2009 Civil Law Volume 1 Reviewer

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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
OBLIGATIONS
Chapter I. GENERAL PROVISIONS I. Obligations II. Sources of Obligations A. Law B. Contracts C. Quasi-Contracts D. Delicts E. Quasi-Delicts Chapter II. NATURE AND EFFECTS OF OBLIGATIONS I. Breach of Obligations A. Voluntary B. Involuntary Types of Breach A. Fraud B. Negligence C. Delay II. Fortuitous Events A. Act of God B. Act of Man/Force Majeure III. Remedies A. Primary Remedies B. Subsidiary Remedies of Creditor IV. Usurious Transactions Chapter III. DIFFERENT KINDS OF OBLIGATIONS I. Pure & Conditional Obligations A. Pure Obligation B. Conditional Obligation II. Reciprocal Obligations III. Obligations with a Period IV. Alternative & Facultative Obligations A. Alternative Obligations B. Facultative Obligations V. Joint & Solidary Obligations A. Joint Obligation B. Solidary Obligation VI. Divisible & Indivisible Obligations A. Divisible Obligation B. Indivisible Obligation VII.Obligations with a Penal Clause 3 3 3 3 3 3 4 4 5 6 6 6 6 6 6 7 8 8 8 9 9 9 10 11 11 11 11 13 13 14 15 15 16 16 17 19 19 19 19 Chapter IV. EXTINGUISHMENT OF OBLIGATIONS I. Payment or Performance A. Application of Payment B. Payment by Cession C. Dation in Payment D. Tender of Payment and Consignation II. Loss of the Thing Due or Impossibility of Performance A. Loss B. Impossibility of Performance III. Condonation or Remission of the Debt IV. Confusion or Merger of Rights V. Compensation VI. Novation A. Objective Novation B. Subjective Novation VII.Charts on Payment and Performance 21 21 21 21 21 21 23 23 23 24 24 24 25 26 26 28
Table of Contents
CONTRACTS
Chapter I. GENERAL PROVISIONS I. Classification II. Elements III. Stages IV. Characteristics A. Mutuality B. Autonomy C. Relativity D. Consensuality E. Obligatory Force Chapter II. ESSENTIAL REQUISITES OF CONTRACTS I. Consent A. Concurrence B. Capacity C. Vices of Consent II. Object III. Cause 35 35 36 36 36 36 36 36 37 37 38 38 38 38 39 40 40 Chapter III. FORMS OF CONTRACTS I. Rules II. Kinds of Formalities A. Contracts Which Must Appear in Writing B. Contracts Which Must Appear in a Public Document Chapter IV. REFORMATION OF CONTRACTS Chapter V. INTERPRETATION OF CONTRACTS Chapter VI. DEFECTIVE CONTRACTS VIII. Rescissible IX. Voidable X. Unenforceable XI. Void or Inexistent 42 42 42 42 42 43
43 44 44 45 45 46
SALES
Chapter I. THE CONTRACT OF SALE A. Essential Requisites B. Stages C. Characteristics D. Kinds E. Form F. Sale Distinguished from Other Contracts G. Contract to Sell H. Bilateral Promise to Buy and Sell I. Option Contract J. Right of First Refusal K. Assignment L. Document of Title Chapter II. ELEMENTS OF A VALID SALE A. Consent 1. Absolute Incapacity 2. Relative Incapacity 3. Offer and Acceptance B. Subject Matter 1. Licit 2. Actual or Possible 3. Determinate C. Price 1. Requisites 2. Gross Inadequacy of Price Chapter III. TRANSFER OF OWNERSHIP I. General Rule: Ownership Transfers upon Delivery II. When Delivery Does Not Transfer Ownership 49 49 49 49 49 50 50 51 51 51 52 52 53 54 54 54 54 55 55 55 55 56 56 56 56 57 57 57 A. Sale on Return B. Sale on Approval, Trial or Satisfaction C. Executory Sales D. Sale by Description or Sample E. In an Invalid Sale F. When Seller is Not Owner III. Kinds of Delivery IV. Double Sales V. Risk of Loss or Deterioration Chapter IV. OBLIGATIONS OF THE SELLER AND THE BUYER A. Obligations of the Seller 1. Preservation 2. Delivery 3. Warranty B. Obligations of the Buyer 1. Acceptance 2. Payment Chapter V. REMEDIES OF THE SELLER AND THE BUYER A. General Remedies B. Remedies of the Seller 1. For non-acceptance of payment 2. For non-payment a. In sale of Movables b. In sale of immovables C. Remedies of the Buyer 1. For breach of obligation to preserve 2. For breach of obligation to deliver 3. For breach of warranty 57 57 57 57 58 58 58 60 61 62 62 62 62 64 66 66 67 68 68 68 68 69 69 71 72 72 72 73
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Chapter VI. EXTINGUISHMENT OF SALE A. Causes B. Conventional Redemption 1. Definition 2. Conventional Redemption vs. Equitable Mortgage 3. Right of Redemption C. Legal Redemption 1. Definition 2. Period to redeem 3. Instances D. Under the Public Land Act E. Under Special Laws 1. Foreclosure and execution sales 2. Under the Agrarian Land Reform Code Chapter VII. THE BULK SALES LAW
75 75 75 75 75 76 77 77 77 77 78 78 78 79 80
CREDIT TRANSACTIONS
Chapter I. GENERAL PRINCIPLES I. Credit Transactions Defined II. Security Defined III. Bailment Defined Chapter II. LOAN I. Characteristics II. Kinds of Loan III. Commodatum and Mutuum Distinguished IV. Kinds of Commodatum V. Commodatum VI. Obligations of the Bailee VII.Obligations of the Bailor VIII. Simple Loan IX. Interest Chapter III. REAL MORTGAGE I. Real Mortgage Defined II. Objects of Real Mortgage III. Kinds of Real Mortgage IV. Essential Requisites V. Effect of Invalidity of Mortgage on Principal Obligation VI. Effect of Mortgage VII.Extent of Mortgage VIII. Foreclosure of Mortgage IX. Right of Mortgagee to Recover Deficiency X. Nature of Judicial Foreclosure Proceedings XI. Waiver of Security by Creditor XII. Redemption Chapter IV. CHATTEL MORTGAGE I. Definition II. Applicability of the Provisions on Pledge III. Subject Matter of Chattel Mortgage IV. Registration in the Chattel 83 83 83 83 84 84 84 84 84 84 85 85 86 86 88 88 88 88 88 89 89 89 89 90 90 90 90 91 91 91 91 Mortgage Register V. Right of Redemption VI. Right of Mortgagee to Possession VII.Foreclosure of Chattel Mortgage VIII. Civil Action to Recover Credit IX. Right of Mortgagee to Recover Deficiency X. Application of Proceeds of Sale Chapter V. PLEDGE I. Provisions Common to Pledge and Mortgage II. Provisions Applicable only to Pledge Chapter VI. ANTICHRESIS I. Definition of Antichresis II. Characteristics III. Special Requisites IV. Application of the Fruits V. Obligations of the Creditor VI. Remedies of Creditor in Case of NonPayment of Debt Chapter VII. DEPOSIT I. General Provisions A. Definition B. Characteristics C. Principal Purpose D. Distinctions from Mutuum and Commodatum E. Creation of a Deposit F. Extinguishment of a Deposit G. Kinds of Deposit H. Subject Matter of Deposit II. Voluntary Deposit A. General Provisions B. Obligations of the Depositary C. Obligations of the Depositor III. Necessary Deposit 92 92 93 93 93 93 93 94 94 95 98 98 98 98 98 98 99 100 100 100 100 100 100 101 101 101 101 101 101 102 106 106
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A. Definition B. Liability of the Hotel-Keeper IV. Judicial Deposit Chapter VIII. GUARANTY I. Guaranty in General Its Nature and Extent A. Characteristics B. Classification of Guaranty C. Guaranty Distinguished from Warranty D. Guaranty Distinguished from Suretyship E. Rules Governing Guaranty II. Effects of Guaranty A. Between Guarantor and Creditor B. Between Debtor and Guarantor C. As Between Co-Guarantors III. Extinguishment of Guaranty Chapter IX. SURETY I. Nature of Suretys Undertaking II. Applicability of Strictissimi Juris Rule
106 106 107 108 108 108 108 108 108 109 112 112 114 115 115 117 117 117
Chapter X. CONCURRENCE AND PREFERENCE OF CREDITS I. Concurrence of Credits Defined II. Preference of Credit Defined III. General Provisions IV. Classification of Credits V. Order of Preference of Credits Chapter XI. SPECIAL LAWS I. Warehouse Receipts Law II. Insolvency Law
118 118 118 118 118 118 118 119 119 124
AGENCY
Chapter I. NATURE, FORM AND KINDS OF AGENCY M. Definition N. Purpose O. Characteristics P. Essential Elements Q. Determination of Existence R. Agency vs. Similar Contracts S. Kinds Chapter II. OBLIGATIONS OF THE AGENT A. To Carry Out the Agency B. To Act Within the Scope of His Authority C. To Advance Necessary Funds D. To Act in Accordance with Instructions E. To Prefer Principals Interest over Personal Interest F. Not to Loan to Himself without Principals Consent G. To Render Account and Deliver Things Received by Virtue of Agency H. To be Responsible for Substitutes I. To Pay Interest J. To Answer for His Fraud/ Negligence K. Special Obligations of Factor/ Commission Agents 134 134 134 134 134 135 135 137 141 141 141 142 142 142 142 143 143 143 143 143 Chapter III. LIABILITIES OF THE AGENT A. Liability to Third Persons B. Liability to the Principal C. Liability of Two or More Agents Chapter IV. OBLIGATIONS OF THE PRINCIPAL A. To Comply with the Obligations Contracted by the Agent B. To Advance Necessary Sums and Reimburse the Agent C. To Indemnify Agent for Damages D. To Pay the Agents Compensation E. Be Solidarily Liable Chapter V. EXTINGUISHMENT OF AGENCY A. Expiration of the Period for which It was Constituted B. Death, Civil Interdiction, Insanity, Insolvency C. Withdrawal of the Agent D. Accomplishment of the Object of the Agency E. Revocation F. Dissolution of the Firm/Corp. which Entrusted/Accepted the Agency 145 145 145 146 147 147 148 148 148 149 150 150 150 150 150 150 151
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Table of Contents
PARTNERSHIP
Chapter I. NATURE, CREATION, KINDS OF PARTNERSHIP A. Essential Features B. Characteristics C. Distinctions D. Rules to Determine Existence E. How Partnership is Formed F. Partnership Term G. Classes of Partners H. Kinds of Partnerships Chapter II. OBLIGATIONS OF THE PARTNERSHIP/PARTNERS AMONG THEMSELVES A. To Make the Contributions as Promised B. Pay Damages Due to Partners Fault C. Bear Risk of Loss D. Manage the Partnership E. Render Full Information F. Liability for Partnership Contracts G. Solidary Liability with Partnership H. Reimbursement Chapter III. OBLIGATIONS OF PARTNERSHIP/PARTNERS AS TO THIRD PERSONS A. Operate under a Firm Name B. Bound by Partnership Admission C. Bound by Notice to Partner D. Liable for Acts of the Partnership Chapter IV. RIGHTS OF PARTNERS A. Share in Losses and Profits B. Associate Another in His Share C. Access Partnership Books D. Obtain Formal Account E. Property Rights F. Convey Real Property Chapter V. RIGHTS OF PARTNERSHIP Chapter VI. DISSOLUTION AND WINDING UP A. Definitions B. Causes for Dissolution C. Consequences of Dissolution D. Partner's Liability Chapter VII. RIGHTS OF PARTNERS UPON DISSOLUTION A. Right to Wind Up B. Right to Damages for/to Continue Business on Wrongful Dissolution 154 154 154 154 155 155 156 156 157 C. Right to Lien or Retention, To Stand in Place of Creditor, To Be Indemnified D. Right of Retiring/Deceased Partner E. Right to Account Chapter VIII. RULES ON SETTLEMENT Chapter IX. LIMITED PARTNERSHIP I. Definition II. Forming/Amending a Limited Partnership III. Limited Partner A. Contribution B. Liabilities of a Limited Partner 1. To the Partnership 2. As Trustee for the Partnership 3. Liabilities to Partnership Creditors & Other Partners a. Contributes Services b. Surname in Firm Name c. False Statement d. Control of Business e. Prohibited Transactions f. Non-Compliance with Requisites for Formation 4. Liabilities to Separate Creditors C. Rights of Limited Partners 1. Common Rights of Limited & General Partners 2. Loan Money & Transact Business 3. Return of Contribution 4. Share of Profits 5. Assign Interests 6. Effect of Death of a Limited Partner 7. Person Erroneously Believing Hes a Limited Partner IV. General Partner V. Dissolution VI. Settling of Accounts After Dissolution
168 169 169 170 171 171 172 173 173 173 173 173 173 173 173 173 174 174 174 174 174 174 174 174 175 175 176 176 176 176 177
158 158 159 159 159 160 160 161 161
162 162 162 162 162 163 163 163 163 163 163 165 165 166 166 166 166 167 168 168 168
REVIEWER IN CIVIL LAW
Table of Contents
OBLIGATIONS
Chapter I. GENERAL PROVISIONS I. Obligations II. Sources of Obligations A. Law B. Contracts C. Quasi-Contracts D. Delicts E. Quasi-Delicts Chapter II. NATURE AND EFFECTS OF OBLIGATIONS I. Breach of Obligations A. Voluntary B. Involuntary Types of Breach A. Fraud B. Negligence C. Delay II. Fortuitous Events A. Act of God B. Act of Man/Force Majeure III. Remedies A. Primary Remedies B. Subsidiary Remedies of Creditor IV. Usurious Transactions Chapter III. DIFFERENT KINDS OF OBLIGATIONS I. Pure & Conditional Obligations A. Pure Obligation B. Conditional Obligation II. Reciprocal Obligations III. Obligations with a Period IV. Alternative & Facultative Obligations A. Alternative Obligations B. Facultative Obligations V. Joint & Solidary Obligations A. Joint Obligation B. Solidary Obligation VI. Divisible & Indivisible Obligations A. Divisible Obligation B. Indivisible Obligation VII.Obligations with a Penal Clause 3 3 3 3 3 3 4 4 5 6 6 6 6 6 6 7 8 8 8 9 9 9 10 11 11 11 11 13 13 14 15 15 16 16 17 19 19 19 19 Chapter IV. EXTINGUISHMENT OF OBLIGATIONS I. Payment or Performance A. Application of Payment B. Payment by Cession C. Dation in Payment D. Tender of Payment and Consignation II. Loss of the Thing Due or Impossibility of Performance A. Loss B. Impossibility of Performance III. Condonation or Remission of the Debt IV. Confusion or Merger of Rights V. Compensation VI. Novation A. Objective Novation B. Subjective Novation VII.Charts on Payment and Performance 21 21 21 21 21 21 23 23 23 24 24 24 25 26 26 28
OBLIGATIONS
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Chapter I. General Provisions
Obligations
FACULTY-STUDENT EDITORIAL BOARD AND LECTURES COMMITTEE
OBLIGATIONS
Prof. Rommel Casis

FACULTY EDITOR
CIVIL LAW Cez Villavert Michelle Dy

SUBJECT EDITORS
LECTURES Edel Cruz

HEAD
ACADEMICS COMMITTEE Samantha Poblacion

DIRECTOR FOR ACADEMICS EDITOR-IN-CHIEF
-------Kae Guerrero
PRINTING AND DISTRIBUTION
OBLIGATIONS and CONTRACTS Rory Lambino

LEAD WRITER Frances Domingo Michelle Arias Pauline Alejandre Alexandria Maroto Angelica Paglicawan Nathan Marasigan Diane Bonilla WRITERS
-------Leo Zulueta
LOGO, COVER AND TEMPLATE DESIGN
Rania Joya
DEPUTY DIRECTOR FOR ACADEMICS LAYOUT HEAD

I. OBLIGATIONS II. SOURCES OF OBLIGATIONS A. LAW B. CONTRACTS C. QUASI-CONTRACTS D. DELICTS E. QUASI-DELICTS
II. SOURCES OF OBLIGATIONS

A. Law: does not require concurrence of any act of the creditor or debtor, nor is the obligation necessarily in accord with their intention; obligations are imposed by the law itself
Art. 1158. Obligations derived from law are not presumed. Only those expressly determined in this Code or in special laws are demandable, and shall be regulated by the precepts of the law which establishes them; and as to what has not been foreseen, by the provisions of this Book.
OBLIGATION Art. 1156. An obligation is a juridical necessity to give, to do or not to do.

The legal relation established between one party and another, whereby the latter is bound to the fulfillment of a prestation, which the former may demand of him. (MANRESA).
B. Contracts
Art. 1305. A contract is a meeting of the minds between two persons whereby one binds himself, with respect to the other, to give something or to render some service Art. 1159. Has the Force of Law Between Parties. Obligations arising from contracts have the force of law between the contracting parties and should be complied with in good faith Art. 1306. The contracting parties may establish such stipulations, clauses, term and conditions as they may deem convenient provided they are not contrary to Law, Morals, Good customs, Public Order and Public Policy.
I. OBLIGATIONS
A. Active Subject (Obligee/Creditor): The one in whose favor the obligation is constituted the person who has the right or power to demand the prestation B. Passive Subject (Obligor/Debtor): The one bound to the performance of the prestation (to give, to do or not to do) C. Prestation (Object): The conduct or duties which has to be observed by the debtor/obligor. Requisites: (PLED) Possible, physically and judicially Licit Possible Equivalent in money Determinate or determinable D. Vinculum Juris (Juridical or Legal Tie; Efficient Cause): That which binds or connects the parties to the obligation.
Parties may freely enter into any stipulation not contrary to law, morals, good customs, public order and public policy Neither party may unilaterally evade his obligation in the contract unless: a) the contract authorizes it, or b) the other party assents.
C. QUASI-CONTRACTS
Art. 2142. It is the juridical relation resulting from lawful, voluntary and unilateral acts by virtue of which the parties become bound to each other to the end that no one shall be unjustly enriched or benefited at the expense of another.
No previous agreement exists; designed to avoid unjust enrichment, and have the character of reimbursements
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Lawful Voluntary Unilateral
Distinguished from crimes Distininguished from quasi-delict, which are based on fault and negligence Distinguished from contract which is based on agreement
Kinds of Quasi-Contracts Negotiorum Gestio: officious or voluntary management of the property or affairs of another without the knowledge or consent of the owner Solutio Indebiti: undue payment. The juridical relation arises when: o a thing is received without any right o it is unduly delivered by mistake Others: See Arts. 2163-2175 D. DELICTS: voluntary but punishable acts, including criminal negligence. Remedies include: 1. Restitution 2. Reparation of damages caused 3. Indemnity for consequential damages Enforcement of Civil Liability 1. INDEPENDENT: Criminal and civil action arising from the same offense may be instituted separately. 2. SUSPENDED: However, after criminal action has been commenced prosecution for civil action is SUSPENDED in whatever stage it may be found, until final judgment in the criminal proceeding is rendered; 3. IMPLIEDLY INSTITUTED: Civil action is impliedly instituted with the criminal action, when: when offended party expressly waives the civil action or reserves the right to institute a separate civil action; or when the law provides for an independent civil action
Barredo v. Garcia, (1942): The same negligent act may give rise to an action based on delict or quasi-delict and the injured party is free to choose which remedy to enforce. Mendoza vs. Arrieta, (1979): If the civil action is based on quasi-delict, there is no need to reserve the right to file a civil action in the criminal case.
action (res judicata) judgment of acquittal contained a declaration that no negligence can be attributed to the accused and that the fact from which civil action might arise did not exist
OBLIGATIONS
E. QUASI-DELICTS: a voluntary act or omission with fault or negligence causing damage to another; not a crime nor a contract
Quasi-Delict Private, against individual Criminal intent is not necessary Present in any act or omission where fault or negligence intervenes Gives rise to liability for damages to the injured party Reparation, compensation or indemnification of the injury suffered by the injured party Preponderance of evidence Can be compromised Crimes Public, against the State Criminal intent is necessary for criminal liability An act can is only punishable when there is a law penalizing it There are crimes from which no civil liability arises Fine or imprisonment or both, to public treasury
Proof of guilt beyond reasonable doubt Can never be compromised
Requisites of Liability (DWD) 1. Wrongful act or omission by fault or negligence 2. Damage or injury proven by the person claiming recovery 3. Direct causal connection between the fault or negligence and the damage or injury
Liability for QuasiDelict (Art. 2180, NCC) Primary, can be directly sued by the injured party Liability for Crimes (Art. 103, RPC) Subsidiary, employee must first be convicted and sentenced to pay civil indemnity Employer is only liable when he is engaged in some kind of business or industry Subsidiary liability is absolute and cannot be avoided by any proof of diligence
Effect of Acquittal on Civil Actions

Barred it is based on the very same facts on which the criminal action which ended in acquittal was based the facts alleged in the civil case has been found to be nonexistent in the criminal No Effect an independent civil action is allowed by law acquittal is due to lack of proof beyond reasonable doubt
All employers, whether engaged in some enterprise or not, are liable for acts of employees, even household helpers Avoid civil liability by proving exercise of diligence of a good father of a family
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Chapter II. Nature and Effects of Obligations

I. II. III. IV. Breach of Obligations Fortuitous Events Remedies Usurious Transactions
OBLIGATION TO GIVE
SPECIFIC THING Particularly designated or physically segregated from all other of the same class; identified by individuality. Cannot substituted. be GENERIC THING Object is designated only by its class/ genus/ species. Debtor can give anything of the same class as long as it is of the same kind. Can be substituted by any of the same class and same kind. LIMITED GENERIC THING When the generic objects are confined to a particular class.
OBLIGATIONS
KINDS OF PRESTATION A. Obligation to Give: to deliver a movable or immovable thing B. Obligation to Do: includes all kinds of work or services C. Obligation Not to Do: to abstain from some act; includes the obligation not to give
Personal Obligation to do (positive) not to do (negative): to be done or not to be done Real Obligation to give: a thing which the obligor must deliver to the oblige
Accessories: those joined to or included with the principal for the latters completion, better use, perfection or enjoyment Accessions: additions to or improvement upon a thing, either naturally or artificially
Personal Right Vested before delivery Jus ad rem / Jus in personam a right enforceable only against the debtor Right of the creditor to demand from the debtor, the fulfillment of a prestation to give, to do or not to do
Real Right Vested after delivery Jus in re a right enforceable against the world Right pertaining to a person over a specific thing, without a passive subject individually determined against whom such right may be personally enforced
To Give Specific Thing (Asked in 83, 84, 85 and 86) To Give Generic Thing
Duties of the Debtor 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 deliver a thing of the quality intended by the parties taking into consideration the purpose of the obligation and other circumstances Creditor cannot demand a thing of superior quality neither can the debtor deliver a thing of inferior quality To be liable for damages in case of breach 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 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
Rights of the creditor To compel specific performance To recover damages in case of breach of the obligation, exclusive or in addition to specific performance Entitlement to fruits and interests from the time the obligation to deliver arises To ask for performance of the obligation To ask that the obligation be complied with by a third person at the expense of the debtor To recover damages in case of breach of obligation
To Do
To compel performance To recover damages where personal qualifications of the debtor are involved To ask to undo what should not be done To recover damages, where it would be physically or legally impossible to undo what has 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 even if the thing prohibited be undone.
Not Do
To
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I. BREACH OF OBLIGATION
A. Voluntary the debtor, in the performance of the obligation is guilty of fraud, negligence, delay or contravention of tenor of the obligation B. Involuntary debtor is unable to comply with his obligation because of a fortuitous event TYPES OF BREACH
SUBSTANTIAL BREACH Total breach Amounts to NonPerformance; Basis for rescission under Art. 1191 and payment of damages SLIGHT/CASUAL BREACH Partial breach Obligation is partially performed; Gives rise to liability for damages only
Purpose is to evade the normal fulfillment of the obligation
Purpose is to secure the consent of another to enter into the contract
Results in the breach of an obligation
A. FRAUD (DOLO): deliberate or intentional evasion of the normal fulfillment of an obligation. Demandable in all obligations (fraud in the performance of a pre-existing obligation) 1. FUTURE FRAUD: Waiver of action for future fraud is void for being contrary to law and public policy (Art. 1171) because the advance renunciation of the creditor would practically leave the obligation without effect. 2. PAST FRAUD: Past fraud can be validly renounced because it is deemed an act of generosity of the creditor. What is renounced is the effect of fraud, particularly the right to indemnity. KINDS OF FRAUD Dolo Causante (Causal Fraud): fraud employed, makes the contract voidable Dolo Incidente (Incidental Fraud): fraud in the performance of the obligation, does not affect the validity of the obligation but only gives rise to damages
Fraud in the Execution Causal Incidental Fraud/ Dolo Fraud/ Dolo Causante Incidente (Art. 1338) (Art. 1344) Present during the perfection of the contract
Gives rise to a liability for damages, a crime, or a quasi-delict (Prof. Labitag)
Results in vitiation of consent; makes the contract voidable Gives rise to a right in favor of an innocent person to annul the contract
Purpose is to secure the consent of he other party but the fraud was not the principal inducement in making the contract Does not affect the validity of the obligation, no vitiation of consent Gives rise to a right of an innocent party to claim for damages
OBLIGATIONS
Woodhouse vs. Halili, (1953): In order that fraud may vitiate consent, it must be the dolo causante and not merely the dolo incidente, inducement to the making of the contract. The false representation was used by plaintiff to get from defendant a bigger share of net profits. This is just incidental to the matter in agreement. Because despite plaintiffs deceit, respondent would have still entered into the contract.
B. NEGLIGENCE: Culpa, omission of that diligence which is required by the nature of the obligation and corresponds with the circumstances of the person, of the time and of the place. Effect of Contributory Negligence: Reduces or mitigates the recoverable damages, UNLESS, the negligent act or omission of the creditor is the proximate cause of the event which led to the damage or injury complained of. In this case, 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 ordinary prudent person would have had under the same circumstances. (diligence of a good father of a family) FUTURE NEGLIGENCE: May be waived except in cases where the nature of the obligation or the public requires another standard of care (ie. extraordinary diligence as for a common carrier)
Fraud in the Performance (Art. 1170) Present during the performance of a preexisting obligation
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FRAUD There is deliberate intention to cause damage Liability cannot be mitigated Waiver for future fraud is void
NEGLIGENCE There is no deliberate intention to cause damage Liability may be mitigated Waiver for future negligence may be allowed in certain cases: gross can NEVER be excused in advance; amounts to wanton attitude; rules on fraud shall apply simple may be excused in certain cases
Culpa Criminal: wrong or negligence in the commission of a crime C. DELAY: Default or Mora, the nonfulfillment of an obligation with respect to time 1. Mora Solvendi: delay on the part of the debtor to fulfill his obligation (to give or to do); 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 not giving something Natural Obligations, because the performance is optional or voluntary on the part of the debtor 2. Mora Accipiendi: delay on the part of the creditor to accept the performance of the obligation 3. Compensatio Morae: delay of the parties in reciprocal obligations; Effect: As if there is no default.
Mora Solvendi (Debtor delays) Requisites: 1. The obligation must be Liquidated, due and demandable 2. The debtor is guilty of Non-performance (delay) 3. There was Demand made judicially or extra-judicially Mora Accipiendi (Creditor delays) Requisites: 1. Offer of performance by the debtor who has the required Capacity 2. Offer must be to comply with the prestation as it should be performed. Prestation offered must be precisely the one due as to content, time and place 3. Creditor Refuses the performance without just cause Effects: 1. The responsibility of the debtor is reduced to fraud and gross negligence 2. The debtor is exempted from risk of loss of the thing which is borne by the creditor 3. The expenses incurred by the debtor for the preservation of the thing after the mora shall be chargeable to the creditor
OBLIGATIONS
Mandarin Villa Inc. v. CA (1996): Test of Negligence: Did the defendant in doing the alleged negligent act use the reasonable care and caution which an ordinary and prudent person would have used in the same situation? If not, then he is guilty of negligence.
EXTENT OF DAMAGES TO BE AWARDED

