated that the goods received will bedelivered to the bearer or to the order ofany person named in such receipt. A provision in a negotiable receipt

that it is non-negotiable is void.2) Non-negotiable receipt: Receipt in which

it is stated that the goods received willbe delivered to the depositor or to anyother specified person. A negotiable warehouse receipt is

not a negotiable instrument in thesame sense as in the NIL.

DUPLICATE RECEIPTS Applies only to negotiable warehouse

receipts:o Whenever more than one negotiable

receipt is issued for the same goods,


Page 120 of 177

CR

ED

ITT

RA

NSA

CT

ION

Sthe word ‘DUPLICATE” shall beplaced on the face of the receiptexcept the one first issued.

o Effect: The warehouseman shall beliable for damages for failing to dothis to any one who purchased thesubsequent receipt (1) for value, and(2) supposing it to be an original,even though the purchase be afterdelivery of the goods by thewarehouseman to the holder of theoriginal receipt.

FAILURE TO MAKE RECEIPT NON-NEGOTIABLE Applies only to non-negotiable

warehouse receipts:o A non-negotiable receipt must

contain the word “non-negotiable”.o Effect: Failure to do so will make a

holder who (1) purchased for valueAND (2) supposing it to benegotiable, may at his option treat itas negotiable.

CONSTRUCTION OF WAREHOUSERECEIPTS: Liberal construction of the law in favor

of bona fide holders. This has noapplication to actions against any partyother than a warehouseman.

OBLIGATION AND RIGHTS OF AWAREHOUSEMAN UPON THEIR RECEIPTS Principal obligations of a

warehouseman1. To take care of the goods, and be

liable for failure to exercise care; buthe is not liable for loss or injurywhich could not have been avoided,unless there is a stipulation to thecontrary.

2. To deliver the goods to the holder ofthe receipt or the depositor upondemand, accompanied with:a. An offer to satisfy the

warehouseman’s lien: Because awarehouseman may refusedelivery until his lien is satisfied

b. An offer to surrender the receipt:For the protection of thewarehouseman and to avoidcriminal liability; this is subjectto waiver.

c. A offer to sign when the goodsare delivered, anacknowledgment that they havebeen delivered.

o But warehouseman may stillrefuse delivery on the grounds ofsome lawful excuse:a. Sec. 10

1. he has been requested bythe person lawfullyentitled to the goods notto make delivery;

2. he has information thatthe delivery about to bemade was to one notlawfully entitled to thegoods;

b. Sec. 16: He has acquiredtitle to the goods which wasderived from1. transfer made by the

depositor at the time ofthe deposit for storage orsubsequent thereto

2. the warehouseman’s lienc. Sec. 18: If there are several

claimants to the goodsd. Sec. 21: If the goods were

lost and he had no faulte. Sec. 36: He has already

lawfully sold the goods

Persons to whom the goods must bedelivered1. Persons lawfully entitled to the

possession of the goods or its agent2. Persons entitled to deliver under:

a. a non-negotiable receipt; orb. with written authority

3. person in possession of a negotiablereceipt (which was lawfullynegotiated)

o A warehouseman does not have acause of action against a person towhom he misdelivered the thing,unless the depositor sues him.

ACTS FOR WHICH A WAREHOUSEMAN ISLIABLE

(1) Failure to stamp “duplicate” oncopies of a negotiable receipt (Sec. 6and 15) When more than one negotiable

receipts are issued for the samegoods, the word “duplicate” must beplainly placed by the warehousemanupon the face of every such receiptexcept the 1st. In such case, thewarehouseman warrants:a. that the duplicate is an accurate

copy of the original receiptb. such original receipt is

uncancelled at the date of theissue of the duplicate


Page 121 of 177

CR

ED

ITT

RA

NSA

CT

ION

S The duplicate imposes no other

liability upon the warehouseman.

(2) Failure to place “non-negotiable” ona non-negotiable receipt (Sec. 7)

(3) Misdelivery of the goods (Sec. 10)a. To one not lawfully entitled to

possessiono Liable for conversion

(unauthorized assumption andexercise of the right of ownershipover goods belonging to anotherthrough alteration or theexclusion of the owner’s right)

b. To a person entitled to deliveryunder a non-negotiable receipt orwritten authorization OR person inpossession of a negotiable receipto Still liable for conversion if:

1. prior to delivery, he had beenrequested NOT to make suchdelivery

2. he had received notice of theadverse claim or title of a 3rd

person

(4) Failure to effect cancellation of anegotiable receipt upon delivery ofthe goods (Sec. 11) This is applicable ONLY to

negotiable receipts but NOT to asituation where there was a validsale in accordance with Sec. 36a. When the goods are delivered

already: Failure to cancel willmake him liable to any one whopurchased for value in good faithsuch receipt

b. When only some of the goodswere delivered: Failure to cancelor to state plainly in the receiptthat some goods were deliveredwill make him liable to any onewho purchased for value in goodfaith such receipt

(5) Issuing receipt for non-existinggoods or misdescribed goods (Sec. 20) General Rule: A warehouseman is

under obligation to deliver theidentical property stored with himand if he fails to do so he is liable.

Exception: If the descriptionconsists merely of marks or labelsupon the goods or upon thepackages containing them, etc., thewarehouseman is not liable even ifthe goods are not of the kind asindicated in the marks or labels

(6) In case of lost or destroyed receipts(Sec. 14) Remember that a warehouseman

must deliver to the one who has thereceipt but if such was lost, acompetent court may order thedelivery of the goods only:a. upon proof of the loss or

destruction of the receipt; andb. upon giving of a bond with

sufficient securities The warehouseman is still liable to a

holder of the receipt for valuewithout notice since thewarehouseman can secure himselfin the bond given.

(7) Failure to take care of the goods(Sec. 12)

(8) Failure to give notice in case of salesof goods to satisfy his lien (Sec. 33)or because the goods are perishableand hazardous (Sec. 34)

EFFECTS OF ALTERED RECEIPTSa. Alteration immaterial: whether

fraudulent or not, authorized or not, thewarehouseman is liable on the alteredreceipt according to its original tenor;

b. Alteration material: but it wasauthorized, the warehouseman is liableaccording to the terms of the receipts asaltered;

c. Material alteration innocently made:though unauthorized, thewarehouseman is liable on the alteredreceipt according to its original term;

d. Material alteration fraudulently made:warehouseman is liable according to theoriginal tenor to a:1. purchaser of the receipt for value

without notice; and2. to the alterer and subsequent

purchasers with notice ( BUT hisliability is limited only to delivery ashe is excused from any otherliability)

Even a fraudulent alteration cannotdivest the title of the owner of storedgoods and the warehouseman is liableto return them to the owner. But abona fide holder acquires no right to thegoods under a negotiable receipt whichhas been stolen or lost or which theindorsement has been forged.

WITH REGARD TO OWNERSHIPa. Ownership is not a defense for refusal

to deliver


Page 122 of 177

CR

ED

ITT

RA

NSA

CT

ION

S The warehouseman cannot refuse to

deliver the goods on the ground thathe has acquired title or right to thepossession of it unless such isderived:1. directly or indirectly from a

transfer made by the depositorat the time of the deposit forstorage or subsequent thereto;

2. from the warehouseman’s lienb. Adverse title of a 3rd person is not a

defense for refusal to deliver by awarehouseman to his bailor on demand,except:1. To persons to whom the goods must

be livered (Sec. 9)2. To the person who wins in the

interpleader case (Sec. 17)3. To the person he finds to be entitled

to the possession after investigation(Sec. 18)

4. To the buyer in case there was avalid sale of the goods (Sec. 36)

DUTY OF WAREHOUSEMAN WHEN THEREARE SEVERAL CLAIMANTS The warehouseman may either:

a. Investigate and determine within areasonable time the validity of theclaims, and deliver to the personwhom he finds is entitled to thepossession of the goodso Effect: He is not excused from

liability in case he makes amistake

b. He may bring a complaint ininterpleadero Effect:

a) he will be relieved fromliability in delivering thegoods to the person whomthe court finds to have betterright;

b) he is liable for refusal todeliver to the rightfulclaimant when it is requiredto have an interpleader;

c. He may not do (a) and (b)o Effect: He will be liable after a

lapse of a reasonable time, ofconversion as of the date of theoriginal demand for the goods.

This does NOT apply to cases where thewarehouseman himself makes a claimto the goods.

COMMINGLING OF DEPOSITED GOODS General Rule: A warehouseman may not

mingle goods belonging to differentdepositors.

Exception: In case of fungible goods ofthe same kind and grade provided:a. he is authorized by agreementb. he is authorized by custom

Effects:a. each depositor shall own the entire

mass in common and entitled to hisportion

b. warehouseman is severally liable toeach depositor for the care andredelivery of their portion as if thegoods had been kept separate

ATTACHMENT OR LEVY ON NEGOTIABLERECEIPTS A warehouseman has the obligation to

hold the goods for the owner or for theperson to whom the negotiable receipthas been duly negotiated. Therefore,the goods cannot be attached or leviedupon under an execution, unless:a. the document be first surrendered;

orb. the negotiation is enjoined, orc. the document is impounded by the

court The warehouseman cannot be

compelled to deliver the goods until:a. the receipt is surrendered to him;b. it is impounded by the court

This provision does not apply if theperson depositing is not the owner ofthe goods or one who has not the rightto convey title to the goods bindingupon the owner.

REMEDY OF CREDITOR WHOSE DEBTOROWNS A NEGOTIABLE RECEIPT Attachment of the negotiable receipt,

not on the goods. The goods themselves cannot readily be

attached or levied upon by ordinarylegal process

EXTENT OF WAREHOUSEMAN’S LIENa. lawful charges for

1. storage, and2. preservation of the goods

b. lawful claims for1. money advanced2. labor3. interest4. weighing5. insurance6. cooperating7. transportation

c. other charges and expenses in relationto such goods

d. Reasonable charges and expenses fornotice and advertisements of sale


Page 123 of 177

CR

ED

ITT

RA

NSA

CT

ION

Se. sale of the goods where defaults has

been made in satisfying the lien

EXTENT OF THE LIEN WHEN ANEGOTIABLE RECEIPT HAS BEEN ISSUEDa. charges for storage and preservation of

the goodsb. other charges expressly enumerated

(from b, c, d and e above) although theamount is NOT stated

For claims not specified, thewarehouseman shares pro rata with theother creditors of the depositor thebalance of the proceeds of the sale forthe satisfaction of the claims.

GOODS SUBJECT TO LIENa. goods of the depositor who is liable to

the warehouseman as debtor whereversuch goods are deposited;

b. goods of other persons stored by thedepositor who is liable to thewarehouseman as debtor with authorityto make a valid pledge

A warehouseman has NO lien on goodsbelonging to another and stored by astranger in fraud of the true owner’sright.

The lien may be lost through:a. voluntarily surrendering possession

of goods - constitutes a waiver orabandonmento A warehouseman may NOT

claim a lien on other goods ofthe same depositor for unpaidcharges on the goodssurrendered if the goods weredelivered to him under differentreceipts.

b. wrongfully refusing to deliver thegoods to a person who holds thereceipt or the depositor uponDEMAND accompanied with:1. an offer to satisfy the

warehouseman’s lien (because awarehouseman may refusedelivery until his lien is satisfied)

2. an offer to surrender the receipta. for the protection of the

warehouseman and to avoidcriminal liability

b. this is subject to waiver3. an offer to sign when the goods

are delivered, anacknowledgment that they havebeen delivered

REMEDIES FOR A WAREHOUSEMAN1. Even if without lien, all remedies allowed

by law to a creditor against his debtorfor collection of charges;

2. By refusing to deliver the goods until hislien is satisfied;

3. All remedies allowed by law for theenforcement of a lien against personalproperty and recovery of any deficiencyin case it exists after the sale of theproperty;

4. By causing the extrajudicial sale of theproperty and applying the proceeds tothe value of the lien

PROCESSA. Written notice to the person on whose

account the goods are held or topersons who claim an interest in thegoods containing:a. itemized statement of

warehouseman’s lien showing thesum due and when it became due

b. brief description of the goodsc. a demand that a claim be paid on or

before a day mentioned, not lessthan 10 days from:1. delivery of notice if personally

delivered2. time when notice should reach

its destination if sent by maild. statement that if the claim is not

paid, the goods will be advertised forsale and then sold at a specifiedtime and place

B. After the time for payment of the claimif the notice has elapsed, the sale will beadvertised stating:a. a description of the goods to be soldb. the name of the owner or person on

whose account the goods were heldc. time and place of the sale

C. Publication:a. if there is a newspaper published in

the place of sale: once a week for 2consecutive weeks and the sale notheld less than 15 days from the timeof the 1st publication

b. if there is no newspaper: posted atleast 10 days before the sale in notless than 6 conspicuous places inthe place of sale

D. Sale itself in:a. place where the lien was acquiredb. if such place is manifestly

unsuitable for the purpose, at thenearest suitable place

E. From the proceeds of the sale:a. the warehouseman shall satisfy his

lien


Page 124 of 177

CR

ED

ITT

RA

NSA

CT

ION

Sb. including the reasonable charges of

notice, advertisement and salec. the balance shall be held by the

warehouseman and delivered ondemand to the person to whom heshould deliver it

F. Any time before the goods are sold, anyperson may pay the warehouseman forhis lien and the other expenses. Thewarehouseman shall deliver the goodsto that person if he is entitled underthis Act, to the possession of the goodson payment of the charges. Otherwise,the warehouseman shall retainownership of the goods.

PERISHABLE AND HAZARDOUS GOODS Warehouseman will give notice to owner

or person in whose name the goods arestored:a. to satisfy his lienb. to remove the goodsc. failure to do a &b will give the

warehouseman authority to sell thegoods without advertising

d. if sale is not possible, he maydispose of the goods in any lawfulmanner without liability

Proceeds of the sale shall be disposed ofin accordance with the process in thesale of the goods.

EFFECTS OF SALEa. warehouseman is NOT liable for non-

delivery even if the receipt was given forthe goods when they were deposited benegotiated

b. when the sale was made without thepublication required and before the timespecified by law, such sale is void andthe purchaser of the goods acquires notitle in them

NEGOTIATION AND TRANSFER OFRECEIPTS Negotiable receipts negotiable by

delivery:1. if the goods are deliverable to the

bearer; or2. when indorsed in blank; or3. person to whose order the goods are

delivered or by a subsequentindorsee indorsed it to bearer

II. INSOLVENCY LAW

INSOLVENCY – state of a person whoseliabilities are more than his assets. It is theinability of a person to pay his debys asthey become due in the ordinary course ofbusiness.

Balance Sheet Test – relative condition ofa man’s assets and liabilities that theformer if all made immediately available,would not be sufficient to discharge thelatter.

Equity Test – a person may be insolventalthough he may be able to pay his debts atsome future time on a settlement andwinding up of his affairs.

INSOLVENCY vs. BANKRUPTCY The only distinction between insolvency

and bankruptcy is a matter ofterminology and the source of the lawsrelating thereto.

Either a bankruptcy or insolvencystatute may operate to discharge a debtas well as release the debtor fromimprisonment, and either may operateon the petition of the debtor or that ofhis creditors.

INSOLVENCY PRIMARILY GOVERNED BYTHE CC Insolvency shall be governed by special

laws insofar as they are notinconsistent with the CC. Insolvency isthus primarily governed by the CC andsubsidiarily by the Insolvency Law.

The Insolvency Law is intended to coverthe entire subject of insolvency andbankruptcy and must be treated as acomplete body of law upon the subject.

PURPOSES OF INSOLVENCY LAW:1. To effect an equitable distribution of the

bankrupt’s property among hiscreditors; and

2. To benefit the debtor in discharging himfrom his liabilities and enabling him tostart afresh with the property set apartto him as exempt.

3. The regulatory and unifying influence ofthe law on credit transactions andbusiness usage throughout the country.


Page 125 of 177

CR

ED

ITT

RA

NSA

CT

ION

SWHAT MAY BE PERMITTED OF A DEBTORBY THE INSOLVENCY LAW1. Petition the court to suspend payments;2. To be discharged from his debts and

liabilities by voluntary or involuntaryinsolvency proceedings.

SUSPENSION OF PAYMENTS postponement, by court order, of the

payment of debts of one who, whilepossessing sufficient property to coverhis debts, foresees the impossibility ofmeeting them when they respectivelyfall due.

PURPOSE To suspend or delay the payment of

debts the amount of which is notaffected although a postponement isdeclared.

BASIS Probability of the debtor’s inability to

meet his obligations when theyrespectively fall due, despite the factthat he has sufficient assets to cover allhis liabilities.

REQUISITES OF PETITION FORSUSPENSION OF PAYMENTS:1. Petition is filed by a debtor;2. Possessing sufficient property to cover

all his debts;3. Foreseeing the impossibility of meeting

them when they respectively fall due;and

4. Petitioning that he be declared in thestate of suspension of payments

RULE ON DOUBLE MAJORITY IN THEMEETING OF CREDITORS Majority shall be:

1. Two thirds (2/3) of the creditorsvoting upon the same proposition,which

2. Represents at least three fifths (3/5)of the total liabilities of the debtor.

KINDS OF INSOLVENCY

A. VOLUNTARY INSOLVENCY – aninsolvent debtor owing debts exceedingthe amount of P1,000.00 may apply tobe discharged from his debts andliabilities by petition to the RTC of theprovince or city in which he has residedfor six months next preceding the filingof the petition.

DISTINCTIONS BETWEEN SUSPENSIONOF PAYMENTS AND INSOLVENCY

Suspensionof Payments

Insolvency

Purpose Suspend ordelay thepayment ofdebts

Discharge thedebtor from thepayment ofdebts

Sufficiencyof property

Debtor hassufficientproperty topay his debts

Debtor does nothave sufficientproperty to payall his debts

Effect onamount ofdebt

Amount ofindebtednessis not affected

The creditorsreceive less thantheir credits,and in casewhere there arepreferences,some creditorsmay not receiveany amount atall

Number ofcreditorsrequired

Number ofcreditors isimmaterial

In case ofinvoluntaryinsolvency, threeor morecreditors arerequired

EFFECT OF COURT ORDER DECLARINGDEBTOR INSOLVENT1. All the assets of the debtor not exempt

from execution are taken possession ofby the sheriff until the appointment of areceiver or assignee.

2. The payment to the debtor of any debtsdue to him and the delivery to thedebtor or to any person for him of anyproperty belonging to him and thetransfer of any property by him areforbidden.

3. All civil proceedings pending against theinsolvent debtor shall be stayed.

4. Mortgages or pledges, attachments orexecutions on property of the debtorduly recorded and not dissolved arenot affected by the order.

B. INVOLUNTARY INSOLVENCY – anadjudication of insolvency may be madeon the petition of three or morecreditors, residents of the Philippines,whose credits or demands accrued inthe Philippines, and the amount ofwhich credits or demands are in theaggregate of not less than P1,000.00


Page 126 of 177

CR

ED

ITT

RA

NSA

CT

ION

SDISTINCTIONS BETWEEN VOLUNTARYINSOLVENCY AND INVOLUNTARYINSOLVENCY

VoluntaryInsolvency

InvoluntaryInsolvency

Number ofcreditors

One creditor issufficient

Three or morecreditors arerequired

Who maypetition

Filed by theinsolventdebtor

Filed by threeor morecreditors whopossess thequalificationsrequired bylaw

Acts ofinsolvency

Debtor mustnot be guilty ofany of the actsof insolvency(Sec. 20)

Debtor musthavecommittedone or more ofsuch acts ofinsolvency

Amount ofdebt

The amount ofindebtednessmust exceedP1,000.00

Amount mustnot be lessthanP1,000.00(aggregate)

Posting ofbond

Bond is notrequired

Petition mustbeaccompaniedby a bond

Ex parteadjudication

An order ofadjudicationmay begranted exparte

An order ofadjudicationgranted onlyafter a hearing

Residencyduration tovestjurisdictionin courts

Petition is filedin the RTC ofthe provinceor city wherethe debtor hasresided for sixmonths

Length ofresidence isimmaterial

Requirementof hearing

Court issuesthe order ofadjudicationdeclaring thepetitionerinsolvent uponthe filing ofthe voluntarypetition

The debtor isnotadjudicatedinsolvent untilafter hearingof the case

ASSIGNEE – person elected by the creditorsor appointed by the court to whom aninsolvent debtor makes an assignment of allhis property for the benefit of his creditors.

CREDITORS NOT ENTITLED TO VOTE INTHE ELECTION OF ASSIGNEE1. Those who did not file their claims at

least two days prior to the timeappointed for such election

2. Those whose claims are barred by thestatute of limitations

3. Secured creditors unless they surrendertheir security or lien to the sheriff orreceiver or unless they shall first havethe value of such security fixed

4. Holders of claims for unliquidateddamages arising out of pure tort.

EFFECTS OF ASSIGNMENT1. Assignee takes the property in the plight

and conditions that the insolvent heldit.

2. Upon appointment, the legal title to allthe property of the insolvent is vestedin the assignee, and the control of theproperty is vested in the court.

3. All actions to recover all the estate,debts, and effects of the insolvent shallbe brought by the assignee and not bythe creditors.

4. The assignment shall:a. Dissolve any attachment levied

within one month next precedingthe commencement of insolvencyproceedings;

b. Vacate and set aside judgmententered in any action commencedwithin 30 days immediately prior tothe commencement of insolvencyproceedings;

c. Vacate and set aside executionissued thereon;

d. Vacate and set aside any judgmententered by default or consent of thedebtor within 30 days prior to thecommencement of insolvencyproceedings

BOND OF THE ASSIGNEE After his election, the assignee is

required to give a bond for the faithfulperformance of his duties.

Purpose:1. To establish his official character2. To establish his right to sue in that

capacity The bond is solely for the benefit of the

creditors of the insolvent, and that thirdpersons have no remedy against thesureties if the assignee, purporting to beas such, wrongfully takes property fromsuch third persons and converts it tohis own use.

PROPERTIES OF INSOLVENT THAT PASSTO THE ASSIGNEE1. All real and personal property, estate,

and effects of the debtor, including alldeeds, books, and papers in relationthereto;

2. Properties fraudulently conveyed;


Page 127 of 177

CR

ED

ITT

RA

NSA

CT

ION

S3. Right of action for damages to real

property4. The undivided share or interest of the

insolvent debtor in property held underco-ownership

PROPERTIES OF INSOLVENT THAT DONOT PASS TO THE ASSIGNEE1. Property exempt from execution;2. Property held in trust;3. Property of the conjugal partnership or

absolute community except insofar asthe debtor’s obligations redounded tothe benefit of the family.

4. Property to which a mortgage orpledge exists unless the creditorsurrenders his security or lien.

5. After-acquired property except fruitsand income of property owned by thedebtor

6. Non-leviable assets like life insurancepolicy which do not have any cashsurrender value

7. Right of action for tort which is purelypersonal in nature.

POWERS OF THE ASSIGNEE1. To sue and recover all the estate,

debts, and claims belonging to or due tothe debtor;

2. To take into his possession all theestate of the debtor except propertyexempt from execution;

3. In case of non-resident or abscondingor concealed debtor, to demand andreceive of every sheriff all the propertyand money in his possession belongingto the debtor.

4. To sell, upon order of the court, anyestate of the debtor which has comeinto his possession;

5. To redeem all mortgages and pledgesand to satisfy any judgment whichmay be an encumbrance on anyproperty sold by him.

6. To settle all accounts between thedebtor and his debtors subject to theapproval of the court;

7. To compound, under the order of thecourt, with any person indebted to suchdebtor;

8. To recover any property fraudulentlyconveyed by the debtor.

CREDITOR’S LIABILITY FORFRAUDULENTLY ASSIGNING HIS CREDIT A creditor’s transfer or assignment of

his credit to another without theknowledge and at the back of othercreditors of the insolvent may be a

shrews surprise move that enables thetransferor creditor to collect almost ifnot the entire amount of the saidcreditor.

REMEDY OF THE ASSIGNEE: SECTION 37OF THE INSOLVENCY LAW: The creditor coming within this purview

is liable to an action by the assignee fordouble the value of the property soembezzled or disposed of, to be receivedfor the benefit of the insolvent’s estate.

Section 37 constitutes a sort of penalclause which shall be strictly construed.

When Sec. 37 does not apply: Notapplicable where what has beendisposed of is the creditor’s own creditand not the insolvent’s property.

DIVIDENDS IN INSOLVENCY Dividends in insolvency – parcel if the

fund arising from the assets of theestate, rightfully allotted to a creditorentitled to share in the fund, whether inthe same proportion with othercreditors or in a different proportion. Itis paid by the assignee only upon orderof the court.

CLASSIFICATION AND PREFERENCE OFCREDITORS PREFERENCE – an exception to the

General Rule. By it, one person is givena superior right or claim over another.Hence, the law on preferences is strictlyconstrued. (The General Rule is that thepurpose of insolvency proceeding is theequitable distribution of the insolvent’sassets among the debtor’s creditors.)

RULES ON ORDER OF DISTRIBUTION1. The priorities fixed by law govern2. The claims which are given priority

must be paid in full in the order oftheir priority, before the generalcreditors receive anything.

3. Creditors claiming preference mustsufficiently establish their credits andtheir right to preference to entitle themto such preference.

ORDER OF DISTRIBUTION1. Equitable claims under Sec. 48;2. Preferred claims with respect to specific

movable property and specificimmovable property under Art. 2241and 2242 of the CC.

3. Preferred claims as to unencumberedproperty of the debtor which shall be


Page 128 of 177

CR

ED

ITT

RA

NSA

CT

ION

Spaid in the order named in Art. 2244 ofthe CC.

4. Common or ordinary credits which shallbe paid pro rata regardless of datesunder Art. 2245 of the CC.

With reference to specific movable andimmovable property of the debtor, thetaxes due the State shall first besatisfied.

The preferred claims enumerated in Art.2241 and 2242 are considered asmortgages and pledges of real orpersonal property or liens within thepurview of the Insolvency Law.

EQUITABLE CLAIMS UNDER THEINSOLVENCY LAW Section 48 of the Insolvency Law:

Any property found among the propertyof the insolvent, the ownership of whichhas not been conveyed to him by legaland irrevocable title, shall not beconsidered to be property of theinsolvent and shall be placed at thedisposal of its lawful owners, on order ofthe court on petition of the assignee orany creditor whose right to the estate ofthe insolvent has been established.1. Paraphernal property belonging to

the wife of the insolvent;2. Property held by the insolvent on

deposit, administration, lease, orusufruct;

3. Merchandise held by the debtor oncommission;

4. Negotiable instruments for collectionor remittance;

5. Money held by the debtor forremittance;

6. Amounts due the insolvent for salesor merchandise on commission;

7. Merchandise bought by theinsolvent on credit where no deliveryis made or where the right ofownership or possession has beenretained by the seller;

8. Goods or chattels wrongfully takenby the insolvent or the amount ofthe value thereof.

ALTERNATIVE RIGHTS OF SECUREDCREDITOR1. To maintain his right under his

security or lien and ignore theinsolvency proceedings – it is the dutyof the assignee to surrender to him theproperty encumbered;

2. To waive his right under the securityor lien – thereby, share in thedistribution of the assets of the debtor;

3. To have the value of the encumberedproperty appraised and then share inthe distribution of the assets of thedebtor with respect to the balance ofhis credit.

WAIVER – release or surrender of the claimto the receiver, sheriff, or assignee. The following do not constitute

waiver:1. Mere recommendation that the

assignee be appointed;2. Voting of a secured claim.

COMPOSITIONAn agreement, made upon a sufficientconsideration, between an insolvent orembarrassed debtor and his creditors,whereby the latter for the sake of immediateor sooner payment, agree to accept adividend less than the whole amount oftheir claims, to be distributed pro rata, indischarge and satisfaction of the wholedebt.

Composition Accord

Designates anarrangement betweena debtor and the wholebody of his creditors(or at least aconsiderable portion ofthem) for theliquidation of theirclaims by the dividendoffered.

An agreement betweena debtor and a singlecreditor for a dischargeof the obligation by apart payment or ondifferent terms.

REQUIREMENTS FOR A VALID OFFER OFCOMPOSITION1. The offer of the terms of composition

must be made after the filing in court ofthe schedule of property andsubmission of his list of creditors;

2. The offer must be accepted in writing bya majority of the creditors representinga majority of the claims which havebeen allowed;

3. It must be made after depositing insuch place designated by the court, theconsideration to be paid and the costsof the proceedings; and

4. The terms of the composition must beapproved or confirmed by the court.


Page 129 of 177

CR

ED

ITT

RA

NSA

CT

ION

SWHEN COURT MAY CONFIRM ACOMPOSITION1. If it is in the best interest of the

creditors;2. The debtor has not been guilty of any of

the acts, or of a failure to perform any ofthe duties which would create a bar tohis discharge; and

3. The offer and its acceptance are in goodfaith and have not been made orprocured in a manner forbidden by theAct.

EFFECTS OF CONFIRMATION OFCOMPOSITION1. The consideration shall be distributed

as the judge shall direct;2. The insolvency proceedings shall be

dismissed;3. The title to the insolvent’s property shall

revest in him; and4. The insolvent shall be released from his

debts.5. The substitution, in a certain sense,

composition for the insolvencyproceedings.

6. A lawful composition and itsperformance by the insolvent has thesame effect of a written discharge,although no written discharge isgranted.

7. For all legal and practical purposes, theinsolvency ended on the date of theconfirmation of composition and thefirm was restored to its status quo. Itreacquired its personality. Its propertiesceased to be in custodia legis.

WHEN CONFIRMATION MAY BE SETASIDE1. Any time within six months after the

composition has been confirmed;2. Fraud was practiced in procuring such

composition;3. Knowledge thereof has come to the

petitioner after the confirmation of suchcomposition.

DISCHARGE The formal and judicial release of an

insolvent debtor from his debts with theexception of those expressly reserved bylaw.

WHEN AN INSOLVENT DEBTOR MAYAPPLY FOR A DISCHARGE General Rule: A debtor may apply to

the RTC for a discharge at three monthsto one year after the adjudication ofinsolvency.

Exception: The property of theinsolvent has not been converted intomoney without his fault, therebydelaying the distribution of dividendsamong the creditors in which case thecourt may extend the period.

DEBTS RELEASED BY A DISCHARGE1. All claims, debts, and liabilities, and

demands set forth in the schedule; and2. All claims, debts, liabilities and

demands which were or might havebeen proved against the estate ininsolvency

DEBTS NOT RELEASED BY DISCHARGE1. Taxes or assessments due the

Government;2. Any debt created by the fraud or

embezzlement of the debtor;3. Any debt created by the defalcation of

the debtor as a public officer or whileacting in a fiduciary capacity;

4. Debt of any person liable for the samedebt, for or with the insolvent debtor,either as a partner, joint contractor,indorser, surety or otherwise;

5. Debts of a corporation (Rationale:Corporation is not granted a discharge)

6. Claim for support (Rationale: It willmake the law a means of avoiding theenforcement of the obligation)

7. Discharged debt but revived by asubsequent new promise to pay(Rationale: Discharge does not end themoral obligation to pay)

8. Debts which have not been dulyschedules in time for proof andallowance.Exception: The creditors had notice oractual knowledge of the insolvencyproceedings

9. Claims for:a. Unliquidated damages;b. Secured creditors;c. Not in existence or not mature at

the time of the discharge;d. Contingent at the time of the

discharged.

LEGAL EFFECTS OF DISCHARGE Discharge takes effect from the

commencement of the proceedings ininsolvency.1. Releases the debtor from all claims,

debts, liabilities and demand setforth in the schedule or which wereor might have been proved againsthis estate in insolvency.


Page 130 of 177

CR

ED

ITT

RA

NSA

CT

ION

S2. Operates as a discharge of the

insolvent and future acquisitionsbut permits mortgages and otherlien

3. It is a special defense which may bepleaded and be a complete bar to allsuits brought on any such debts,claims, liabilities or demands.

4. It does not operate to release anyperson liable for the same debts, foror with the debtor, either as partner,joint contractor, indorser, surety, orotherwise.

5. The certificate of discharge is primafacie evidence of the fact of release,and the regularity of suchdischarge.

Remedy of guarantor or surety whendebtor declared judicially insolvent:File a contingent claim in the insolvencyproceeding, if his rights as suchguarantor or surety are not to be barredby the subsequent discharge of theinsolvent debtor from all his liabilities.

WHEN DISCHARGE MAY BE REVOKED Discharge may be revoked by the court

which granted it upon petition of anycreditor:1. Whose debt was proved or provable

against the estate in insolvency, onthe ground that the discharge wasfraudulently obtained; andprovided,

2. The petition is filed within one yearafter the date of the discharge.

FRAUDULENT PREFERENCES ANDTRANSFERSTRANSFER – includes the sale and everyother and different modes of disposing of orparting with property, or the possession ofproperty, absolutely or conditionally, as apayment, pledge, mortgage, gift, or security.

WHEN PREFERENTIAL TRANSFER EXISTS1. There must be a parting of the

insolvent’s property;2. For the benefit of the creditor;3. Consequent diminution of the

insolvent’s estate;4. With the result that such creditor

receives a greater proportion of hisclaim than other creditors of the sameclass.

General Rule: A debtor is notprohibited from paying one creditor inpreference to another

Exception: In cases mentioned in theInsolvency Law

Deposit of money to one’s credit on abank does not create any preference.

Rationale: The estate of the depositor isnot diminished for there is an obligationon the part of the bank to pay theamount of the deposit as soon as thedepositor may see fit to draw a checkagainst it.

WHEN FRAUDULENT PREFERENCEEXISTSFRAUDULENT PREFERENCE – when thedebtor procures any part of his property tobe attached, sequestered, or seized onexecution or makes any payment, pledge,mortgage, assignment, transfer, sale orconveyance of any part of his property,whether directly or indirectly, absolutely orconditionally, to any one under thefollowing circumstances:1. The debtor is insolvent or in

contemplation of insolvency;2. The transaction in question is made

within 30 days before the filing of apetition by or against the debtor;

3. It is made with a view to givingpreference to any creditor or personhaving a claim against him; and

4. The person receiving a benefit therebyhas reasonable cause to believe:a. That the debtor is insolvent;b. That the transfer is made with a

view to prevent his property fromcoming to his assignee ininsolvency, or to prevent the samefrom being distributed ratablyamong his creditors, or to defeat theobject of or any way hinder theoperation or evade the provisions ofthe Insolvency Law.

*Date of registration of sale of real propertyshould determine whether the sale wasprohibited by the Insolvency Law or not.

WHEN PRESUMPTION OF FRAUD EXISTS1. If such payment, pledge, mortgage,

conveyance, sale, assignment ortransfer is not made in the usual andordinary course of business of thedebtor; or

2. If such seizure is made under ajudgment which the debtor hasconfessed or offered to allow, that factshall be prima facie evidence of fraud.

EQUAL EXCHANGE NOT A PREFERENCE An exchange of securities within the

thirty-day period is not a fraudulent


Page 131 of 177

CR

ED

ITT

RA

NSA

CT

ION

Spreference under the law, even whenboth parties know that the debtor isinsolvent, if:1. The security given up is a valid one

at the time the exchange;2. Of equal value with the one received

in exchange. Rationale: Exchange takes nothing

away from the other creditor Equal value: Not necessary that their

value should be mathematically equal,but it is sufficient if they aresubstantially equal.

WHEN FRAUDULENT TRANSFER EXISTS1. Any payment, pledge, mortgage,

conveyance, sale, assignment, ortransfer of property of whatevercharacter;

2. Made by the insolvent;3. Within one month before the filing of

the petition in insolvency against him Exception: Transfer for a valuable

pecuniary consideration in good faith Effect of fraudulent transfer: Such

transfer is VOID

RIGHT OF ASSIGNEE TO RECOVERPROPERTY OR ITS VALUE The creditors of the insolvent are not

authorized to institute an independentaction. In all actions or proceedings toset aside or nullify fraudulentpreferences or transactions as VOID,the assignee appears for, andrepresents the general creditors.

EFFECT OF DEATH OF INSOLVENTDEBTOR1. Death after the order of adjudication

– the proceedings shall be continuedand concluded in like manner and withlike validity and effects as if he hadlived.