BAD FAITH Debtor is liable for all damages which can be reasonably attributed to the non-performance of the obligation. Any waiver or renunciation made in anticipation of such liability is null and void GOOD FAITH Debtor is liable only for the natural and probable consequences of the breach of obligation and fortuitous events
NELIGENCE IN CULPA CONTRACTUAL AND CULPA AQUILIANA

CULPA CONTRACTUAL Negligence is merely incidental in the performance of an obligation There is always a preexisting contractual relation The source of obligation of defendant to pay damages is the breach or non-fulfillment of the contract Proof of the existence of the contract and of its breach or non-fulfillment is sufficient prima facie to warrant recovery Proof of diligence in the selection and supervision of the employees is NOT available as defense CULPA AQUILANA (Asked in 83, 84, and 86) Negligence is substantive and independent There may or may not be a pre-existing contractual obligation The source of obligation is the defendants negligence itself The negligence of the defendant must be proved Proof of diligence in the selection and supervision of the employee is a defense
Effects: 1. The debtor is liable for damages 2. The debtor is liable even if the loss is due to fortuitous events 3. For determinate objects, the debtor shall bear the risk of loss
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4.
5. 6.
If the obligation bears interest, the debtor does not have to pay from the time of delay The creditor is liable for damages The debtor may relieve himself of obligation by consigning the thing
In any manner contravenes the tenor means any illicit act, which impairs the strict and faithful fulfillment of the obligation, or every kind of defective performance.
OBLIGATIONS
II. FORTUITOUS EVENT

Events which could not be foreseen, or which though foreseen are inevitable (Art. 1174) An extraordinary circumstance independent of the will of the obligor or his employee
RULES ON MORA, DELAY OR DEFAULT

UNILATERAL OBLIGATIONS General Rule: No demand No delay. The mere expiration of the period fixed by the parties is not enough in order that the debtor may incur in delay Note: Delay occurs from the time of creditors judicial or extra-judicial demand RECIPROCAL OBLIGATIONS General Rule: In reciprocal obligations, delay happens from the moment one party fulfills his undertaking, while he himself does not comply or is not ready to comply in a proper manner with what is incumbent upon him. Fulfillment by both parties should be simultaneous. (Art. 1169). If neither party performs his undertaking, neither incurs delay. Delay of one is compensated by the delay of the other. Exception: when different dates for the performance of the obligation is fixed by the parties
Exception: 1. when the obligation or law expressly declares 2. when time is the controlling motive 3. when the demand would be useless 4. when the debtor acknowledged that he is in default NOTE: It is not enough that there is a specific date of performance, eg on Jan. 30, 2010, the words no need of further demand must appear in the face of the instrument
A. Act of God: An accident, due directly or exclusively to natural causes without human intervention, which by no amount of foresight, pains or care, reasonably to have been expected, cold have been prevented. B. Act of Man/Force Majeure: Force majeure is a superior or irresistible force, which is essentially an act of man; Includes unavoidable accidents, even if there has been an intervention of human element, provided that no fault or negligence can be imputed to the debtor (Asked in 81, 87 and 88) Liability in case of Fortuitous Event: No person shall be responsible for fortuitous events, UNLESS: 1. expressly specified by law (Arts. 552(2), 1942, 2147, 2148, 2159) 2. liability specified by stipulation 3. the nature of the obligations requires assumption of risk (Art. 1174) 4. when debtor is guilty of concurrent or contributory negligence 5. debtor has promised to deliver the same thing to two or more persons who do not have the same interests (Art. 1165 par. 3) 6. the thing is lost due to the obligors fraud, negligence, delay or contravention of the tenor of the obligation (Art. 1170) 7. the obligation to deliver a specific thing arises from a crime (Art. 1268) 8. the object is a generic thing, i.e. the genus never perishes Requisites for Exemption 1. The event must be independent of the debtors will (fraud or negligence) 2. The event must be unforeseeable or inevitable 3. The event renders it impossible for debtor to fulfill his obligation in a normal manner
NOTE: In reciprocal obligations, demand is still necessary only when the respective obligations are to be performed on separate dates
When there is delay, the injured party may ask for damages. But this benefit arising from Mora, default or delay may cease upon: o renunciation of the creditor o prescription of action o extension of time for the fulfillment of the obligation
D. Contravention of the Tenor: violation of the terms and conditions stipulated in the obligation, which must not be due to a fortuitous event or force majeure.
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4. The debtor must be free from any participation in the aggravation of the injury to the creditor 5. It must be the ONLY and SOLE cause, not merely a proximate cause.
4. The debtors assets are insufficient (debtor is insolvent) 5. The right of action is not purely personal to the debtor 2. Accion Pauliana: Rescission, which involves the right of the creditor to attack or impugn by means of a rescissory action any act of the debtor which is in fraud and to the prejudice of his rights as creditor. Requisites: (CASAL) 1. There is a credit in favor of plaintiff prior to alienation 2. The debtor has performed a subsequent contract conveying a patrimonial benefit to third persons 3. The creditor has no other legal remedy to satisfy his claim 4. The debtors acts are fraudulent to the prejudice of the creditor 5. The third person who received the property is an accomplice in the fraud
ACCION SUBROGATORIA Not necessary that creditors claim is prior to the acquisition of the right by the debtor No need for fraudulent intent No period for prescription ACCION PAULIANA Credit must exist before the fraudulent act Fraudulent intent is required if the contract rescinded is onerous Prescribes in 4 years from the discovery of the fraud
OBLIGATIONS
III. REMEDIES TO CREDITORS

Art. 1170. Those who in the performance of their obligations are guilty of fraud, negligence, or delay and those who in any manner contravene the tenor thereof, are liable for damages.
Transmissibility of Rights (Art. 1178): Rights acquired by virtue of an obligation are transmissible in character, UNLESS: 1. by their very nature (Obligation is personal) 2. by stipulation of the parties 3. by operation of Law A. Primary Remedies: (Art. 1165-1168) (PRESS) 1. Specific Performance performance by the debtor of the prestation itself 2. Substituted Performance someone else performs or something else is performed at the debtors expense 3. Equivalent Performance right to claim damages (in either performance or rescission) 4. Rescission right to rescind or cancel the contract 5. Pursue the Leviable to attach the properties of the debtor, except those exempt by law from execution B. Subsidiary Remedies of Creditor General Rule: Contracts are binding only between the parties thereto, and their heirs, assignees, and the estate, UNLESS: Accion Subrogatoria and Accion Pauliana 1. Accion Subrogatoria: right of creditor to exercise all of the rights and bring all of the actions which his debtor may have against third persons; Novation by change of debtor (Art. 1291, par.3). Requisites: 1. Debtor to whom the right of action properly pertains must be indebted to the creditor 2. The debt is due and demandable 3. The creditor must be prejudiced by the failure of the debtor to collect his own debt from 3rd persons either through malice or negligence
3. Accion Directa (Art. 1729, 1652, 1608, 1893): the right of lessor to go directly to a sublessee for unpaid rents of the lessee 4. the right of laborers or persons who furnish materials for a piece of work undertaken by a contractor to go directly to the owner for any unpaid claim due to the contractor 5. the right of vendor against every possessor whose right is derived from the vendee 6. right of a principal against a substitution appropriated by an agent
Siguan vs. Lim, (1999): Petitioner cannot invoke the credit of a different creditor to justify the rescission of the subject deed of donation, because the only creditor who may benefit from the rescission is the creditor who brought the action; those who are strangers to the action cannot benefit from its effects.
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IV. USURIOUS TRANSACTIONS RULES ON INTEREST
and
Determination of Interests IMPORTANT: As stated in the case of Eastern Shipping Lines v. CA (1961)
Stage 1 For loan or forbearance NOT for loan or of money, goods or forbearance of money, credit, the interest rate goods or credit, the is 12% interest rate is 6% a) Interest = interest rate stipulated in writing + 12% legal interest, computed from date of judicial demand (filing of complaint) b) If there is no stipulated interest rate, the interest rate is 12% computed from date of default or demand (judicial or extrajudicial) a) If date of demand is certain, compute from the date when demand is made (judicial or extra-judicial) b) If date of demand is NOT certain, compute from the date of trial court decision (judicial demand)
USURY, defined: contracting for or receiving something in excess of the amount allowed by law for the loan or forbearance of money, goods, or chattels.
There is no longer any ceiling in interest rates on loans. CB Circular No. 224, Dec. 1, 1982.
OBLIGATIONS
INTEREST: the income produced by money in relation to its amount and to the time it cannot be used by its owner. There shall be no interest, UNLESS, there is a written stipulation of interest for the use of money, goods or chattels. There shall be no interest (without delay). Kinds of Interest: 1. Moratory those paid in contractual obligations (ie for the use of money) 2. Compensatory those which arise from quasi-delicts or delicts Presumption on Payment of Interest and Prior Installments
Art. 1176. Receipt of the principal without reservation as to the interest shall give rise to a disputable presumption that the interest has been paid. Receipt of the latter installment without reservation as to prior installments shall likewise give rise to a disputable presumption that such prior installments have been paid.
Stage 2 Add 12% interest from finality of SC decision until fully paid (equivalent to a forbearance of credit)
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Chapter III. Different Kinds of Obligations

I. II. III. IV. V. VI. VII. PURE & CONDITIONAL OBLIGATIONS RECIPROCAL OBLIGATIONS OBLIGATIONS WITH A PERIOD ALTERNATIVE & FACULTATIVE OBLIGATIONS JOINT & SOLIDARY OBLIGATIONS DIVISIBLE & INDIVISIBLE OBLIGATIONS OBLIGATIONS WITH A PENAL CLAUSE
The article can have no application to an external contingency which is lawfully within the control of the obligor. The mere intention of the debtor to prevent, without actually preventing fulfillment is not sufficient. Constructive fulfillment will not hold when the debtor acts pursuant to a right.
OBLIGATIONS
I. PURE & CONDITIONAL OBLIGATIONS

A. Pure Obligation (Art.1179): Effectivity or extinguishment does not depend upon the fulfillment or non-fulfillment of a condition or upon the expiration of a term or period and characterized by the quality of its being IMMEDIATELY DEMANDABLE. B. Conditional Obligation (Art.1181): Effectivity is subject to the fulfillment or non-fulfillment of a condition, which is characterized to be a FUTURE and UNCERTAIN event. (Asked in 79, 88, 00, 03) Effects of Conditions 1. Suspensive Condition: Obligation shall only be effective upon the fulfillment of the condition (Art.1181). What is acquired by the obligee upon the constitution of the obligation is mere hope or expectancy, but is protected by law.
Before Fulfillment The demandability & acquisition or effectivity of the rights arising from the obligation is suspended. Anything paid by mistake during such time may be recovered. After Fulfillment The obligation arises or becomes effective. The obligor can be compelled to comply with what is incumbent upon him.
PRINCIPLE OF RETROACTIVITY IN SUSPENSIVE CONDITIONS (Art.1187 par.1) Once the condition is fulfilled its effects must logically retroact to the moment when the essential elements, which gave birth to the obligation have taken place. The condition which is imposed is only accidental, not an essential element of the obligation. Applied only to consensual contracts. No application to real contracts which can only be perfected by delivery.
To Give If reciprocal, the fruits and interests shall be deemed to have been mutually compensated as a matter of justice and convenience If unilateral, the debtor shall appropriate the fruits and interests received, unless from the nature and circumstance it should be inferred that the intention of the persons constituting the same was different. To Do/Not To Do In obligations to do or not to do, the court shall determine the retroactive effect of the condition that has been complied with. The power of the court includes the determination whether or not there will be any retroactive effects. This rule shall likewise apply in obligations with a resolutory condition (Art.1190 par.3)
DOCTRINE OF CONSTRUCTIVE FULFILLMENT OF SUSPENSIVE CONDITIONS (Art.1186): The condition shall be deemed fulfilled when the obligor actually prevented the obligee from complying with the condition, and that such prevention must have been voluntary or willful in character. Applied to suspensive conditions and not to resolutory conditions.
PRESERVATION OF CREDITORS RIGHTS (Art.1188 par.1): The creditor may, before the fulfillment of the condition, bring the appropriate action for the preservation of his rights. However, this does not grant any preference of credit but only allows the bringing of the proper action for the preservation of the creditors rights. 2. Resolutory Condition: Obligation becomes demandable immediately after its establishment or constitution. The rights are immediately vested to the
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obligee, but always subject to the threat or danger of extinction

Before Fulfillment Preservation of creditors rights (Art.1188 par.1) also applies to obligations with a resolutory condition After Fulfillment Whatever may have been paid or delivered by one or both of the parties upon the constitution of the obligation shall have to be returned upon the fulfillment of the condition. There is no return to the status quo. However, when condition is not fulfilled, rights are consolidated and they become absolute in character
Osmena v. Rama: Defendant executed an endorsement saying that shell pay her debt if the house in which she lives is sold. Such condition depended upon her exclusive will thus it is void. Hermosa v. Longara: The condition that payment should be made by Hermosa as soon as he receives funds from the sale of his property in Spain is a mixed condition. The condition implies that the obligor already decided to sell the house and all that was needed to make the obligation demandable is that the sale be consummated and the price thereof remitted to the islands. There were still other conditions that had to concur to effect the sale, mainly that of the presence of a buyer, ready, able and willing to purchase the property under the conditions set by the intestate.
OBLIGATIONS
3. Potestative Condition
Exclusively upon the Creditors Will Exclusively upon the Debtors Will in case of a Suspensive Condition Condition and obligation are void because to allow such condition would be equivalent to sanctioning obligations which are illusory. It also constitutes a direct contraventio n of the principle of mutuality of contracts. Exclusively upon the Debtors Will in case of a Resolutory Condition Condition and obligation is valid because in such situation, the position of the debtor is exactly the same as the position of the creditor when the condition is suspensive. It does not render the obligation illusory.
Condition and obligation is valid
6. Impossible Condition: Conditions which are impossible, contrary to good customs, or public policy and those prohibited by law shall annul the obligations which depend upon them (Art.1183) If pre-existing obligation, only the impossible condition is void, but not the obligation If divisible obligation, that part which is not affected by the impossible or unlawful condition shall be valid If the condition is not to do an impossible thing, it shall be considered as not having been agreed upon. Consequently, it becomes pure and immediately demandable If attached to a simple or remuneratory donation, or testamentary disposition, condition is considered as not imposed while the obligation is valid. 7. Positive Condition: Obligation shall be extinguished as soon as the time expires or if it becomes indubitable that the event will not take place (Art.1184) 8. Negative Condition: Obligation shall be rendered effective from the moment the time indicated has lapsed, or if it has become evident that the event will not occur (Art.1185)
4. Casual Condition: The fulfillment of the condition depends upon chance and/or upon the will of a third person 5. Mixed Condition: The fulfillment of the condition depends partly upon the will of a party to the obligation and partly upon chance and/or will of a third person
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Effects of Loss, Deterioration, and Improvement in Real Obligations Pending the Condition
With Debtors Fault/Act Loss Obligation is extinguished Without Debtors Fault/Act Obligation is converted into one of indemnity for damages Creditor may choose between bringing an action for rescission of the obligation OR bringing an action for specific performance with damages in either case. Improvement by the things nature or by time shall inure to the benefit of the creditor
Deterioration
Impairment to be borne by the creditor
contact, the other party has the right to either demand the performance or ask for the resolution of the contract. Based on the breach of faith committed by the person who is supposed to comply with the obligation as compared to the rescission referred to in Art.1308 which involves the damage or lesion, or injury to the economic interest of a person. Where both parties have committed a breach of obligation, the liability will be shouldered by the first infractor. This shall be determined by the courts. However, if it cannot be determined who was the first infractor, the contract shall be deemed extinguished and each shall bear his own damages. (Art.1192)
UP v. Delos Angeles, 1970. The injured party may extra-judicially rescind the contract on account of the breach of the other party. However, this is without prejudice to the option of the other party to resort to the courts in order to determine if the rescission made is valid, if not, the party who rescinded the contract will be sentenced to pay damages.
OBLIGATIONS
Improvement
Improvement at the debtors expense, the debtor shall ONLY have usufructuary rights
Loss, defined: when the thing perishes; goes out of commerce; disappears in such a way that its existence is unknown or it cannot be recovered
Where the other party does not oppose the extra-judicial declaration of rescission, such declaration shall produce legal effect. Effect is retroactive therefore invalidating and unmaking the juridical tie between the contracting parties.
II. RECIPROCAL OBLIGATIONS:

Obligations which are established from same cause, such that one obligation is correlative to the other. It results in mutual relationship between the creditor and the debtor. It is performed simultaneously, so that the performance of one is conditioned upon the simultaneous fulfillment of the other. Tacit Resolutory Condition: if one of the parties fail to comply with what is incumbent upon him, there is a right on the part of the other to rescind the obligation. The power to rescind is given to the injured party. RESCISSION OF RECIPROCAL OBLIGATIONS (Art.1191) Right to rescind is implied in reciprocal obligations thus where one party fails to comply with this obligation under a
III.TERM/PERIOD
(Asked in 84, 86 and 91): Interval of time, which either suspends demandability or produces extinguishment. The period should be: future, certain, and possible (legally or physically) Fortuitous event does not interrupt the running of the period. It only relieves the contracting parties from the fulfillment of their respective obligations during the period.
Art. 1180. When the debtor binds himself to pay when his means permit him to do so, the obligation shall be deemed to be one with a period xxx.
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Term/Period and Condition Distinguished

Term/Period Interval of time which is future and certain Must necessarily come, although it may not be known when Exerts an influence upon the time of demandability or extinguishment of an obligation No retroactive effect unless there is an agreement to the contrary When it is left exclusively to the will of the debtor, the existence of the obligation is not affected Condition Fact or event which is future and uncertain May or may not happen Exerts an influence upon the very existence of the obligation itself Has retroactive effect
The only action that can be maintained under Art.1197 is the action to ask the courts to fix the term within which the debtor must comply with his obligation. The fulfillment of the obligation itself cannot be demanded until after the court has fixed the period for compliance, therewith, and such period has arrived. Art.1197 does not apply to contract of services and to pure obligations.
OBLIGATIONS
WHEN DEBTOR LOSES RIGHT TO MAKE USE OF PERIOD (Art.1198) (I GIV A LA) 1. Debtor becomes Insolvent, unless he gives a guaranty or security for his debt, after obligation is contracted 2. Debtor fails to furnish the Guaranties or securities promised 3. Debtor by his own acts Impaired said guaranties or securities after their establishment, and when through a fortuitous event they disappear, unless he immediately gives new ones equally satisfactory 4. Debtor Violates any undertaking, in consideration of which the creditor agreed to the period 5. Debtor attempts to Abscond 6. By Law or stipulation 7. Parties stipulate an Acceleration Clause
When it is left exclusively to the will of the debtor, the very existence of the obligation is affected
PERIOD FOR WHOSE BENEFIT (Art.1196) Presumption: Period in an obligation is presumed to be established for the benefit of both the creditor and debtor, UNLESS: If from the tenor of the obligation or other circumstances, it shall appear that the period has been established in favor of either the creditor or debtor Period for the Benefit of either Creditor or Debtor
Creditor Creditor may demand the fulfillment or performance of the obligation at any time but the obligor cannot compel him to accept payment before the expiration of the period Debtor Debtor may oppose any premature demand on the part of the oblige for the performance of the obligation, of if he so desires, he may renounce the benefit of the period by performing his obligation in advance
IV. ALTERNATIVE OBLIGATIONS

Alternative Obligations Several objects are due May be complied with by delivery of one of the objects or by performance of one of the prestations which are alternatively due Choice may pertain to debtor, creditor, or third person Loss/impossibility of all objects/prestations due to fortuitous event shall extinguish the obligation Culpable loss of any of the objects alternatively due before the choice is made may give rise to liability on the part of the debtor
&
FACULTATIVE
WHEN COURT Art.1197)
MAY
FIX
PERIOD
Facultative Obligations Only one object is due May be complied with by the delivery of another object or by the performance of another presation in substitution of that which is due Choice pertains only to the debtor Loss/impossibility of the object/prestation due to fortuitous event is sufficient to extinguish the obligation Culpable loss of the object which the debtor may deliver in substitution before the substitution is effected does not give rise to any liability on the part of the debtor
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 was intended If the period is void, such as when it depends upon the will of the debtor If the debtor binds himself when his means permit him to do so. Second, it must decide what period was probably contemplated by the parties.
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A. Alternative Obligations: Several objects are due but the fulfillment of one is sufficient. It is determined by the choice of the debtor who generally has the right of election. RIGHT OF CHOICE IN ALTERNATIVE OBLIGATION (Art.1200): The right of choice belongs to the debtor, UNLESS: 1. when it is expressly granted to the creditor 2. when it is expressly granted to a third person Limitations: The debtor cannot choose prestations which are 1. impossible prestations 2. unlawful prestations 3. those which could not have been the object of the obligation WHEN CHOICE SHALL PRODUCE EFFECT (Art.1201): Choice shall produce no effect except from the time it has been communicated. The effect of the notice is to limit the obligation of the object or prestation selected. Notice of selection or choice may be in any form provided it is sufficient to make the other party know that the selection has been made. It can be: o oral o in writing o tacit o any other equivocal means Choice of the debtor when communicated to the creditor does not require the latters concurrence. When the choice is rendered impossible through the creditors fault, the debtor may bring an action to rescind the contract with damages (Art.1203). Obligation is converted into a simple obligation when: o When the person who has the right of choice has communicated his choice o When only one prestation is practicable (Art.1202)
EFFECT OF LOSS OF OBJECTS ALTERNATIVE OBLIGATION Debtors Choice

Fortuitous Event Debtor is released from the obligation
OF
OBLIGATIONS
Debtors Fault Creditor shall have a right to indemnity for damages based on the value of the last thing which disappeared or service which become impossible Debtor to deliver that which the creditor shall choose from among the remainder without damages Debtor to deliver that which remains
All Lost
Some
Debtor to deliver that which he shall choose from among the remainder Debtor to deliver that which remains
One Remains
Creditors Choice
Fortuitous Event Debtor is released from the obligation Debtors Fault Creditor may claim the price/value of any of them with indemnity for damages creditor may claim any of those subsisting without a right to damages OR price/value of the thing lost with right to damages Creditor may claim the remaining thing without a right to damages OR the price/value of the thing lost with right to damages
All Lost
Some
Debtor to deliver that which he shall choose from among the remainder Creditor may claim any of those subsisting without a right to damages OR price/value of the thing lost with right to damages
One Remains
B. Facultative Obligation: only one thing is due, but the debtor has reserved the right to substitute it with another. It may be complied with by the delivery of the thing or the performance of another prestation in substitution
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EFFECT OF LOSS OF SUBSTITUTE IN FACULTATIVE OBLIGATION

Before Substitution is Made If due to bad faith or fraud of obligor: obligor is liable If due to the negligence of the obligor: obligor is not liable After Substitution is Made The loss or deterioration of the substitute on account of the obligors delay, negligence or fraud obligor is liable because once substitution is made, the obligation is converted into a simple one with the substituted thing as the object of the obligation.
debtor, does not benefit the other creditors nor interrupt the prescription as to other debtors 3. Vices of each obligation arising from the personal defect of a particular debtor or creditor does not affect the obligation or right of the others 4. Insolvency of a debtor does not increase the responsibility of his co-debtors, nor does it authorize a creditor to demand anything from his co-debtors 5. Defense of res judicata is not extended from one debtor to another JOINT DIVISIBLE OBLIGATION (Art.1208): Each creditor can demand only for the payment of his proportionate share of the credit, while each debtor can be liable only for the payment of his proportionate share of the debit
Presumption: Credit or debt shall be presumed to be divided into as many equal shares as there are creditors or debtors.
OBLIGATIONS
V. JOINT & SOLIDARY OBLIGATIONS