2. Death before the order ofadjudication – the proceedings shall bediscontinued.

Remedy: File claims in the propertestate or intestate proceedings

WHEN RECEIVER MAY BE APPOINTED Anytime before the election of an

assignee, when it appears by theverified petition of a creditor:1. That the assets of the insolvent or a

considerable portion thereof havebeen pledged, mortgaged,transferred, assigned, conveyed, orseized on legal process in violationof Sec. 70;

2. That it is necessary to commence anaction to recover the same;

The receiver shall deliver all theproperty, assets, or effects remaining inhis hands to the assignee who shall besubstituted for him in all pendingactions or proceedings.

WHEN PETITION MAY BE DISMISSED At anytime before the appointment of an

assignee:1. Voluntary petition – upon the

application of the debtor, if nocreditor files written objections;

2. Involuntary petition –a. Upon the application of the

petitioning creditors; orb. By written consent of all

creditors filed in court, in whichcase, the proceedings may bedismissed at any time.

After the appointment of an assignee,dismissal is not allowed without theconsent of all parties interested in oraffected thereby.

WHEN APPEAL MAY BE TAKEN TO THESUPREME COURT From an order granting or refusing:

1. An adjudication in insolvency and inthe latter case, from the order fixingthe amount of costs, expenses,damages, and attorney’s feesallowed the debtor;

2. A creditor’s claim when the amountin dispute exceeds P300.00

3. A claim for property not belonging tothe insolvent, presented under Sec.48 (equitable claims)

4. Settling an account of an assignee;5. Setting apart homestead or other

property claimed as exempt fromexecution.

6. A discharge to the debtor.

- end of Credit Transactions -


AG

EN

CY

Page 133 of 177

AGENCY

Chapter I. NATURE, FORM ANDKINDS OF AGENCYA. DefinitionB. PurposeC. CharacteristicsD. Essential ElementsE. Determination of ExistenceF. Agency vs. Similar ContractsG. Kinds

Chapter II. OBLIGATIONS OF THEAGENTA. To Carry Out the AgencyB. To Act Within the Scope of His

AuthorityC. To Advance Necessary FundsD. To Act in Accordance with

InstructionsE. To Prefer Principal’s Interest over

Personal InterestF. Not to Loan to Himself without

Principal’s ConsentG. To Render Account and Deliver

Things Received by Virtue ofAgency

H. To be Responsible for SubstitutesI. To Pay InterestJ. To Answer for His Fraud/

NegligenceK. Special Obligations of Factor/

Commission Agents

Chapter III. LIABILITIES OF THEAGENTA. Liability to Third PersonsB. Liability to the PrincipalC. Liability of Two or More Agents

Chapter IV. OBLIGATIONS OF THEPRINCIPALA. To Comply with the Obligations

Contracted by the AgentB. To Advance Necessary Sums and

Reimburse the AgentC. To Indemnify Agent for DamagesD. To Pay the Agent’s CompensationE. Be Solidarily Liable

134134134134134135135137

141141

141142

142

142

142

143143143

143

143

145145145146

147

147

148148148149

Chapter V. EXTINGUISHMENT OFAGENCYA. Expiration of the Period for which

It was ConstitutedB. Death, Civil Interdiction,

Insanity, InsolvencyC. Withdrawal of the AgentD. Accomplishment of the Object of

the AgencyE. RevocationF. Dissolution of the Firm/Corp.

which Entrusted/Accepted theAgency

150

150

150150

150150

151

REVIEWER IN CIVIL LAW Chapter I. Nature, Form and Kinds of Agency

AG

EN

CY

Page 134 of 177

AgencyFACULTY-STUDENT EDITORIAL BOARD AND LECTURES COMMITTEE


ACADEMICS COMMITTEE


EDITOR-IN-CHIEF


LAYOUT HEAD

CIVIL LAW


SUBJECT EDITORS

SALES

Michelle DyLEAD WRITER

Kristine BongacaronViktor Fontanilla

WRITERS

LECTURES

Edel CruzHEAD

--------


--------


Chapter I. Nature, Form andKinds of Agency

A. DEFINITIONB. PURPOSEC. CHARACTERISTICSD. ESSENTIAL ELEMENTSE. DETERMINATION OF EXISTENCEF. AGENCY V SIMILAR CONTRACTSG. KINDS

A. DEFINITION [Art. 1868, CC]

By the contract of agency,1. a person (agent) binds himself2. to render some service or to do

something in representation or onbehalf of another (principal),

3. with the consent or authority of thelatter.

B. PURPOSE

1. The purpose of agency is to extend theprincipal’s personality.

2. What acts may be delegatedGeneral Rule: What a man may do in person, he

may do thru another.Exceptions:1. Personal acts2. Criminal acts3. Theory of imputed knowledge

General Rule: Knowledge of agent imputed to

principalExceptions:i. Agent’s interests are adverse to

those of the principal;ii. Agent’s duty is not to disclose

information;

iii. 3rd person claiming the benefitof the rule colludes with agent todefraud principal.

Note:The theory of imputedknowledge ascribes theknowledge of the agent, to theprincipal, not the other wayaround. The knowledge of theprincipal can’t be imputed to itsagent. [Sunace Internat’l Mgt.Services v. NLRC, 2006]

C. CHARACTERISTICS(CNPPU/B)

1. Consensual: perfected by mereconsent

2. Nominate: has its own name3. Preparatory: purpose is the

execution of a juridical act inrelation to a third person

4. Principal: can stand by itselfwithout need of another contract

5. Unilateral if gratuitous: createsobligations for one of the parties;Bilateral if for compensation: givesrise to reciprocal rights andobligations

D. ESSENTIAL ELEMENTS

1. Essential Elements (CORS)[Rallos v Felix Go Chan, 1978]i. Consent, express or implied, of

the parties to establish therelationship

ii. Object is the execution of ajuridical act in relation to a thirdperson

iii. Agent acts as a Representativeand not for himself


AG

EN

CY

Page 135 of 177

iv. Agent acts within the Scope ofhis authority

2. Important considerations underConsent

Intent to establish agency essentialGeneral Rule [Victorias Milling v CA,2000]: On the part of the principal there

must be an actual intention toappoint or an intention naturallyinferable from his words oractions;

On the part of the agent, theremust be an intention to accept theappointment and act on it.

Exception: One who clothes another with

apparent authority as his agent,and holds him out to the public assuch, can’t be permitted to denythe authority of such person to actas his agent, to the prejudice ofinnocent third parties dealing withsuch person in good faith. [Mackev Camps, 1907]

E. DETERMINATION OF EXISTENCEOF AGENCY

1. Designation by parties— is notcontrolling.

2. Fact of existence—If relations that constitute agency exist,there is agency regardless of whether ornot the parties understood the exactnature of the relation.

3. No presumption of existence—Agency must exist as a fact.Exceptions:i. When agency arises ipso jureii. To prevent unjust enrichment

4. Intention of the parties to create—i. The nature of the contract depends

on the intention of the parties asgathered from the whole scope andeffect of the language employed.

ii. As between principal and 3rdperson, however, agency may existwithout the direct assent of theagent.

Note Keeler Rule:Against the principal, the agent has theobligation to determine existence and scope

of agency….Against the agent, the thirdperson has the obligation to determineexistence and scope of agency….The persondealing with the agent must also act withordinary prudence and reasonablediligence. If he knows or has good reason tobelieve that the agent is exceeding hisauthority, he cannot claim protection.[Harry Keeler Electric v Rodriguez, 1922]

F. AGENCY VS. SIMILARCONTRACTS

1. Partnershipi. An agent acts not for himself, but

for his principal; a partner can actfor himself, for his firm, and for hispartners

ii. Parity of Standing Test—A partnership generally presupposesa parity of standing between thepartners, in which each party hasan equal proprietary interest in thecapital or property contributes &where each party exercises equalrights in the conduct of thebusiness. [Sevilla v CA, 1988]

2. Independent Contractor (IC)

Agency IC1. ControlThe agent actsunder the controland instruction ofthe principal.

The IC is authorizedto do the workaccording to hisown method,without beingsubject to the otherparty’s control,except insofar asthe result of thework is concerned.

2. Liability for tortPrincipal is liable fortorts committed bythe agent within thescope of hisauthority.

Employer not liablefor torts committedby the independentcontractor.

3. SubagentsAgents of the agentcan be controlled bythe principal

The employees ofthe contractor arenot the employees ofthe employer of thecontractor

3. Lease of Service

Agency Lease of Service1. BasisBasis isrepresentation

Basis is employment


AG

EN

CY

Page 136 of 177

2. PurposeExecution of ajuridical act inrelation to a thirdperson

Execution a piece ofwork or rendering ofservice

3. Authorized ActsThe agent isdestined to executejuridical acts(creation,modification orextinction ofrelations with thirdparties)

Lease of servicescontemplate onlymaterial acts.

4. DiscretionAgent exercisesdiscretionarypowers.

Lessor ordinarilyperforms onlyministerialfunctions.

5. Parties3 parties: Principal,agent and the 3rdperson with whomthe agent contracts

2 parties: Lessorand lessee.

4. Lease of Property

Agency Lease of Property1. ControlThe agent actsunder the controland instruction ofthe principal.

Lessee is notcontrolled by thelessor

2. Things involvedAgency may involvethings other thanproperty

Lease of propertyonly involvesproperty

3. Binding powerAgent can bind theprincipal

Lessee cannot bindthe lessor

5. Salei. Agency to Sell vs. Sale

Agency to Sell Sale1. Ownership of goodsAgent receives thegoods as the goodsof the principal

Buyer receives thegoods as owner

2. PaymentAgent deliversproceeds of the saleto the principal

Buyer pays theprice

3. Return of goodsGenerally, the agentcan return the goodsin case he is unableto sell them to athird person

generally, buyercannot return thegoods bought



5. PartiesAgent in dealingwith thing receivedis bound to actaccording to theinstructions of hisprincipal;

Buyer can deal withthe thing as hepleases, being theowner.

ii. Agency to Buy v Sale

Agency to Buy Sale1. Ownership of goodsThe agent acquiresownership in behalfof the principal

The buyer acquiresownership forhimself.

2. Changes in priceGenerally, anychange in the priceshould be borne bythe principal

Buyer cannot adjustthe price alreadyagreed upon.

3. PaymentThe agent pays thepurchase price inbehalf of theprincipal

Buyer pays the price

6. Guardianship

Agency Guardianship1. Person representedAgent represents acapacitated person

A guardianrepresents anincapacitatedperson.

2. Source of authorityAgent is appointedby the principal andcan be removed bythe latter.

Guardian isappointed by thecourt.

3. ControlThe agent actsunder the controland instruction ofthe principal.

Guardian is notsubject to thedirections of theward but must actfor the benefit of thelatter



5. Binding powerAgent can make theprincipal personallyliable.

Guardian has nopower to imposepersonal liability onthe ward.


AG

EN

CY

Page 137 of 177

G. KINDS

1. As to Manner of Creation

i. Expressa. Agent has been actually authorized

by the principalb. Agency may be oral or in writing,

unless the law requires a specificform. [Art. 1869, CC]

ii. Implieda. Agency may be implied from:

the acts of the principal; his silence or lack of action; his failure to repudiate the

agencyknowing that another person isacting on his behalf withoutauthority [Art. 1869, CC]

b. Acceptance by the agent may beimplied from his acts which carry out

the agency; from his silence or inaction

according to the circumstances[Art. 1870, CC]

c. Acceptance of the agency may beimplied between persons who arepresent if the principal delivers hispower of attorney to the agent andthe latter receiver it withoutobjection [Art. 1871, CC]

d. Rule on acceptance of the agencybetween persons who are absent:[Art. 1872, CC]General Rule:Acceptance cannot be implied fromthe silence of the agentExceptions: when the principal transmits his

POA to the agent, who receives itwithout any objection;

when the principal entrusts tohim by letter or telegram a POAwith respect to the business inwhich he is habitually engagedas an agent, and he did not replyto the letter

e. When there is estoppel: If a person specially informs

another or states by publicadvertisement that he has givena power of attorney to a thirdperson,

the latter thereby becomes aduly authorized agent, in theformer case with respect to theperson who received the special

information, and in the lattercase with regard to any person.

The power shall continue to bein full force until the notice isrescinded in the same manner inwhich it was given. [Art. 1873,CC]

2. As to formalities

General Rule: Agency may be oral or in writing [Art.

1869, CC]

Exception:i. When the law requires a specific form

[Art. 1869, CC]ii. Sale of a piece of land or any interest

therein—When a sale of a piece of land or anyinterest therein is through an agent, theauthority of the latter shall be inwriting; otherwise, the sale shall bevoid. [Art. 1874, CC]

Note:It is not necessary that the real property tobe sold be precisely described in the writtenauthority of the agent. It is sufficient if theauthority is so expressed as to determinewithout doubt the limits of the agent’sauthority. [Jimenez v Rabot, 1918]

3. As to cause or consideration

Agency may be onerous or gratuitous General Rule:

Agency is presumed to be forcompensation [Art. 1875, CC]ExceptionThere is proof to the contrary [Art. 1875,CC]

4. As to extent of business covered

i. Universal—all acts that the principal maypersonally do, and which he canlawfully delegate to another the power ofdoing. [Mechem, Sec. 58]

ii. General—comprises all the business of theprincipal [Art. 1876, CC]

iii. Special—comprises on or more specifictransactions [Art. 1876, CC]


AG

EN

CY

Page 138 of 177

General Agency Special Agency1. Scope of authorityAll acts connected withthe business oremployment in whichhe is engaged.

Specific acts inpursuance ofparticular instructionsor with restrictionsnecessarily impliedfrom the act to bedone.

2. Nature of service authorizedInvolves continuity ofservice.

No continuity ofservice.

3. Extent to which agent may bind principalMay bind his principalby an act within thescope of his authorityalthough it may becontrary to the latter’sspecial instructions.

Cannot bind hisprincipal in a mannerbeyond or outside thespecific acts which heis authorized toperform.

4. Termination of authorityApparent authoritydoes not terminate bythe mere revocation ofhis authority withoutnotice to the 3rd party.

Duty imposed uponthe 3rd party toinquire makestermination of therelationship asbetween the principaland agent effective asto such 3rd party,unless the agency hasbeen entrusted for thepurpose of contractingwith such 3rd party.

5. Construction of principal’s instructionsMerely advisory innature.

Strictly construed asthey limit the agent’sauthority.

5. As to authority conferred

1) Agency may be couched in general orspecific termsa. Couched in general terms [Art.

1877, CC]—If couched in general terms, itcomprises only acts ofadministration, EVEN IF: the principal states that he

withholds no power; or he states that the agent may

execute such acts as he mayconsider appropriate; or

the agency should authorize ageneral and unlimitedmanagement

b. Couched in specific terms—authorizing only the performance ofspecific act/acts

2) Power of Attorneya. Definition—

Written authorization to an agent toperform specified acts in behalf ofhis principal which acts, when

performed, shall have binding effecton the principal [2 Am. Jur. 30]

b. Purpose—Not to define the agent’s authority,but to evidence such authority to3rd parties

c. Interpretation—General RulePower of Attorney should be strictlyconstruedExceptionWhen strict construction willdestroy the very purpose of thepower

d. Special Power of Attorney— an authority granted by the

principal to the agent where theact for which it is drawn isexpressly mentioned. [Strong v.Repide, 1906]

A special power can be includedin a gen. power of attorney,either by giving authority for allacts of a particular character orby specifying therein theact/transaction for which aspecial power is needed.[Tolentino]

3) When special powers are necessary [Art.1878, CC](PNC-WIG-LLB-PORIRS):a. to make such Payments as are not

usually considered acts ofadministration

b. to effect Novations which put an endto obligations already in existence atthe time the agency was constituted

c. Compromise, to submit questions toarbitration, to renounce the right toappeal from a judgment, to waiveobjections to the venue of an actionor to abandon a prescription alreadyacquired

d. to Waive any obligation gratuitouslye. to enter into any contract by which

the ownership of an Immovable istransmitted or acquired eithergratuitously or for a valuableconsideration

f. to make Gifts, except customaryones for charity or those made toemployees in the business managedby the agent;

g. to Loan or borrow money, unless thelatter act be urgent andindispensable for the preservation ofthe things which are underadministration


AG

EN

CY

Page 139 of 177

h. to Lease any real property toanother person for more than oneyear

i. to Bind the principal to render someservice without compensation

j. to bind the principal in a contract ofPartnership

k. to Obligate the principal as aguarantor or surety

l. to create or convey Real rights overimmovable property

m. to accept or repudiate anInheritance

n. to Ratify or recognize obligationscontracted before the agency

o. any other act of Strict dominion

Note:i. 1878 refers to the nature of the

authorization, not to its form. Even if adocument is titled as a general power ofattorney, the requirement of specialpower of attorney is met is there is aclear mandate from the principalspecifically authorizing the performanceof the act [Bravo-Guerrero v Bravo,2005]

ii. What SPA to sell/mortgage does notinclude [Art. 1879, CC] A special power to sell excludes the

power to mortgage; Special power to mortgage does not

include the power to sell.

iii. A special power to compromise does notauthorize submission to arbitration.[Art. 1880, CC]

iv. The power to legally compel thepayment of debts owing to the principalis an express grant of the right to bringsuit for the collection of such debts.[Germann & Co v Donaldson, 1901]

v. A power of attorney “to loan and borrowmoney” and to mortgage the principal’sproperty does not carry with it or implythat that the agent has a legal right tomake the principal liable for thepersonal debts of the agent. [BPI v DeCoster, 1925]

vi. Unless the contrary appears, theauthority of an agent must be presumedto include all the necessary and usualmeans of carrying the agency into effect.[Macke v Camps, 1907].

vii. Effect of lack of SPA where one isrequired—It is neither accurate not correct toconclude that the absence of SPA(where one is required by law) rendersthe contract entered into by virtue ofsaid SPA void. The contract is merelyunenforceable. [Dungo v Lopena, 1962,citing Art. 1403(1), CC]

6. As to nature and effects

i. Ostensible or Representative—agent actsin the name and representation of theprincipal

ii. Simple or Commission—agent acts in hisown name but for the principal’saccount

iii. Agency by Estoppel—there is no agency,and the alleged agent seemed to haveapparent or ostensible, but not real,authority to represent another

Apparent Authority Agency by EstoppelThough not actuallygranted, principalknowingly permits orholds out the agent aspossessing thenecessary powers toact in a certain way.

Where the principal,by his negligence,permits his agent toexercise powers notgranted to him, eventhough the principalmay have no notice orknowledge of theconduct of the agent.

Implied Agency Agency by EstoppelThere is actualagency; thus withrights & duties as anagent.

There is no actualagency; thus withoutrights & duties as anagent.

Principal alone isliable.

If caused by theprincipal, he isresponsible. If causedby the agent, he isresponsible. Provided,3rd person in goodfaith.

iv. Agency by Ratificationa. Conditions for ratification (CaP-

DECK) The principal must have

Capacity and Power to ratify. The act must be Done in behalf

of the principal He must ratify the acts in its

Entirety The act must be Capable of

ratification He must have had Knowledge of

material facts.


AG

EN

CY

Page 140 of 177

b. Effects of ratification With respect to the agent: It

relieves the agent from liability.He may also recovercompensation.

With respect to the principal: Heassumes responsibility for theunauthorized act, as fully as ifthe agent had acted underoriginal authority; but he is notliable for acts outside theauthority approved by hisratification.

With respect to 3rd persons: Theyare bound by ratification. Theycannot question agent’sauthority.

Ratification EstoppelRests on intention Rests on prejudiceAffects the entiretransaction from thebeginning.

Affects only relevantparts of thetransaction.

The substance ofratification isconfirmation ofunauthorized acts orconduct after it hasbeen done.

The substance ofestoppel is theprincipal’s inducementto another to act to hisprejudice.

7. As to kinds of principal

i. Principal may be:a. Disclosedb. Partially disclosed—

third persons are unaware ofprincipal’s identity

c. Undisclosed—agent acts in his ownname

ii. General Rule [Art. 1883, CC]If the principal is undisclosed (agentacts in his own name):a. the agent is the one directly bound

in favor of the person with whom hehas contracted, as if the transactionwere his own

b. the principal has no right of actionagainst the persons with whom theagent has contracted; neither havesuch persons against the principal.

Exception [Art. 1883, CC]i. When the contract involves things

belonging to the principalii. Exception qualified by National Bank

v Agudelo, 1933—For the principal to be bound by theact of an agent who contracted inhis [agent’s] own name, it is notsufficient that the contract involvedthings belonging to the principal.

The agent should also have actedwithin his scope of authority.[National Bank v Agudelo, 1933;Rural Bank of Bombon v CA, 1992]

iii. Note:Agent may still be sued even if principalis undisclosed and contract involvedthings belonging to the principal.—Even if the principal is undisclosed andthe contract involved things belongingto the principal, the third person whocontracted with the agent has a right ofaction not only against the principal butalso against the agent, when the rightsand obligations which are the subjectmatter of the litigation cannot be legallyand juridically determined withouthearing both of them. In such case, theagent being a necessary party to the fulland complete determination of the casewhich originated from his act should beincluded in the case as defendant.[Beaumont v Prieto, 1921]

REVIEWER IN CIVIL LAW Chapter II. Obligations of the Agent

AG

EN

CY

Page 141 of 177

Chapter II. Obligations ofthe Agent

A. TO CARRY OUT THE AGENCYB. TO ACT WITHIN THE SCOPE OF HIS

AUTHORITYC. TO ADVANCE NECESSARY FUNDSD. TO ACT IN ACCORDANCE WITH

INSTRUCTIONSE. TO PREFER PRINCIPAL’S INTEREST

OVER PERSONAL INTERESTF. NOT TO LOAN TO HIMSELF WITHOUT

PRINCIPAL’S CONSENTG. TO RENDER ACCOUNT AND DELIVER

THINGS RECEIVED BY VIRTUE OFAGENCY

H. TO BE RESPONSIBLE FOR SUBSTITUTESI. TO PAY INTERESTJ. TO ANSWER FOR HIS

FRAUD/NEGLIGENCEK. SPECIAL OBLIGATIONS OF

FACTOR/COMMISSION AGENTS

A. TO CARRY OUT THE AGENCY

1. Obligation to carry out the agency heaccepted [Art. 1884, CC]—i. The agent is bound by his

acceptance to carry out the agencyown

ii. He shall be liable for damages thatthe principal may suffer due to hisnon-performance

2. Obligation to finish business begun onprincipal’s death [Art. 1884, CC]—

The agent must finish the businessalready begun on the death of theprincipal, should delay entail anydanger

3. Obligation should he decline the agency[Art. 1885, CC]—i. He is bound to observe the diligence

of a good father of a family in thecustody and preservation of thegoods forwarded to him by theowner until the latter shouldappoint an agent or take charge ofthe goods

ii. However, the owner must act assoon as practicable either byappointing an agent or by takingcharge of the property

4. Obligation to continue agency should hewithdraw [Art. 1929, CC]—

The agent, even if he shouldwithdraw from the agency for a validreason, must continue to act untilthe principal has had reasonable

opportunity to take the necessarysteps to meet the situation.

5. When the agency shouldn’t be carriedout [Art. 1888, CC]—

An agent shall not carry out anagency if its execution wouldmanifestly result in loss or damageto the principal.

B. TO ACT WITHIN THE SCOPE OFHIS AUTHORITY [Art. 1881, CC]

1. Authority is the power to act within thescope of his assignment on hisprincipal’s behalf with binding effect onthe latter

2. When agent acting within the scope ofhis authority—i. When he is performing acts which

are conducive to theaccomplishment of the purpose ofthe agency [Art. 1881, CC]

ii. If the agency has been performed ina manner more advantageous to theprincipal than that specified by him[Art. 1882, CC]

iii. If he lends money to the agency atthe current rate of interest, in casehe has been empowered to borrowmoney. [Art. 1890, CC]

iv. Insofar as third persons, when theagent’s act is within the terms of thepower of attorney, as written, even ifthe agent has in fact exceeded thelimits of his authority according toan understanding between theprincipal and the agent. [Art. 1900,CC]

Note:1) A 3rd person with whom the agent

wishes to contract on behalf of theprincipal may require thepresentation of a power of attorney[Art. 1902, CC]

2) The scope of the agent’s authority iswhat appears in the written terms ofthe power of attorney. While thirdpersons are bound to inquire intothe extent or scope of the agent’sauthority, they are not required togo beyond the terms of the writtenpower of attorney. [SiredyEnterprises, Inc. v CA, 2002]


AG

EN

CY

Page 142 of 177

3. Effect when agent acts within the scopeof his authority—Agent shall not be personally liable [Art.1897, CC]General Rule: The agent who acts as such is not

personally liable to the party withwhom he contracts

Exception: He expressly bound himself [Art.

1897, CC] If he exceeds the limits of his

authority without giving such partysufficient notice of his powers [Art.1897, CC]

He acted in his own name; except ifthe contract involves thingsbelonging to the principal [Art. 1883,CC]

C. TO ADVANCE THE NECESSARYFUNDS [Art. 1886, CC]

General Rule: Agent bound to advance necessary

funds, should there be a stipulation todo so

Exception: When the principal is insolvent

D. TO ACT IN ACCORDANCE WITHPRINCIPAL’S INSTRUCTIONS

1. Obligation to act in accordance withprincipal’s instructions—In the execution of the agency, theagent shall act in accordance with theinstructions of the principal. [Art. 1887,CC]

2. Obligation in the absence ofinstructions—Agent shall do all that a good father of afamily would do, as required by thenature of the business [Art. 1887, CC]

3. When private orders and instructions notbinding to third persons—Private or secret orders and instructionsof the principal do not prejudice thirdpersons who have relied upon the powerof attorney or instructions shown them.[Art. 1902, CC]

4. Effect when agent acts in accordancewith principal’s orders—Principal cannot set-up the ignorance ofthe agent as to circumstances whereof

he himself was, or ought to have beenaware (Art. 1899, CC)

5. Authority v Instructions

Authority InstructionsThe sum total of thepowers committed orpermitted to theagent

Only a private ruleof guidance to theagent

Relates to thesubject(biz/transaction)with which the agentis empowered to dealor act.

Refers to themanner or mode ofagent’s action withrespect to matterswithin thepermitted scope ofaction.

Limits of authority tooperate vs those whohave/are chargedwith knowledge ofthem.

Binding only on theprincipal and agent

E. TO PREFER INTEREST OFPRINCIPAL OVER PERSONALINTEREST

1. Rule in case of conflict of interest

General Rule:The agent shall be liable for damages if,there being a conflict between hisinterests and those of the principal, heshould prefer his own. [Art. 1889, CC]

Exceptions The principal waives the benefit of

the rule, provided he does so withfull knowledge of the facts.

The interests of the agent aresuperior

2. Agent prohibited from purchasingproperty of principal—The following persons cannot acquire bypurchase, even at a public or judicialauction, either in person or through themediation of another: Agents, theproperty whose administration or salemay have been entrusted to them,unless the consent of the principal hasbeen given; [Art. 1491(2), CC]

F. NOT TO LOAN TO HIMSELFWITHOUT PRINCIPAL’S CONSENTIF HE HAS BEEN AUTHORIZEDTO LEND MONEY AT INTEREST[Art. 1890, CC]

1. If the agent has been authorized to lendmoney at interest, he cannot borrow itwithout the consent of the principal.


AG

EN

CY

Page 143 of 177

2. BUT, if he has been empowered toborrow money, he may himself be thelender at the current rate of interest.

G. TO RENDER ACCOUNTS ANDDELIVER THINGS RECEIVED BYVIRTUE OF THE AGENCY

1. Obligation to account and deliver [Art.1891, CC]—Every agent is bound to:i. render an account of his

transactions; andii. deliver to the principal whatever he

may have received by virtue of theagency, even though it may not beowing to the principal.

2. Effect of failure to comply—If he fails to do so or uses themoney/property for his own use, theagent is liable for estafa [Art. 315, RPC]

3. Contrary stipulation void—Every stipulation exempting the agentfrom the obligation to render anaccount shall be void [Art. 1891, CC]

4. When inapplicable (SLIM)—i. Solutio indebitiii. A right of Lien exists in favor of the

agent.iii. The agent or broker Informed the

principal of the gift or bonus orprofit he received from the vendee,and the principal did not object.

iv. If the agent or broker acted only asa Middleman with the task of merelybringing together the vendor andvendee [Domingo v Domingo]

H. TO BE RESPONSIBLE FORSUBSTITUTES [Art. 1892, CC]

1. When the agent responsible for the actsof his substitutei. when he was not given the power to

appoint one; orii. when he was given such power, but

without designating the person, andthe person appointed wasnotoriously incompetent orinsolvent.

2. The agent may appoint a substitute ifthe principal has not prohibited himfrom doing so. All acts of the substituteappointed against the prohibition of theprincipal shall be void.

3. Principal may also bring an actionagainst the substitute with respect to

the obligations which the latter hascontracted under the substitution. [Art.1893, CC]

I. TO PAY INTEREST [Art. 1896, CC]

The agent owes interest on:1. the sums he has applied to his own use

from the day on which he did so2. those which he owes after the

extinguishment of the agency

J. TO ANSWER FOR HISNEGLIGENCE OR FRAUD [Art. 1909,CC]

1. The agent is responsible not only forfraud, but also for negligence

2. Liability shall be judged with more orless rigor by the courts, according towhether the agency was or was not for acompensation

K. SPECIAL OBLIGATIONS OFFACTOR/ COMMISSION AGENTS

1. Definition— one whose business is toreceive & sell goods for a commission,and is entrusted by the principal withits possession [Mechem on Agency]

2. Obligations of a commission agenti. Responsibility for goods received

[Art. 1903, CC]a. He shall be responsible for the

goods received by him in theterms and conditions and asdescribed in the consignment

b. To avoid liability, he shouldmake a written statement of thedamage and deteriorationsuffered by the same uponreceiving them

ii. Obligation when handling goods ofthe same kind and mark withdifferent owners [Art. 1904, CC]—He should distinguish the goods bycountermarks, and designate themerchandise respectively belongingto each principal.

iii. Obligation not to sell on creditwithout express consent [Art. 1905,CC]The commission agent cannot,without the express or impliedconsent of the principal, sell oncredit.Should he do so: the principal may demand from

him payment in cash


AG

EN

CY

Page 144 of 177

but the commission agent shallbe entitled to any interest orbenefit, which may result fromsuch sale.

iv. Obligation to inform the principal ofsale made on credit, if authorized todo so [Art. 1906, CC]a. Should the commission agent,

with authority of the principal,sell on credit, he shall so informthe principal, with a statementof the names of the buyers.

b. Should he fail to do so, the saleshall be deemed to have beenmade for cash insofar as theprincipal is concerned.

v. Obligation to indemnify principal fordamages for failure to collect thecredits of his principal when they falldue [Art. 1908, CC]—General Rule: The commission agent who does

not collect the credits of hisprincipal at the time when theybecome due and demandableshall be liable for damages

Exception If he proves that he exercised

due diligence for that purposevi. Additional obligations should he

receive a guarantee commission (delcredere commission) [Art. 1907,CC]—a. Bear the risk of collectionb. Pay the principal the proceeds of

the sale on the same termsagreed upon with the purchaser

3. Ordinary Agent v Commission Agent

Ordinary Agent Commission AgentActs for and in behalfof the principal.

Acts in his own name orin that his principal.

Need not havepossession of thegoods of theprincipal.

Must be in possession ofthe goods of theprincipal.

4. Broker v Commission Agent[Pacific Commercial v Yatco, 1939]

Broker Commission AgentHas no custody orpossession of thething he disposes;merely acts as anintermediary betweenthe sellers and thebuyer.

Engaged in thepurchase and sale, for aprincipal, of personalproperty which has to beplaced in his possessionand disposal.

Maintains no relationwith the thing whichhe purchases orsells.

Has a relation with theprincipal (buyers orsellers) and the propertywhich is the object ofthe transaction.

REVIEWER IN CIVIL LAW Chapter III. Liabilities of the Agent

AG

EN

CY

Page 145 of 177

Chapter III. Liabilities ofthe Agent

A. LIABILITY TO THIRD PERSONSB. LIABILITY TO THE PRINCIPALC. LIABILITY OF TWO OR MORE AGENTS

A. LIABILITY TO THIRD PERSONS

1. Agent not personally liable as a generalrule—An agent who acts as such is notpersonally liable to the party with whomcontracts [Art. 1897, CC]

2. When agent personally liable to personhe contracted with—i. When he acts in his own name,

except when the contract involvesthings belonging to the principal[Art. 1883, CC]

ii. If he expressly binds himself [Art.1897, CC]

iii. If he exceeds the limits of hisauthority without giving such partysufficient notice of his powers [Art.1897, CC]

Note:Third persons cannot set up the factthat the agent has exceeded hispowers if the principal has ratified,or has signified his willingness toratify the agent’s acts [Art. 1901, CC]

iv. Under Art. 1898, CC—a. Agent contracts in the name of

the principal;b. He exceeds the scope of his

authority;c. The party with whom he

contracted with is aware of thelimits of his powers; AND

d. The agent undertook to securethe principal’s ratification.

Note:Under Art. 1898,CC, the contractshall be void if the principal doesnot ratify the contract and the partywith whom the agent has contractedis aware of the limits of the powersgranted by the principal.

3. Agent liable for damages to third personsunder Art. 1916 & 1917, CC—i. When two persons contract with

regard to the same thing, one ofthem with the agent and the otherwith the principal;

ii. the two contracts are incompatiblewith each other

iii. the agent acted in bad faithiv. agent shall be liable for damages to

third person whose contract mustbe rejected

B. LIABILITY TO THE PRINCIPAL

1. Damages due to non-performance ofagencyThe agent is liable for the damageswhich, thru his non-performance, theprincipal may suffer [Art. 1884, CC]

2. Damages for preferring personal interestto that of principal—The agent shall be liable for damages if,there being a conflict between hisinterests and those of the principal, heshould prefer his own. [Art. 1889, CC]

3. Damages due to his withdrawal [Art.1928, CC]— The agent must indemnify the

principal for any damage that theprincipal may suffer by reason of thewithdrawal of the agent;

Exception: The agent should base hiswithdrawal upon the impossibility ofcontinuing the performance of theagency without grave detriment tohimself.

4. Responsibility if solidarity has beenagreed upon [Art. 1895, CC]—Each of the agents is responsible for:i. the non-fulfillment of agency; andii. for the fault or negligence of his

fellows agents,Exception:When the fellow agents acted beyond thescope of their authority in case of faultor negligence.

Note:Exception applies only to the secondcase.

5. Responsibility for acts of substituteunder Art. 1892, CCThe agent shall be responsible for theacts of the substitute:i. when he was not given the power to

appoint one; orii. when he was given such power, but

without designating the person, andthe person appointed wasnotoriously incompetent orinsolvent.

REVIEWER IN CIVIL LAW Chapter III. Liabilities of the Agent

AG

EN

CY

Page 146 of 177

6. Responsibility for fraud or negligence—The agent is responsible not only forfraud, but also for negligence, whichshall be judged with more or less rigorby the courts, according to whether theagency was or was not forcompensation. [Art. 1909, CC]

7. Interest under Art. 1896, CCThe agent owes interest on:i. the sums he has applied to his own

use from the day on which he did soii. those which he owes after the

extinguishment of the agency

8. For Commission Agents, failure tocomply with obligations laid down in Art.1903-1908, CC

C. LIABILITY OF TWO OR MOREAGENTS

1. Liability is joint as a general rule [Art.1894, CC]General Rule: Responsibility of two or more

agents, even though they have beenappointed simultaneously, is joint.

Exception: Solidarity is expressly stipulated

2. Responsibility if solidarity has beenagreed upon [Art. 1895, CC]—Each of the agents is responsible for:i. the non-fulfillment of agency; andii. for the fault or negligence of his

fellows agents, except when thefellow agents acted beyond thescope of their authority in case offault or negligence.

Note:Exception applies only to the secondcase.