A. Joint Obligation: One where a concurrence of several creditors, or of several debtors, or of several creditors and debtors, by virtue of which, each of the creditors has a right to demand, and each of the debtors is bound to render compliance with his proportionate part of the prestation which constitute the object of the obligation (Obligacion Mancomunada)
Presumption: Obligation is presumed joint if there is a concurrence of several creditors, of several debtors, or of several creditors and debtors in one and the same obligation.
Joint creditor cannot act in representation of the others, neither can a joint debtor be compelled to answer for the liability of others
Exceptions: 1. When the obligation expressly stated that there is solidarity 2. When the law requires the solidarity 3. When the nature of the obligation requires solidarity 4. When the nature or condition is imposed upon heirs or legatees, and the testament expressly makes the charge or condition in solidum 5. When the solidary responsibility is imputed by a final judgment upon several defendants Principal Effects of Joint Liability 1. Demand by one creditor upon the debtor, produces the effects of default only with respect to the creditor who demanded and the debtor on whom the demand was made, but not with respect to others 2. Interruption of prescription by the judicial demand of one creditor upon a
JOINT INDIVISIBLE OBLIGATION (Art.1209): no creditor can act in representation of the other; no debtor can be compelled to answer for the liability of the others If there are two or more debtors, the fulfillment of or compliance with the obligation requires the concurrence of all the debtors, although each for his own share and for the enforcement of the obligation In case of breach where one of the joint debtors fails to comply with his undertaking, the obligation can no longer be fulfilled or performed. Consequently, it is converted into one of indemnity for damages. In case of insolvency of one of the debtors, the others shall not be liable for his shares. To hold otherwise would destroy the joint character of the obligation.
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Joint Divisible Obligations In case of breach of obligation by one of the debtors, damages due must be borne by him alone
Joint Indivisible Obligations In case of breach where one of the joint debtors fails to comply with his undertaking, the obligation can no longer be fulfilled or performed. Thus action must be converted into indemnity for damages.
All the debtors are liable for the loss of the thing due, even if such loss is caused by the fault of only one of them and for delay, even if it is caused by just one of them The interruption of prescription as to one debtor affects all the others; but the renunciation by one debtor of prescription already had does not prejudice the others
OBLIGATIONS
B. Solidary Obligation: An obligation where there is concurrence of several creditors, or of several debtors, or of several creditors and several debtors, by virtue of which, each of the creditors has the right to demand, and each of the debtors is bound to render, entire compliance with the prestation which constitutes the object of the obligation (Obligacion Solidaria)
Indivisibility Refers to the prestation which constitutes the object of the obligation Plurality of subjects is not required In case of breach, obligation is converted into indemnity for damages because the indivisibility of the obligation is terminated Solidarity Refers to the legal tie or vinculum, and consequently to the subjects or parties of the obligation Plurality of subjects is indispensable When there is liability on the part of the debtors because of the breach, the solidarity among the debtors remains
3. Mixed: Solidarity among creditors and debtors Solidarity is not destroyed by the fact that the obligation of each debtor is subject to different conditions or periods. The creditor can commence an action against anyone of the debtors for the compliance with the entire obligation minus the portion or share which corresponds to the debtor affected by the condition or period.
Kinds of Solidary Obligations 1. Active (solidarity among creditors): Each creditor has the authority to claim and enforce the rights of all, with the resulting obligation of paying everyone of 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 is made on him, he must pay only to the plaintiff (Art.1214) 2. Passive (solidarity among debtors): Each debtor can be made to answer for the others, with the right on the part of the debtor-payor to recover from the others 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 the debtors
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Effects of Modes of Extinguishment

Assignment of Rights in Solidary Obligations The solidary creditor cannot assign his right because it is predicated upon mutual confidence, UNLESS, the (1) the assignment is to a co-creditor; (2) assignment is with consent of co-creditor Novation If prejudicial, the solidary creditor who effected the novation shall reimburse the others for damages incurred by them; If beneficial and secured by one, h shall be liable to the others for the share (obligation & benefits) which corresponds to them If by substituting the debtor, the solidary creditor who effected the novation is liable for the acts of the new debtor in deficiency or damages If by subrogating a third person in creditors rights, the obligation is not in reality extinguished as the relation between the other creditors and the debtor/s is maintained. Compensation & Confusion If is partial, the rules regarding application of payment shall apply (w/o) prejudice to the right of other creditors who have not caused the confusion or compensation to be reimbursed to the extent that their rights are diminished or affected If total, the obligation is extinguished, what is left is the ensuing liability for reimbursement Remission If entire obligation, obligation is totally extinguished. If for the benefit of one of the debtors covering his entire share, he is completely released from the creditor/s. If for the benefit of one of the debtors and it covers only part of his share, his character as a solidary debtor is not affected. Loss or Impossibility
OBLIGATIONS
If not debtors fault, the obligation is extinguished If thru debtors OR fortuitous event after delay, the obligation is converted into indemnity for damages but the solidary character of the obligation remains.
EFFECTS OF PREJUDICIAL AND BENEFICIAL ACTS (Art.1212) 1. Each one of the solidary creditors may do whatever may be useful or beneficial to the others, but not anything which may be prejudicial to the latter 2. As far as the debtors are concerned, a prejudicial act performed by a solidary creditor is binding 3. As between the solidary creditors, the creditor who performed such act shall incur the obligation of indemnifying the others for damages
DEFENSES AVAILABLE TO A SOLIDARY DEBTOR (Art.1222) 1. Those derived from the nature of the obligation 2. Those personal to him 3. Those pertaining to his own share 4. Those personally belonging to other codebtors but only as regards that part of the debt for which the latter are responsible.
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EFFECTS:
Demand Upon a Solidary Debtor The demand made against one of them shall not be an obstacle to those which may subsequently be directed against the others so long as the debt has not been fully collected The creditor may proceed against any one of the solidary debtors or all simultaneously A creditors right to proceed against the surety exists independently of his right to proceed against the principal Payment by a Debtor Full payment made by one of the solidary debtors extinguishes the obligation
If two or more solidary debtors offer to pay, the creditor may choose which offer to accept The solidary debtor who made the payment shall have the right to claim from his co-debtors the share which corresponds to them with interest, UNLESS barred by prescription or illegality.
not to the thing which is the object thereof. The thing may be divisible, yet the obligation may be indivisible. When the obligation has for its object the execution of a certain number of days of work, the accomplishment of work by metrical units, or analogous things which by their nature are susceptible of partial performance, it shall be divisible (Art.1225 par.2). When there is plurality of debtors and creditors, the effect of divisibility/indivisibility of the obligation depend upon whether the obligation is joint or solidary.
OBLIGATIONS
EFFECT OF DIVISIBLE OR INDIVISIBLE OBLIGATIONS (Art.1223): Creditor cannot be compelled partially to receive the prestation in which the obligation consists; neither may the debtor be required to make the partial payment, UNLESS: The obligation expressly stipulates the contrary The different prestations constituting the objects of the obligation are subject to different terms and conditions The obligation is in part liquidated and in part unliquidated
In reimbursement of the solidary debtor, If payment was made before the debt became due, no interest during the intervening period may be demanded When one of the solidary debtors cannot reimburse his share to the debtor paying the obligation due to insolvency, such share shall be borne by all his codebtors, in proportion to the debt of each.
VII. OBLIGATIONS WITH A PENAL CLAUSE

PENAL CLAUSE: An accessory undertaking to assume greater liability in case of breach. It is attached to an obligation in order to ensure performance. The enforcement of the penalty can be demanded by the creditor only when the non-performance is due to the fault or fraud of the debtor. If the principal obligation is void, penal clause shall also be void. However, the nullity of the penal clause does not carry with it the nullity of the principal obligation (Art.1230). PURPOSES OF PENALTY 1. Funcion coercitiva de garantia- to insure the performance of the obligation 2. Funcion liquidatoria- to liquidate the amount of damages to be awarded to the injured party in case of breach of the principal obligation (compensatory) 3. Function estrictamente penal- to punish the obligor in case of breach of the principal obligation (punitive)
Inchausti v. Yulo, (1914): Debtors obligated themselves solidarily, so creditor can bring its action against any of them. Remission of any part o fthe debt, made by the creditor in favor of one of the solidary debtors, inures to the benefit of the rest of them.
VI. DIVISIBLE & OBLIGATIONS
INDIVISIBLE
A. Divisible Obligation: one which is susceptible of partial performance; that is, the debtor can legally perform the obligation by parts and the creditor cannot demand a single performance of the entire obligation. B. Indivisible Obligation: one which cannot be validly performed in parts. Divisibility/indivisibility refers to the performance of the prestation and
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EFFECT OF PENALTY: 1. The penalty shall substitute the indemnity for damages and payment of interest in case of non-compliance (Art.1226), UNLESS: a. There is a stipulation to the contrary b. The obligor refuses to pay the penalty c. The obligor is guilty of fraud 2. Debtor cannot exempt himself from the performance of the principal obligation by paying the stipulated penalty unless this right has been expressly reserved for him (Art.1227). 3. Creditor cannot demand the fulfillment of the principal obligation and demanding the satisfaction of the penalty at the same time unless the right has been clearly granted to him (Art.1227). Tacit/implied grant is admissible. a. If creditor has chosen fulfillment of the principal obligation and performance thereof become impossible without his fault, he may still demand the satisfaction of the penalty. b. If there was fault on the part of the debtor, creditor may demand not only satisfaction of penalty but also the payment of damages. c. If creditor chooses to demand the satisfaction of the penalty, he cannot afterwards demand the fulfillment of the obligation. PROOF OF ACTUAL DAMAGE (Art.1228): Proof of actual damages is not necessary is applicable only to the general rule stated in Art.1226 and not to the exceptions. The penalty is exactly identical with what is known as liquidated damages in Art.2226. WHEN PENALTY MAY BE REDUCED (Art. 1229) 1. If the principal obligation has been partly complied with 2. If the principal obligation has been irregularly complied with 3. If the penalty is iniquitous or unsconscionable even if there has been no performance
OBLIGATIONS
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Chapter IV. Extinguishment of Obligations

I. II. PAYMENT OR PERFORMANCE LOSS OF THE THING DUE OR IMPOSSIBILITY OF PERFORMANCE III. CONDONATION OR REMISSION OF THE DEBT IV. CONFUSION OR MERGER OF RIGHTS V. COMPENSATION VI. NOVATION
B. Payment by Cession (Art. 1255): whereby a debtor abandons all property to his creditors, so that latter may apply the proceeds (of sale) to their credits.
Act his the its
OBLIGATIONS
I. PAYMENT OR PERFORMANCE
(Art. 1232) Payment means not only delivery of money but also performance in any manner of the obligation. (See Diagrams of Prof. Labitag at the end section of the Chapter on Obligations.) Special Forms of Payment A. Application of Payment (Art. 1252): Designation of the debt to which should be applied a payment made by a debtor who owes several debts to the same creditor Rules on Application: 1. Preferential right of debtor debtor has the right to select which of his debts he is paying. 2. The debtor makes the designation at the time he makes the payment 3. If not, the creditor makes the application, by so stating in the receipt that he issues, unless there is cause for invalidating the contract. 4. If neither the creditor nor debtor exercises the right to apply, or if the application is not valid, the application is made by operation of law. 5. If debt produces interestpayment not deemed applied to the principal unless interests are covered. 6. When no application can be inferred from the circumstances of payment, it is applied to: To the most onerous debt of the debtor; or if debts due are of the same nature and burden, to all the debts in proportion 7. Rules of application of payment may not be invoked by a surety or solidary guarantor.
Reparations Commission vs. Universal Deep Sea Fishing Corp. (1978): Rules on application of payment cannot be made applicable to a person whose obligation as a mere surety is both contingent and singular. There must be full and faithful compliance with the terms of the contract.
C. Dation in payment (Art. 1245): Delivery and transmission of ownership of a thing by the debtor to the creditor as an accepted equivalent of the performance of the obligation.
Dation in payment In favor of only one creditor Payment extinguishes the obligation to the extent of the value of the thing delivered, unless the parties agree that the obligation be totally extinguished Transfer of ownership of thing alienated to creditor Payment by cession There are various creditors Extinguishes credits only up to the extent of proceeds from sale of assigned property, unless otherwise agreed upon Only possession and administration with authorization to convert property to cash with which the debts shall be paid Assignment presupposes insolvency of debtor. Assignment involves all the property of the debtor.
Not necessarily in state of financial difficulty Assignment of only some specific thing
D. Tender of payment and consignation 1. Tender of payment: Manifestation made by debtor to creditor of his desire to comply with his obligation, with offer of immediate performance Preparatory act to consignation Extrajudicial in character 2. Consignation: Deposit of the object of obligation in a competent court in accordance to the rules prescribed by law, whenever the creditor unjustly refuses payment or because of some circumstances which render direct payment to the creditor impossible or inadvisable. 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 payment 2. Creditor is incapacitated to receive the thing due at time of payment
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3. Without just cause, creditor refuses to give receipt 4. Two or more persons claim the same right to collect 5. Title of the obligation has been lost Effects of withdrawal by debtor (Arts. 1260- 1261) 1. Before approval of the courtObligation remains in force 2. After approval of the court or acceptance by the creditor, with the consent of the latter Obligation remains in force, but guarantors and
co- debtors are liberated. Preference of the creditor over the thing is lost. 3. After approval of the court or acceptance by the creditor, and without creditors consentObligation subsists, without change in the liability of guarantors and co- debtors, or the creditors right of preference. Expenses of consignation: When properly made, shall be charged against the creditor (Art. 1259)
OBLIGATIONS
Requisites and Effects

Application of Payment Requisites 1. Plurality of debts 2. Debts are of the same kind 3. Debts are owed to the same creditor and by the same debtor 4. All debts must be due 5. Payment made is not sufficient to cover all debts Effects Payment of debt designated as to corresponding amount Cession Requisites 1. Plurality of debts 2. Plurality of creditors 3. Partial insolvency of the debtor 4. Abandonment of the totality of the debtors properties for the benefit of the creditors 5. Acceptance by the creditors Effects Assignment liberates debtor up to the amount of the net proceeds of the sale of his assets Assignment does not vets title to the property in the creditors, who are only authorized to sell it. Dation Requisites 1. Should not be prejudicial to other creditors 2. Should not constitute a pactum commissorium Tender and Consignation Requisites 1. There is a debt due 2. consignation is made because of some legal cause 3. previous notice of consignation was given to those persons interested in the performance of the obligation 4. amount or thing due was placed at the disposal of the court 5. after the consignation has been made, the persons interested were notified thereof Effects If accepted by the creditor or declared properly made by the Court: 1. Debtor is released in same manner as if he had performed the obligation at the time of consignation 2. Accrual of interest is suspended from the moment of consignation. 3. Deterioration or loss of the thing or amount consigned, occurring without the fault of debtor, must be borne by creditor from the moment of deposit 4. Any increment or increase in the value of the thing after consignation inures to the benefit of the creditor
Effects Extinguishment of debt from as an equivalent of the performance of the obligation
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II. 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 debtor 2. Before the debtors incurs delay 3. After the obligation has constituted Effects of Loss
Obligation to Deliver a Specific Thing Extinguishment of the obligation if the thing was destroyed w/o fault of the debtor and before he has incurred delay. Obligation to Deliver a Generic Thing Loss of a generic thing does not extinguish an obligation, UNLESS, Delimited generic things: kind or class is limited itself, and the whole class perishes
Partial loss (Art. 1264) Partial loss due to a fortuitous event does not extinguish the obligation; thing due shall be delivered in its present condition, without any liability on the part of the debtor, UNLESS, the obligation is extinguished when the part lost was of such extent as to make the thing useless. Loss of the thing when in possession of the debtor: Loss was due to the debtors fault. Burden of explaining the loss of the thing falls upon him, UNLESS, due to a natural calamity: earthquake, flood, storm, etc.
Subjective impossibility: Where there is no physical or legal loss, but the thing belongs to another, the performance by the debtor becomes impossible. The debtor must indemnify the creditor for damages.
OBLIGATIONS
been
Action against 3rd personsCreditor shall have all the rights of action the debtor may have against 3rd persons by reason of the loss. Presumption: The loss was due to the debtors fault, UNLESS: 1. Law provides that the debtor shall be liable even if the loss is due to fortuitous events (Arts. 1942, 1979, 2147, 2159) 2. Obligor is made liable by express stipulation 3. Nature of the obligation requires an assumption of risk 4. Fault or negligence concurs with the fortuitous event 5. Loss occurs after delay 6. Debtor has promised to deliver the same thing to two or more different parties 7. Obligation arises from a criminal act 8. Borrower in commodatum: saves his own things and not the thing of the creditor during a fortuitous event In Reciprocal Obligations Extinguishment of the obligation due to loss of the thing or impossibility of performance affects both the creditor and debtor; the entire juridical relation is extinguished.
B. IMPOSSIBILITY OF PERFORMANCE (Arts. 1266- 1267): When prestation becomes legally or physically impossible (by fortuitous event or force majeure), the debtor is released.Impossibility must have occurred without fault of debtor, and after the obligation has been constituted. PARTIAL IMPOSSIBILITY 1. Courts shall determine whether it is so important as to extinguish the obligation. 2. If debtor has performed part of the obligation when impossibility occurred, creditor must pay the part done as long as he benefits from it. 3. If debtor received full payment from creditor, he must return excess amount corresponding to part which was impossible to perform. DOCTRINE OF UNFORESEEN EVENTS: When the service has become so difficult as to be manifestly beyond the contemplation of all the parties, the obligor may be released in whole or in part. The intention of parties should govern and the courts may release debtor partially or wholly, but it cannot revise, remake, or modify the contract. Requisites: 1. Event could not have been foreseen at the time of the constitution of the contract 2. Event makes performance extremely difficult but not impossible 3. Event not due to any act of the parties 4. Contract is for future prestation
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III.CONDONATION OF THE DEBT
OR
REMISSION
IV. CONFUSION RIGHTS
OR
MERGER
OF
CONDONATION: An act of liberality, by virtue of which, without receiving any equivalent, creditor renounces the enforcement of the obligation. The obligation is extinguished either in whole or in such part of the same which to remission refers. Requisites: 1. Debt must be existing and demandable 2. Renunciation must be gratuitous; without any consideration 3. Debtor must accept the remission Effect (Art. 1273): Renunciation of the principal debt shall extinguish the accessory obligations, but remission of the latter leaves the principal obligation in force. Presumptions: (Arts. 1271, 1272, 1274) Whenever the private document in which the debt is found in the possession of the debtor, it shall be presumed that the creditor delivered it voluntarily, unless contrary is proved. Delivery of a private document evidencing credit, made voluntarily by the creditor to the debtor, implies the renunciation of the action of creditor against the latter. Kinds: 1. As to form (Art. 1270) Express: made formally; in accordance with forms of ordinary donations Implied: inferred from the act of the parties 2. As to extent Total: entire obligation Partial: may refer only to amount of indebtedness, or to an accessory obligation, or to some other aspect of 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 a will or testament
CONFUSION: The meeting in one person of the qualities of creditor and debtor of the same obligation. Requisites: 1. It should take place between principal debtor and creditor 2. It must be complete and definiteParties must meet all the qualities of creditor and debtor in the obligation/ in the part affected. Effects: (Art. 1275- 1277) 1. The obligation is extinguished from the time the characters of the debtor and creditor are merged in the same person. 2. In joint obligations, confusion does not extinguish the obligation except as regards the corresponding share of the creditor or debtor in whom the two characters concur. 3. In solidary obligations, confusion in one of the solidary debtors extinguishes the entire obligation. 4. Obligation is not extinguished when confusion takes place in the person of subsidiary debtor (e.g. guarantor), but merger in the person of the principal debtor shall benefit the former.
OBLIGATIONS
V. COMPENSATION (Art. 1278)

COMPENSATION: Offsetting of two obligations which are reciprocally extinguished if they are of the same value, or extinguished to the concurrent amount if of different values. (Asked in 80, 81, 98, and 02)
Compensation There must always be 2 obligations There are 2 persons who are mutually debtors and creditors of each other in 2 separate obligations, each arising from the same cause. Confusion Involves only one obligation There is only one person whom the characters of the creditor and debtor meet
Kinds: 1. As to extent Total: Debts are of the same amount Partial: Amounts are not equal
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2. As to origin Legal: takes place by operation of law Conventional: parties agree to compensate their mutual obligations even when some requisite in Art. 1279 is lacking (Art. 1282) Judicial: decreed by court when there is counterclaim; effective upon final judgment (Art. 1283) Facultative: when it can be claimed by one of the parties who, however, has the right to object to it
1. Requisites Each obligor is bound principally, and at the same time a principal creditor of the other Both debts must consist in a sum of money, or if the things due are FUNGIBLE, of the same kind & quality Both debts are due Debts are liquidated and demandable There must be no retention or controversy over either of the debts, commenced by 3rd persons and communicated in due time to the debtor Compensation is not prohibited by law 1. 2. Effects Effects rise from the moment all the requisites concur. Debtor claiming its benefits must prove compensation; once proven, effects retroact from the moment when the requisites concurred. Both debts are extinguished to the concurrent amount, eventhough the creditors and debtors are not aware of the compensation. Accessory obligations are also extinguished.
ASSIGNMENT OF CREDIT (Art. 1285): No effect and does not bind the debtor unless and until the latter is notified of the assignment or learns of it.
With Debtors Consent Debtors consent to assignment of credit constitutes a waiver of compensation, unless he reserved his right to compensation. With Debtors Knowledge Debtor may set up compensation of debts (maturing) before the assignment of credit but not of subsequent ones Without Debtors Knowlege Debtor may setup compensation of all credits (maturing) prior to the assignment and also latter ones until he had knowledge of the assignment.
OBLIGATIONS
2.
3. 4. 5.
3.
Facultative compensation: Compensation which can only be set up at the option of a creditor, when legal compensation cannot take place because some legal requisites in favor of the creditor are lacking. Creditor may renounce his right to compensation, and he himself may set it up.As opposed to conventional compensation, facultative compensation is unilateral and does not depend upon the agreement of the parties.
VI. NOVATION (Art. 1291)

NOVATION: Extinguishment of an obligation by the substitution or change of the obligation by a subsequent one which extinguishes or modifies the first either by changing the object or principal conditions, or by substituting the person of the debtor, or by subrogating a third person in the rights of the creditor. A juridical act of dual functionit extinguishes an obligation, and at the same time, it creates a new one in lieu of the old. (Asked in 78, 88, 94 and 01) Requisites: 1. A previous valid obligation 2. Agreement of all the parties to the new obligation 3. Extinguishment of the old obligation 4. Validity of the new obligation Novation is not presumed. Express novation: Parties must expressly disclose their intent to extinguish the old obligation by creating a new one.
4.
6.
Compensation is prohibited in: 1. Contracts of depositum 2. Contracts of commodatum 3. Future support due by gratuitous title 4. Civil liability arising from a penal offense 5. Obligations due to the government 6. Damage caused to the partnership by a partner
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Implied novation: No specific form is required. There must be incompatibility between the old and new obligation or contract. (Asked in 79, 82, 88, and 94)
California Bus Line v. State Investment (2003): In the absence of an unequivocal declaration of extinguishment of the pre-existing obligation, only proof of incompatibility between the old and new obligation would warrant a novation by implication. The restructuring agreement merely provided for a new schedule of payments and authority giving Delta to take over management and operations of CBLI in case it fails to pay installments. There was no change in the object of prior obligations.
Original or new obligation with suspensive or resolutory condition: If original obligation was subject to a suspensive/ resolutory condition, the new obligation shall be under the same condition, unless it is otherwise stipulated. (Art. 1299)
Compatible Conditions Fulfillment of both conditions: new obligation becomes demandable Fulfillment of condition concerning the original obligation: old obligation is revived; new obligation loses force Fulfillment of condition concerning the new obligation: no novation; requisite of a previous valid and effective obligation lacking Incompatible Conditions Original obligation is extinguished, while new obligation exists Demandability shall be subject to fulfillment/ nonfulfillment of the condition affecting it
OBLIGATIONS
TEST OF INCOMPATIBILITY: Whether or not the old and new obligation can stand together, each one having an independent existence. No incompatibility exists when they can stand together. Hence, there is no novation. Incompatibility exists when they cannot stand together. Hence, there is novation. Effects
In General 1. Old obligation is extinguish ed and replaced by the new one stipulated. If Original Obligation is Void Novation is void if the original obligation was void, except when annulment may be claimed only by the debtor, or when ratification validates acts that are voidable. (Art. 1298) 1. Original obligation is void: No novation 2. Original obligation voidable: Effective if contract is ratified before novation If New Obligation is Void New obligation is void, the old obligation subsists, unless the parties intended that the former realations shall be extinguished in any event. (Art. 1297) 1. New obligation void: No novation 2. New obligation voidable: Novation is effective
A. OBJECTIVE NOVATION 1. Change of the subject matter 2. Change of causa or consideration 3. Change of the principal conditions or terms B. SUBJECTIVE NOVATION 1. Substitution of the Debtor: Consent of creditor is an indispensable requirement both in expromision and delegacion.
Expromision Initiative for change does not emanate from the debtor, and may Even be made without his knowledge. Delegacion Debtor (delegante) offers or initiates the change, and the creditor (delegatorio) accepts 3rd person (delegado) as consenting to the substitution Requisites 1. Consent of old debtor, new debtor, and creditor
Accessory obligations also extinguished, but may subsist only insofar as they may benefit 3rd persons who did not give their consent to the novation OR may not be affected upon agreement between the parties.
Requisites 1. Consent of the creditor and the new debtor 2. Knowledge or consent of the old debtor is not required Effects 1. Old debtor is released
Effects 1. Insolvency of the new debtor revives
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2.
3.
4.
Insolvency of the new debtor does not revive the old obligation in case the old debtor did not agree to expromision If with knowledge and consent of old debtor, new debtor can demand reimbursement the entire amount paid and w/ subrogation of creditors rights If without knowledge of the old debtor, new debtor can demand reimbursement only up to the extent that the latter has been benefited w/o subrogation of creditors rights
2.
the obligation of the old debtor if it was anterior and public, and known to the old debtor. New debtor can demand reimbursement of the entire amount he has paid, from the original debtor. He may compel creditor to subrogate him to all of his rights.
express or tacit approval of the debtor 3. When, even without the knowledge of the debtor, a person interested in the fulfillment of the obligation without prejudice to the effects of confusion as to the latters share effects of confusion as to the latters share Effects
Total 1. Transfers to the person subrogated the credit with all the rights thereto appertaining, either against the debtor or 3rd persons. 2. Obligation is not extinguished, even if the intention is to pay it. 3. Defenses against the old creditor are retained, unless waived by the debtor Partial 1. A creditor, to whom partial payment has been made, may exercise his right for the remainder, and shall be preferred to the person subrogated in his place in virtue of the partial payment.
OBLIGATIONS
2. Subrogation of a 3rd person in the rights of the creditor a. Conventional subrogation: agreement of the parties; by
Requisites: the consent of the 3rd person, and of the original parties (debtor and old creditor) (Art. 1301)
Conventional subrogation Debtors consent is necessary Extinguishes an obligation and gives rise to a new one Assignment of credit Debtors consent is not required Refers to the same right which passes from one person to another, without modifying or extinguishing the obligation Defects/ vices in the old obligation are not cured
Defects/ vices in the old obligation are cured
b. Legal subrogation: by operation of law Legal subrogation is not presumed, except in the following circumstances: 1. When creditor pays another creditor who is preferred, even without the debtors knowledge 2. When a 3rd person not interested in the obligation pays with the
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PAYMENT & PERFORMANCE by Professor Eduardo A. Labitag UP College of Law (Asked in 75, 84, 88, 95, and 98)
OBLIGATIONS
WHO CAN PAY?