REVIEWER IN CIVIL LAW Chapter IV. Obligations of the Principal

AG

EN

CY

Page 147 of 177

Chapter IV. Obligations ofthe Principal

A. TO COMPLY WITH THE OBLIGATIONSCONTRACTED BY THE AGENT

B. TO ADVANCE NECESSARY SUMS ANDREIMBURSE THE AGENT

C. TO INDEMNIFY AGENT FOR DAMAGESD. TO PAY THE AGENT’S COMPENSATIONE. BE SOLIDARILY LIABLE

A. TO COMPLY WITH THEOBLIGATIONS CONTRACTED BYTHE AGENT

1. Obligations principal is bound to complywithi. obligations which the agent may

have contracted within the scope ofhis authority [Art. 1910, CC]

ii. obligations which the agent mayhave contracted beyond the scope ofhis authority but were ratifiedexpressly or tacitly by the principal[Art. 1910, CC]

Note:Conditions for ratification(CaP-DECK)1) The principal must have

Capacity and Power to ratify.2) The act must be Done in behalf

of the principal3) He must ratify the acts in its

Entirety4) The act must be Capable of

ratification5) He must have had Knowledge of

material facts.

iii. When an agent acts in his ownname, but the contract involvesthings belonging to the principal,the contract must be considered asentered into between the principaland the third person. [Art. 1883,CC; Sy-Juco and Viardo v Sy-Juco,1920]

iv. The principal is solidarily liable withthe agent who has exceeded hisauthority if the former allowed thelatter to act as though he had fullpower. [Art. 1911, CC]

v. If two persons contractsimultaneously with agent &principal for the same thing:a. Contract of prior date prevailsb. If applicable, follow the rule on

double sales in Art. 1544, CC.[Art. 1916, CC]

2. Liability if 2 persons contractsimultaneously with agent & principalfor the same thing [Art. 1917-1917,CC]—i. When two persons contract with

regard to the same thing, one ofthem with the agent and the otherwith the principal

ii. two contracts are incompatible witheach other

iii. the agent acted in good faithiv. the principal shall be liable for

damages to the third person whosecontract must be rejected

3. Principal not liable in the followingcases:i. Void or inexistent contracts under

[Art. 1409, CC]ii. Sale of a piece of land or any

interest therein & the authority ofthe agent is not in writing [Art.1874, CC]

iii. Acts of the substitute appointedagainst the prohibition of theprincipal [Art. 1892, CC]

iv. Art. 1898, CCRequisitesa. agent contracts in the name of

the principalb. he exceeds the scope of the his

authorityc. the principal does not ratify the

contractd. the party with whom the agent

contracted is aware of the limitsof the powers granted by theprincipal; &

e. the agent did not undertake tosecure the principal’s ratification

v. Agent has no authority or actedbeyond the scope of his authority[Arts. 1403(1); 1910, CC; Dungo vLopena, 1962]

vi. When the agent acts in his ownname, persons with whom the agenthas contracted have no right ofaction against the principal, exceptwhen the contract involves thingsbelonging to the principal. [Art.1883, CC]

vii. Unenforceable contracts under Art.1403, CC


AG

EN

CY

Page 148 of 177

B. TO ADVANCE THE NECESSARYSUMS AND REIMBURSE THEAGENT

1. Obligation to advance sums [Art. 1912,CC]—The principal must advance to theagent, should the latter so request, thesums necessary for the execution of theagency.

2. Obligation to reimburse [Art. 1912,CC]—i. Should the agent have advanced

them, the principal must reimbursehim therefor, even if the business orundertaking was not successful,provided the agent is free from allfault.

ii. The reimbursement shall includeinterest on the sums advanced, fromthe day on which the advance wasmade.

3. Exceptions to obligation to reimburse[Art.1918] (FCKS)i. When the expenses were due to the

Fault of the agent;ii. If the agent acted in Contravention

of the principal's instructions,unless the latter should wish toavail himself of the benefits derivedfrom the contract;

iii. When the agent incurred them withKnowledge that an unfavorableresult would ensue, if the principalwas not aware thereof;

iv. When it was Stipulated that theexpenses would be borne by theagent, or that the latter would beallowed only a certain sum.

Note:Under Art. 1236(2), CC, “whoeverpays for another may demand fromthe debtor what he has paid, exceptthat if he paid without theknowledge or against the will of thedebtor, he can recover only insofaras the payment has been beneficialto the debtor.”

4. Agent’s right to retain in pledge object ofagency should principal fail to reimbursehimi. The agent may retain in pledge the

things which are the object of theagency until the principal:a. effects the reimbursement set

forth in Art. 1912, CC; and

b. pays indemnity set forth in Art.1913, CC.

ii. But agent isn’t entitled to the excessin case the thing was sold to satisfyhis claim, and the proceeds aremore than his claim [Arts. 2115,2121, CC]. Also he must possess thething lawfully in his capacity asagent [2 C.J.S. 457]

C. TO INDEMNIFY THE AGENT FORDAMAGES

1. Obligation to pay indemnity for damages[Art. 1913, CC]The principal must indemnify the agentfor all the damages which the executionof the agency may have caused thelatter, without fault or negligence on hispart.

2. Agent’s right to retain in pledge object ofagency should principal fail to pay himindemnityi. The agent may retain in pledge the

things which are the object of theagency until the principal:a. effects the reimbursement set

forth in Art. 1912, CC; andb. pays indemnity set forth in Art.

1913, CC.ii. But agent isn’t entitled to the excess

in case the thing was sold to satisfyhis claim, and the proceeds aremore than his claim [Arts. 2115,2121, CC]. Also he must possess thething lawfully in his capacity asagent [2 C.J. 457]

D. TO PAY THE AGENT’SCOMPENSATION

1. Agency is presumed to be for acompensation, unless there is proof tothe contrary. [Art. 1875, CC]

2. Compensation of brokersi. Since the broker’s only job is to

bring together the parties to atransaction, it follows that if thebroker does not succeed in bringingthe mind of the purchaser and thevendor to an agreement withreference to the terms of a sale, heis not entitled to a commission.[Rocha v Prats, 1922]

ii. Doctrine of Procuring Cause—When a party is not the efficientprocuring cause in bringing about asale, he is not entitled to the


AG

EN

CY

Page 149 of 177

stipulated broker’s commission.[Inland Realty v CA, 1997]

iii. However, for the purpose of equity,an agent who is not the efficientprocuring cause is nonethelessentitled to his commission, wherehe, notwithstanding the expirationof his commission, nonetheless tookdiligent steps to bring back togetherthe parties, such that a sale wasconsummated. [Prats v CA]

iv. If the principal breaks off fromnegotiations with a buyer broughtby the agent in order to deliberatelydeal later with the buyer personally,this is evident bad faith. In suchcase, justice demands compensationfor the agent. [Infante v Cunanan,1953]

E. BE SOLIDARILY LIABLE

1. With agent, if agent acted beyond scopeof authority and principal allowed him toact as though he had full powers—Even when the agent has exceeded hisauthority, the principal is solidarilyliable with the agent if the formerallowed the latter to act as though hehad full powers. [Art. 1911, CC]

2. With person who appointed an agentwith him for a common transaction—If two or more persons have appointedan agent for a common transaction orundertaking, they shall be solidarilyliable to the agent for all theconsequences of the agency. [Art. 1915,CC]

REVIEWER IN CIVIL LAW Chapter V. Extinguishment of Agency

AG

EN

CY

Page 150 of 177

Chapter V. Extinguishmentof Agency

A. EXPIRATION OF THE PERIOD FORWHICH IT WAS CONSTITUTED

B. DEATH, CIVIL INTERDICTION, INSANITY,INSOLVENCY

C. WITHDRAWAL OF THE AGENTD. ACCOMPLISHMENT OF THE OBJECT OF

THE AGENCYE. REVOCATIONF. DISSOLUTION OF THE FIRM/CORP.

WHICH ENTRUSTED/ACCEPTED THEAGENCY

(EDWARD) [Art. 1919, CC]

A. EXPIRATION OF THE PERIODFOR WHICH IT WASCONSTITUTED—

When the agency was created for a specificperiod of time, and the period has expired,it is automatically terminated.

B. DEATH, CIVIL INTERDICTION,INSANITY, INSOLVENCY

i. General Rule:Death extinguishes agencyExceptions:a. Agency constituted in the common

interest of the principal and of theagent or in the interest of a 3rd

person who has accepted thestipulation in his favor. [Art. 1930,CC]

b. Anything done by the agent, withoutknowledge of the death of theprincipal or of any other causewhich extinguishes the agency, isvalid and fully effective with respectto 3rd persons who may havecontracted with him in good faith.[Art. 1931, CC]

c. Agent must finish business alreadybegun on the death of the principal,should delay entail any danger. [Art.1884, CC]

ii. Obligation of heirs of agent upon agent’sdeath [Art. 1932, CC]—a. They must notify the principal of the

agent’s deathb. They should adopt such measures

as the circumstances may demandin the interest of the principal in themeantime.

C. WITHDRAWAL OF THE AGENT

General RuleAgent may withdraw from the agency bygiving due notice to the principal [Art.1928, CC]

But:If the principal should suffer anydamage by reason of the withdrawal,the agent must indemnify him therefor;

Exception:If the agent based his withdrawal uponthe impossibility of continuingperformance of the agency withoutgrave detriment to himself. [Art. 1928,CC]

The agent, even if he should withdrawfrom the agency for a valid reason, mustcontinue to act until the principal hashad reasonable opportunity to take thenecessary steps to meet the situation.[Art. 1929, CC]

D. ACCOMPLISHMENT OF THEOBJECT OR PURPOSE OF THEAGENCY

E. REVOCATION

i. Principal may revoke the agency at willas a general rule

General Rule:The principal may revoke the agency atwill, and compel the agent to return thedocument evidencing the agency. Suchrevocation may be express or implied.[Art. 1920, CC]

Exceptions:a. The right of the principal to

terminate the authority of his agentis absolute and unrestricted, exceptonly that he may not do so in badfaith [Danon v Brimo, 1921]

b. Agency is coupled with an interest[Art. 1927, CC]1) A bilateral contract depends

upon it;2) It is the means of fulfilling an

obligation already contracted;3) Partner is appointed manager of

a partnership in the contract ofpartnership and his removalfrom the management isunjustifiable.

REVIEWER IN CIVIL LAW Chapter V. Extinguishment of Agency

AG

EN

CY

Page 151 of 177

Note: Powers of attorney falling under

1927 cannot be revoked at thepleasure of the principal, but maybe revoked for a just cause, such aswhen the attorney-in-fact betraysthe interest of the principal.(Coleongco v Claparols, 1964)

A mere statement in the power ofattorney that it is coupled with aninterest is not enough. In what doessuch interest consist must be statedin the power of attorney. (DelRosario v Abad, 1958)

Irrevocability of the contract cannotaffect 3rd persons and is obligatoryonly on the principal who executedthe agency. (New Manila Lumber vRepublic, 1960)

ii. Revocation may be express or implied

a. Express—principal clearly and directly makesa cancellation of the authority of theagent in writing or orally

b. Implied— The appointment of a new agent

for the same business ortransaction revokes the previousagency from the day on whichnotice thereof was given to theformer agent, without prejudiceto the provisions Art. 1921 andArt. 1922, CC [Art. 1923, CC]

The agency is revoked if theprincipal directly manages thebusiness entrusted to the agent,dealing directly with thirdpersons. [Art. 1924, CC]

A general power of attorney isrevoked by a special one grantedto another agent, as regards thespecial matter involved in thelatter [Art. 1926, CC]

iii. When revocation makes principal liablefor damagesa. If there is a period stipulated in the

agency contract, the agent may stillrevoke the agent’s authority at will;but principal will be liable fordamages.

b. No period fixed: principal liable ifthe agent can prove the former actedin bad faith.

iv. Effect of revocation with respect to 3rd

persons [Arts. 1921-1922,CC]

Agency to contractwith specific

persons

Agency to contractwith general public

Won’t prejudice 3rd

persons until noticeis given them.

Won’t prejudicethose in good faith& w/o knowledge.

Notice must bepersonal.

Notice may bepersonal.

v. Revocation in case of solidary principals[Art. 1925, CC]When two or more principals havegranted a power of attorney for acommon transaction, any one of themmay revoke the same without theconsent of others.

F. DISSOLUTION OF THE FIRM ORCORPORATION WHICHENTRUSTED OR ACCEPTED THEAGENCY

- end of Agency -


PA

RT

NE

RSH

IP

Page 153 of 177

PARTNERSHIP

Chapter I. NATURE, CREATION,KINDS OF PARTNERSHIPA. Essential FeaturesB. CharacteristicsC. DistinctionsD. Rules to Determine ExistenceE. How Partnership is FormedF. Partnership TermG. Classes of PartnersH. Kinds of Partnerships

Chapter II. OBLIGATIONS OF THEPARTNERSHIP/PARTNERS AMONGTHEMSELVESA. To Make the Contributions as

PromisedB. Pay Damages Due to Partner’s

FaultC. Bear Risk of LossD. Manage the PartnershipE. Render Full InformationF. Liability for Partnership

ContractsG. Solidary Liability with

PartnershipH. Reimbursement

Chapter III. OBLIGATIONS OFPARTNERSHIP/PARTNERS AS TOTHIRD PERSONSA. Operate under a Firm NameB. Bound by Partnership AdmissionC. Bound by Notice to PartnerD. Liable for Acts of the Partnership

Chapter IV. RIGHTS OF PARTNERSA. Share in Losses and ProfitsB. Associate Another in His ShareC. Access Partnership BooksD. Obtain Formal AccountE. Property RightsF. Convey Real Property

Chapter V. RIGHTS OFPARTNERSHIP

Chapter VI. DISSOLUTION ANDWINDING UPA. DefinitionsB. Causes for DissolutionC. Consequences of DissolutionD. Partner's Liability

Chapter VII. RIGHTS OF PARTNERSUPON DISSOLUTIONA. Right to Wind UpB. Right to Damages for/to Continue

Business on Wrongful Dissolution

154154154154155155156156157

158158

159159159160

160

161161

162162162162162

163163163163163163165

165

166166166166167

168168

168

C. Right to Lien or Retention, ToStand in Place of Creditor, To BeIndemnified

D. Right of Retiring/DeceasedPartner

E. Right to Account

Chapter VIII. RULES ONSETTLEMENT

Chapter IX. LIMITED PARTNERSHIPI. DefinitionII. Forming/Amending a Limited

PartnershipIII. Limited Partner

A. ContributionB. Liabilities of a Limited Partner

1. To the Partnership2. As Trustee for the

Partnership3. Liabilities to Partnership

Creditors & Other Partnersa. Contributes Servicesb. Surname in Firm Namec. False Statementd. Control of Businesse. Prohibited Transactionsf. Non-Compliance with

Requisites for Formation4. Liabilities to Separate

CreditorsC. Rights of Limited Partners

1. Common Rights of Limited &General Partners

2. Loan Money & TransactBusiness

3. Return of Contribution4. Share of Profits5. Assign Interests6. Effect of Death of a Limited

Partner7. Person Erroneously Believing

He’s a Limited PartnerIV. General PartnerV. DissolutionVI. Settling of Accounts After

Dissolution

168

169169

170

171171

172173173173173

173

173173173173174174

174

174174

174

174174175175

176

176176176

177

REVIEWER IN CIVIL LAW Chapter I. Nature, Creation, Kinds of Partnership

Page 154 of 177

PA

RT

NE

RSH

IP

PartnershipFACULTY-STUDENT EDITORIAL BOARD AND LECTURES COMMITTEE


ACADEMICS COMMITTEE


EDITOR-IN-CHIEF


LAYOUT HEAD

CIVIL LAW


SUBJECT EDITORS

SALES

Michelle DyLEAD WRITER

Kristine BongacaronViktor Fontanilla

WRITERS

LECTURES

Edel CruzHEAD

--------


--------


Chapter I. Nature, Creation, Kindsof Partnership

A. ESSENTIAL FEATURESB. CHARACTERISTICSC. DISTINCTIONSD. RULES TO DETERMINE EXISTENCEE. HOW PARTNERSHIP IS FORMEDF. PARTNERSHIP TERMG. CLASSES OF PARTNERSH. KINDS OF PARTNERSHIPS

Art. 1767. By the contract of partnershiptwo or more persons bind themselves tocontribute money, property, or industry toa common fund, with the intention ofdividing the profits among themselves.

Two or more persons may also form apartnership for the exercise of a profession.(1665a)

A. ESSENTIAL FEATURES(CVC-J-Lo)

1. There must be a valid contract2. The parties must have legal capacity3. A mutual contribution of money,

property, or industry to a common fund4. It has a separate juridical personality

(Art. 1768 CC) Note: Associations and societies,

whose articles are kept secretamong the members, and whereinany one of the members maycontract in his own name with thirdpersons, shall have no juridicalpersonality, and shall be governedby the provisions relating to co-ownership. (1775)

5. Has a lawful object (Art. 1770, CC) A partnership must have a lawful

object or purpose, and must beestablished for the common benefitor interest of the partners.

o When an unlawful partnership isdissolved by a judicial decree,the profits shall be confiscatedin favor of the State, withoutprejudice to the provisions of thePenal Code governing theconfiscation of the instrumentsand effects of a crime)

6. The primary purpose is to obtain profitsand divide the same among the parties

B. CHARACTERISTICS

1. Fiduciary2. Nominate3. Consensual4. Bilateral/multilateral5. Principal6. Onerous7. Preparatory8. Profit oriented

C. DISTINCTIONS

Partnership Corporation

Created by mereagreement of theparties;

Created by operation of law

May be organizedby only twopersons

Requires at least 5incorporators;

Juridicalpersonalitycommences fromthe moment ofexecution of thecontract ofpartnership

Personality commencesfrom SEC’s issuance of thecertificate of incorporation

May exercise anypower authorizedby the partners aslong as it is notcontrary to law,etc.