1. 2. 3. 4. In GENERAL Debtor or his: Authorized Agent Heir Successor-ininterest
Legend: G = General Rule = Exception C = Creditor D = Debtor
3rd PERSON
Interested in obligation (creditor cannot refuse to accept valid payment) Not interested in obligation (creditor may refuse to accept payment [1236]) 3rd person (whether or not interested in obligation) does not intend to be reimbursed (1238)
Payment w/ or w/o debtors knowledge Effects: 1. Valid payment; obligation extinguished 2. Debtor to reimburse fully 3rd person interested in obligation 3. 3rd person subrogated to rights of creditor
Payment with debtors consent (express/tacit) Effects: 1. 3rd person is entitled to full reimbursement 2. Legal subrogation (novation) 3rd person is subrogated/step into the shoes of creditor
Payment without debtors knowledge or against the will of D Effects: 3rd person can only be reimbursed only insofar as payment has been beneficial to debtor(1236, 2nd. par.) burden of proof on 3rd person cannot compel C to subrogate him (1237)
Debtor must give consent
Effects: 1. Payment is deemed as a donation/offer of donation 2. Donation must be in proper form (if above P5Th must be in writing
In Obligation to Give, if PAYOR has
No free disposal & no capacity to alienate Minor who entered contract w/o consent of parent or guardian
Effects: Payment is invalid w/o prejudice to natural obligations Effects: No right to recover fungible thing delivered to creditor who spent or consumed it in good faith 28
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TO WHOM PAYMENT MAY BE MADE

In GENERAL
OBLIGATIONS
Creditor /person in whose favor obligation was constituted, or His successor in interest, or Any person authorized to received payment (1240)
G NOT valid 1) If C has kept the thing delivered 2) Insofar as payment benefited C
Payment to Incapacitated Creditor (1241)
Payment to 3rd PERSON (1241, 2nd par.)
G VALID if 3rd person proves that it redounded to Cs benefit
Exception to proof of benefit: .3rd person acquires Cs rights after payment .C ratifies payment .Cs conduct leads D to believe that 3rd person had authority to receive payment .Assignment of credit without notice to D
In Case of ACTIVE SOLIDARITY
If no demand is made, D may pay to ANY of solidary creditors
If any judicial/extrajudicial demand is made by any one of the creditors who made the demand (1214)
29
Effect: No extinguishment If payment is made to a WRONG PARTY
Extinguishment if fault or negligence can be imputed to creditor
Payment in good faith to person in possession of credit = debtor released (1242)
If debtor pays creditor after being judicially ordered to retain debt = payment not valid (1243) Payment made in good faith to any person in possession of credit Effect: D released (1242)
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WHAT IS TO BE PAID? IDENTITY

OBLIGATIONS
In GENERAL The very prestation (thing or service Give: 1. Specific thing itself 2. Accessions & accessories 3. If with loss, improvements, deterioration Apply Art. 1189 Debtor cannot compel C to receive a different specific thing even latter has same value or more valuable than that due (1244)
Obligation to give a SPECIFIC thing
G: C cannot demand a thing of superior quality; can demand inferior D cannot deliver a thing of inferior quality Unless quality & circumstances have been stated (1246) purpose and other circumstances of obligation considered Obligation to pay sum of money, if D alienates property to C = DACION EN PAGO governed by law on SALES (1245) Identity: The very same act promised to be done or not to be done Substitution cannot be done against Cs will (1244, 2nd par.)
Obligation to give a GENERIC thing
Obligation to DO or NOT to DO
Payment of MONEY
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 of obligation was established (1250) No interest (i.e., for the use of someones money) shall be due unless expressly stipulated in writing
Payment of INTEREST
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HOW IS PAYMENT TO BE MADE INTEGRITY

In GENERAL 1233 Complete delivery or rendering 1248 C cannot be compelled to received partial prestations; D cannot be compelled to give partial payments Exceptions: 1. Contrary stipulation 2. When debt is in part liquidated & in part unliquidated 3. When there are several subjects/parties are bound under different terms/conditions Effect if C accepts incomplete performance (1235): WAIVER
OBLIGATIONS
May be express or implied If C knows the incompleteness/ irregularity of the payment, and he still accepts it w/o objection, then obligation is deemed extinguished (estoppel) * There must be intent to waive Except if C has no knowledge of the incompleteness
In Case of SUBSTANTIAL PERFORMANCE IN GOOD FAITH (1234)
D may recover as if there had been complete fulfillment - Less damages suffered by C
PRESUMPTIONS in payment of INTERESTS & INSTALLMENTS
INTEREST If principal amount is received w/o reservation as to interest interest is presumed to have been paid (1176; 1253) INSTALLMENTS If a latter installment of a debt is received w/o reservation to prior installments Prior installments are presumed paid (1176, 2nd par.)
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WHERE PAYMENT IS TO BE MADE (ART. 1251)

OBLIGATIONS
In GENERAL In the place designated in the obligation
If no place is designated
If obligation is to deliver a SPECIFIC thing Place of performance is wherever the thing was at the moment obligation was constituted Unless there is a contrary express stipulation
Expenses Payment
of
Making
In GENERAL Extrajudicial expenses required by the payment shall be borne by DEBTOR
In any other case Domicile of debtor
Unless otherwise stipulated
If D changes his domicile in bad faith or after he has incurred in delay Additional expenses shall be borne by D
As to JUDICIAL expenses Rules of Court shall govern
WHEN PAYMENT IS TO BE MADE?

When obligation is due and demandable but D may pay before due date if period is for benefit of D In GENERAL Payment to be made when the creditor makes a demand (judicially/extrajudicially) Exceptions wherein demand of creditor is not necessary for delay to exist: 1. When obligation/law expressly declares 2. Nature & circumstances of the obligation designation of time is controlling motive or establishment of contract 3. When demand would be useless
WHY SHOULD PAYMENT BE MADE?

Because C may compel D to pay, and failure to pay will allow C to satisfy credit from properties of D that are not exempt from execution
- end of Obligations Page 32 of 177
Table of Contents
CONTRACTS
Chapter I. GENERAL PROVISIONS I. Classification II. Elements III. Stages IV. Characteristics A. Mutuality B. Autonomy C. Relativity D. Consensuality E. Obligatory Force Chapter II. ESSENTIAL REQUISITES OF CONTRACTS I. Consent A. Concurrence B. Capacity C. Vices of Consent II. Object III. Cause Chapter III. FORMS OF CONTRACTS I. Rules II. Kinds of Formalities A. Contracts Which Must Appear in Writing B. Contracts Which Must Appear in a Public Document Chapter IV. REFORMATION OF CONTRACTS Chapter V. INTERPRETATION OF CONTRACTS Chapter VI. DEFECTIVE CONTRACTS I. Rescissible II. Voidable III. Unenforceable IV. Void or Inexistent 35 35 36 36 36 36 36 36 37 37 38 38 38 38 39 40 40 42 42 42 42 42 43
CONTRACTS
43 44 44 45 45 46
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Contracts
FACULTY-STUDENT EDITORIAL BOARD AND LECTURES COMMITTEE Prof. Rommel Casis
FACULTY EDITOR

SUBJECT EDITORS
LECTURES Edel Cruz

HEAD

-------Kae Guerrero
OBLIGATIONS and CONTRACTS Rory Lambino

LEAD WRITER Frances Domingo Michelle Arias Pauline Alejandre Alexandria Maroto Angelica Paglicawan Nathan Marasigan Diane Bonilla WRITERS
-------Leo Zulueta
Rania Joya
CONTRACTS

I. II. III. IV. CLASSIFICATION ELEMENTS STAGES CHARACTERISTICS
D. To fulfillment of prestations 1. Commutative: fulfillment is determined in advance 2. Aleatory: fulfillment is determined by chance E. By equivalence of prestations 1. Gratuitous: no correlative prestation is received by a party 2. Onerous: there is an exchange of correlative prestations 3. Remuneratory: the prestation is based on services or benefits already received F. By the time of fulfillment 1. Executed: obligation is fulfilled at the time contract is entered into 2. Executory: fulfillment does not take place at the time the contract is made G. To their purpose 1. Transfer of ownership e.g. sale 2. Conveyance of Use e.g. Commodatum 3. Rendition of Service e.g. agency H. To their subject matter 1. Things e.g. sale, deposit 2. Services e.g. agency I. To their designation 1. Nominate: the law gives the contract a special designation or particular name e.g. deposit 2. Innominate: the contract has no special name
Art. 1307. INNOMINATE CONTRACTS shall be regulated by the stipulations of the parties, by the general provisions of
CONTRACT: A juridical convention manifested in legal form whereby two parties agree to perform 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 to render some service.
I. CLASSIFICATION OF CONTRACTS
A. To formation: 1. Consensual: consent is enough; e.g.sale 2. Real: consent and delivery is required; e.g. deposit, pledge 3. 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. lease 2. Accessory: depends on another contract for its existence; e.g. guaranty 3. Preparatory: a preliminary step towards the celebration of a subsequent contract e.g. agency C. To nature of vinculum 1. Unilateral: only one party is bound by the prestation e.g. commodatum 2. Bilateral (synallagmatic): where both parties are bound by reciprocal prestations e.g. sale
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Titles I and II of [the Civil Code], by the rules governing the most analogous nominate contracts, and by the customs of the place.
different person (Tolentino)
in
another
capacity.
Classes of Innominate Contracts 1. Do ut des: I give so that you give 2. Do ut facias: I give so that you do 3. Facio ut facias: I do so that you do 4. Facio ut des: I do so that you give
may may may may
The validity of auto contracts in our law is generally accepted. The existence of a contract is not determined by the number of persons who intervene in it, but by the number of parties thereto; not by the number of individual will, but by the number of declarations of will. (Tolentino)
Collective Contracts: The law authorizes the will of the majority to bind a minority to an agreement, notwithstanding the opposition of the latter. (Tolentino)
II. ELEMENTS OF CONTRACTS

A. Essential: Those without which the contract would not exist (consent, object, causa). B. Natural: Those which are derived from the nature of the contract and ordinarily accompany the same-they are presumed to exist unless the contrary is stipulated e.g. warranty in sales C. Accidental: Those which exist only if stipulated
Common Elements Special Elements Example Solemn Real Consensual Consent, subject matter, causa Formality Donation of personal property more than P5K Delivery Loan, pledge None Others
IV. CHARACTERISTICS OF CONTRACTS

A. B. C. D. E. Mutuality Autonomy Relativity Consensuality Obligatory Force
CONTRACTS
A. MUTUALITY: The contract must bind both contracting parties; its validity or compliance cannot be left to the will of one of them (Art.1308).
Taylor v. Uy Teng Piao, 1922: [BUT] a contract may expressly confer upon one party the right to cancel the contract because the exercise of that right is a fulfillment of the provisions of the contract itself
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 when the parties come to agree on the terms of the contract C. Consummation or death: the fulfillment or performance of the terms agreed upon Auto Contract: A contract made by one person acting in the name of another in one capacity and in his own name or that of a
The release must be binding on both parties. The determination of the performance may be left to a 3rd person, whose decision 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 parties may establish such stipulations, clauses, terms and conditions as they may deem convenient, provided they are not contrary to law, morals, good customs, public order, or public policy (Art. 1306). C. RELATIVITY: Contracts take effect only between parties, their assigns and heirs UNLESS, obligations arising from the contract are not transmissible by their (1) nature, (2) by stipulation or (3) by provision of law. The heir is not liable beyond the value of the property he received from the decedent. (Art. 1311)
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Exception: Strangers may enforce contract in their favor in the ff. cases:
the
4. TORTUOUS INTERFERENCE: Where the third person induces a contracting party to violate his contract (Art.1314). Requisites: a. Existence of a valid contract b. Knowledge of the third person of the existence of the contract; and c. Interference by third person without legal justification or excuse D. CONSENSUALITY: Contracts are perfected by mere consent and from that moment, the parties are bound not only to the fulfillment of what has been expressly stipulated but also to all consequences which, according to their nature, may be in keeping with good faith, usage and law, (Art.1315) UNLESS, real contracts, such as deposit, pledge and commodatum, are not perfected until the delivery of the object of the obligation. (Tolentino) E. OBLIGATORY FORCE
Art. 1159. Obligations arising from contracts have the force of law between the contracting parties and should be complied with in good faith. Art. 1308. The contract must bind both contracting parties; its validity or compliance cannot be left to the will of one of them. Art. 1315. Contracts are perfected by mere consent, and from that moment the parties are bound not only to the fulfillment of what has been expressly stipulated but also to all the consequences which, according to their nature, may be in keeping with good faith, usage and law. Art. 1356. Contracts shall be obligatory, in whatever form they may have been entered into, provided all the essential requisites for their validity are present. However, when the law requires that a contract be in some form in order that it may be valid or enforceable, or that a contract be proved in a certain way, that requirement is absolute and indispensable. In such cases, the right of the parties stated in the following article cannot be exercised.
1. STIPULATIONS POUR AUTRUI: If a contract should contain some stipulation in favor of a third person, he may demand its fulfilment provided he communicated his acceptance to the obligor before its revocation. A mere incidental benefit or interest of a person is not sufficient. The contracting parties must have clearly and deliberately conferred a favour upon a third person (Art.1311). Requisites: a. There must be a stipulation in favor of a third person b. The stipulation must be part, not the whole of the contract c. The contracting parties must have clearly and deliberately conferred a favor upon a third person, NOT a mere incidental benefit or interest. d. The third person must have communicated his acceptance to the obligor before its revocation e. No relation of agency exists between any of the parties and the third person favored
Florentino v. Encarnacion, 1977: 1. Contracts to perform personal acts which cannot be as well performed by others are discharged by the death of the promissor. Conversely, where the service or act is of such a character that it may as well be performed by another, or where the contract, by its terms, shows that performance by others was contemplated, death does not terminate the contract or excuse nonperformance. 2. In this case the stipulation is a stipulation pour atrui because the true intent of the parties is to confer a direct and material benefit upon a third party. ACCION DIRECTA: Where the statute authorizes the creditor to sue on his debtors contract, e.g. lessor v. sub-lessee (Art. 1651,1652) (J.B.L. Reyes)
CONTRACTS
2. THIRD PERSON IN POSSESSION: When the third person comes into possession of the object of a contract creating real rights (Art 1312) 3. FRAUD: Where the contract is entered into in order to defraud a person (Art. 1313);
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Chapter II. Essential Requisites
Chapter II. Essential Requisites of Contracts

I. CONSENT II. OBJECT III. CAUSE
to a proposal being made to him, which might be accepted by him or not.
I.
CONSENT:
Conformity of the parties to the terms of the contract; the acceptance by one of the offer made 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 possess the necessary legal capacity (Arts. 13271329) 3. It must be intelligent, free, spontaneous, and real (not vitiated) (Arts. 1330-1346) A. CONCURRENCE 1. OFFER: a unilateral proposition which one party makes to the other for the celebration of the contract. (Tolentino) Requisites: a. Definite b. Intentional c. Complete Invitations to make offers (advertisements) Business advertisements of things for sale, are NOT definite offers, just invitations to make an offer, UNLESS the contrary appears (Art. 1325) Advertisements for bidders are invitations to make proposals, advertiser is NOT bound to accept lowest or highest bid, UNLESS contrary appears; the bidder is the offeror (Art. 1326). Statements of intention: no contract results even if accepted
Rosenstock v. Burke, 1924: FACTS: Elser, in a letter, informed Burke that he was in a position and is willing to entertain the purchase of the yacht under some terms. HELD: The word entertain applied to an act does not mean the resolution to perform said act, but simply a position to deliberate for deciding to perform or not to perform said act. It was merely a position to deliberate whether or not he would purchase the yacht and invitation
OFFER TERMINATES upon: a. Rejection by the offeree b. Incapacity (death, civil interdiction, insanity, or insolvency) of the offerer or offeree before acceptance is conveyed c. Counter-offer d. Lapse of the time stated in the offer without acceptance being conveyed e. Revocation of the offer before learning of acceptance f. Supervening illegality before acceptance (J.B.L. Reyes) 2. ACCEPTANCE. Requisites: a. Unqualified and Unconditional, i.e. it must conform with all the terms of the offer, otherwise it is a counteroffer (Art. 1319) b. Communicated to the offerer and learned by him (Arts. 1319, 1322). If made through an agent, the offer is accepted from the time the acceptance is communicated to such agent. c. Express/Implied, but is not presumed OPTION CONTRACT: A preparatory contract in which one party grants to the other, for a fixed period, the option to decide whether or not to enter into a principal contract. (Art. 1324)
With consideration Offeror cannot unilaterally withdraw his offer Without consideration Offeror may withdraw by communicating withdrawal to the offeree before acceptance
CONTRACTS
B. CAPACITY 1. Incapacitated to Give Consent a. Minors, UNLESS, the minors consent is operative in contracts: For necessaries (Art.1427) Where the minor actively misrepresents his age (estoppel)
Mercado v. Espiritu, 1917: Minors held in estoppel through active misrepresentation. Bambalan v. Maramba, 1928: There is no estoppel if the minority was known.
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b. Insane or demented persons, UNLESS, they contract during a lucid interval c. Deaf-mutes who do not know how to 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 sell if the marriage is under ACP (Art.1490) d. The ff. cannot purchase (Art. 1491): The guardian: his wards property The agent: the principals property Executors and administrators: property under administration Public officers-state property under their administration Justices, judges, prosecutors, clerks of court, lawyers-property attached in litigation. e. Members of Ethnic Minorities: their contracts (excluding sale of personal property or personal service contracts) must be approved by the Governor or his representative. (Public Land Act)
Incapacity to Give Consent (Art. 1327) Restrains the exercise of the right to contract Based on subjective circumstances of certain persons Voidable Disqualification to Contract (Art.1329) Restrains the very right itself Based on public policy and morality Void
conditions which have principally moved one or both parties to enter into the contract (Art.1331)
Mistake of Fact When one or both contracting parties believe that a fact exists when in reality it does not, or vice versa Mistake of Law When one or both parties arrive at an erroneous conclusion on the interpretation of a question of law or the legal effects Mutual Mistake Must be as to the legal effect of an agreement Must be mutual Real purpose of the parties must have been frustrated
CONTRACTS
2. INTIMIDATION: When one of the contracting parties is compelled by a reasonable and wellgrounded fear of an imminent and grave evil upon his person or property, or upon the person or property of his spouse, descendants or ascendants, to give his consent (Art. 1335).
Martinez v. HSBC, 1910: The conveyance of several properties by to her husbands creditors, though reluctant is still consent. She assented to the requirements of the defendants, the civil and criminal actions against them would be dropped. A contract is valid even though one of the parties entered into it against his wishes and desires, or even against his better judgment. Contracts are also valid even though they are entered into by one of the parties without hope of advantage or profit.
3. VIOLENCE: Irresistible force used to extort consent (J.B.L. Reyes) 4. UNDUE INFLUENCE: When a person takes improper advantage of his power over the will of another, depriving the latter of a reasonable freedom of choice (Art. 1337). Circumstances: Relationship of the parties (family, spiritual, confidential etc.) That the person unduly influenced was suffering from infirmity (mental weakness, ignorance etc.) (Art.1337)
C. VICES OF CONSENT (Art. 1330) (MIVUF)

1. 2. 3. 4. 5. Mistake Intimidation Violence Undue Influence Fraud
1. MISTAKE: Inadvertent and excusable disregard of a circumstance material to the contract. (J.B.L. Reyes) In order that mistake may invalidate consent, it should refer to the substance of the thing which is the object of the contract, or to those
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5. FRAUD: When through insidious words or machinations of one of the contracting parties, the other is induced to enter into a contract which, without them, he would not have agreed to (Art. 1338).
Art. 1339. Failure to disclose facts, when there is a duty to reveal them, as when the parties are bound by confidential relations, constitutes fraud. Art. 1340. The usual exaggerations in trade, when the other party had an opportunity to know the facts, are not in themselves fraudulent. Art. 1341. A mere expression of an opinion does not signify fraud, unless made by an expert and the other party has relied on the former's special knowledge. Art. 1342. Misrepresentation by a third person does not vitiate consent, unless, such misrepresentation has created substantial mistake and the same is mutual. Art. 1343. Misrepresentation made in good faith is not fraudulent but may constitute error.
c. Transmissible: Within the commerce of man d. Determinate or determinable All things or services may be the object of 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 be expressed In order that a thing, right or service may be the object of a contract, it should be in existence at the moment of the celebration of the contract, or at least, it can exist subsequently or in the future. A FUTURE THING may be the object of a contract, such contract may be interpreted as a: Conditional contract: where its efficacy should depend upon the future existence of the thing Aleatory contract: where one of the contracting parties assumes the risk that the thing will never come into existence, e.g. insurance III. CAUSE: It is the impelling reason for which a party assumes an obligation under a contract. Requisites: a. Existing b. Licit or Lawful c. True Cause in:
Onerous Contracts As to each of the contracting parties is understood to be the undertaking or the promise of the thing or service by the other party Renumeratory Contracts The service or benefit which is remunerated Pure Beneficence Mere liberality of the benefactor
CONTRACTS
SIMULATION OF CONTRACTS (Art. 13451346): Declaration of a non-existent will made deliberately for the purpose of producing the appearance of a transaction that does not exist, or which is different from the one which actually arose. (J.B.L. Reyes)
Absolute No real transaction is intended Fictitious contract Void Relative Real transaction is hidden Disguised contract Bound as to hidden agreement, so long as it does not prejudice a third person and is not contrary to law, morals, good customs, public order or public policy
II. OBJECT: The thing right or service which is the subject matter of the obligation arising from the contract. Requisites: a. Lawful: Not contrary to law, morals, good customs, public order or public policy. b. Actual or possible
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In Villaroel v. Estrada (1940), where a moral obligation is based upon a previous civil obligation, which has already been barred by the statute of limitations at the time the contract is entered into, it constitutes a sufficient cause or consideration to support a contract (Natural Obligation). BUT, In Fisher v. Robb (1939), if the moral obligation arises wholly from ethical consideration, it cannot constitute a sufficient cause to support an onerous contract, as when the promise is made on the erroneous belief that one was morally responsible for the failure of an enterprise (Moral Obligation).
Cause Lack Cause
of
Defined Absence or total lack of cause Contrary to law, morals, good customs, public policy and public order Cause is stated but is untrue
Illegality of Cause
Effect The contract confers no right and has no legal effect Null and Void
CONTRACTS
Falsity cause
of
Lesion or inadequacy of cause
Cause is not proportionate to object
Void if it should not be proved that it was founded upon another cause which was true and lawful Shall not invalidate the contract except when a)there is fraud, mistake, undue influence b)when parties intended a donation
Liguez v. CA (1957): In making the donation in question, Lopez was not moved exclusively by the desire to benefit Liguez, but also to secure her cohabiting with him, so that he could gratify his sexual impulses. The donation was an onerous transaction and clearly predicated upon an illicit causa.
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Chapter III. Forms of Contracts
Chapter III. Forms of Contracts

I. RULES II. KINDS OF FORMALITIES
I. RULES:
Contracts shall be obligatory, in whatever form they may have been entered into, provided all the essential requisites for their validity are present. (Art. 1356)
Spiritual System of the Spanish Code: The law looks more on the spirit rather than the form of contracts.
appear in a public document, or should prejudice a third person; d. The cession of actions or rights proceeding from an act appearing in a public document. e. All other contracts where the amount involved exceeds five hundred pesos must appear in writing, even a private one. But sales of goods, chattels or things in action are governed by Articles, 1403, No. 2 and 1405. 2. Donation of immovable properties (Art. 749) 3. Partnership where immovable property or real rights are contributed to the common fund (Arts.1771 and 1773)
BF Corporation v. CA, 1998: A contract may be encompassed in several instruments even though every instrument is not signed by the parties since it is sufficient if the unsigned instruments are clearly identified or referred to and made part of the signed instruments.
CONTRACTS
Exceptions: When the law requires that a contract be in some form for validity (Arts. 13571358) When the law requires that contract be in some form to be enforceable (Statute of Frauds)
II. KINDS OF FORMALITIES

A. Contracts Which Must Appear in Writing: 1. Donation of personal property whose value exceeds five hundred pesos (Art 748) 2. Sale of a piece of land or any interest 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 a Public Document 1. Art. 1358: a. Acts and contracts which have for their object the creation, transmission, modification or extinguishment of real rights over immovable property; sales of real property or of an interest therein a governed by Articles 1403, No. 2, and 1405; b. The cession, repudiation or renunciation of hereditary rights or of those of the conjugal partnership of gains; c. The power to administer property, or any other power which has for its object an act appearing or which should
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Chapter IV. Reformation of Contracts Chapter V. Interpretation of Contracts
Chapter IV. Reformation of Contracts

REFORMATION: is that remedy in equity by means of which a written instrument is made or construed so as to express or conform to the real intention of the parties when some error or mistake has been committed. (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 of mistake, fraud, inequitable conduct, or accident. (J.B.L. Reyes)
If the mistake, fraud, inequitable conduct, or accident has prevented the meeting of the minds of the parties, the proper remedy is not reformation but annulment of the contract.
Chapter V. Interpretation of Contracts

(Arts 1370-1379) RULES ON DOUBTS (Art. 1378)
Principal Objects Doubts where it cannot be known what may have been the intention or will of the parties, the contract shall be null and void. Gratuitous Contracts Absolutely impossible to settle doubts by the rules and only refer to incidental circumstances the least transmission of rights and interests shall prevail. Onerous Contracts Absolutely impossible to settle doubts by the rules and only refer to incidental circumstances the doubt shall be settled in favor of the greatest reciprocity of interests.
CONTRACTS
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, or his 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): The action to enforce bars subsequent action to reform when one of the parties has brought an action to enforce the instrument, he cannot subsequently ask for its reformation.
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Chapter VI. Defective Contracts

I. II. III. IV. RESCISSIBLE VOIDABLE UNENFORCEABLE VOID OR INEXISTENT
I. RESCISSIBLE CONTRACTS (Arts. 1380-1389)

Contracts of guardians What makes defective? it Contracts in representation of absentees Contracts are entered into to defraud existing creditors *Prior to the alienation (the action is called ACCION PAULIANA) Contracts refer to things in litigation Entered into without the knowledge & approval of litigants or competent judicial authority
Effect on the Contract How to rescind?
Acts of Acts of administration administration cause LESION or cause LESION damage to the or damage to the WARD they ABSENTEE they represent, > 25% represent, > of the value of the 25% of the value thing of the thing Valid until rescinded Direct Action NO rescission if: 1. Injured party has other legal means to obtain reparation. 2. Plaintiff cannot return his part of the obligation 3. Object of the contract is in the hands of third person, onerously acquired by him in good faith 4. If court does not approve it (article 1386) In general, by By absentee injured party By ward, or by guardian ad litem of ward during incapacity of ward in an action against the original guardian Within four years from [re-] gaining capacity
CONTRACTS
Direct Accion (Accion Pauliana, Contracts in Fraud of Creditors)
for
NO rescission if: 1. Injured party has other legal means to obtain reparation. 2. Plaintiff cannot return his part of the obligation 3. Object of the contract is in the hands of third person, onerously acquired by him in good faith By creditor(s) By party litigant
Who can rescind?
When?
How to defect?
cure
Ratification by injured party (ward), within four years from gaining capacity
Within 4 years from knowledge of domicile of absentee Ratification by injured party (absentee), within four years from knowledge of domicile of absentee or knowledge of fraudulent contract
Within 4 years from knowledge of fraudulent contract
Within 4 years from knowledge of fraudulent contract Ratification by injured party (defrauded creditor), within four years from knowledge of fraudulent contract Same as contracts in fraud of creditors
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II. VOIDABLE CONTRACTS (Arts. 1390-1402)

What makes it defective? Effect on the Contract How to annul? Incapacity of one party to the Consent vitiated by mistake, violence, contract intimidation, undue influence or fraud Valid until annulled by competent court 1. Directly, by an action for annulment 2. Indirectly, by counterclaim asking for positive action of the court to set aside the contract Annulment cannot proceed when object of the contract is lost through fraud or deceit of person with right to institute proceedings (art 1401); if lost by party with no right to file action, he should pay the value of the thing and its fruits, plus interest (art 1402) 1. Parties who are obliged principally or subsidiarily 2. Party who has knowledge of the defect CANNOT file for annulment Within four years after guardianship of Within four years minors or incapacitated persons ceases 1. After intimidation, violence or undue influence ceases 2. From the time of discovery of mistake or fraud 1. Mutual restitution of the things delivered, along with fruits and price paid with interest 2. Damages to be paid by party who caused defect of the contract, by virtue of Article 20 and 21 of the Civil Code Express (written or oral Either through express (written or oral manifestation) or tacit ratification manifestation) or tacit ratification (acts (acts or conduct) by injured party, or conduct) by injured party or guardian of incapacitated person. No need for other party who has no No need for other party who has no right to bring action to conform right to bring action to conform
Who can annul? When?
CONTRACTS
Effect Annulment How to Defect?
of
Cure
III.UNENFORCEABLE CONTRACTS (Arts. 1403-1408)

What makes defective? it Contracts covered by Contract where both Statute of Frauds which parties incapable of did not comply with the giving consent to written memorandum contract requirement No effect unless ratified. Cannot be enforced by a proper action in court. Contract entered into without authority of, or in excess of authority given by owner Not by direct action. 1. As a defense, by motion to dismiss complaint on the ground that the contract is unenforceable Cannot be assailed by direct action By person whose name the contract was entered into. By owner of property. Not by direct action. 1. As a defense, by motion to dismiss complaint on the ground that the contract is unenforceable; 2. Objection to the presentation of oral evidence to prove an oral contract By party against whom the contract is being enforced; or his privies. Not by direct action. 1. As a defense, by motion to dismiss complaint on the ground that the contract is unenforceable
Effect on the Contract How to assail?
Who can assail?
When? How to Defect?
Cure
By party against whom the contract is being enforced; or his privies; or parents or guardians persons, as it is a personal defense NOTE: Cannot be assailed by third persons, as it is a personal defense When a party asks the court to enforce the contract 1. Ratification by person 1. Ratification by party 1. By ratification of whose name the against whom the party against whom contract was entered contract is being enforced the contract is being into 2. By failure to object to the enforced; or his presentation of oral privies; or parents or evidence to prove an oral guardians contract The ratification by one party converts the contract into a voidable contract Page 45 of 177
IV. VOID OR INEXISSTENT CONTRACTS (Arts. 1409-1422)

What makes defective? it Contracts Cause, Object of Purpose is contrary to morals, good customs, public order or public policy Contracts expressly prohibited or declared void by law (Art 1409); contracts which are direct results of a previous illegal contract (art 1422) No effect: does not create, modify or extinguish juridical relation to which it refers 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 offense 1. Innocent party 1. Any of the parties 1. Any person whose 2. Less-guilty party, 2. Any person whose interests are upon court discretion interests are directly directly affected by 3. Incapacitated person affected by the contract the contract who is a party to an 2. By party for whose illegal contract, upon protection the court discretion prohibition of the 4. Any person whose law is designed. interests are directly affected by the contract Does not prescribe Inexistent contracts, or contracts whose essential elements are absent
Effect on the Contract How to assail?
Who can assail?
CONTRACTS
When?
- end of Contracts -
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Table of Contents
SALES
Chapter I. THE CONTRACT OF SALE A. Essential Requisites B. Stages C. Characteristics D. Kinds E. Form F. Sale Distinguished from Other Contracts G. Contract to Sell H. Bilateral Promise to Buy and Sell I. Option Contract J. Right of First Refusal K. Assignment L. Document of Title Chapter II. ELEMENTS OF A VALID SALE A. Consent 1. Absolute Incapacity 2. Relative Incapacity 3. Offer and Acceptance B. Subject Matter 1. Licit 2. Actual or Possible 3. Determinate C. Price 1. Requisites 2. Gross Inadequacy of Price Chapter III. TRANSFER OF OWNERSHIP I. General Rule: Ownership Transfers upon Delivery II. When Delivery Does Not Transfer Ownership A. Sale on Return B. Sale on Approval, Trial or Satisfaction C. Executory Sales D. Sale by Description or Sample E. In an Invalid Sale F. When Seller is Not Owner III. Kinds of Delivery IV. Double Sales V. Risk of Loss or Deterioration Chapter IV. OBLIGATIONS OF THE SELLER AND THE BUYER A. Obligations of the Seller 1. Preservation 2. Delivery 3. Warranty B. Obligations of the Buyer 1. Acceptance 2. Payment 49 49 49 49 49 50 50 51 51 51 52 52 53 54 54 54 54 55 55 55 55 56 56 56 56 57 57 57 57 57 57 57 58 58 58 60 61 62 62 62 62 64 66 66 67 Chapter V. REMEDIES OF THE SELLER AND THE BUYER A. General Remedies B. Remedies of the Seller 1. For non-acceptance of payment 2. For non-payment a. In sale of Movables b. In sale of immovables C. Remedies of the Buyer 1. For breach of obligation to preserve 2. For breach of obligation to deliver 3. For breach of warranty Chapter VI. EXTINGUISHMENT OF SALE A. Causes B. Conventional Redemption 1. Definition 2. Conventional Redemption vs. Equitable Mortgage 3. Right of Redemption C. Legal Redemption 1. Definition 2. Period to redeem 3. Instances D. Under the Public Land Act E. Under Special Laws 1. Foreclosure and execution sales 2. Under the Agrarian Land Reform Code Chapter VII. THE BULK SALES LAW 68 68 68 68 69 69 71 72 72 72 73 75 75 75 75 75 76 77 77 77 77 78 78 78 79 80
SALES
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Chapter I. The Contract of Sale
Sales
FACULTY-STUDENT EDITORIAL BOARD AND LECTURES COMMITTEE Prof. Concepcion Jardeleza
FACULTY EDITOR

SUBJECT EDITORS
LECTURES Edel Cruz

HEAD

-------Kae Guerrero
SALES Donna Arevalo

LEAD WRITER
-------Leo Zulueta
Rania Joya
Jeric Cruz Rich Sta.Lucia Caloy Mendoza Thea Cunanan Darwin Angeles
WRITERS

This chapter gives a general overview of the contract of sale. M. N. O. P. Q. R. S. T. U. V. W. X. Essential Requisites Stages Characteristics Kinds Form Sale Distinguished from Other Contracts Contract to Sell Bilateral Promise to Buy and Sell Option Contract Right of First Refusal Assignment Document of Title
B. STAGES
1. Negotiation: From the time the parties indicate interest in the contract up to the time said contract is perfected 2. Perfection: Upon concurrence of the essential elements of the sale (Asked in 88 and 91) At the time of the meeting of the minds of the parties as to the object of the contract and the price 3. Consummation: Begins when the parties perform their respective undertakings under the sale Culminates in the extinguishment of the sale
SALES
1458. A contract of sale is a contract where one of the parties obligates himself to transfer ownership of and to deliver a determinate thing, and the other to pay therefor a price certain in money or its equivalent.
C. CHARACTERISTICS
1. 2. 3. 4. 5. 6. 7. Nominate Consensual: Founded upon and perfected by mere consent of the contracting parties Commutative: Each party gives a thing of value and receives an equivalent Bilateral: Each is bound to fulfill reciprocal obligations Onerous: Thing is sold in consideration of the price and vice versa Principal Real obligation
A. ESSENTIAL REQUISITES
(ConObCa) 1. Consent: Meeting of the minds as to the offer and acceptance as to the offer and acceptance thereof on the price, subject matter, and terms and conditions of payment 2. Object: Must be a determinate thing 3. Cause: For seller: Payment of price For buyer: Transfer of ownership and delivery of the thing
D. KINDS
(Asked in 97, 00) 1. Absolute: Sale is not subject to any condition whatsoever; title passes to the buyer upon delivery of thing sold 2. Conditional: Contract is subject to certain conditions (usually the payment of the purchase price); title will only pass once the conditions have been fulfilled
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E. 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 of the parties. Exceptions: 1) Statute of Frauds (1403) What are under the Statute of Frauds: o Sale of real property or an interest therein o Sale of goods, chattels, or things in action at a price not less than P500 o Sale not to be performed within 1 year Contract or some memorandum thereof must be in writing and subscribed by the party or his agent, otherwise contract is unenforceable o Unless ratified by failure to object to oral evidence or acceptance of benefits under the contract Applies only to executory contracts, not to contracts either totally or partially performed. (Iigo v. Estate of Maloto, 1967) 2) Sale of realty by an agent Agents authority must be in writing Otherwise the sale is void (Art.1874) 3) Sale of large cattle To be valid, transfer of large cattle must be registered with the municipal treasurer (Sec.529, Revised Administrative Code) 4) Electronic Commerce Act Electronic documents have the legal effect, validity or enforceability of any other document or legal writing As long as electronic document maintains its integrity and liability and is capable of being displayed to the person to whom it is to be presented, containing the electronic signature of the person sending it
F. SALE DISTINGUISHED OTHER CONTRACTS

(Art.1467)
SALE Goods are manufactured or procured in the ordinary course of business For the general market
FROM
1. Sale vs. Contract for a Piece of Work

CONTRACT FOR A PIECE OF WORK Goods are manufactured for customer upon his special order Specifically customer for
Contract for a piece of work: Contractor binds himself to execute a piece of work for the employer in consideration of a certain price or compensation If the article ordered by the purchaser is exactly such as the plaintiff makes and keeps on hand for sale to anyone, and no change or modification of it is made at the defendants request, it is a contract of sale, even though it may be entirely made after and in consequence of the defendants order for it. If the essence is the object, it is a sale. If the object is the skill, knowledge or reputation, then it is a contract for a piece of work.
SALES
2. Sale vs. Lease of Things

SALE Ownership transferred is LEASE OF THINGS Ownership is not transferred
3. Sale vs. Agency to Buy or Sell

(Asked in 99, 00)
SALE Buyer pays the price AGENCY TO BUY OR SELL Agent does not pay the price but delivers the price Buyer pays the price he obtains from the sale to the principal If agent cannot sell the thing, he must return it to the principal.
In construing a contract as a sale or an agency to sell, the essential clauses of the whole instrument shall be considered. (Art.1466) (ART.1638)
4. Sale vs. Barter/Exchange

SALE Consideration is price in money or its equivalent BARTER Consideration is another thing
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Barter is a contract where one of the parties binds himself to give one thing in consideration of the others promise to give another thing (Art.1638) If consideration consists partly in money and partly in another thing: transaction characterized by the manifest intention of the parties. o If manifest intention is not clear: Barter if value of thing > amount of money or its equivalent Otherwise, sale. (Art.1468) The intention of the parties must be manifested by ostensible signs.
H. BILATERAL AND SELL
PROMISE
TO
BUY
(Asked in 80, 91) A promise to buy and sell a determinate thing for a price certain is reciprocally demandable. (1479) Like a sale, the thing must determinate and the price certain.
SALE
be
5. Sale vs. Donation

SALE Onerous DONATION Gratuitous
CONSIDERATION
For buyer: thing For seller: price
When the price of the contract of sale is simulated, the sale may be void but the act may be shown to have been in reality a donation or some other contract. (Art.1471)
TRANSFER TITLE
OF
Title passes buyer
BILATERAL PROMISE TO BUY AND SELL Promise made by one party is the consideration for the promise made by the other (Baviera) No transfer
to
6. Sale vs. Dacion en Pago

SALE No pre-existing debt Creates an obligation Price is more freely agreed upon, fixed by the parties DACION EN PAGO Pre-existing debt Extinguishes the obligation (mode of payment) Price is value of the thing given
I. OPTION CONTRACT/ACCEPTED UNILATERAL PROMISE TO BUY OR SELL A DETERMINATE THING

(Asked in 75, 77, 80, 93, 02)
Art. 1324. When the offerer has allowed the offeree a certain period to accept, the offer may be withdrawn at any time before acceptance by communicating such withdrawal, except when the option is founded upon a consideration, as something paid or promised. Art. 1479. A promise to buy and sell a determinate thing for a price certain is reciprocally demandable. An accepted unilateral promise to buy or to sell a determinate thing for a price certain is binding upon the promissor if the promise is supported by a consideration distinct from the price.
SALES
There is a novation of the contract of loan into a contract of sale when the creditor agrees to accept a thing in payment of the debt.
G. CONTRACT TO SELL/ EXECUTORY CONTRACT OF SALE

(Asked in 97, 01, 03) McCullough & Co. vs. Berger, (1922): A sale is an executory contract if the seller merely promises to transfer the property at some future date, or when the agreement contemplates the performance of some act or condition necessary to complete the transfer. No title passes to the buyer until the act is performed or the condition fulfilled which is necessary to convert the executory contract into an executed contract. No need for judicial rescission: Failure by one of the parties to abide by the condition in a contract to sell will result to rescission.
De la Cavada vs. Diaz, (1918): An optional contract is a privilege existing in one person for which he had paid a consideration which gives him the right to buy, for example, certain merchandise or certain specified property, if he chooses, at any time within the agreed period, at a fixed price.
SALE Bilateral OPTION CONTRACT Unilateral: gives a right to buy or to sell, but imposes no obligation on the part of the option-holder, aside from the consideration for the offer Sale of right to purchase
Sale of property
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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 promise to sell, to be valid, must be supported by a consideration distinct from the price. Therefore, the option can still be withdrawn, even if accepted, if it is not supported by a consideration. Option Money vs. Earnest Money
Art. 1482. Whenever earnest money is given in a contract of sale, it shall be considered as part of the price and as proof of the perfection of the contract.
validly offer to sell the property to a 3rd person under the same terms as offered to the grantee. A sale made in violation of a right of first refusal is valid but rescissible, and may be the subject of an action for specific performance. o However, before the sale to the 3rd person may be rescinded, he must have been actually or constructively aware of the right of 1st refusal at the time he bought it.
RIGHT OF 1ST REFUSAL Unilateral Price and other terms are yet to be agreed upon
Earnest money is paid in advance of the purchase price agreed upon by the parties in a contract of sale, given by the buyer to the seller, to bind the latter to the bargain. (Asked in 93, 02)
EARNEST MONEY Part of purchase price
SALE Bilateral Price and other terms of payment are certain
In both sale and right of 1st refusal, the thing to be sold must be determinate.
RIGHT OF 1ST REFUSAL No need for consideration a separate
Limson vs. Ca, (2001):

OPTION MONEY Separate and distinct consideration from the purchase price Given when sale is not yet perfected When given, the would-be-buyer is not required to buy, but may even forfeit it depending on the terms of the option (Baviera) Grantee of option is still undecided whether or not to buy or sell the property
Given only when there is already a sale When given, the buyer is bound to pay the balance
OPTION CONTRACT Separate consideration is necessary Grantee has the right to buy or sell
No right to buy or sell, only a right to the 1st offer should the grantor decide to sell
SALES
K. ASSIGNMENT
Buyer manifests his earnest desire to buy the property
A sale of credit and other incorporeal rights o Because things in action are involved, Statute of Frauds applies if price is not less than 500. Project Builders, Inc. et.al. vs. CA & IFC, (2001): An assignment of credit is an act of transferring, either gratuitously or onerously, the right of the assignor, to an assignee who would then be capable of proceeding against the debtor for enforcement or satisfaction of the credit. o Transfer of rights takes place upon perfection of contract o Assignee becomes owner of the right including all appurtenances and accessory rights (Ex. Guaranty, Mortgage, Preference, etc.) Perfected at the moment there is a meeting of the minds upon the object and the price (Baviera)
J. RIGHT OF FIRST REFUSAL

(Asked in 93, 96, 98, 02, 08) Usually an integral part of contracts of lease; the consideration is built into the reciprocal obligations of the parties. (Baviera)
Illustrations: Equatorial Realty Development vs. Mayfair, (1996): If the lessor should desire to sell the leased premises, the lessee should be given 30-days exclusive option to purchase the same. Paranaque Kings vs. CA, (1997): Only after the grantee fails to exercise its right of 1st priority under the same terms and conditions within the period agreed upon, could the grantor
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Debtor must be notified of the assignment so that he would be informed that, from the date of the assignment, payment should be made to the assignee. o Debtor who pays creditor before having knowledge of the assignment shall be released from the obligation. To bind 3rd persons: must appear in public instrument o If real property is involved: must be recorded in Registry of Deeds
o o
If bailee undertakes to deliver the goods to such person If document is in such form that it may be negotiated by delivery
A person to whom a document has been negotiated acquires: Rights of the vendor Rights of the original consignee A person who negotiates a document of title warrants: 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 particular purpose, whenever such warranties would have been implied had the contract been transfer 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 by a negotiable document cannot be attached or levied 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-negotiable document of title are deliverable only to a specified person Carrier will not deliver the goods to any holder of the document or to whom such document may have been endorsed by the consignee Must present the deed of sale or donation in his favor Negotiation [negotiable document of title] VS. Transfer [non-negotiable document of title]: Transfer the assignment of rights of the consignee of a non-negotiable document of title to another Order document of title was sold or assigned, without indorsement Transferee does not acquire a better title than his transferor [unlike in a negotiable document of title, where the buyer may acquire a better title].
L. DOCUMENT OF TITLE
Document of Title a document used in the ordinary course of business in the sale or transfer of goods, as proof of the possession or control of the goods, or authorizing or purporting to authorize the possessor of the document to transfer or receive, either by endorsement or by delivery, goods represented by such document. (Art. 1636) Examples: bill of warehouse receipts lading, quedan,
SALES
Function: Evidence of possession or control of goods described therein Medium of transferring title and possession over the goods described therein without having to effect actual delivery thereof (Villanueva) 1. Negotiable Documents of Title Document of title which states that the goods referred to therein will be delivered to the bearer, or to the order of any person named in such document.
TERMS OF THE DOCUMENT Goods are deliverable to bearer Endorsed in blank by the person to whose order the goods were deliverable Goods are deliverable to the order of a specified person HOW NEGOTIATED By delivery of the document to another
By indorsement such person
of
Who may negotiate it? Owner Person to whom the possession or custody of the document has been entrusted by the owner
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Chapter II. Elements of a Valid Sale

A. Consent 1. Absolute Incapacity 2. Relative Incapacity 3. Offer and Acceptance B. Subject Matter 1. Licit 2. Actual or Possible 3. Determinate C. Price 1. Requisites a. Certain b. In money or Its Equivalent c. Real d. True 2. Gross Inadequacy of Price
If necessaries are sold and delivered to an incapacitated person: must pay a reasonable price therefor o Necessaries those which are indispensable for his support, according to the social position of the 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 other o Exception: Separation of property in marriage settlement, OR judicial separation of property Rationale: To protect 3rd persons who may have contracted with the spouse
Art. 96/124. The administration and enjoyment of the community property/ conjugal partnership shall belong to both spouses jointly. In case of disagreement, the husband's decision shall prevail, subject to recourse to the court by the wife for proper remedy, which must be availed of within five years from the date of the contract implementing such decision. In the event that one spouse is incapacitated or otherwise unable to participate in the administration of the common properties, the other spouse may assume sole powers of administration. These powers do not include disposition or encumbrance without authority of the court or the written consent of the other spouse. In the absence of such authority or consent, the disposition or encumbrance shall be void. However, the transaction shall be construed as a continuing offer on the part of the consenting spouse and the third person, and may be perfected as a binding contract upon the acceptance by the other spouse or authorization by the court before the offer is withdrawn by either or both offerors. (Family Code)
A. CONSENT
Consent: meeting of offer and acceptance on the thing sold and price Consent must not be vitiated, otherwise sale is voidable. Vices of Consent: FIMVU Fraud Intimidation Mistake Violence Undue Influence Buyer and Seller must have capacity to enter into the contract of sale.
SALES
1. Absolute Incapacity: Cannot validly
give 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 mind but by reason of age, disease, weak mind, and other similar causes, cannot take care of themselves and manage their property without outside aid (Easy prey for deceit and exploitation) If both parties UNENFORCABLE If only 1 VOIDABLE party are is incapacitated: incapacitated:
b. Guardian Cannot purchase property of person under his guardianship c. Agents Property whose administration or sale was given to them o Except if principal gives consent d. Public Officers and Employees Property of State/any of its subdivisions/GOCC, the administration of which was entrusted to them
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e. Executors and Administrators Property of estate under administration f.
their
B. SUBJECT MATTER
Thing sold must be: (LAD)
Justices, Judges, prosecuting attorneys, clerks Property or rights in litigation or levied upon on execution Rationale: to prevent fraud and to surround their profession with prestige
1. Licit
Not contrary to law, morals, good customs, public order or public policy o Examples of illicit: dangerous drugs, dynamited fish, wild bird or mammal Within the commerce of man o Examples of illicit: properties belonging to the State or its political subdivisions, intended for public use or public service
g. Lawyers Property or rights in litigation in which they take part because of their profession Rationale: Lawyer may have undue influence over client
h.
2. Actual or Possible
Actual: Existing Possible: Has a potential existence o VALID: Sale of future goods (goods to be manufactured, raised, or acquired by seller after the perfection of the sale) Sale of undivided interest in a thing Buyer becomes co-owner of the entire mass, in proportion to the amount he bought Co-owner cannot sell more than his share (Asked in 01, 02) Sale of things subject to a resolutory condition (Asked in 99)
Sale of MERE hope or expectancy Valid BUT Subject to condition that the thing will come into existence Example: Next catch of a fisherman Emptio Rei Speratei Valid Parties make the contract depend upon the existence of a thing, If the thing does not come into existence: contract is considered as not made and there is no obligation to pay the price Emptio Spei Void Parties intend the contract to exist at all events Buyer will have to pay the price even if the thing does not actually came into existence Sale of VAIN hope or expectancy Void
Aliens or private corporations or associations Lands located in the Philippines Except natural-born Filipinos allowed to acquire residential lands
For persons under (a)-(g): Have fiduciary relationship with the owners; prohibition is to prevent them from taking advantage of such Ancestral domains of indigenous cultural communities belong to all their generations and cannot be sold or disposed of except to or among the members, subject to their customary laws and traditions.
SALES
3. Offer and Acceptance

Offer must be certain as to the object and price o Business advertisements of things for sale are not offers Mere invitations to make an offer Exception: If otherwise provided o Advertisements for bidders are simply invitations to make proposals (Asked in 80) Advertiser not bound to accept the highest or lowest bid Exception: Unless the contrary appears Acceptance must be absolute o Plain and unconditional; Qualified acceptance = counteroffer o May be express or implied
Beaumont vs. Prieto, (1916): Where the acceptance was not in accordance with the terms and conditions of the offer, the offer lapsed even though the offeree later on was willing to accept the terms and conditions of the offer.
(Tolentino)
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o o
VOID: Sale of future inheritance (But heir may sell his hereditary rights) RESCISSIBLE: Sale of things under litigation entered into by defendant, without the approval of the litigants or the court NO RESCISSION where the thing is legally in the possession of 3rd persons who did not act in bad faith o
3. Determinate
Particularly designated Physically segregated Capable of being made determinate without the necessity of a new or further agreement between the parties Determinate also covers generic things, future goods, and undivided interests. (Baviera)
buyer: Innocent party may avail of remedies If price cannot be determined: (Asked in 76) Sale is inefficacious But if thing or part thereof has been delivered and appropriated by the buyer, he must pay a reasonable price therefor What is reasonable price? Question of fact dependent on circumstances
In money or its equivalent o Example: Letters of credit o If price is partly in money and partly in another thing: Determine manifest intention of the parties to see whether it was barter or sale Real o Realwhen buyer has an intention to pay and the seller has an expectation to receive the price o Not simulated If simulated: Sale is VOID But act may be shown to have been a donation or some other act or contract True o Price is false when the real consideration is not the same as that stated in the contract o If false price is stated: Sale is void, unless proved to be founded on another true and lawful price (1353)
SALES
C. PRICE
A contract of sale is null and void and produces 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 of payment goes into the price such that a disagreement on the manner of payment is tantamount to a failure to agree on the price.
1. Requisites
Price must be: Certain o Considered certain if the price agreed upon is that which the thing sold would have on a definite day, or in a particular exchange or market, or could be determined with reference to a thing certain. o Price is fixed by agreement of the parties Fixing of price cannot be left to discretion of one of the parties, BUT if such is accepted by the other, 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
2. Gross Inadequacy of Price

Does not affect a contract of sale, except that: o It may indicate a defect in consent such as fraud, mistake, or undue influence o It may indicate that the contract was in reality a donation or some other act or contract Sale is rescissible if: o Sale is entered into by a guardian or representative of an absentee o Ward or absentee suffers lesion by more than of the thing sold o Sale is not approved by the court When there is right to redeem, inadequacy of price is not material o Judgment debtor may reacquire his property or else sell his right to redeem so he may recover the losses he claims to have suffered o The lesser the price, the easier it is for the owner to redeem the property (Baviera)
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Chapter III. Transfer of Ownership
(Asked in 84, 98, 99, 03)