Can exercise such powersexpressly granted by law orincident to its existence


Page 155 of 177

PA

RT

NE

RSH

IPPartnership Corporation

If no agreement asto mgt. - everypartner is anagent of thepartnership

Power to do business isvested in the board ofdirectors/ trustees

A partner as suchmay sue a co-partner whomismanages

Suit against theboard/director whomismanages must bebrought in the corp.’sname

Has no right ofsuccession

Has right of succession

The partners areliable personallyand subsidiarilyfor partnershipdebts

The stockholders are liableto the extent of the sharessubscribed by them

Based on delectuspersonam

Not based on delectuspersonam

May beestablished for anyperiod of timestipulated

May not be formed for aperiod exceeding 50 years

May be dissolvedat anytime by thewill of any or allpartners

May be dissolved only withthe consent of the state

Governed by theCivil Code

Governed by theCorporation Code

Partnership Co-ownership

Creation Always createdby a contract

Gen., createdby law, mayexist evenwithout acontract

JuridicalPersonality

Has aseparate,distinctjuridicalpersonality

Has no juridicalpersonality

Purpose Realization ofprofits

Commonenjoyment of athing or right

Duration No limitationupon theduration is setby law

Property can’tbe undividedfor more than10 years

Transfer ofInterests

Needunanimousconsent ofpartners tomake assigneeof interest apartner

A co-owner candispose of hisshare withoutthe consent ofthe others

Power toact withThirdPersons

A partner maybind thepartnership

A co-ownercan’t representthe co-ownership

Dissolution Death orincapacity of apartnerdissolves thepartnership

Death orincapacity of aco-ownerdoesn’t dissolvethe co-ownership

Partnership Co-ownership

Representa-tion

There ismutual agency

There is nomutual agency

Profits Must bestipulatedupon

Must alwaysdepend uponproportionateshares and anystipulation tothe contrary isvoid.

D. RULES TO DETERMINEEXISTENCE

Art. 1769. In determining whether apartnership exists, these rules shall apply:

General Rule: Persons who are notpartners to each other are not partnersas to third persons. Exception: partnership by estoppel.

Co-ownership and sharing of grossreturns don’t establish a partnership,by itself

Prima facie evidence of partnership:receipt of a share of the business profits Except if received in payment as:

A debt by installment Wages or rent An annuity Interest on a loan Consideration in a sale

E. HOW PARTNERSHIP IS FORMED

Form of Contract General Rule: The contract may be

constituted in any form (Art. 1771,CC)1. Exceptions:

Where immovable property orreal rights are contributed (Art.1771, CC)o The contract must appear in

a public instrument (1771)o It must have an inventory of

such immovable propertysigned by the parties andattached to the instrument(1773)

2. Where the capital is at leastP3,000, in money or property The contract must appear in

a public instrument whichmust be recorded in theSEC. (Art. 1772, CC) But a partnership has a

juridical personality andis liable to third personseven if this requirementis not complied with.


Page 156 of 177

PA

RT

NE

RSH

IPF. PARTNERSHIP TERM

Commencement of the partnership: General Rule: A partnership begins

from the moment of the execution ofthe contract,

Exception: When otherwise agreedupon by the parties

A Partnership may either be for Fixed Term At Will

Until termination is demandedaccording to law

Extension of Life of Partnership

By express renewal of the agreement By implied renewal

Requisites:o A partnership is for a fixed

term or particularundertaking

o It is continued after thetermination of such term orparticular undertakingwithout any expressagreement

Effect:o The rights and duties of the

partners remain the same asthey were at suchtermination, so far as isconsistent with apartnership at will (1785) Prima facie evidence of

continuation:o Continuation of the business

by the partners without anysettlement or liquidation ofthe partnership affairs (1785)

G. CLASSES OF PARTNERS

1. As to membershipa. Real – a contributing memberb. By estoppel/Quasi-partner – not

really a partner but representshimself as one

2. As to continuation of business affairsafter dissolutiona. Continuingb. Discontinuing

3. As to value of contributiona. Majorityb. Nominal

4. As to nature of membershipa. Originalb. Incoming

5. As to state of survivorshipa. Surviving – continues to be a

partner after dissolution due todeath of a partner

b. Deceased6. As to effect of expulsion

a. Expelled (Art. 1840[6], CC)b. Expelling

7. As to nature of contributiona. Capitalist – contribute money or

propertyb. Industrial – contribute

industry/labor.8. As to liability

a. General/Real – liability extend toseparate property (Art. 1776, CC)

b. Limited/Special – only to extent ofcontribution (Art. 1843, CC)

c. Capitalist-Industrial9. As to management

a. Managing – manages the firm’saffairs

b. Silent – doesn’t participate inmanagement

c. Liquidating – winds up the affairsafter dissolution

10. Other special classificationsa. Subpartner – related only to the

regular partner (Art. 1804, CC)b. Retiring – withdraws/retires from

the partnership

IndustrialistPartner

CapitalistPartner

Contribution Contributeshis industry

Contributesmoney orproperty

Prohibition toengage inotherbusiness

Cannot engagein anybusiness forhimself

Can’t engagein the same orsimilarenterprise

Profits Receives a justand equitableshare

Shares inprofitsaccording toagreementthereon; ifnone, pro ratato hiscontribution

Losses Exempted asto losses asbetweenpartners but itis liable to 3rdpersonswithoutprejudice toreimbursementfrom thecapitalistpartners

1. stipulationas to losses

2. if none, theagreement asto profits

3. if none, prorata tocontribution


Page 157 of 177

PA

RT

NE

RSH

IPH. KINDS OF PARTNERSHIPS

1. As to naturea. Commercial/tradingb. Professional

2. As to durationa. With a fixed termb. At will (Art. 1785, CC)

3. As to legality of existencea. De jure – has complied with all the

necessary requisites for lawfulestablishment (Arts. 1772, 1773, CC)

b. De facto – failed to comply with therequisites

4. As to representation to othersa. Ordinary/real – really exists between

& among the partners themselves andas to third persons

b. Ostensible/by estoppel – deemed oneonly in relation to transacting thirdpersons (Art. 1825, CC)

5. As to publicitya. Open – known to the publicb. Secret

6. As to its objecta. Universal (Art. 1777, CC)

i. As to all present property (Art.1778, CC)

ii. As to profits (Art. 1780, CC)b. Particular (Art. 1783, CC)

7. As to partners’ liabilitya. General – liable pro rata (Art. 1816,

CC) or solidarily (Arts. 1822-1824,CC)

b. Limited (Art. 1843, CC)

Types of Universal Partnerships

Of all presentproperty

Of all profits

Includes title to allpresent property (Art1778)

Title to property ofeach partner does notpass to the partnership

Does not includefuture propertyacquired by gratuitoustitle

Comprises thoseacquired by industryor work

Note: In case of doubt, the article ofuniversal partnership shall onlyconstitute a universal partnership ofprofits. (1781)

Who are prohibited from entering intouniversal partnerships: those prohibitedfrom giving donations (Art. 1782, CC),such as:1. legally married, common law spouses

(Art. 87, FC)2. parties guilty of adultery/concubinage3. criminals convicted for the same

offense in consideration of the same4. a person & a public officer (or his wife,

descendants, ascendants) by reason ofhis office (Art. 739, CC)

General v. Limited Partnership

General LimitedAll partners are generalpartners liable forpartnership obligationspro rata with all theirproperty afterexhaustion ofpartnership assets

Formed by two ormore partners, withone or more generalpartners and one ormore limited partners

Partnership and Partner by Estoppel Requisites of “Partner By Estoppel”:

1. The person –a. represents himself as a

partner of an existingpartnership or of two or morepersons not actual partners,or

b. consents to anotherrepresenting him as a partnerof an existing partnership or oftwo or more persons notactual partners,

2. Third person relied on themisrepresentation, unaware of thedeception.

3. On the faith of themisrepresentation, the 3rd persongave credit to the actual/apparentpartnership.

4. The person representing orconsenting to the representation isliable:a. as an actual member if a

partnership liability resultsb. pro rata with other persons

when no partnership liabilityresults(Art. 1825, CC)

Partnership by estoppel: composed ofthe alleged partner and thepartnership itself. It arises when allthe members of the existingpartnership consented to therepresentation (Art. 1825, CC). Theperson becomes an agent of theexisting firm and his act/obligationbinds the firm.

No real partnership is created byestoppel. It’s only insofar as 3rd

persons are involved and for thepurpose of protecting them that theprincipal of estoppel is recognized.

As to liability resulting from therepresentation:1. when all the members consent,

partnership obligation results2. if not all consent, only a joint

obligation of the one representingand of those who consentedresults

Corporation by estoppel: all persons areliable as general partners (Sec. 21, Corp.Code). A de facto partnership is created.

REVIEWER IN CIVIL LAW Chapter II. Obligations of the Partnership/Partners Among Themselves

Page 158 of 177

PA

RT

NE

RSH

IPChapter II. Obligations of the

Partnership/PartnersAmong Themselves

A. TO MAKE THE CONTRIBUTIONS ASPROMISED

B. PAY DAMAGES DUE TO PARTNER’SFAULT

C. BEAR RISK OF LOSSD. MANAGE THE PARTNERSHIPE. RENDER FULL INFORMATIONF. LIABILITY FOR PARTNERSHIP

CONTRACTSG. SOLIDARY LIABILITY WITH

PARTNERSHIPH. REIMBURSEMENT

A. TO CONTRIBUTE

Obligation with respect tocontribution of property Partner is a debtor: for whatever he

had promised to contribute thereto(Art. 1786, CC)

Partner is a warrantor forcontributions of specific &determinate things: he’s bound towarrant vs. eviction (Art. 1786, CC)

Liability for undelivered fruits: property is fruit-producing, the fruits weren’t delivered at the

execution of the contract or anyspecified time(Art. 1786, CC).

No demand is necessary. Remedy for breach of warranty:

partnership may recoverindemnity from contributingpartner.

If the partnership wouldn’t havebeen constituted had it not beenfor the contribution, the otherpartners may dissolve the firm(11 Planiol & Ripert, 276)

Other duties of contributing partners: to preserve the property with the

diligence of a good father of afamily (Art. 1163, CC)

to indemnify the partnership fordamages caused to it by delay incontribution of property (Art.1170, CC)

Appraisal of goods or propertycontributed Rule when contribution is in goods

(1787) Appraisal must be made in a

manner prescribed in thecontract of partnership

In the absence of stipulation

1. Made by experts chosen bythe partners

2. According to current prices,subsequent changes beingfor the account of thepartnership

Obligation with respect tocontribution of money, and moneyconverted to personal use Sanctions: Partner becomes the firm’s debtor

for interest and damages from thetime of his failure to contribute orfrom time of conversion (Art.1788, CC)

When money or property has beenreceived by a partner for a specificpurpose and he latermisappropriated it, such partneris guilty of estafa. (Liwanag v CA,2008)

Bring to partnership capital creditreceived Equal contribution by general

partners: capitalist partners shallcontribute equal shares to thecapital of the partnership (Art.1790, CC).

Obligation of capitalist partner tocontribute additional capital To contribute additional capital in

case of imminent loss, requisites:1. There is an imminent loss of the

business2. There is a need to contribute

additional capital to save theventure

3. Capitalist partner refusesdeliberately to contribute anadditional share

4. There is no agreement to thecontrary

If refused to contribute: the partnermust sell his interest in thepartnership to the other partners(Art. 1791, CC)

Industrial partner is exempted fromcontributing.

Obligation of collecting managingpartner Requisites:

1. 2 separate credits, bothdemandable,

2. one credit is owed to thepartnership,


Page 159 of 177

PA

RT

NE

RSH

IP3. the other to the collecting

partner who’s a managingpartner.

Managing partner should: If issued receipt for own account

only apply the sum to the 2credits in proportion to theiramounts

Issued receipt for partnership’saccount apply whole sum topartnership’s credit (Art. 1792,CC)

Obligation of partner who receivesshare of partnership credit Partner shall give to the partnership

what he received if: a debtor made a partial

payment of his debt to thepartnership

a partner received his share ofthe credit and the others haven’t

the debtor later becomesinsolvent, (Art. 1793, CC).

Cf. 1792: in 1793 there’s only 1debt where the partnership isthe creditor.

B. PAY DAMAGES

Liability for damages due to partner’sfault:

The damages can’t be compensatedwith the profits & benefits he mayhave earned for the partnership byhis industry (Art. 1794, CC).

Mitigation of liability: if through hisextraordinary efforts in other activitiesunusual profits have been realized (Art.1794, CC)

C. BEAR RISK OF LOSS

Risk of loss of things contributed (Art.1795, CC): owner bears the loss

Specific & determinatethings, not fungiblewhere only usufruct iscontributed

Risk is borne bypartner

Specific & determinatethings, with ownershiptransferred topartnership

Risk is borne bypartnership

Fungible things whichcan’t be kept withoutdeteriorating(consumable)


Things contributed tobe sold


Things brought andappraised in theinventory


D. MANAGEMENT OF THEPARTNERSHIP

General Rules:

right of management is primarilygoverned by agreement of thepartners

Right to manage may either be: exercised by all the partners, or limited to a certain number of

partners called managingpartners

Management is entrusted to specifiedpartners

If right is conferred in the articles ofpartnership (1800) Manager may execute all acts of

administration despite theopposition of other partnersunless he is in bad faith

Power is irrevocable without justor lawful cause. The vote of thecontrolling interest of thepartners is necessary forrevocation.

If power is granted after constitutionof partnership: may be revoked at anytime

o reason: in the first case,management is part of theconsideration –the lawassumes that partners wouldnot have entered into thepartnership unlessmanagement was conferredon a specific partner. In thiscase, there is no suchassumption. (JBL Reyes)

Two or more partners are appointed asmanagers (1800, 1801)

General rule: each one mayseparately act for the partnership if there is opposition, decision of

majority of the managingpartners prevails

in case of a tie, matter is to bedecided by the controllinginterest.

If there is a stipulation thatmanagers must act jointly one cannot act without the

consent of the others concurrence of all managers is

necessary for validity of the actseven in the absence or disabilityof any of them unless there isimminent danger or grave orirreparable injury to thepartnership.


Page 160 of 177

PA

RT

NE

RSH

IP No specification as to management:

Rules: (1803)1. all partners are considered

agents and the act of anyonebind the partnership

2. important alterations in theimmovable property of thepartnership, even if useful, needthe consent of all the partners if refusal to give consent is

prejudicial to thepartnership, court’sintervention may be sought

Every partner is considered an agent ofthe partnership for the purpose of itsbusiness and any act of the agent forapparently carrying on the usualbusiness of the partnership binds thepartnership.

Partnership is not bound by thepartner’s act even if for apparentlycarrying on in the usual business of thepartnership (1818) when:1. partner has no authority to act, and2. third person dealing with him knew

that the partner had no authority

Acts of the partner not apparently forcarrying out the business of thepartnership does not bind thepartnership unless: (1818)1. authorized by other partners, or2. other partners have abandoned the

business

Acts not usual in the business ofpartnership: (1818)(ADD-CESR)1. Assign the partnership property in

trust for creditors or on theassignee's promise to pay the debtsof the partnership;

2. Dispose of the good-will of thebusiness;

3. Do any other act which would makeit impossible to carry on theordinary business of a partnership;

4. Confess a judgment;5. Enter into a compromise concerning

a partnership claim or liability;6. Submit a partnership claim or

liability to arbitration;7. Renounce a claim of the

partnership.

E. RENDER FULL INFORMATION

Duty to give info:1. On demand, to give true & full info

relating to partnership affairs (Art.1806, CC).

2. Voluntary disclosure of materialfacts within his knowledge relatingto/affecting partnership affairs (Art.1821, CC).

F. LIABLE FOR PARTNERSHIPCONTRACTS

Liability of partnership & partners forpartnership contracts:

Pro rata, with all their property (Art.1816, CC).

The private property of the partnerscan’t be seized for satisfaction ofpartnership debts until all thepartnership assets have beenexhausted.

for the contracts which may beentered into:1. in the name and for the account

of the partnership2. under its signature and3. by a person authorized to act for

the partnership. (1816)

The exemption of an industrial partnerfrom paying losses relates exclusively tothe settlement of the partnership affairsamong the partners themselves, and notwith the partners’ liabilities to 3rd

persons (La Compania Maritima vMunoz, 1907).

While the liability of the partners arejoint in transactions entered into by thepartnership, a 3rd person whotransacted with the partnership canhold partners solidarily liable for thewhole obligation if the 3rd person’s casefalls under Arts. 1822-1823 (Muñasquev. CA, 1985).

Partner acting in his own name: he issolely liable

General Rule: stipulation against prorata liability is void Except: such stipulation is valid by

& among the partners (Art. 1817,CC)

Art. 1817 vs. 1799: it is permissible tostipulate among partners that acapitalist partner will be exempted from


Page 161 of 177

PA

RT

NE

RSH

IPliability in excess of the original capitalcontributed; but won’t be exemptedinsofar as his capital is concerned(Paras).

Liability of a newly-admitted partner:

Obligations contracted before hisadmission: liable only up to hisshare in the partnership propertyunless there’s a contrary stipulation(Art. 1826, CC).

Obligations contracted afteradmission: liable as an ordinaryoriginal partner.

Liability of outgoing partner:

When he gives notice of hisretirement or withdrawal, he’s freedfrom liability on contracts enteredinto thereafter but still liable onexisting incomplete contracts

He is liable for goods sold &delivered after hisretirement/withdrawal if the salewas pursuant to a contract madebefore such retirement/withdrawal

G. SOLIDARILY LIABLE WITHPARTNERSHIP

The partnership and the partner aresolidarily liable in the following cases:

Vicarious liability, requisites:1. the partner committed a

wrongful act/omission;2. he acted in the ordinary course

of the partnership business orwith the authority of the co-partners even if the act wasn’tconnected with the partnershipbusiness;

3. loss/injury is caused to a 3rd

person by the wrongfulact/omission;

4. 3rd person isn’t a partner (Art.1822, CC);

Misappropriation of one partner(1824) partner acts within the scope of

his apparent authority when partner in the course of

business, receives money orproperty and the same ismisapplied by the partner whilein the custody of the saidpartner.

o Exceptions are without prejudice tothe guilty partner being liable to theother partners, but as far as third

partners are concerned, thepartnership is answerable.

o Liability for money misappropriatedcovers:1. Interest2. Damages

Extent of liability: firm is liable to thesame extent as the partner (Art. 1822,CC) & all partners are solidarily liablewith the firm (Art. 1824, CC).