I. II.

GENERAL RULE: OWNERSHIP TRANSFERS UPON DELIVERY WHEN DELIVERY DOES NOT TRANSFER OWNERSHIP A. SALE ON RETURN B. SALE ON APPROVAL, TRIAL OR SATISFACTION C. EXECUTORY SALES D. SALE BY DESCRIPTION OR SAMPLE E. IN AN INVALID SALE F. WHEN SELLER IS NOT OWNER KINDS OF DELIVERY DOUBLE SALES RISK OF LOSS OR DETERIORATION
Sale providing that the buyer would be permitted to return them unless they measured up to the description was a sale with option to return and NOT a sale on approval
Conditional Sale WHEN TITLE PASSES: Upon delivery
Sale w/ Privilege of Return WHEN TITLE PASSES: Upon payment of price
III. IV. V.
I. GENERAL RULE
Ownership of the thing shall transfer to the vendee upon: A. Actual or Constructive Delivery DELIVERY is the method of accomplishing the transfer or acquisition of ownership in a sale. Kuenzle v. Macke, (1909): Sale without delivery gives the purchaser only the rights of a creditor. Essential Elements of Tradition: 1. Property under the control of the seller 2. Intention to deliver or transfer 3. Seller places the buyer in control
B. Sale on approval, trial, or satisfaction - Goods delivered to the buyer subject to his approval or on trial or on satisfaction Ownership passes to the buyer when: 1. He signifies his approval or acceptance to the seller or does any other act adopting the transaction, OR 2. He retains the goods without giving notice of rejection on the expiration of the time fixed for the return of the goods, OR 3. On the expiration of a reasonable time, if no period has been fixed. C. Executory Sales 1. Ownership in the thing shall not pass to the purchaser until he has fully paid the price. 2. Seller reserves the right of possession or ownership in the goods until certain conditions have been fulfilled notwithstanding delivery to the buyer/carrier/bailee. Luzon Brokerage v. Maritime Bldg., (1972): Where the buyer failed to comply with the condition precedent to the transfer of ownership or possession of the thing sold, the seller may recover possession or extrajudicially terminate the operation of the contract, refuse conveyance, and retain sums already received, where such rights are expressly provided for in the contract. Neither does the buyers 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 the description or sample 2. Contract is by sample AND description not sufficient that the
SALES
B. Any manner signifying an agreement that possession is transferred from vendor to vendee
II. EXCEPTIONS
When Delivery Ownership Does NOT Transfer
A. Sale on Return - Goods delivered to buyer on sale or return Ownership passes upon delivery, but buyer may revest ownership in the seller by returning or tendering the goods within the time fixed in the contract. Buyer remains liable for the price even if it becomes impossible to return the goods. Non-exercise of the privilege of return rendered the sale absolute and the buyer becomes liable for the price.
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bulk of goods correspond with the sample if they do not also correspond 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 has been unlawfully deprived of a movable, he may recover it even from a buyer in good faith. o Limitation: if buyer in good faith acquired it in a public sale, the owner must reimburse the price paid therefor
Art. 559. The possession of movable property acquired in good faith is equivalent to a title. Nevertheless, one who has lost any movable or has been unlawfully deprived thereof may recover it from the person in possession of the same. If the possessor of a movable lost or which the owner has been unlawfully deprived, has acquired it in good faith at a public sale, the owner cannot obtain its return without reimbursing the price paid therefor. (464a)
III.KINDS OF DELIVERY
(Asked in 77) 1. Real Delivery thing sold is delivered when it is placed in the control and possession of the vendee
Ocejo v. International Bank, (1918): The fact that the price of the property has not been paid in full yet is not an obstacle to the acquisition of ownership by the buyer. This is without prejudice to the right of the seller to claim payment of the price. Even if the buyer is subsequently declared insolvent, seller cannot institute an action for replevin, as rescission did not ipso facto take place by the mere fact of insolvency of the buyer. Bean v. Cadwallader, (1908): A mere contract for the sale of goods, where nothing remains to be done by the seller before making the delivery, transfers the right of property, although the price has not been paid, nor the thing sold actually delivered to the purchaser.
Exceptions: a. Estoppel: Owner is by his conduct precluded from denying the sellers authority to sell b. Sale under court order o In execution sale, the buyer merely steps into the shoes of the judgment debtor (Rule 39, sec. 33, ROC) c. When goods are purchased in a o Merchant store, o Fair, or o Market d. Registered land bought in good faith o General rule: Buyer need not go beyond the Torrens title o Exception: When he has actual knowledge of facts and circumstances that would impel a reasonably cautious man to make further inquiry
2. Constructive Delivery i. Symbolic Delivery Delivery by Public Instrument Execution thereof shall be equivalent to delivery of the thing which is the object of the contract, IF from the deed, the contrary does not appear or cannot be clearly inferred. A person must be in ACTUAL possession to be able to transfer CONSTRUCTIVE possession through a public instrument. When NOT equivalent to delivery: The intention of the parties is otherwise.
Phil. Suburban v. Auditor General, (1975): Material delivery could NOT have been made in the ff. cases: 2. When a certain date is fixed for the purchaser to take possession of the object of the conveyance, OR 3. Where, in a case of sale by installment, it is stipulated that until the last installment is paid, title to the property remains with the vendor, OR 4. When the vendor reserves the right to use and enjoy the property, OR 5. Where the vendor has no control over the thing sold, at the moment of the sale.
SALES
ii. Tradition Longa Manu The MOVABLE is placed in the sight of the purchaser so that he can take possession of it at pleasure.
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Delivery effected by the delivery of the keys of the place or depositary where it is stored or kept. Where quedans were issued to the purchaser for goods located in the sellers warehouse placed at the disposal of the buyer, delivery was effected upon the execution of the quedans, and the seller became only a depositary of the goods sold.
Even if the vendor sells the property again to another, the second purchaser cannot acquire ownership.
Board of Liquidators v. Floro, (1960): In a contract for the salvage of surplus property, whereby the employer assigned all its rights and title to all surplus property salvaged by the contractor, and payment is to be made monthly on the basis of property salvaged during the preceding month, tradition longa manu takes place and ownership passed as soon as the property was salvaged.
iii. Tradition Brevi Manu MOVABLE is delivered when the vendee had the thing already in his possession before the sale took place, not as owner but as lessee, borrower, or depositary. iv. Tradition Constitutum Possessorium Vendor remains in possession of the property sold, by virtue of a lease contract agreement with the vendee.
Kind 1. Symbolic
v. Delivery to a Common Carrier Title passed to the buyer at the point of shipment, UNLESS: Seller reserved title by the form of the bill of lading, with intent to remain the owner, not merely for the purpose of securing payment, OR Contrary intent appears in the contract (i.e. seller is required to deliver goods to buyer at the point of destination) F.O.B.: Free on Board Seller bears the expenses of transportation up to the F.O.B. point. C.I.F.: Cost, Insurance, Freight Price quoted includes the costs of the goods, insurance, and freight charges on the goods up to the point of destination. F.A.S.: Free Alongside Seller bears the expenses of transportation until he delivers the goods alongside a vessel at a named port. The best indication of the intention of the parties as to the place of delivery is the manner and place of payment.
Applies to real or personal incorporeal property personal property personal property personal property property;
SALES
How Made o By execution of public instrument evidencing sale EXCEPT: if contrary appears or can be clearly inferred o delivery of keys where stored/kept By mere agreement of the buyer and seller if possession cannot be transferred at the time of the sale By mere agreement of the buyer and seller if the buyer already had possession for any other reason Seller remains in possession of the property in a different capacity e.g. as lessee Placing of the titles of ownership in the possession of the buyer or allowing the buyer to use his rights When a non-owner who sells a thing later acquires title thereto delivery to a carrier for transmission to the buyer
2. Traditio longa manu 3. Traditio brevi manu
4. Traditio possessorium 5. Quasi-tradition
constitutum
real or personal property incorporeal property
6. Tradition by operation of law (Art.1434) 7. Delivery to a carrier
real or personal property goods
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Effect of Form of Bill of Lading Ownership is retained: By the form of the bill of lading, seller may consign the goods to himself or to his agent and thus prevent title from passing to the buyer until the latter pays the price Mere possession is retained: He may consign the goods to the order of the buyer or to the latters agent BUT by retaining the bill of lading, he prevents buyer from obtaining goods from the carrier until price is paid.
title, PROVIDED there is good faith. The 2 transactions must both be sales involving the same subject matter. Cheng v. Genato, (1998): Registration includes any entry made in the books of the registry, including both registration in its ordinary and strict sense and cancellation, annotation, and even marginal notes.
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 rightful ownership of the thing sold; 4. Same seller When not all requisites for the application of Art. 1544 are present, the principle of prior tempore, potior jure (he who is first in time is preferred in right) applies. The only essential requisite of this rule is priority in time; in other words, the only one who can invoke this is the first vendee. Undisputedly, he is a purchaser in good faith because at the time he bought the real property, there was still no sale to a second vendee. B. Rules Governing Sale of MOVABLES If the same thing is sold to different vendees, ownership shall be transferred to the person who may have first taken possession in good faith. C. Rule Governing Sale of IMMOVABLES Registered Land If the same immovable is sold to different buyers, ownership belongs to the person who: o In good faith first recorded in the Registry of Property; o If there is no inscription, ownership passes to the person who in good faith was first in possession; AND o In the absence thereof, to the person who presents the oldest
D. Must Be in Good Faith Purchaser in good faith for value (Asked in 76, 86, 08) one who buys the property of another without notice that some other person has a right to or interest in such property and pays a full and fair price for the sale, at the time of the purchase or before he has notice of the claim/interest of some other person in the property. Good faith an honest intention to abstain from taking any unconscious advantage of another. 1st buyer: ALWAYS in good faith because there is no sale prior to his transaction 2nd buyer: must continue to be in good faith until his contract ripens into ownership by tradition or recording 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 an innocent purchaser for value where it ignored the lis pendens on the title. E. Sale by Virtue of Execution and Attachment General Rule: Carumba v. CA, (1970): Art. 1544 does NOT apply to the sale of unregistered land at an execution sale because a buyer of unregistered land at a execution sale only steps into the shoes of the judgment debtor, and merely acquires the latter's interest in the property sold as of the time the property was levied upon. F. Unregistered Land Instrument or deeds establishing, transmitting, acknowledging, modifying or extinguishing rights
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with respect to lands not registered under the Land Registration Act or the Spanish Mortgage Law, are required to be registered in the Registry of Property to prejudice 3rd persons, although such registration is understood to be w/o prejudice to a 3rd party with a better right. Art. 1544 applies to unregistered land subject to a conventional sale but NOT to unregistered land subject to judicial sale.
2. When loss occurs at time of perfection Loss must have occurred before the contract was entered into, without the knowledge of both parties
TOTAL LOSS PARTIAL LOSS (Or loss which results in substantial change in character) Buyer may withdraw from the contract OR Buy the remainder at a proportionate price
Contract ineffective.
is
G. First in Possession in Good Faith If neither the vendee registered the sale in his favor nor any registration was done in good faith, vendee who was first in possession in good faith acquired ownership of the land. Quimson v. Rosete, (1950): Possession under Art. 1544 for determining who had better right when the piece of land has been sold several times by the same seller includes not only material but also symbolic possession. H. Oldest Title If neither of the vendees registered their deeds of sale nor acquired possession of the land sold, the one who can present the oldest title, PROVIDED there is good faith, has a better right. Oldest Title any document showing acquisition of the land in good faith o Examples: Deed of sale, receipt for the price Does not include a public document, UNLESS it can be inferred therefrom that delivery was NOT effected by the execution thereof.
Because there can be no contract without an object
3. When loss occurs after perfection but before delivery Seller bears risk of loss Buyer does not bear risk of loss until goods are delivered to him When Ownership is Transferred General Rules: Owner bears risk of loss Ownership is not transferred delivery Exceptions: Contrary stipulation Sun Brothers Appliances vs. Perez, (1963): The law allows an agreement which stipulates that: (1) where goods are sold and delivered to the buyer, the title is to remain in the seller until full payment, [but] (2) the loss or destruction of the property while in the possession of the buyer before payment, does not relieve him from the obligation to pay the price; in which case, the buyer suffers the loss. The reasons for its validity are: First, the absolute and unconditional nature of the vendees promise to pay for the goods. Second, the vendor has fully performed his contract and the vendee received what he bargained for. Third, the policy of providing an incentive to care properly for the goods, which is under the control and dominion of the vendee. Security title: Goods are delivered but seller retains ownership merely to secure payment o Buyer, as beneficial owner, bears risk of loss at time of delivery Delay through fault of the buyer or sellerrisk is on party at fault
until
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V. RISK OF LOSS OR DETERIORATION

(Asked in 81, 85, 90) A. Of Generic Things An obligation to deliver a generic thing is not extinguished by loss. (1263) B. Of Specific Things 1. When loss occurs before perfection Borne by seller (ownership is still with him)
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Chapter IV. Obligations of the Seller and the Buyer

Obligations of the Seller (WPD) 1. Preservation 2. Delivery a. General Concepts b. Actual & Constructive Delivery c. Completeness of Delivery 3. Warranty a. Express Warranty b. Implied Warranty c. Other Warranties B. Obligations of the Buyer (AP) 1. Acceptance 2. Payment A.
A. OBLIGATIONS OF THE SELLER 1. Preservation (Art. 1163)

Duration: from the perfection of sale until delivery (Art 1480) Default standard of care: diligence of a good father of a family General rule: seller is liable for loss or deterioration except for fortuitous event (Art. 1174) o Exception to exception: seller is still liable for fortuitous event i. Law provides (e.g. delay or promising to deliver the same thing to 2 or more persons with different interests Art. 1165) ii. By stipulation iii. Nature of obligation requires assumption of risk Fungibles sold for a price fixed according to weight, number or measure: duty to preserve begins only after the things are weighed, counted or measured except when seller is already in delay.
ii. Usage of trade iii. Sellers place of business (office) iv. Sellers residence o In case of specific goods, which the parties knew to be at some other place when the contract was perfected, that place is the place of delivery o If goods are at the time of sale possessed by a third person, then there is no delivery until he acknowledges to the buyer that he holds the goods for buyer. When to deliver: Absent a stipulation as to time, delivery must be made within a reasonable time; demand or tender of delivery shall be made at a reasonable hour. Improvements by seller at his expense grants him a usufructuary right o No indemnification o But he may remove it to the extent that there is no damage (Art. 1538)
b. Actual & Constructive Delivery

Execution of public instrument has the effect of actual or physical delivery o Except 1. When stipulated otherwise e.g. fixed date or ownership reserved (Art. 1503) 2. When thing sold was not subject to the control of the seller during execution of instrument 3. Sale or Return option where a buyer may choose to return instead of paying ownership is initially transferred but may be reverted. (Art. 1502) 4. Sale on Acceptance option where goods are delivered on approval or trial ownership is transferred only when the buyer expressly or impliedly accepts or approves the goods o Control over thing sold must be such that seller is capable of physically transferring it to buyer; and o This control must also extend for a reasonable time after delivery (Pasagui v Villablanca, 1975) Unless otherwise agreed, when symbolic delivery has been made, the seller is not obliged to remove tenants to place the buyer in actual possession of the property as he has already complied with his obligation to transfer ownership of and deliver the thing sold.
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2. Delivery (Art. 1495) a. General Concepts

Delivery comprises 2 obligations in Art. 1495: o Actual duty to deliver o 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
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(Power Commercial and Industrial Corp. v. CA, 1997; Sabio v. The International Corporate Bank, Inc., 2001)
c. Completeness of Delivery
When may the seller refuse to deliver: 1. No payment yet or no period for payment has been fixed in the contract (Art.1524); 2. The buyer loses the right to make use of the term, as when: a. He becomes insolvent UNLESS he gives a guaranty or security for the debt; b. He does not does not furnish the seller the guaranties or securities he promised; c. He impairs the guaranties or securities or they disappear fortuitously UNLESS he immediately gives new ones equally satisfactory; d. He violates any undertaking, in consideration of which the seller agreed to the period; e. He attempts to abscond. (Art.1536) Rules on Sales of Goods o Quantity less than expected a. Buyer may reject all b. Buyer accepts with knowledge of sellers inability to deliver the rest buyer pays at contract price c. Buyer has used or disposed prior to knowing sellers inability to deliver the rest buyer pays fair value o Quantity more than expected a. If divisible, buyer may reject excess b. If indivisible, buyer may reject all o Quality different or different goods a. If divisible, buyer may accept the goods compliant with contract and reject those that are not b. If indivisible, buyer may reject all (Art. 1522) o Sale of specific mass of goods In the sale of fungibles where the measure or weight has not been agreed upon nor is there a fixed rate based upon a measurement, the subject matter of the sale is a determinate object the specific
mass; seller is merely required to deliver such mass even if actual quantity falls short of parties estimate (Art. 1480) Delivery by installments a. By default, buyer is not bound to accept delivery of goods by instalments b. In a contract of delivery by installment to be paid for via installment as well, delay or breach may not necessarily mean breach of the entire contract; depending on the circumstances, breach may be severable and the aggrieved party is entitled to damages and not rescission. (Art. 1583)
Rules on Sales of Immovables o Sale at a fixed rate per unit of measure a. Seller bound to deliver entire land b. If the area is less than that stated, buyer may rescind or demand a proportionate reduction in price c. If a part of the land is not of the quality stated in the contract, buyer may rescind or demand a proportionate reduction in price d. Buyer may only avail of rescission if the area deficiency is 10% or more of total area or if the inferior value of the part of the land exceeds 10% of the price agreed upon. (Art. 1539) e. If the area turns out to be greater than that stated, buyer may accept area included and reject the excess or accept all and pay a proportionate increase in price (Art. 1540) o Sale for lump sum a. Follows the same rule as the sale of a specific mass which is explained above b. There is no change in price even if area or number turns out to be greater or lesser than that stated (Art. 1542) c. Exception: when the excess or deficiency is no longer reasonable; in Asian v Jalandoni, 1923, 644 sq m was found to be unreasonable. d. Exception to the exception: when buyer expressly assumes
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risk on actual area of the land. (Garcia v Veloso, 1941) e. If the price per unit or measure is not provided for in the contract, then the rules of lump sum sale should prevail. (Sta. Ana v Hernandez, 1966)
May attach to either to the sellers duty to deliver thing or some other circumstance
Always relates to the subject matter or the sellers obligations as to the subject matter
d. Effect of Delivery
Delivery, generally, results in transfer of ownership from seller to buyer. As such, it also transfers the risk of loss of the thing sold to the buyer. Acceptance is not a condition for the completeness of delivery; even with such refusal of acceptance, delivery will be deemed completed and produce its legal effects. By default, expenses of and incidental to putting the goods into a deliverable state must be borne by seller. (Art. 1521) Delivery through carrier
on Shipping point Delivery to carrier is equivalent to delivery to buyer Delivery to Destination buyer is upon point arrival at the point of destination; risk of loss is sellers prior to that Seller bears the expenses of transportation until he delivers the goods alongside a vessel at a named port. Price quoted includes the costs of the goods, insurance, and freight charges on the goods up to the place of destination to be paid by seller.
If seller has promised that the condition should happen or be performed, the buyer may treat the nonperformance of the condition as a breach of warranty. (Art.1545)
a. Express Warranty (APIR)

For there to be express warranty, the following 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 induce the buyer to buy; 3. The buyer buys the thing relying thereon. (Art. 1546) o Made before the sale not upon delivery or any other point Affirmation of the value of the thing or statement of the sellers opinion only is not a warranty unless: 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 instrument should be regarded as dealer's or trader's talk; conversely, what is specifically represented as true in said document cannot be considered as mere dealer's talk. (Moles v. IAC, 1989) An express warranty can be made by and also be binding on the seller even in the sale of a secondhand article. (Moles v. IAC, 1989) Concealment of facts does not necessarily amount to false representation unless there was an active misstatement of fact or a partial statement of fact such that withholding of that unsaid portion makes that which is stated absolutely false. Buyer who fails to inspect condition of property despite ample opportunity to do so and no opposition on the part of seller cannot later on allege false representation. (Phil Mftg Co. v Go Jucco, 1926)
F.O.B. (Free board)
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F.A.S. (Free alongside) C.I.F. (Cost, insurance & freight)
3. Warranty (Art. 1495)

May be express or implied Condition vs. Warranty
Warranty Goes into the performance of an obligation and may, in itself, be an obligation Non-fulfillment constitutes breach of contract Stipulation or operation of law
Condition Pertains to and affects the existence of the obligation Non-happening does not amount to breach of contract Must be stipulated
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b. Implied Warranty
1. Enumeration of implied warranties: o Implied Warranty of Title o Implied Warranty against Encumbrance / Non-Apparent Servitudes o Implied Warranty against Hidden Defects (Art. 1547) a. Redhibitory Defects of Animals b. Implied Warranty as to Merchantable Quality and Fitness of Goods in Sale by Sample or Description Implied Warranty of Title o Warranty of Sellers Right to Sell: seller warrants his right to sell at the time the ownership is to pass. Inapplicable to a sheriff, auctioneer, mortgagee, pledge, or other person professing to sell by virtue of authority in fact or law. (Art. 1547) o Warranty against Eviction: seller warrants that buyer, from the time ownership passes, shall have and enjoy legal and peaceful possession of 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 act imputable to the vendor Seller is summoned and made co-defendant in the suit for eviction at the instance of the buyer. (Power Commercial and Industrial Corp. v. CA, 1997) Implied Warranty against Encumbrance / Non-Apparent Servitudes o Requisites for breach: a. Thing sold is an immovable b. 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 buyer would not have bought it had he been aware thereof Not recorded in the Registry of Property unless there is an express warranty that the thing is free from all burdens
and (Art.1560)
encumbrances
Implied warranty against Hidden Defects o Requisites for breach: a. The defect renders the thing sold unfit for the use for which it was intended OR diminishes its fitness for such use to such an extent that had the buyer been aware thereof, he would not have bought it or would have paid a lower price; b. The defect is not patent or visible; c. The buyer is not an expert who, by reason of his trade or profession, should have known the defect d. The seller is aware of the hidden fault or defect, OR even he is not aware thereof if there is no stipulation to the contrary (Arts.1561 &1566) Implied warranty as to Merchantable Quality and Fitness of Goods b. Merchantable Quality: 1) Where the goods are brought by description from a seller who deals in goods of that description (Art.1562) 2) In a sale by sample, if the seller is a dealer in goods of that kind and the defect is not apparent on reasonable examination of the sample (Art.1566) c. Fitness for a particular purpose: Where the buyer expressly or impliedly makes known to the seller the particular purpose for which the goods are acquired AND it appears that the buyer relies on the sellers skill or judgment (Art.1562(1)) Implied warranty against Redhibitory Defect in the Sale of Animals Redhibitory defect- a hidden defect of animals of such nature that expert knowledge is not sufficient to discover it, even in case a professional inspection has been made No warranty in case of: a. Animals sold at fairs or public auctions b. Livestock sold as condemned The following sales are void:
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a. Sale of animals suffering from contagious diseases b. Sale of animals unfit for the purpose for which they are acquired as stated in the contract Veterinarian liable if he fails to discover or disclose the hidden defect through ignorance or bad faith Seller liable if animal dies within 3 days after its purchase due to a disease that existed at the time of sale.
d. Other Warranties
Warranty in Sale of Consumer Goods o Consumer goods goods primarily for personal, family, household or agricultural purposes, which shall include but not limited to food, drugs, cosmetics, and devices (Sec.4(q), RA 7493: Consumer Act of the Phil) o Kinds of express warranty: 1. Full warranty- if the written warranty meets the minimum standards 2. Limited warranty- if the written warranty does not meet the minimum standards (Sec.6(c), RA7394) o Minimum standard for warranties that the warrantor shall: 1. Remedy such consumer product within a reasonable time and without charge in case of a defect, malfunction or failure to conform to such written warranty; 2. Permit the consumer to elect whether to ask for a refund or replacement without charge of such product or part, as the case may be, where after reasonable number of attempts to remedy the defect or malfunction, the product continues to have the defect or to malfunction o The warrantor will not be required to perform the above duties if he can show that the defect, malfunction or failure to conform to a written warranty was caused by damage due to unreasonable use thereof. (Sec.68(d), RA 7394)
Warranty in sale of Subdivision Lot or Condominium Units o The owner or developer shall be answerable and liable for the facilities, improvements, infrastructures or other forms of development represented or promised in brochures, advertisements and other sales propaganda disseminated by the owner or developer or his agents and the same shall form part of the sales warranties enforceable against said owner or developer, jointly and severally. (Sec.19, PD 957: The Subdivision and Condominium Buyers Protective Decree)
B. OBLIGATIONS OF THE BUYER 1. Acceptance (Art. 1582)

Express: buyer intimates acceptance Implied: o Goods delivered to the buyer and he does any act in relation to them that is inconsistent with the ownership of the seller. o After the lapse of a reasonable time, the buyer retains the goods without intimating to the seller that he has rejected them. (Art.1585) Right of Inspection: reasonable opportunity to examine the goods upon delivery . If there is a stipulation that delivery is preconditioned on payment, then buyer has no right of inspection until he has paid. (Art.1584) If buyer refuses to accept goods, having the right to do so, he is not bound to return them to the seller; it being sufficient that he notifies the seller of his refusal to accept. o If he voluntarily constitutes himself a depositary of the goods, he shall be liable as such. (Art.1587) Unjust refusal to accept still results to transfer of ownership; title to the goods passes to the buyer from the moment they are placed at his disposal, except if ownership has been reserved by the seller (Art.1588)
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2. 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 or extrajudicial demand for payment Buyer may suspend payment when: o his ownership or possession of the thing is disturbed or o he has reasonable grounds to fear such disturbance by a vindicatory action or a foreclosure of mortgage Exception: buyer cannot suspend payment when: o seller gives security for the return of the price in a proper case o it has been stipulated that, notwithstanding any such contingency, the buyer shall be bound to pay (Art. 1590) Suspension may continue until the seller has caused the disturbance or danger to cease A mere act of trespass shall authorize the suspension of payment. (Art.1590) not the
b) refund cash surrender value to buyer; amount is equivalent to 50% of total payments made including deposits, options and down-payments plus 5% for every year in excess of 5 years of the life of the contract or any of its extensions
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In the sale of immovable property, buyer may pay even beyond the expiration of the period agreed upon, as long as no demand for rescission of the contract has been made upon him either judicially 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 grant him a new term R.A. 6552 applies to sale or financing of real estate on installment o Buyer is awarded a grace period of 1 month per year of installments paid or 60 days, whichever is higher, within which he may pay without additional interest a) may be used once every 5 years of the life of the contract or any of its extensions o If contract is to be cancelled, seller must first: a) give 30 day notice of cancellation, and
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Chapter V. Remedies of the Seller and the Buyer

A. GENERAL REMEDIES 1. Specific Performance 2. Rescission 3. Damages B. REMEDIES OF THE SELLER 1. For non-acceptance of payment a. Damages b. Rescission c. Action for the Price 2. For non-payment a. In sale of Movables 1) Self-help Remedies i. Lien ii. Stoppage in Transitu iii. Resale iv. Rescission 2) Recto Law i. Specific performance ii. Cancellation of Sale iii. Foreclosure of Chattel Mortgage b. In sale of immovables 1) Rescission for anticipatory breach 2) Specific performance 3) Rescission i. Maceda Law C. REMEDIES OF THE BUYER 1. For breach of obligation to preserve 2. For breach of obligation to deliver 3. For breach of warranty
B. REMEDIES OF THE SELLER 1. For non-acceptance of goods

a. Damages for non-acceptance, if buyer wrongfully neglects or refuses to accept and pay for the goods (1596) Measure of damages: Estimated loss directly and naturally resulting in the ordinary course of events from the buyers breach Where there is available market for goods: Difference between the contract price and the market price at the time the goods ought to have been accepted or if no time was fixed, at the time of refusal to accept If the resale was made with diligence, resale price is evidence of market value, taking into account whether or not the goods could be readily sold Where labor/expense was necessary for seller to fulfill his obligation: Labor performed and expenses made by seller before receiving notice of buyers repudiation or countermand Profit that the seller would have made if sale had been fully performed b. Rescission by giving the buyer notice of election to rescind (1597) Under this rule, rescission would bar an action on the contract because it means cancellation of the contractual obligations between the parties. (Baviera) c. Action for the price (specific performance) (1595) Only in the following cases: i. Ownership of the goods has passed to the buyer ii. Price is payable on a certain day, irrespective of delivery of the goods iii. Buyer can set up the defense that seller could not or did not intend to deliver the goods iv. Seller was notified by the buyer of his repudiation of the contract after the seller has completed the manufacture of the goods/had procured the goods to be delivered and the goods could not readily be resold for a reasonable price
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A. GENERAL REMEDIES
(1191) 1. Specific performance (Asked in 02) 2. Rescission (Asked in 03, 08) 3. Damages Song Fo & Co. vs. HawaiianPhilippine Co., (1925): General rule is that rescission of a contract will not be permitted for a slight or casual breach, but only for such substantial and fundamental breach as would defeat the very object of the parties in making the agreement. Neither party incurs in delay if the other does not comply or is not ready to comply in a proper manner with what is incumbent upon him (1169) Prescriptive periods: 10 years if based on written contract 6 years if based on oral contract
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2. For non-payment
Unpaid sellerWhole price has not been paid or tendered, or when check received as conditional payment was dishonored by non-payment or insolvency of the buyer Includes agent of seller to whom bill of lading was indorsed, or consignor who is responsible for the price, or any other person in the position of a seller
Available when: Vendee becomes insolvent When are goods in transit? From time of delivery to the carrier or other bailee by the seller, for the purpose of transmission to the buyer, until the buyer or his agent takes such delivery from the carrier. Even when goods have reached their ultimate destination, if buyer rejects them and carrier retains possession To terminate transit by delivery to a middleman, delivery must be to keep, not to transport. When are goods no longer in transit? Buyer obtained delivery of the goods before such have reached their ultimate destination Goods have arrived at ultimate destination, but carrier refuses to deliver Carrier enters into a new contract with the buyer upon arrival of the goods at their ultimate destination How exercised? By obtaining actual possession of the goods By giving notice of his claim to the carrier/other bailee who has possession of the goods o Carrier must redeliver goods to seller, or according to his instructions o Carrier not obliged to redeliver until the negotiable document of title, if any, has been surrendered for cancellation Sellers right to stoppage in transitu not affected even if buyer has sold or disposed of the goods Unless the seller assented iii. Resale: Available to unpaid seller who has a right of lien or who has stopped the goods in transitu Purpose: For seller to liquidate his damages. He must do so within a reasonable time and in such manner as to obtain the best price possible. Resale = fair sale if in accordance with established business practices, with no attempt to take advantage of the original buyer.
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a. In sale of movables 1. Self-help remedies LSRR
i. ii. iii. iv.
No need to resort to the courts

Lien Stoppage in Transitu Resale Rescission
i.
Right of Lien: Right to retain possession of goods until payment or tender of the whole price, or unless he agrees to sell on credit When available: Goods are sold without stipulation as to credit Goods are sold on credit, but term of credit has expired Buyer becomes insolvent When lost: Seller delivers goods to carrier or other bailee for transmission to the buyer under a straight or nonnegotiable bill of lading Buyer/his agent lawfully obtains possession of goods Seller waives it Not lost in remainder of goods when only partial delivery is made (unless such is symbolic delivery of the whole) Not lost by mere fact that seller obtained a judgment for the price When revived: Goods are returned by the buyer in a wrongful repudiation of the contract
ii. Stoppage in transitu: An extension of the lien for the price; entitles unpaid seller to resume possession of the goods while they are in transit before the goods come in possession of the vendee (Baviera)
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Resale may be in a private or public sale, but seller cannot buy indirectly or directly. For resale to be valid, buyer need not be notified of an intention to resell or the time and place of the resale.
after the seller has completed the manufacture of the goods/had procured the goods to be delivered and the goods could not readily be resold for a reasonable price
When available: Goods are of perishable nature Seller expressly reserves right of resale in case buyer defaults Buyer defaults in payment for an unreasonable time Effects: Seller is no longer liable to the original buyer upon the contract of sale or for any profit made by the resale Buyer at resale acquires good title as against the original owner In case resale is at a loss, seller entitled to recover the difference from the original buyer Seller may recover damages from original buyer for breach of contract iv. Rescission: Return of the title over the undelivered goods to the seller, and right to recover damages for breach of contract Available to unpaid seller who has a right of lien or who has stopped the goods in transitu When available: Seller expressly reserved right to rescind in case buyer defaults Buyer has been in default in payment for an unreasonable time Transfer of title shall not be held to have been rescinded by the unpaid seller until he manifests by notice to the buyer or some other overt act an intention 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 the goods Buyer can set up the defense that seller could not or did not intend to deliver the goods Seller was notified by the buyer of his repudiation of the contract
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 of movables, the price of which is payable in 2 or more installments, but not to straight-term sales where the price is payable in full, after making a down payment because the law aims to protect improvident buyers who may be tempted 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 of the thing (Ex. When lessor files a complaint for replevin against lessee) Also applies when seller assigns his credit to someone else Alternative Remedies under Recto Law SCF Remedies are alternative, not cumulative: Exercise of one bars exercise of the others
i. Specific Performance ii. Cancellation of Sale iii. Foreclosure of Chattel Mortgage
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i.
Specific Performance: In case vendee fails to pay Tajanlangit vs. Southern Motors, Inc., (1957): It is true that there was a chattel mortgage on the goods sold, but Southern Motors elected to sue the note exclusively to exact fulfillment of the obligation to pay. It had the right to select among the three remedies established in Art 1484. In choosing to sue on the note, it was not thereby limited to the proceeds of the sale, on execution, of the mortgaged good.
ii. Cancellation of sale: If vendee fails to pay 2 or more installments
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When the seller cancels the sale by repossessing the property sold, he is barred from exacting payment for its price. iii. Foreclosure of Chattel Mortgage: If vendee fails to pay 2 or more installments If seller chooses this remedy, he shall have no further action to recover any unpaid balance, and any stipulation to the contrary shall be void Northern Motors vs. Sapinoso, (1970): What Art 1484 (3) prohibits is further action against the purchaser to recover any unpaid balance of the price; and although this Court has construed the word action to mean any judicial or extrajudicial proceeding by virtue of which the vendor may lawfully be enabled to exact recovery of the supposed unsatisfied balance of the purchase price from the purchaser or his privy, there is no occasion at this stage to apply the restrictive provision of the said article because there has not yet been a foreclosure sale resulting in a deficiency. The payment of the sum of P1,250 of Sapinoso was a voluntary act on his part and did not result from a further action instituted by Northern Motors. Bachrach Motor Co., Inc. v. Millan, (1935): Purpose of the law is to remedy the abuses committed in foreclosure of chattel mortgages. It prevents mortgagees from seizing the mortgaged property, buying it at foreclosure sale for a low price and then bringing the suit against the mortgagor for a deficiency judgment. The almost invariable result of this procedure was that the mortgagor found himself minus the property and still owing practically the full amount of his original indebtedness.
security therefor, and buyer becomes insolvent Court has no discretion to compel the seller to wait for the expiration of the period to pay, or to grant the buyer more time to pay
2) Specific Performance + Damages (1191) Seller may choose between specific performance and rescission, with damages in either case Court has discretion, for a just cause, to give the buyer more time to pay even if the seller chose rescission 3) Rescission + Damages (1191) If seller chose specific performance, and such becomes impossible, he may still avail of rescission If absolute sale, seller must make a demand for rescission Judicially, OR By a notarial act Necessary even if automatic rescission is stipulated Effect of lack of demand: Buyer can still pay Effect of demand: Court may not grant buyer a new term i. RA 6552: Realty Installment Buyer Protection Act (Maceda Law) (Asked in 77, 89, 99, 00) Imposes additional requirements for a valid rescission If buyer has paid at least 2 years of installments: GRN 1. Grace period: 1 month per year of installment payments made. BUT buyer may only avail of it only 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% of total amount paid 3. Notice of cancellation of demand for rescission by notarial act, effective 30 days from the buyers receipt thereof and upon full payment of CSV If buyer has paid less than 2 years: GN 1. Grace period: at least 60 days 2. Notice of cancellation or demand for rescission by notarial act,
SALES
b. In sale of immovables
1. Rescission for Anticipatory Breach (1591) Available when seller has reasonable grounds to fear the loss of the immovable property sold and its price Example: Buyer destroys the building sold, there being no
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effective 30 days upon receipt thereof Down payments, deposits, or options on the contract shall be included in the total number of installments made Seller may go to court for judicial rescission in lieu of a notarial act of rescission During the grace period, buyer shall have the right: 1. To sell or assign his rights, to be evidenced in a notarial instrument 2. To update his account 3. To pay in advance any installment, or the full unpaid balance of the price, without any interest RA 1. 2. 3. 6552 does not apply to: Industrial lots Commercial buildings Sale to tenants Agricultural Reform (RA3844)
A thing is lost when it: Perishes Goes out of commerce Disappears in such a way that its existence is unknown or it cannot be recovered If thing deteriorates:
WITHOUT FAULT OF SELLER No breach Impairment shall be borne by buyer THROUGH FAULT OF SELLER Rescission + damages Or Specific performance + damages
2. For breach of obligation to deliver

Delivery of wrong quantity (1522)
Goods are less than what was contracted Reject the goods OR Accept and pay At contract rate if buyer accepts knowing that seller wont perform in full At fair value: If goods were used before knowing that seller wont be able to perform in full More Reject the excess (Or the whole, if indivisible) OR Accept the whole and pay at contract rate
SALES
under Code
C. REMEDIES OF THE BUYER

General rule: Courts will refuse to decree specific performance with respect to chattels, because damages are a sufficient remedy Exception: Buyer is entitled to the specific thing which to him has special value and which he cannot readily obtain in the market OR where damages would not furnish a complete and adequate remedy (Baviera)
1464. In the sale of an undivided share of a specific mass of fungible goods, if the mass contains less than the number, weight, or measure bought, the buyer becomes the owner of the whole mass and the seller is bound to make good the deficiency from goods of the same kind and quality, UNLESS a contrary intent appears.
Real Estate (1539-1543) If at the rate of a certain price per unit of measure or number:
Less (in area or quality) than what was agreed upon: Proportional reduction of price OR Rescission, if: Lack in area is at least 1/10 of what is stated, or inferior value of thing sold exceeds 1/10 of price Buyer would not have bought the property has he been aware of the inferior quality or smaller area More Reject the excess OR Accept the whole and pay at contract rate
1. For breach of obligation to preserve

If thing is lost:
WITHOUT FAULT OF SELLER No breach Obligation extinguished THROUGH FAULT OF SELLER (Or through fortuitous event, if seller is liable) Damages
is
Also applies to judicial sales (1541)
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If for a lump sum:

Everything is within boundaries, even if less or more than stated area No remedy Rudolf Lietz, Inc. v. CA, (2005): Where both the area and the boundaries of the immovable are declared, the area covered within the boundaries of the immovable prevails over the stated area. Not everything is within boundaries Proportional reduction in price OR Rescission
and has right of lien to secure payment of part of price paid Implied warranty (1555,1556)
TOTAL EVICTION Enforce liability for eviction - Demand from seller: VICED Value of thing sold at time of eviction Income or fruits, if he has been ordered to deliver them to the party who won the eviction suit Costs of eviction suit and in a proper case, suit against seller for warranty Expenses of the contract, if buyer has paid them Damages and interests, and ornamental expenses, IF sale was made in bad faith
against
eviction
Prescriptive period: 6 months, counted from date of delivery
3. For breach of warranty

Express Warranty Prescriptive period: Period specified in express warranty OR 4 years, if no period is specified (following the general rule on rescission of contracts) Remedies: 1. Accept goods + demand diminution/extinction of price 2. Accept goods + damages 3. Refuse to accept goods + damages 4. Rescind (Refuse to accept or return or offer to return) + recover price paid Rescission not available when buyer: Knew of breach of warranty when he accepted the goods without protest Fails to notify the seller about election to rescind within a reasonable period of time Fails to return or offer to return the goods to the seller in substantially a good condition as they were when delivered, unless deterioration was due to breach of warranty Measure of damages: Difference between value of goods at time of delivery and the value they would have had if they had answered to the warranty
PARTIAL EVICTION Enforce liability (demand VICED) OR Rescind If he would not have bought the thing sold without the part lost BUT he must return the thing without other encumbrances than those which it had when he acquired it
SALES
Rules: 2. Buyer need not appeal from decision to hold seller liable for eviction 3. When adverse possession commenced before sale, but prescription period completed after transfer: seller is not liable 4. If property sold for nonpayment of taxes due and not made known to the buyer before the sale: seller liable 5. Judgment debtor also responsible for eviction in judicial sales, unless it is otherwise 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 knowledge of risks of eviction: Seller liable only for the value of thing sold at time of eviction Buyer made waiver with knowledge of risks: Seller not liable, buyer assumed the consequences
Effects of rescission: Buyer no longer liable for price o Entitled to return of any part of price paid, concurrently with or immediately after an offer to return the goods If seller refuses to accept offer to return goods: buyer deemed bailee for seller
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Implied warranty against encumbrances (1560) 1. Rescission: Within 1 year from execution of deed of sale OR 2. Damages: Within 1 year from execution of deed of sale or discovery of the burden or servitude Implied warranty against hidden defects (1567-1571) If thing is not lost: 1. Withdraw from contract (accion redhibitoria) + damages 2. Demand a proportionate reduction of the price (accion quanti minoris) + damages If thing is lost:
DUE TO FAULT HIDDEN DUE TO FORTUITOUS EVENT OR FAULT OF BUYER Demand: - Price paid minus value of thing when it was lost - Damages, if seller acted in bad faith
Warranty in sale of consumer goods (RA 7394, Sec68) If implied warranty accompanies express warranty, both will be of equal duration.
EXPRESS WARRANTY 1. Demand repair within 30 days Extendible for causes beyond the control of the warrantor Demand refund of price minus amount directly attributable to the use of the consumer prior to the discovery of the non-conformity IMPLIED WARRANTY 1. Retain the goods and recover damages OR 2. Reject the goods, cancel contract and recover from seller so much of the purchase price as has been paid + damages
2.
If seller aware of defect, buyer may demand: - Return of price - Refund of expenses of contract - Damages If seller not aware of defect: Buyer may demand price and expenses BUT NOT damages
SALES
Prescriptive period: 6 months from delivery Implied warranty defects of animals against redhibitory
1. Withdraw from contract + damages 2. 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
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Chapter VI. Extinguishment of Sale

A. CAUSES B. CONVENTIONAL REDEMPTION 1. DEFINITION 2. CONVENTIONAL REDEMPTION VS. EQUITABLE MORTGAGE 3. RIGHT OF REDEMPTION C. LEGAL REDEMPTION 1. DEFINITION 2. PERIOD TO REDEEM 3. INSTANCES D. UNDER THE PUBLIC LAND ACT E. UNDER SPECIAL LAWS 1. FORECLOSURE AND EXECUTION SALES 2. UNDER THE AGRARIAN LAND REFORM CODE
Villarica v CA, 1968: Available when the seller reserves the right to repurchase the thing sold in the same instrument of sale as one of the stipulations of the contract
2. Conventional Redemption Equitable Mortgage

a. Definition
vs.
(Asked in 79, 80, 82, 84, 86, 89, 91, 05)
Molina v. CA, 2003: An equitable mortgage is defined as one which, although lacking in some formality, or form or words, or other requisites demanded by a statute, nevertheless reveals the intention of the parties to charge real property as security for a debt, and contains nothing impossible or contrary to law. b. Presumption that a contract is an equitable 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 the expiration of the right to repurchase; 5. Part of the purchase price retained by the seller; 6. Payment of taxes on the thing sold borne by the seller; 7. Any other case where it may be fairly inferred that the real intention of the parties is for the transaction to secure a debt or other obligation. For the presumption of an equitable mortgage to arise under Art. 1602, 2 requisites must concur: (a) That the parties entered into a contract denominated as a contract of sale, and (b) That their intention was to secure an existing debt by way of a mortgage. (Molina v. CA, 2003) In case of doubt, a contract purporting to be a sale with right to repurchase shall be construed as an equitable mortgage (Art. 1603) Remedies of apparent vendor: 1. If the instrument does not reflect the true agreement, the remedy is reformation 2. If decreed to be an equitable
A. CAUSES
1. Generally, by the same causes as all other 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 the property 3. Legal Redemption Sale is extinguished if the person to whom the law grants the right of legal redemption exercises such right
SALES
B. CONVENTIONAL REDEMPTION
(Arts.1601-1618)
1. Definition
Art. 1601. Conventional redemption shall take place when the vendor reserves the right to repurchase the thing sold, with the obligation to comply with the provisions of Article 1616 and other stipulations which may have been agreed upon.
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3.
mortgage, then any money, fruits or other benefit to be received by the buyer as rent or otherwise considered as interest. If decreed as a true sale with right to purchase- seller may redeem w/in 30 days from finality of judgment, even if the period for redemption has expired.
d. How exercised i. Returning the ff. to the buyer: (PEN) 1) Price of the sale; 2) Expenses of the contract and other legitimate payments made by reason of the sale; 3) Necessary and useful expenses made on the thing sold ii. Complying with any other stipulation agreed upon, if any. BPI Family Savings Bank, Inc. v. Veloso, (2004): The general rule in redemption is that it is not sufficient that a person offering to redeem manifests his desire to do so. The statement of intention must be accompanied by an actual and simultaneous tender of payment for the full amount of the repurchase price. Paez v. Magno, (1949):Tender of payment is enough (i.e., consignation is not necessary), if made on time, as a basis for action against the buyer to compel him to resell. But that tender does not in itself relieve the buyer from his obligation to pay the price when redemption is allowed by the court. e. Effect of redemption i. The seller shall receive the thing free from all charges or mortgages constituted by the buyer BUT he shall respect leases executed by the buyer in good faith and in accordance with local custom. ii. If there are growing fruits at the time of sale and at the time of redemption: no reimbursement or prorating if the buyer did not pay indemnity at the time of sale iii. If there were no growing fruits at the time of sale, but some exist at the time of redemption: fruits prorated (buyer entitled to part corresponding to time he possessed the land in the last year, counted from the anniversary of the date of sale) f. Effect of non-redemption Ownership is consolidated in the buyer BUT the consolidation shall not be recorded in the Registry of property w/o a judicial order, after the vendor has been duly heard.
SALES
3. Right of Redemption a. Period (Asked in 77) Gen. Rule: Follow period stipulated in contract, but should not exceed 10 years. If no period stipulated, then it shall be four years from the execution of the contract But vendor may still exercise the right to repurchase within thirty days from the time final judgment was rendered in a civil action on the basis that the contract was a true sale with right to repurchase
b. By whom exercised i. Vendor ii.His heirs, assigns or agents iii. Creditor, if he has exhausted the property of the vendor iv. Co-owners of an immovable, if they sold their interests to the same person, may only redeem their respective shares Vendee cannot be compelled to agree to a partial redemption If the co-owners sold their interest to the same person who previously bought the share of a co-owner subject to a right of redemption, then the latter may be compelled to redeem the whole property c. From whom to redeem i. Vendee a retro ii. His heirs, assigns or agents iii. Subsequent purchaser of property, even if the right to redeem was not mentioned in the subsequent contract; except if registered land, where the right to redeem must be annotated in the title iv. If several heirs, then the right of redemption can be exercised against each heir for his share of the property
Heirs of Arches v. Diaz, (1973): If the court declares the contract as an equitable mortgage, the right of action to foreclose the mortgage or to collect the indebtedness arises from the judgment, even if it is not alternatively prayed for.
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C. LEGAL REDEMPTION
(Arts. 1619-1623)
1. Definition
Art. 1619. Legal redemption is the right to be subrogated, upon the same terms and conditions stipulated in the contract, in the place of one who acquires a thing by purchase or dation in payment, or by any other transaction whereby ownership is transmitted by onerous title.
Applies to transfers of ownership by onerous title where subrogation is possible. Hence, it cannot apply to barter or to transfer by gratuitous title or hereditary succession. Applies to sales with pacto de retro (BAVIERA citing MANRESA) How exercised: by either a formal offer to redeem or the filing of an action in court together with the consignation of the redemption price within the reglementary period.
Debtor-mortgagor, successors-ininterest, judicial/judgment creditor, any person having a lien on the property, in case of extrajudicial foreclosure of mortgage (Act No. 3135. Sec. 6. ) Debtor-mortgagor in case of judicial foreclosure of real estate mortgage IF the mortgagee is a bank or a banking institution. (The General Banking Law of 2000) Agricultural lessee w/o knowledge of sale of landholding (Agrarian Land Reform Code, Sec.12)
1 year from the date of the sale
90 days from finality of judgment
2 years from the registration 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 all the co-owners or any of them are sold to a third person o Third person refers to all person who are not heirs of the vendor, by will or intestate succession o The right is available not only to original co-owners, but to those who had later acquired the share of the co-owner o But the right is not available if the share of the co-owner was merely mortgaged, or the share of the co-owner was sold to another co-owner If the price of the alienation is grossly excessive, the redemptioner shall pay only a reasonable one Should two or more co-owners desire to exercise the right, they may also do so in proportion to the share they may respectively have in the thing owned in common Basis of the law: Public Policy, since co-ownership is a hindrance to the development and administration of the property (BAVIERA)
2. Period to Redeem
To whom granted a. Co-owner (Art 1620) b. Adjoining owner of Rural Land (Article 1621) c. Adjoining owner of urban land (Art. 1622) Debtor in case a credit or incorporeal right in litigation is sold (Art.1634) Applicant or his widow or legal heirs in case of sale of homestead (Sec.119, Public Land Act) Taxpayer in case of tax sale (Sec. 215, NIRC) Judgment debtor, successorin- interest, or creditor with subsequent lien, in case of execution sale (Rule 39, Sec.27, ROC) Period 30 days from notice - In writing - By the seller Of the actual execution and delivery of the deed of sale Doromal v. CA: Actual knowledge of the sale is immaterial 30 days from the date the assignee demands payment from debtor 5 yrs. from date of conveyance
SALES
1 year from date of forfeiture 1 year from the date of registration of the certificate of sale
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b. Redemption by Adjoining Landowners of rural land (Art. 1621) Owners of adjoining land shall have the right of redemption when: o A piece of rural land is alienated o Area does not exceed one hectare When not applicable: o The grantee does not own any rural land o Adjacent lands are separated by brooks, drains, roads and other apparent servitudes for the benefit of other estates Order of preference if two or more wish to exercise the right o Owner with smaller land area o If same land area, then the one who first requested the redemption Ortega v. Orcine, (1971): What constitutes rural or urban is to be determined from the character of the community or vicinity in which it is found, and NOT from the nature of the land itself nor the purpose to which it is devoted c. Redemption by adjoining land-owners of urban land (Art. 1622) 1) Right of Pre-emption Owner of any adjoining land has a right of pre-emption at a reasonable price when: o Urban land is so small and so situated that a major portion of it cannot be used for any practical purpose w/in a reasonable time; o Was bought merely for speculation; o Was resold. 2) Right of Redemption If the resale has been perfected, the owner of the adjoining land shall have a right of redemption, also at a reasonable price Priority if 2 or more adjoining owners want to redeem: owner whose intended use of the land appears to be best justified d. Redemption of Credit Available when it is sold while in litigation (From the time the complaint is answered) NOT available when the assignment in favor of:
Co-heir/co-owner of right assigned o Creditor in payment of his credit o Possessor of a tenement or piece of land which is subject to the right assigned How exercised: reimburse the assignee for the: o Price paid o Judicial expenses incurred o Interest on the price from date of payment o
D. UNDER THE PUBLIC LAND ACT

1. What transactions are covered o Every conveyance of land acquired under a free patent or homestead o The ownership of the land must have been transferred to another. If the transaction is a mere promise to sell, there is no right yet to redeem o This refers to conveyances made after the prohibited 5 years from the issuance of the patent or grant 2. Period o Within 5 years from the date of conveyance o If pacto de retro sale, the period to redeem cannot be less than 5 years 3. Who may redeem o Applicant, widow, or heirs o NOT available if the land is sold to another member of the family of the applicant, or his direct descendant or heir 4. From whom can it be redeemed o Subsequent purchasers
SALES
E. UNDER SPECIAL LAWS

1. Foreclosure and Execution Sales Who may redeem a. In extra judicial foreclosure i. Debtor ii. Successor in interest iii. Judicial or judgment creditor of said debtor iv. Junior encumbrancer b. In execution sales i. Judgment debtor ii. Successor in interest iii. Creditor having a lien on the property sold by attachment,
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judgment or mortgage on the property subsequent to the judgment Period to redeem a. Extra judicial foreclosure within 1 year from the date of the sale b. Execution sale within 12 months after the sale c. If land is mortgaged in favor of a bank within 1 year after the sale Amount of redemption o Amount of the purchase o Interest at 1% per month from the time of the sale up to the time of redemption o Any assessment or taxes which the purchaser may have paid the Agrarian Land Reform
2. Under Code
Lessees right of pre-emption o The agricultural lessee shall have the preferential right to buy under the same reasonable terms and conditions, in case the lessor decides to hold the landholding o Conditions: The landholding must be pre-empted by the DAR When two or more lessees, each shall have preferential right only to the extent of the area cultivated by him o Period: 180 days from notice in writing Lessees right of redemption o In case landholding is sold to 3rd person without the knowledge of the lessee, the latter shall have the right to redeem the same at a reasonable price and consideration o Period: within 180 days from notice in writing
SALES
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Chapter VII. The Bulk Sales Law
Chapter VII. The Bulk Sales Law