The liability of partners under theWorkmen’s Compensation Act alsosolidary. If their responsibility wasmerely joint and one became insolvent,the amount awarded would only bepartially satisfied, which is contrary tothe law’s purpose (Liwanag v.Workmen’s CompensationCommission, 1959)

H. REIMBURSEMENT(1796)

The partnership is responsible to everypartner for:1. amounts disbursed on behalf of the

partnership plus interest from thetime the expense is made

2. obligations contracted in good faithin the interest of the business

3. risks in consequence ofmanagement

REVIEWER IN CIVIL LAW Chapter III. Obligations of the Partnership/Partners as to Third Persons

Page 162 of 177

PA

RT

NE

RSH

IPChapter III. Obligations ofPartnership/Partners as To

Third Persons

A. OPERATE UNDER A FIRM NAMEB. BOUND BY PARTNERSHIP ADMISSIONC. BOUND BY NOTICE TO PARTNERD. LIABLE FOR ACTS OF THE PARTNERSHIP

A. OPERATE UNDER A FIRM NAME(1815)

The firm name may or may not includethe name of one or more of the partners

Persons, not being members of thepartnership, include their names in thefirm name, are liable as partners (1825)

Use of deceased partner’s name in lawfirm: permissible as long as it’sindicated in the firm’s communicationsthat the partner is deceased (Rule 3.02,CPR)

limited partner’s surname shall notappear in the firm name unless

it’s also the surname of a generalpartner

before the limited partner becamesuch, the business had been carriedon under a name in which hissurname appeared (Art. 1846, CC)

B. BOUND BY PARTNERSHIPADMISSION

Requisites to be admissible against thepartnership:1. it must be connected with

partnership affairs2. it is within the scope of the partner’s

authority (Art. 1820, CC)3. it is made during the firm’s

existence Exception: when a partner makes

admissions for himself only withoutpurporting to act for the partnership

Admission by a former partner notadmissible in evidence against thepartnership. (Congco vs. Trillana,1909)

C. BOUND BY NOTICE TO ORKNOWLEDGE OF PARTNER

Notice to the partner relatingpartnership affairs

Knowledge acquired by a partner who’sacting in a particular matter, acquired

while he was still a partner or thenpresent to his mind

The partner who acquired it has reasonto believe that it be the subject of thebusiness, and could’ve communicated itto the acting partner (Art. 1821, CC)

D. LIABLE FOR ACTS OFPARTNERSHIP

All partners, including the industrialpartner, are liable pro rata with theirown properties after partnershipproperties have been exhausted

general rule: liability is joint however, liability is solidary in the

following: wrongful acts and omissions

causing loss to a non-partner. conversion or misappropriation

of funds committed in the usualcourse of business or consentedto by all partners

Any stipulation against this liability isvoid as against third persons but validamong the partners (1817)

An industrial partner is liable to thirdpersons but as between the partners, heis not liable for losses (1797)

Partners are individually liable afterpartnership assets are exhausted

Contracts for which partners are liablepro rata with their individual property:

those entered into in the name andaccount of the partnership

entered into under its signature entered into by a person authorized

to act for the partnership Exception– partner may enter

into a separate obligation toperform a partnership contract.

REVIEWER IN CIVIL LAW Chapter IV. Rights of Partners

Page 163 of 177

PA

RT

NE

RSH

IPChapter IV. Rights of Partners

A. SHARE IN LOSSES AND PROFITSB. ASSOCIATE ANOTHER IN HIS SHAREC. ACCESS PARTNERSHIP BOOKSD. OBTAIN FORMAL ACCOUNTE. PROPERTY RIGHTSF. CONVEY REAL PROPERTY

A. SHARE IN LOSSES AND PROFITS

OF PROFITS OF LOSSES

Withagreement

According toagreement

According toagreement

Withoutagreement

1. Share ofcapitalistpartner is inproportion tohis capitalcontribution2. Share ofpurelyindustrialpartner isnot fixed - asmay be justandequitableunder thecircumstances

1. If sharingof profits isstipulated -apply tosharing oflosses2.If no profitsharingstipulated -losses shallbe borneaccording tocapitalcontribution3.Purelyindustrialpartner notliable forlosses

In the absence of stipulation, theIndustrial Partner is:(1797)

not liable for losses as for profits, receives such share as

is equitable under thecircumstances

if he contributes capital, he receivesan additional share in theproportion to the capital

If a third person is entrusted with thedesignation of shares and profits (1798)

designation is valid unlessmanifestly inequitable

partner cannot impugn the decisionwhen: he has begun to execute the

same, or he has not impugned it within 3

months from knowledge

Designation entrusted to one of thepartners is void. (1798)

Stipulation which excludes a partnerfrom the profits or from sharing in thelosses is void (Art. 1799, CC).

B. ASSOCIATE ANOTHER IN HISINTEREST IN THE PARTNERSHIP

Every partner may associate anotherperson with him in his share, but theassociate shall not be admitted into thepartnership without the consent of allthe other partners, even if the partnerhaving an associate should be amanager. (1804)

C. ACCESS TO PARTNERSHIPBOOKS

Partnership books: open to inspection ofall the partners at a reasonable hour(Art. 1805, CC).

Where kept:

place agreed upon if without agreement, at principal

place of business (Art. 1805, CC)

Reasonable hours on business daysthroughout the year, not merely duringsome arbitrary period of a few dayschosen by the managing partners(Pardo v. Lumber Co., 1924)

D. OBTAIN FORMAL ACCOUNT

Gen. rule: a partner isn’t entitled to aformal account, save in dissolution Basis: his right of access to the

books Except:

1. if he’s wrongfully excluded fromthe business/possession of theproperty by his co-partners

2. if the right exists by agreement3. when the partner derives any

profit as provided in Art. 18074. whenever other circumstances

render it just & reasonable (Art.1809, CC)

The right of a partner to demand anaccounting exists as long as thepartnership exists. The prescription periodbegins to run only upon the dissolutionwhen the final accounting is done (FueLeung v. IAC,1989).

E. PROPERTY RIGHTS

Property rights (Art. 1810, CC):1. in the specific partnership property2. in the partnership, and3. to participate in the management

REVIEWER IN CIVIL LAW Chapter IV. Rights of Partners

Page 164 of 177

PA

RT

NE

RSH

IP Partnership capital vs. partnership

property

Capital PropertyWith a constant value Value varies, in

accordance withmarket value

Includes only theactual capitalcontributed &promised to thepartnership

Includes thecontribution & allproperty later acquiredon the partnership’saccount

Partners are co-owners of specificpartnership property: the incidents are –1. A partner has an equal right with

his co-partners to possess specificproperty for partnership purposes if excluded from this, can seek a

formal accounting (Art. 1809,CC) or judicial dissolution (Art.1831, CC)

2. A partner’s right in specific propertycan’t be assigned except when allpartners assign their rights in thatproperty

3. A partner’s right in specific propertyisn’t subject toattachment/execution except on aclaim against the partnership

4. A partner’s right in specific propertyisn’t subject to support payment(Art.1811, CC)

Property used by the partnership: apartner may:1. contribute only the use of property2. allow partnership to use his

separate property3. hold the title to partnership property

in his own name without having itbelong to him

Property acquired by a partner withpartnership funds: partnership property

Except:1. contrary intention appears2. property was acquired after

dissolution but before windingup

Partner’s interest in the partnership: hisshare in the profits & surplus (Art.1812, CC). This may be assigned,attached, & subject to payment ofsupport as there was already aliquidation of the partnership affairs.The assignee is only entitled to theprofits assigned.

Conveyance of partner’s entire interest:doesn’t, of itself, dissolve thepartnership (Art. 1813, CC)

Rights of thetransferee orassignee

What assigneescannot do

To receive inaccordance with hiscontract the profitsaccruing to theassigning partner

Interfere in themanagement;

To avail of the usualremedies provided bylaw in the event offraud in themanagement

Require anyinformation oraccount

To receive theassignor’s interest incase of dissolution;may require anaccount from thedate only of the lastaccount agreed to byall the partners.

Inspect any of thepartnership books.

Enforcement of a judgment vs. a debtor-partner’s interest (Art. 1814, CC): thejudgment creditor may –1. Apply for an order charging the

partner’s interest with payment ofthe unsatisfied amount of the finaljudgment with interest

2. Have a receiver appointed3. Have the court make an order as the

circumstances render it necessary

Redemption: a partner or more mayredeem the interest charged at any timebefore the foreclosure with –1. their separate property2. with partnership property, with the

consent of all partners whoseinterests aren’t charged/sold (Art.1814, CC)

REVIEWER IN CIVIL LAW Chapter V. Rights of Partnership

Page 165 of 177

PA

RT

NE

RSH

IPF. CONVEY REAL PROPERTY

(1819)

Title in partnershipname - Anypartner mayconvey underpartnership name

Conveyance passes titlebut partnership canrecover unless: 1)Thepartner who sold it wascarrying on in the usualway the business of thepartnership hencebinding the partnership;or 2) Buyer had noknowledge of the lack ofauthority of the seller

Title in partnershipname -Conveyance inpartner's name

Conveyance does notpass title but onlyequitable interest.Provided that: Thepartner who sold it wascarrying on in the usualway the business of thepartnership hencebinding the partnership

Title in the name ofone or more but notall the partnersand the recorddoes not disclosethe right of thepartnership - Thepartners in whomthe title standsmay convey

Conveyance passes titlebut partnership canrecover unless: 1)Thepartner who sold it wascarrying on in the usualway the business of thepartnership hencebinding the partnership;or 2) Buyer had noknowledge of the lack ofauthority of the seller

Title in the name ofone or more or allpartners or in thirdperson in trust forthe partnership -Conveyance inpartner's name orin partner’s name

Conveyance does notpass title but onlyequitable interest.Provided that: Thepartner who sold it wascarrying on in the usualway the business of thepartnership hencebinding the partnership

Title in the namesof all the partners– Conveyance byall partners

Passes all their rights insuch property

Chapter V. Rights of Partnership

A. ACQUIRE IMMOVABLES

Immovables/an interest therein may beacquired in the partnership name, andtitle so acquired can only be conveyedin the partnership name (Art. 1774,CC).

Cf Art. 1819: see table

B. PREFERENCE OF CREDITORS

Preference: partnership creditorspreferred to creditors of individualpartners (Art. 1827, CC).

Remedy of private creditors of partners:seek the attachment/public sale of theshares

REVIEWER IN CIVIL LAW Chapter VI. Dissolution and Winding Up

Page 166 of 177

PA

RT

NE

RSH

IPChapter VI. Dissolution and

Winding Up

A. DEFINITIONSB. CAUSES FOR DISSOLUTIONC. CONSEQUENCES OF DISSOLUTIOND. PARTNER'S LIABILITY

A. DEFINITIONS

Dissolution – change in the partners’relation caused by any partner ceasingto be associated in the carrying on ofthe business (Art. 1828, CC).

Termination – when all the affairs of thepartnership are liquidated and thepartnership is definitely ended. It is thefinal settlement of accounts of thepartnership. (JBL Reyes)

Winding up – process of liquidation ofpartnership affairs, between dissolutionand termination. (JBL Reyes)

Effect of dissolution: partnershipcontinues until winding up is completed(Art. 1829, CC).

Effect of dissolution on the partners:1. they can’t evade prior obligations2. generally they’re spared from new

obligations to which they didn’tconsent, unless these are essentialfor the winding up (Testate Estateof Mota v. Serra, 1925)

B. CAUSES FOR DISSOLUTION

Voluntary1. without violation of the agreement

between the partners (1830)i. termination of the term or

particular undertakingii. express will of any partner in

good faith, when the partnershipis at will

iii. express will of all partners whohave not assigned their interestsor suffered them to be charged

iv. bona fide expulsion of anypartner in accordance with theagreement

2. in contravention of the agreement,by express will of one partner

effects – partner is liable fordamages; other partners maycontinue the business

Involuntary (grounds)1. business becomes unlawful2. specific thing promised perishes

before delivery to the partnership,the use and enjoyment of which hasbeen transferred to the partnership

3. death of a partner4. insolvency of any partner or the

partnership5. civil interdiction of any partner

Judicial1. Decree of court upon application

(1831)i. application by partner (grounds)

insanity of any partner incapacity of any partner to

perform his part of thecontract

partner guilty of conductprejudicial to the partnershipbusiness

wilfull breach of agreementby any partner

business can only be carriedout with loss

ii. application by purchaser ofpartnership interest may beallowed in the following cases:

termination of term orundertaking

partnership is at will andinterest of partnership isassigned

C. CONSEQUENCES OFDISSOLUTION

Except as necessary for winding up,dissolution terminates all authority ofthe partners to act for the partnership(1832)

Partnership is not bound by any actof a partner when dissolution is not by the act,

insolvency or death of a partner dissolution is by such act,

insolvency or death and thepartners acting have knowledgethereof

acts not connected with windingup

Partnership is not bound withrespect to third persons (1834) business become unlawful partner dealing with third party

becomes insolvent partner has no authority to wind

up

REVIEWER IN CIVIL LAW Chapter VI. Dissolution and Winding Up

Page 167 of 177

PA

RT

NE

RSH

IP Partner can bind the partnership

even after dissolution(1834) acts appropriate to winding up third person is in good faith and

without knowledge ofdissolution:i. third person who extended

credit to the partnershipii. third person who knew the

existence of the partnership

D. PARTNER’S LIABILITY

if partner transacts business with thirdpersons notwithstanding death orinsolvency of a co-partner, liability shallbe satisfied out of partnership assetsalone if:

partner was unknown as partner tothird person

partner is unknown and inactive inpartnership affairs

partner still has existing liabilities tothe partnership at the time of thedissolution (1835)

dissolution does not discharge apartner

discharged only by agreementamong partner, creditor and theperson or partnership continuingthe business

in case of death: individual property is liable for

obligation of the partnershipincurred while he was a partner,subject to prior payments ofindividual debts.

Liability of person/partnershipcontinuing the business (Art. 1840,CC)

Contemplates 7 situations:1. when any partner is admitted

into an existing partnership2. when any partner retires and

assigns his rights in partnershipproperty to two or more partnersor third persons

3. when all but one partner retireand assign their rights to theremaining partner

4. any partner retires or dieswithout any assignment of hisright in partnership property

5. All the partners or theirrepresentatives assign theirrights in partnership property toone or more third persons whopromise to pay the debts and

who continue the business ofthe dissolved partnership

6. Any partner wrongfully causes adissolution

7. When a partner is expelled

When applicable: a partnership isdissolved due to change inmembership but the remainingpartners continue the businesswithout liquidation.

Effect: unpaid old creditors of thedissolved partnership automaticallybecome creditors of the newpartnership.

New partner’s liability: satisfied out ofpartnership property only, unlesswith a contrary stipulation

Not only the retiring partners but alsothe new partnership itself whichcontinued the business of thedissolved one, are liable for the debtsof the prior partnership. Awithdrawing partner remains liable toa 3rd party creditor of the oldpartnership (Singsong vs. IsabelaSawmill, 1979).

REVIEWER IN CIVIL LAW Chapter VII. Rights of Partners Upon Dissolution

Page 168 of 177

PA

RT

NE

RSH

IPChapter VII. Rights of Partners

Upon Dissolution

A. RIGHT TO WIND UPB. RIGHT TO DAMAGES FOR/TO CONTINUE

BUSINESS ON WRONGFUL DISSOLUTIONC. RIGHT TO LIEN OR RETENTION, TO

STAND IN PLACE OF CREDITOR, TO BEINDEMNIFIED

D. RIGHT OF RETIRING/DECEASEDPARTNER

E. RIGHT TO ACCOUNT

A. RIGHT TO WIND UP(1836)

Based on: Agreement No agreement

the partners who have notwrongfully dissolved the partnership

the legal representative of the lastsurviving partner, not insolvent

Any partner, his legal representative orhis assignee, upon cause shown, mayobtain winding up by the court.

B. RIGHT TO DAMAGES FOR/TOCONTINUE BUSINESS ONWRONGFUL DISSOLUTION

General Rule:

Each partner may have thepartnership property applied to thepayment of the firm’s debt

Surplus is applied to payment incash of the net amount owed to therespective partners

Each partner who has not causeddissolution wrongfully shall have theright, as against each partner who hascaused the dissolution wrongfully, todamages for breach of the agreement.

The partners who have not caused thedissolution wrongfully, if they all desireto continue the business in the samename either by themselves or jointlywith others, may do so, during theagreed term for the partnership and forthat purpose may possess thepartnership property, provided they secure the payment by bond

approved by the court, or

pay any partner who has caused thedissolution wrongfully, the value ofhis interest in the partnership at thedissolution, less any damagesrecoverable

in like manner indemnify himagainst all present or futurepartnership liabilities.

A partner who has caused thedissolution wrongfully shall have theright:

If the business is not continued Each partner may have the

partnership property applied tothe payment of the firm’s debt

Surplus is applied to payment incash of the net amount owed tothe respective partners subjectto payment of damages

If the business is continued the right as against his co-

partners and all claimingthrough them in respect of theirinterests in the partnership,

to have the value of his interestin the partnership, less anydamage caused to his co-partners by the dissolution,ascertained and paid to him incash, or the payment secured bya bond approved by the court,

to be released from all existingliabilities of the partnership; butin ascertaining the value of thepartner's interest the value ofthe good-will of the businessshall not be considered.

C. RIGHT TO LIEN OR RETENTION,TO STAND IN PLACE OFCREDITOR, TO BE INDEMNIFIED

Where a partnership contract isrescinded on the ground of the fraud ormisrepresentation of one of the partiesthereto, the party entitled to rescind is,without prejudice to any other right,entitled:

To a lien on, or right of retention of,the surplus of the partnershipproperty after satisfying thepartnership liabilities to thirdpersons for any sum of money paidby him for the purchase of aninterest in the partnership and forany capital or advances contributedby him;

To stand, after all liabilities to thirdpersons have been satisfied, in theplace of the creditors of thepartnership for any payments made

REVIEWER IN CIVIL LAW Chapter VII. Rights of Partners Upon Dissolution

Page 169 of 177

PA

RT

NE

RSH

IPby him in respect of the partnershipliabilities; and

To be indemnified by the personguilty of the fraud or making therepresentation against all debts andliabilities of the partnership.

D. RIGHT OF RETIRING/DECEASEDPARTNER(1841)

Factual Situation: any partner retires or dies, and the business is continued without

any settlement of accounts asbetween him or his estate and theperson or partnership continuingthe business

Rights: he or his legal representative as

against such person or partnershipmay have the value of his interest atthe date of dissolution ascertained

either: receive as an ordinary creditor

an amount equal to the value ofhis interest in the dissolvedpartnership with interest; or,

at his option or at the option ofhis legal representative, receivein lieu of interest, the profitsattributable to the use of hisright in the property of thedissolved partnership;

The provision shall not apply if there isan agreement between the parties.

E. RIGHT TO ACCOUNT(1842)

The right to an account of his interestshall accrue to any partner, or his legalrepresentative as against

the winding up partners or thesurviving partners or

the person or partnershipcontinuing the business,

When right accrues: At the date of dissolution, in the

absence of any agreement to thecontrary.

REVIEWER IN CIVIL LAW Chapter VIII. Rules on Settlement

Page 170 of 177

PA

RT

NE

RSH

IPChapter VIII. Rules on Settlement

(1839)

The rules for distribution won’t apply ifthere’s a contrary agreement betweenthe partners.

Rule of preference in the payment ofpartnership liabilities:1. those owed to creditors other than

partners2. those owed to partners other than

capital and profits3. those owed to partners in respect of

capital4. those owed to partners in respect of

profits

When assets are insufficient to satisfyliabilities: the partners are required tocontribute, based on contributedcapital. If refuses to contribute – a petition in

court may be filed for itsenforcement.

If partner is dead – contribution maybe enforced against his privateproperty through the administrator

Doctrine of Marshalling of Assets: Ifthere are claims over both partnershipassets & partners’ individual properties,both in custody of the court fordistribution:1. Partnership creditors are preferred

with regard to partnership property2. Individual creditors are preferred

with respect to individual propertiesof partners.

3. Anything left from either goes to theother.

Order in case of insolvency of a partneror his estate (in case of death):1. Separate creditors2. Partnership creditors3. Partners who gave contributions

Liquidation needed. The business profitscan’t be determined by taking intoaccount the result of 1 transactioninstead of all the transactions had, thusthe need for a general liquidation beforea partner may claim a specific sum ashis share of the profits (Sison v.McQuaid, 1953).

No return of shares without dissolution &liquidation, because the firm’s outsidecreditors have preference over the firm’sassets and the firm’s property can’t bediminished to their prejudice (Magdusav. Albaran, 1962).

REVIEWER IN CIVIL LAW Chapter IX. Limited Partnership

Page 171 of 177

PA

RT

NE

RSH

IPChapter IX. Limited Partnership

I. DEFINITIONII. FORMING/AMENDING A LIMITED

PARTNERSHIPIII. LIMITED PARTNER

A. CONTRIBUTIONB. LIABILITIES OF A LIMITED PARTNER

1. TO THE PARTNERSHIP2. AS TRUSTEE FOR THE

PARTNERSHIP3. LIABILITIES TO PARTNERSHIP

CREDITORS & OTHER PARTNERSi. CONTRIBUTES SERVICESii. SURNAME IN FIRM NAMEiii. FALSE STATEMENTiv. CONTROL OF BUSINESSv. PROHIBITED TRANSACTIONSvi. NON-COMPLIANCE WITH

REQUISITES FOR FORMATION4. LIABILITIES TO SEPARATE

CREDITORSC. RIGHTS OF LIMITED PARTNERS

1. COMMON RIGHTS OF LIMITED &GEN. PARTNERS

2. LOAN MONEY & TRANSACTBUSINESS

3. RETURN OF CONTRIBUTION4. SHARE OF PROFITS5. ASSIGN INTERESTS6. EFFECT OF DEATH OF A LIMITED

PARTNER7. PERSON ERRONEOUSLY

BELIEVING HE’S A LIMITEDPARTNER

IV. GENERAL PARTNERV. DISSOLUTIONVI. SETTLING OF ACCOUNTS AFTER

DISSOLUTION

I. DEFINITION

Limited partnership:

formed by 2/more persons, in accordance with the requirements

of law,

composed of 1/more generalpartners & 1/more limited partners(Art. 1843, CC).

Limited partners are not bound by thepartnership’s obligations (Art. 1843,CC).

Characteristics:1. Complied with the statutory

requirement of form (Art. 1844 CC)2. The business is controlled by 1/more

gen. partners who are personally liableto creditors (Arts. 1848, 1850 CC)

3. 1/more limited partners contribute tothe capital & share in the profits butdon’t manage the business

4. The limited partners aren’t personallyliable for obligations beyond theircontribution (Arts. 1845, 1848, 1856CC)

5. Obligations/debts are paid out ofpartnership assets and the gen.partners’ separate assets

6. Limited partners may get back theircapital contributions subject toconditions prescribed by law (Arts.1844, 1857 CC)

Advantages of limited partnerships:1. For gen. partners: secure capital

from others while retaining control& supervision of the business

2. For limited partners: share in theprofits without the risk of personalliability

GeneralPartner

LimitedPartner

Extent ofliability

Personallyliable forpartnershipobligations

Only to theextent of hiscapitalcontributions

Right toparticipate inmanagement

If manner ofmgt. notagreed upon,all generalpartnershave anequal right inbusiness mgt

Noparticipation inmanagement

Contribution Cash,property orindustry

Cash orproperty only,not industry

Proper partytoproceedingsby or againstthepartnership

Proper partytoproceedingsby/againstpartnership

Not properparty toproceedingsby/againstpartnershipunless:1. he is also agen. partner2. where theobject of theproceedings isto enforce alimitedpartner's rightagainst orliability to thepartnership

Name in firmname

Name mayappear infirm name

Name mustappear in firmname

Prohibition toengage inotherbusiness

Prohibited No prohibition


Page 172 of 177

PA

RT

NE

RSH

IPGeneralPartner

LimitedPartner

Effect ofretirementdeathinsanity orinsolvency

Dissolves thepartnership

Different effect;rightstransferred tolegal rep.

Assignabilityof interest inpartnership

Notassignable

Assignable

Gen.Partnership

LimitedPartnership

Creation May beconstituted inany form,except whereimmovableproperty or realrights arecontributed, apublicinstrumentshall benecessary

Partners must:(1) Sign andswear to acertificatewhich shallstate the itemsenumerated inArt. 1844 and

(2) File forrecord thecertificate inthe Office of theSecurities andExchangeCommission

Composition Only generalpartners

1/more gen.partners and1/more limitedpartners

Firm name Must containthe word“Company”(SEC MemoCirc. #14-00)unless it’s aprofessionalpartnership

Everypartnershipshall operateunder a firmname, whichmay or may notinclude thename of one ormore of thepartners.

Name mustinclude theword “Limited”(SEC MemoCirc. #14-00)

The surname ofa limitedpartner shallnot appear inthe partnershipname unless:

(1) It is also thesurname of ageneralpartner, or

(2) Prior to thetime when thelimited partnerbecame such,the businesshas beencarried onunder a namein which hissurnameappeared.

Gen.Partnership

LimitedPartnership

DissolutionandWinding Up

Rulesgoverning areArt. 1828-1842

Rulesgoverning areArt. 1860-1863

II. FORMING/AMENDING A LIMITEDPARTNERSHIP

Two or more persons desiring to form apartnership shall:1. Sign and swear to a certificate which

shall state the following itemsenumerated in Art. 1844

2. File for record the certificate in theOffice of Securities and ExchangeCommission

A limited partnership is formed if therehas been substantial compliance ingood faith with Art. 1844

When the cert. of partnership may beamended: (CSAAG – CFCTM)1. Change in partnership name or in

the amount/character ofcontribution of any limited partner

2. Substitution of a limited partner3. Additional limited partner is

admitted4. Admission of a general partner5. Gen. partner retires, dies, becomes

insolvent or insane, or under civilinterdiction & the business iscontinued:a. Under a right so to do stated in

the certificate, orb. With the consent of all members

6. Change in the character of business7. False/erroneous statement in the

cert.8. Change in the time as stated in the

cert. for the dissolution of thepartnership or return of acontribution

9. Time is fixed for dissolution orreturn of a contribution

10. The Members want to change astatement in the cert. to make itmore accurate (Art. 1864, CC)

Requirements to amend:1. Must be in writing, under oath, &

set forth clearly the change desired2. Signed & sworn to by all the

members, including the newmembers & assigning members

3. The cert., as amended, must be filedin the SEC (Art. 1865, CC)


Page 173 of 177

PA

RT

NE

RSH

IP When the certificate shall be cancelled:

1. When the partnership is dissolved2. When all limited partners cease to

be such (Art. 1864, CC)

Requirements to cancel:1. Must be in writing2. Signed by all the members3. Filed with the SEC; if cancellation is

court-ordered, a certified copy of theorder shall also be filed (Art.1865,CC)

III.LIMITED PARTNER

Who may be limited partners:

A partnership – no A gen. partnership may be changed

into a limited one, & a partner in theformer gen. partnership may be alimited partner in the limitedpartnership formed.

A. Contribution

May be cash or property, but notservices.

B. Liabilities of a Limited Partner

Gen. rule: not liable as a gen. partner.His liability is limited to the extent ofhis contribution to the partnership.

1. To the partnership (Art. 1858, CC)i. Difference between his actual

contribution & that stated in thecertificate as having been made

ii. Unpaid contributions which heagreed to make at specified futuretime & on the conditions stated inthe certificate

2. As Trustee for the Partnership:1) Specific property which he

committed but didn’t contribute, orwhich he contributed but waswrongfully returned to him

2) Money/property wrongfully paid orconveyed to him

Liabilities of a limited partner can bewaived or compromised only by theconsent of all the members. However:

This shall not affect the right of acreditor who: extended credit or whose claim arose after the filing

& before a cancellation/amendment of the certificate.

Even if a limited partner rightfullyreceived back his contribution tocapital, he remains liable to thepartnership for any sum necessary todischarge the liabilities of thepartnership to creditors who:

extended credit or whose claims arose before such

return.

3. Liabilities to partnership creditors &other partners

a. Contributes services (Art. 1845,CC)

Effect:1. The limited partner:

i. Will be considered anindustrial & general partneror

ii. If the certificate states thathe’s a limited partner, he willbe a general partner &limited partner at the sametime.

2. He divests himself of theprivilege of limited liability & willbe exposed to all the liabilities ofa gen. partner.

b. Surname in firm name (Art.1846,CC)

Gen. rule: the surname of a limitedpartner shall not appear in thepartnership name

If used in firm name, he is liableas a gen. partner to creditorswho didn’t know that he isn’t agen. partner.

c. False statement (Art. 1847, CC)

If a person suffers loss by relianceon the false statement in thecertificate, he may hold liable anyparty to the certificate who knew thestatement to be false:

At the time he signed thecertificate, or

Subsequently but within asufficient time before thereliance to enable him to amendor cancel the certificate


Page 174 of 177

PA

RT

NE

RSH

IPd. Control of business (Art. 1848,

CC)

He becomes liable as a gen. partnerwithout acquiring the rights of one.

Control here contemplates activeparticipation in the business andnot just having the option toexercise control.

e. Prohibited Transactions (Art.1854, CC)

Prohibited transactions of limitedpartners:1. Receiving/holding as collateral

security any partnershipproperty

2. Receiving any payment,conveyance, or release fromliability if it will prejudice therights of 3rd persons

If prohibited acts are performed:

Presumption of fraud on thecreditors. But the law doesn’t

absolutely prohibit thetaking as collateral securityof the property, as theprohibitions are modified bythe requirement of sufficientassets to discharge thepartnership obligations.

f. Non-compliance with requisitesfor formation (Art. 1844 par.2,CC)

If there is no substantialcompliance:

the partnership becomes ageneral partnership with respectto 3rd persons

the members are liable asgeneral partners.

4. Liabilities to separate creditors

Right of creditors of a limited partner topetition a court of competentjurisdiction to:

Charge the interest of the indebtedlimited partner with the payment ofthe unsatisfied amount of the claim

Appoint a receiver to preserve theinterest

Make all other orders as thecircumstances would require

The interest may be redeemed with theseparate property of any gen. partnerbut not with partnership property. (Art.1862, CC)

This is different from the rule ingeneral partnership where theinterest can also be redeemed withpartnership property. (Art. 1814,CC)

C. Rights of Limited Partners

1. Common rights of limited & gen.partners (Art. 1851, CC)

i. Demand that partnership books bekept at the principal place ofbusiness

ii. Inspect & copy any of the booksiii. Demand true & full info of all things

affecting the partnershipiv. Demand a formal account whenever

circumstances render it just andreasonable

v. Resort to the court for thedissolution and winding up of thebusiness

vi. Receive a share of the profits orother compensation by way ofincome

vii. Demand the return of hiscontribution provided assets aremore than the liabilities

2. Loan money & transact business (Art.1854, CC)

Limited partner allowed to loanmoney, transact business becausethe relationship between the limitedpartner & partnership isn’t based ontrust & confidence. There is noconflict of interests.

Unless he is also a general partner,he is entitled to a pro rata share ofthe partnership assets together withthe general creditors.

3. Return of contribution (Art.1857,CC)

Conditions for return:1. All liabilities to non-partner

creditors had been paid, or thereare sufficient assets to satisfythem, or

2. All members consent, unless thelimited partner desiring thereturn has lawfully demandedthe return of his contribution, or


Page 175 of 177

PA

RT

NE

RSH

IP3. The certificate had been

cancelled or amended as toreflect the withdrawal/reductionof contribution.

When return may be demanded:1. On the dissolution of the

partnership2. On the arrival of the date

specified in the certificate3. On the lapse of 6 months from

notice in writing to all othermembers if no time is specified

General rule: return of contributionis in cash, except:

if there’s a statement to thateffect in the certificate or allpartners consent

Dissolution, upon petition of limitedpartner:1. When he rightfully but

unsuccessfully demands thereturn of his contribution

2. The other liabilities of thepartnership have not been paidpr property is insufficient forpayment and the limitedpartner would otherwise beentitled to the return of hiscontribution

In case of several limited partners:

Members may agree to givepriority to 1/more limitedpartners, and

This must be stated in thecertificate of partnership. Thepreference covers –

1. return of contributions,2. compensation, and3. other matters where some

benefit is granted (Art. 1855,CC).

In the absence of such statement,all the limited partners shall standupon equal footing.

4. Share of profits (Art. 1856, CC)

When the assets exceed liabilities(except those to limited & generalpartners), a limited partner mayrecover his share in theprofits/compensation by way ofincome stipulated in the certificate.

5. Assign interests (Art. 1859, CC)

A limited partner’s interest isassignable.

Substituted limited partner: aperson admitted to all the rights of alimited partner who has died orassigned his interest in apartnership

He has all the rights and powersof a limited partner

Subject to all restrictions &liabilities of his assignor except: those he was ignorant of

when he became a limitedpartner and couldn’t beascertained in the certificate

An assignee who does not become asubstituted limited partner has:

No right to require anyinformation or account ofpartnership transactions

No right to inspect partnershipbooks

Only entitled to receive theassignor’s share of the profits orother compensation by way ofincome

Only entitled to the return of theassignor’s contribution

The assignee shall have the right tobecome a substituted limitedpartner if –1. all the members consent, or2. the assignor is empowered in the

articles of partnership, and hegave the assignee the right to bea substituted limited partner.

In either case, it is still requiredthat the certificate be amended(Art. 1865, CC) and registeredwith the SEC.

That the assignee has become asubstituted limited partner doesn’trelieve the assignor from liabilitiesto the partnership under Art. 1858,as a trustee, or for false statementin the certificate.


Page 176 of 177

PA

RT

NE

RSH

IP6. Effect of death of a limited partner

(Art. 1861, CC)

Rights of executors/administrators:1. All the rights of a limited partner

for the purpose of settling theestate

2. If the deceased had assigned hisinterest in the partnership, theexecutor or administrator mayconstitute the assignee asubstituted limited partner if thedeceased was empowered to doso

The deceased limited partner’sestate is liable for all the deceased’sobligations & liabilities to thepartnership as a limited partner

7. Person erroneously believing he’s alimited partner (Art. 1852, CC)

A person who has contributedcapital erroneously believing that hehas become a limited partner:

Does not become a generalpartner, or

Become bound by theobligations of the partnership, if: he exercises the rights of a

limited partner on ascertaining his mistake

he promptly renounces hisinterest in the profits of thebusiness

IV.GENERAL PARTNER

A general partner shall have all therights and powers and is subject to allthe restrictions and liabilities of apartner in a partnership without limitedpartners.

General partners can’t, without thewritten consent or written ratification ofall limited partners, do the ff: (ACAP-ACA)1. Any act in contravention of the

certificate2. Confess judgment3. Any act which would make it

impossible to carry on thepartnership business

4. Possess partnership property, orassign their rights in specificpartnership property for other than apartnership purpose

5. Admit a person as a gen. partner

6. Continue the business withpartnership property on the death,retirement, insanity, civil interdictionor insolvency of a gen. partner,unless the power is granted in thecertificate

7. Admit a person as a limited partner,unless the right is granted in thecertificate (Art. 1850, CC)

V. DISSOLUTION

When a limited partnership may bedissolved:1. The misconduct of a general partner2. Fraud on the limited partner by the

general partner3. The retirement, death, insolvency,

insanity, or civil interdiction of ageneral partner, except: if thebusiness is continued by theremaining general partnersi. under a right stated in the cert.ii. when all members consented to

the continuation (Art. 1860, CC)4. When all the limited partners ceased

to be such (Art. 1864, CC)5. End of the term for which it was to

exist (Art. 1844, CC)6. By mutual consent of the partners

before the end of the firm’s originalterm

7. When the limited partner demandedthe return of his contribution butwas unjustifiably denied (Art. 1857,CC)

8. The causes in Arts. 1830 & 1831.

If dissolved by expiration of the fixedterm, the notice of dissolution need notbe given since the papers filed in theSEC are notice to the world.

If dissolved by express will of thepartners, the certificate should becancelled, and dissolution isn’t effecteduntil there has been compliance withthis requirement.


Page 177 of 177

PA

RT

NE

RSH

IPVI.SETTLING ACCOUNTS AFTER

DISSOLUTION

Order of priority in the payment ofliabilities (Art. 1863, CC):1. Those owed to creditors, in the order

of priority provided by law (Arts.2236-2251, CC), except those tolimited partners on account of theircontribution & to general partners

2. Those to limited partners in respectto their share of the profits andother compensation by way ofincome in their contributions

3. Those to limited partners in respectof their capital contributions

4. Those to general partners other thanfor capital and profits

5. Those to general partners in respectto profits

6. Those to general partners in respectto capital

General partners have the duty & powerto wind up the partnership’s affairs

If there’s no agreement, the limitedpartners shall share in thepartnership assets and profits inproportion to the respectiveamounts of their claims (Art. 1863,CC).

- end of Partnership -- end of Civil Law Vol. 1 -