Applies to sales and transfers in bulk, including any sale, transfer, mortgage or assignment of: A stock of goods, wares, merchandise, provisions or materials NOT in the ordinary course of trade and the regular prosecution of the business of the seller, transferor, mortgagor, or assignor All, or substantially all, of the business or trade theretofore conducted by the seller, transferor, mortgagor, or assignor All, or substantially all, of the fixtures and equipment used in and about the business of the seller, transferor, mortgagor, or assignor 4. 2. 3.
When not applicable: Waiver by vendor, transferor, mortgagor or assignor, as shown by verified statements To executors, administrators, receivers, assignees in insolvency, or public officers, acting under judicial process. 5.
Delivered to: o Buyer, mortgagee or agent o If corporation: president, vice-president, treasurer or secretary o If partnership firm: a member thereof Pro-rata application of the purchase or mortgage money to the payment of listed creditors Inventory of the goods, wares, merchandise, provisions or materials When made: at least 10 days before sale or mortgage Contents: o Quantity o Cost price of each article (as far as possible) Notice to listed creditors When made: at least 10 days before transfer of possession How: personally or by registered mail Contents: Price, terms and conditions of sale, transfer, mortgage or assignment Consideration for the sale, transfer, mortgage or assignment Must not be nominal
SALES
Effect of non-compliance: Criminal liability: 6 months to 5 years imprisonment, or fine of P5K or less, or both. If the purchase or mortgage money is not applied pro-rata to the bona fide claims of listed creditors: Sale, transfer or mortgage shall be FRAUDULENT and VOID.
REQUIREMENTS: SPIN-C 1. Sworn statement of list of creditors Contents: o Names + addresses of all creditors o Amount of indebtedness due or owing When delivered: Before any part of the purchase price is received, or any promissory note or evidence of indebtedness therefor
- end of Sales -
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Table of Contents
CREDIT TRANSACTIONS
Chapter I. GENERAL PRINCIPLES I. Credit Transactions Defined II. Security Defined III. Bailment Defined Chapter II. LOAN I. Characteristics II. Kinds of Loan III. Commodatum and Mutuum Distinguished IV. Kinds of Commodatum V. Commodatum VI. Obligations of the Bailee VII.Obligations of the Bailor VIII. Simple Loan IX. Interest Chapter III. REAL MORTGAGE I. Real Mortgage Defined II. Objects of Real Mortgage III. Kinds of Real Mortgage IV. Essential Requisites V. Effect of Invalidity of Mortgage on Principal Obligation VI. Effect of Mortgage VII.Extent of Mortgage VIII. Foreclosure of Mortgage IX. Right of Mortgagee to Recover Deficiency X. Nature of Judicial Foreclosure Proceedings XI. Waiver of Security by Creditor XII. Redemption Chapter IV. CHATTEL MORTGAGE I. Definition II. Applicability of the Provisions on Pledge III. Subject Matter of Chattel Mortgage IV. Registration in the Chattel Mortgage Register V. Right of Redemption VI. Right of Mortgagee to Possession VII.Foreclosure of Chattel Mortgage VIII. Civil Action to Recover Credit IX. Right of Mortgagee to Recover Deficiency X. Application of Proceeds of Sale Chapter V. PLEDGE I. Provisions Common to Pledge and Mortgage II. Provisions Applicable only to Pledge Chapter VI. ANTICHRESIS I. Definition of Antichresis II. Characteristics III. Special Requisites IV. Application of the Fruits V. Obligations of the Creditor 83 83 83 83 84 84 84 84 84 84 85 85 86 86 88 88 88 88 88 89 89 89 89 90 90 90 90 91 91 91 91 92 92 93 93 93 93 93 94 94 95 98 98 98 98 98 98 Chapter XI. SPECIAL LAWS I. Warehouse Receipts Law II. Insolvency Law 119 119 124 VI. Remedies of Creditor in Case of NonPayment of Debt Chapter VII. DEPOSIT I. General Provisions A. Definition B. Characteristics C. Principal Purpose D. Distinctions from Mutuum and Commodatum E. Creation of a Deposit F. Extinguishment of a Deposit G. Kinds of Deposit H. Subject Matter of Deposit II. Voluntary Deposit A. General Provisions B. Obligations of the Depositary C. Obligations of the Depositor III. Necessary Deposit A. Definition B. Liability of the Hotel-Keeper IV. Judicial Deposit Chapter VIII. GUARANTY I. Guaranty in General Its Nature and Extent A. Characteristics B. Classification of Guaranty C. Guaranty Distinguished from Warranty D. Guaranty Distinguished from Suretyship E. Rules Governing Guaranty II. Effects of Guaranty A. Between Guarantor and Creditor B. Between Debtor and Guarantor C. As Between Co-Guarantors III. Extinguishment of Guaranty Chapter IX. SURETY I. Nature of Suretys Undertaking II. Applicability of Strictissimi Juris Rule Chapter X. CONCURRENCE AND PREFERENCE OF CREDITS I. Concurrence of Credits Defined II. Preference of Credit Defined III. General Provisions IV. Classification of Credits V. Order of Preference of Credits 99 100 100 100 100 100 100 101 101 101 101 101 101 102 106 106 106 106 107 108 108 108 108 108 108 109 112 112 114 115 115 117 117 117 118 118 118 118 118 118 118
CREDIT TRANSACTIONS
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Chapter I. General Principles
Credit Transactions
FACULTY EDITOR

SUBJECT EDITORS
LECTURES Edel Cruz

HEAD

-------Kae Guerrero
CREDIT TRANSACTIONS Thea Cunanan

LEAD WRITER Jeric Cruz Caloy Mendoza Sherwin Ebalo Diane Singayan Emmeline Escobillo Rich Sta. Lucia Nikki Mendez Donna Arevalo WRITERS
-------Leo Zulueta
Rania Joya
Chapter I. General Principles

This 1st Chapter is a review of the basic concepts and principles surrounding credit transactions, securities, and bailments. There are THREE MAJOR LESSONS in this Chapter: I. Credit Transactions Defined II. Security Defined III. Bailment Defined
III.BAILMENT DEFINED
BAILMENT is the delivery of property of one person to another in trust for a specific purpose, with a contract, express or implied, that the trust shall be faithfully executed and the property returned or duly accounted for when a special purpose is accomplished or kept until the bailor reclaims it. Parties in Bailment 1. Bailor the GIVER, the party who delivers possession/custody of the thing bailed 2. Bailee the RECIPIENT, the party who receives the possession/custody of the thing delivered
CREDIT TRANSACTIONS
I. CREDIT TRANSACTIONS DEFINED

CREDIT TRANSACTIONS include all transactions involving the purchase or loan of goods, services or money in the present with a promise to pay or deliver in the future (contract of security). 2 Types of Credit Transactions 1. Secured Transactions supported by a collateral or an encumbrance of property 2. Unsecured Transactions supported only by a promise to pay or the personal commitment of another such as a guarantor or surety
II. SECURITY DEFINED

SECURITY is something given or deposited which serves as a means to ensure the fulfillment or enforcement of an obligation or to protect some interest in the property. 2 Types of Security 1. Personal - an individual becomes a surety or a guarantor 2. Real or Property an encumbrance is made on property
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Chapter II. Loan
Chapter II. Loan

This 2nd Chapter discusses all the important concepts in the subject of Loan as a security transaction. There are NINE MAJOR LESSONS in this Chapter: I. Characteristics II. Kinds of Loan III. Commodatum and Mutuum Distinguished IV. Kinds of Commodatum V. Commodatum VI. Obligations of the Bailee VII. Obligations of the Bailor VIII. Simple Loan IX. Interest
Nature Subject Matter
of
Ownership of Thing Loaned Nature Thing to be Returned Purpose When Demand for Return May be Made Risk of Loss
Commodatum Ordinarily, something NOT consumable Retained by lender Gratuitous Same loaned thing
I. CHARACTERISTICS
1. A real contractDelivery of the thing loaned is NECESSARY for the perfection of the contract. An accepted promise to make a future contract is a consensual contract, hence, BINDING, but it is only after delivery when the real contract of loan arises. 2. A unilateral contractOnce the subject matter is delivered, it creates obligations on the part of only one of the parties (borrower).
For use or temporary possession Before the expiration of the term in case of urgent need Bailor, since he is the owner
Mutuum Money or other consumable thing Transferred to the borrower Gratuitous or onerous (with interest) Something of the same kind and quality For consumption Demand may NOT be made before the lapse of the term agreed upon Borrower, even if caused exclusively by a fortuitous event
IV. KINDS OF COMMODATUM

1. Ordinary commodatum 2. Precarium Bailor may demand the thing at will
II. KINDS OF LOAN

1. Commodatum Bailor/lender gives to the bailee/borrower a NONCONSUMABLE thing so that the latter may use it for a certain time and return the IDENTICAL thing 2. Simple Loan or Mutuum Lender delivers to the borrower MONEY or other CONSUMABLE thing upon the condition that borrower shall pay the same amount of the same kind and quality
V. COMMODATUM
The purpose of the contract of commodatum is the TEMPORARY USE of the thing loaned. If the bailee is NOT entitled to the use of the thing, the contract may be a deposit. A commodatum and becomes a contract of lease if compensation is paid by the borrower. General Rule: Subject matter of a commodatum is generally a nonconsumable thing, whether real or personal. o EXCEPT: If the purpose is merely for exhibition, a consumable thing may be made the subject of a commodatum.
CREDIT TRANSACTIONS
III.COMMODATUM AND DISTINGUISHED

Character Kind Subject Matter of Commodatum Purely personal Real or personal property
MUTUUM
Mutuum NOT purely personal Money or other consumable thing
Producers Bank v. CA, (2003): A contract of commodatum exists in an agreement to deposit a sum of money in the account of another where it was clear to the parties that the money would not be removed from the account and would be returned after a specified period of time. In such case, even
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Chapter II. Loan
if the subject matter involved is a consumable thing, the purpose of the contract is not the consumption of the object but merely for exhibition. The death of a party terminates the contract UNLESS by stipulation, the commodatum is transmitted to the heirs of either or both parties. If there are two or more borrowers, the death of one does NOT extinguish the contract in the absence of stipulation to the contrary. In the absence of an agreement to that effect, a bailee CANNOT lend or lease the object of the commodatum to a third person. o EXCEPTION: The use of the thing loaned may extend to the members of the bailees household. EXCEPTION TO THE EXCEPTION: When there is a stipulation to the contrary; AND The nature of the thing forbids such use. The right to use the thing is limited to the thing loaned but not to its fruits UNLESS there is a stipulation to the contrary. o If the enjoyment of the FRUITS and not of the thing itself is the main cause of the contract, the contract is of usufruct.
iv. If he lends or Leases the thing to a third person who is NOT a member of his household v. If being able to Save the thing borrowed or his own thing, he chooses his own 4. Bailee does not answer for the Deterioration of the thing loaned due only to the use thereof and without his fault. i. Liable if he is guilty of fault or negligence 5. To Return the thing loaned and has no right of retention if bailor owes him something. EXCEPT: Bailee has right of retention when bailor owes him something for the damages he suffered due to the defects of the thing loaned. i. This adverse claim CANNOT ripen into ownership through acquisitive prescription. ii. If bailee has right to retain the thing, he CANNOT sell the thing to satisfy the damages owed him. 6. 2 or more bailees to whom a thing is loaned in the same contract are Solidarily liable.
VII.
OBLIGATIONS OF THE BAILOR
[H-A-R-E] 1. To Allow the bailee the use of the thing loaned for the duration of the period stipulated OR until the accomplishment of the purpose for which the commodatum was constituted. EXCEPTIONS: i. Precarium where the bailor may demand the thing at will ii. Acts of Ingratitude: (1) Bailee commits offense against the person, honor, or property of bailor, his wife, or children under his authority (2) Bailee imputes to bailor a criminal offense, or act involving moral turpitude, even though he should prove it, UNLESS the crime or the act has been committed against the bailee himself, his wife, or children under his authority (3) Bailee unduly refuses to support bailor 2. To Refund extraordinary expenses for preservation of the thing loaned, PROVIDED, he was informed by the bailee before incurring the expenses,
VI. OBLIGATIONS OF THE BAILEE

[S-C-O-L-De-R] 1. To take Care of the thing loaned with the diligence of a good father of a family 2. To pay for Ordinary expenses (for the use and preservation of the thing) 3. Bailee is not liable for Loss or damage due to fortuitous event since bailor retains ownership EXCEPTIONS: [P-L-A-P-S] i. If bailee devotes the thing to a Purpose different from that which it had been loaned ii. If bailee keeps it longer than the Period stipulated, OR after accomplishment of the use for which the commodatum has been constituted iii. If the thing is delivered with an Appraisal of its value UNLESS there is a stipulation exempting the bailee from responsibility in case of a fortuitous event
CREDIT TRANSACTIONS
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Chapter II. Loan
EXCEPT when they are so urgent that the reply to the notification cannot be awaited without danger. Note: What can be dispensed with is the reply, NOT the notification 3. To bear Extraordinary expenses arising from actual use of thing loaned i. only when such expenses are caused by a FORTUITOUS EVENT ii. if it were caused through the fault of bailee, he alone must bear the expenses iii. Parties may stipulate a different apportionment or that they be borne by bailor or bailee only 4. Liable for Hidden defects 5 REQUISITES: i. defect in the thing ii. defect is hidden iii. bailor is aware of such defect iv. bailor does not advise bailee of the same v. bailee suffers damages by Rationale of said defect Expenses NOT necessary for the use and preservation of the thing loaned must be borne by the borrower. These include expenses for OSTENTATION. Bailor cannot exempt himself from payment of expenses for damages by abandoning the thing to the bailee.
i.
which is the legal tender in the Phils. Legal tender notes and coins issued by the Bangko Sentral ng Pilipinas o Check is NOT a legal tender and cannot constitute a valid tender of payment. Naguiat v. CA, (2003): Checks shall produce the effect of payment only when they have been encashed. In case of extraordinary inflation/deflation: Payment shall be the value of the currency at the time of the CREATION of obligation.
Cebu Financial v. CA, (1999): The rules on the modes of payment of loan (Art. 1249) applies to a money-market transaction. A money market transaction involves a market dealing where the lenders and borrowers deal with each other through a middleman or dealer in open market.
IX. INTEREST
1. Requisites for an interest to be chargeable: 1. Must be expressly stipulated 2. Agreement is in writing 3. Must be lawful 2. Exceptions to Requirement of Express Stipulation 1. Interest by way of damages 2. Interest accruing from unpaid interest: Interest due earns interest from the time of judicial demand. 3. Rules on Interest Concepts on Payment of Interest: 1. Interest for use of money, goods, or credit for forbearance of money, goods or credit i. NO stipulation re: payment of interest: NO interest ii. There is express stipulation for payment of interest but NO rate of interest: Interest is 12% p.a. iii. Stipulation in writing and rate of interest is agreed upon: Such interest shall not be subject to ceiling rates. 2. Interest as damages for breach or default for loan or forbearance of money i. NO stipulation as to interest: 12% p.a. from date of judicial or extrajudicial demand ii. Rate of interest is stipulated:
VIII. SIMPLE LOAN

Obligation of the debtor is TO PAY. Includes accessory duty to pay INTEREST Borrower can dispose of the thing borrowed. Fungible things those usually dealt with by number, weight, or measure, so that any given unit or portion is treated as any other unit or portion Distinguished from Barter one party binds himself to give one thing in consideration of the others promise to give another thing SUBJECT MATTER: nonfungibles/non- consumables OBLIGATION OF RECEIVER: equivalent thing is given in return for what has been received. NATURE OF CONTRACT: onerous If thing loaned is MONEY When there is stipulation: Payment must be made in currency stipulated. When there is a stipulation but NOT possible: Must be paid in currency
CREDIT TRANSACTIONS
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Chapter II. Loan
Loan + stipulated interest earn 12% p.a. from date of judicial demand. 3. Interest when obligation NOT consisting of a loan or forbearance of money is breached i. Interest may be imposed at discretion of court at 6% p.a. ii. NO interest on unliquidated claims or damages, until demand can be established with reasonable certainty. iii. After the former has been established, 6% interest p.a. begins to run from date of judicial or extrajudicial demand iv. Obligation cannot be established with reasonable certainty at time of demand, 6% p.a. interest runs only from date of judgment When a money judgment (in nos. 1, 2, and 3) becomes final and executory, it shall earn 12% p.a. from finality of judgment until full paymentmoney judgment considered as forbearance of credit. Obligations with a penal clause (in case debtor fails to pay): Penalty substitutes for indemnity for damages, if no contrary stipulation. Damages on top of penal clause (above): To be paid if obligor refuses to pay.
Ligutan v. CA, (2002): Although the interest rate expressly stipulated by the parties is not subject to ceiling rates, a stipulated interest may be equitably reduced by the courts if it is iniquitous or unconscionable, or if the principal obligation has been partly or irregularly complied with.
CREDIT TRANSACTIONS
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Chapter III. Real Mortgage

(Asked in 82, 84, 85, 89, 01, and 08)
This 3rd Chapter discusses all the important concepts in Real Estate Mortgage as a security transaction. There are TWELVE MAJOR LESSONS in this Chapter: I. II. III. IV. V. Real Mortgage Defined Objects of Real Mortgage Kinds of Real Mortgage Essential Requisites Effect of Invalidity of Mortgage on Principal Obligation VI. Effect of Mortgage VII. Extent of Mortgage VIII. Foreclosure of Mortgage IX. Right of Mortgagee to Recover Deficiency X. Nature of Judicial Foreclosure Proceedings XI. Waiver of Security by Creditor XII.Redemption
securities for the subsequent loans. Thus, when the mortgagor takes another loan for which another security was given, it could not be inferred that such loan was made in reliance solely on the original security with the dragnet clause, but rather, on the new security given. This is the reliance on the security test.
III.KINDS OF REAL MORTGAGE

A. Voluntary B. Legal C. Equitable one which, although lacking the proper formalities of a mortgage, shows the intention of the parties to make the property as a security for a debt. Provisions governing equitable mortgage: Arts. 1365, 1450, 1454, 1602, 1603, 1604 and 1607. (DE LEON)
I. REAL MORTGAGE
A contract where the debtor secures to the creditor the fulfillment of a principal obligation, specially subjecting to such security IMMOVABLE property or REAL RIGHTS over immovable property in case the principal obligation is not complied with at the time stipulated. (DE LEON)
IV. ESSENTIAL REQUISITES

A. Constituted to secure the fulfillment of a principal obligation. B. Mortgagor must be the absolute owner of the thing mortgaged. C. The persons constituting the mortgage have free disposal of the property; in the absence thereof, they should be legally authorized for the purpose. D. Cannot exist without a valid obligation. E. When the principal obligation becomes due, the thing in which the mortgage consists may be alienated for payment to the creditor. F. Must appear in a public document duly recorded in the Registry of Property, to be validly constituted. In a legal mortgage, the persons in whose favor the law establishes a mortgage have the right to demand the execution and recording of a document formalizing the mortgage.
II. OBJECTS OF REAL MORTGAGE

A. Immovables B. Alienable real rights in accordance with the laws, imposed upon immovables Future property cannot be object of mortgage.
CREDIT TRANSACTIONS
Prudential Bank vs. Alviar (2005): A blanket mortgage clause or dragnet clause subsumes all debts of past or future origins. Such clauses are carefully scrutinized and strictly construed. Mortgages of this character enable the parties to provide continuous dealings and avoid the expense and inconvenience of executing a new security on each new transaction. The parties having conformed to the blanket mortgage clause or dragnet clause, subsequent loans need not be secured by other securities, as the subsequent loans will be secured by the first mortgage. But there is no prohibition against contractually requiring other
Samanilla vs. Cajucom, (1960): A mortgage, whether registered or not, is binding between the parties, registration being necessary only to make the same valid against 3rd persons. Registration only operates as a notice of the mortgage to others, but neither adds to its validity nor convert an invalid mortgage into a valid one between the parties. If the
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purpose of registration is merely to give notice, the questions regarding the effect or invalidity of instruments are expected to be decided after, not before, registration. Registration must first be allowed and validity or effect litigated afterwards.
V. EFFECT OF INVALIDITY OF MORTGAGE ON THE PRINCIPAL OBLIGATION

A. Principal obligation remains valid. B. Mortgage deed remains as evidence of a personal obligation. (DE LEON)
A. Kinds of Foreclosure 1. Judicial Foreclosure (Rule 68, Rules of Court) i. Judgment on foreclosure for payment or sale: Court shall render judgment for the sum due and order that it be paid within a period of not less than 90 days nor more than 120 days from the entry of judgment, and in default of such payment the property shall be sold at public auction. ii. Effect of sale of mortgaged property: When confirmed, it shall operate to divest the rights in the property of all parties to the action and to vest their rights in the purchaser, subject to right of redemption. iii. Upon finality of order of confirmation or upon expiration of period of redemption, the purchaser or last redemptioner is entitled to possession unless a 3rd party is actually holding it adversely to obligor. iv. Disposition of proceeds of sale: (1) Costs of the sale; (2) Amount due the mortgagee; (3) Claims of junior encumbrancers or persons holding subsequent mortgages in the order of their priority; and (4) Balance, if any shall be paid to the mortgagor. 2. Extrajudicial Foreclosure(Act No. 3135) i. Redemption of property sold: The debtor may redeem within one year from and after the date of sale. ii. In the case of juridical persons engaged in banking and quasi-banking functions, they may redeem until, but not after the registration of the certificate of foreclosure sale which in no case shall be more than 3 months after foreclosure, whichever is earlier. (RA 8791)
VI. EFFECT OF MORTGAGE

Art. 2126. The mortgage directly and immediately subjects the property upon which it is imposed, whoever the possessor may be, to the fulfillment of the obligation for whose security it was constituted.
EFFECTS A. Creates real rights, a lien inseparable from the property mortgaged, enforceable against the whole world. B. Creates merely an encumbrance. (DE LEON)
VII. EXTENT OF MORTGAGE

Mortgage extends to: A. Growing fruits B. Rents or income not yet received C. Improvements D. Natural accessions E. Indemnity from insurers or in virtue of expropriation for public use
Art. 2130. A stipulation forbidding the owner from alienating the immovable mortgage shall be void.
CREDIT TRANSACTIONS
* Also known as pactum non alienando
VIII. FORECLOSURE OF MORTGAGE

Foreclosure is the remedy available to the mortgagee by which he subjects the mortgaged property to the satisfaction of the obligation secured by the mortgage. (DE LEON)
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iii. The purchaser may petition that possession be given to him during the redemption period by giving a bond in an amount equivalent to the use of the property for 12 months.
It is of no moment that the collection suit was filed ahead, what is determinative is the fact that the foreclosure proceedings ended even before the decision in the collection suit was rendered.
IX. RIGHT OF MORTGAGEE RECOVER DEFICIENCY
TO
XII. REDEMPTION
A transaction where mortgagor reacquires or buys back the property which may have passed under the mortgage or divests the property of the lien which the mortgage may have created. (DE LEON) A. Kinds of Redemption 1. Equity of redemption: Right of the mortgagor in case of judicial foreclosure to redeem the mortgaged property after his default in the performance of the conditions of the mortgage but before the confirmation of the sale of the mortgaged property. 2. Right of redemption: Right of the mortgagor in case of extrajudicial foreclosure to redeem the property within a certain period after it was sold for the satisfaction of the debt. Medida vs. CA (1992): The judgment debtor remains in possession of the property foreclosed and sold, during the period of redemption. After the termination of the period of redemption and no redemption having been made, the purchaser is entitled to a deed of conveyance and to the possession of the property. The purchaser of land sold at public auction under a writ of execution has only an inchoate right to the property, subject to be defeated and terminated within the period of 12 months from the date of sale, by a redemption on the part of the owner. Since the mortgagor remains as the absolute owner of the property during the redemption period and has the free disposal of his property, he can constitute another mortgage on the property.
A. Mortgagee is entitled to recover deficiency- mortgage is merely a security, not a satisfaction of an obligation. B. If the deficiency is embodied in a judgment, it is referred to as deficiency judgment. C. Action for recovery of deficiency may be filed even during redemption period. D. Action to recover prescribes after 10 years from the time the right of action accrues.
X. NATURE OF JUDICIAL FORECLOSURE PROCEEDINGS

A. Quasi in rem action B. Foreclosure is only the result incident of the failure to pay debt. C. Survives death of mortgagor or
XI. WAIVER OF CREDITOR
SECURITY
BY
CREDIT TRANSACTIONS
A. Mortgagee may waive right to foreclose his mortgage and maintain a personal action for recovery of the indebtedness. B. Remedy is alternative, not cumulative- mortgagee cannot have both remedies. Caltex Phils., Inc. vs. IAC (1989): The mortgagee has a choice of 1 of 2 remedies, but he cannot have both. The mortgagee may: 1. foreclose the mortgage; or 2. file an ordinary action to collect the debt. The mere act of filing a collection suit for the recovery of a debt secured by a mortgage constitutes waiver of the other remedy of foreclosure.
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Chapter IV. Chattel Mortgage

(Asked in 82, 83, 85, 92, 93, and 99)
This 4th Chapter discusses all the important concepts in Chattel Mortgage as a security transaction. There are TEN MAJOR LESSONS in this Chapter I. II. III. IV. Definition Applicability of the Provisions on Pledge Subject Matter of Chattel Mortgage Registration in the Chattel Mortgage Register V. Right of Redemption VI. Right of Mortgagee to Possession VII. Foreclosure of Chattel Mortgage VIII. Civil Action to Recover Credit IX. Right of Mortgagee to Recover Deficiency X. Application of Proceeds of Sale
purchase personal property installments.
of in
Dy v. CA, 1991: Mortgagor still has the right to sell it (the property mortgaged) although he is under the obligation to secure the written consent of the mortgagee or lays himself open to criminal prosecution under Art. 319, par.2, RPC.
II. APPLICABILITY OF PROVISIONS ON PLEDGE
THE
I. DEFINITION
CHATTEL MORTGAGE is a contract by virtue of which a personal property is recorded in the Chattel Mortgage Register as security for the performance of an obligation. If the movable, instead of being recorded, is delivered to the creditor, it is a pledge and not a chattel mortgage.
Chattel Mortgage Movable property Delivery NOT necessary. Necessary for validity OF FORECLOSURE: Sec. 14 of Act 1508, Act 3135 for extrajudicial foreclosure AFTER FORECLOSURE: The excess over the amount due goes to the debtor. Pledge Movable property Delivery necessary.
The provisions on pledge shall apply to chattel mortgage only insofar as they are not in conflict with any provision of the Chattel Mortgage Law
III.SUBJECT MATTER OF CHATTEL MORTGAGE

The subject matter of chattel mortgage must always be personal or movable property.
Property Involved Delivery
is
Registration Procedure
NOT necessary for validity. OF SALE: Art. 2112, CC.
Excess
Deficiency
AFTER FORECLOSURE: Creditor is entitled to deficiency from the debtor EXCEPT if it is a security for the
AFTER SALE: The debtor is not entitled to the excess UNLESS otherwise stipulated or in case of legal pledge. AFTER SALE: Creditor is not entitled to recover deficiency notwithstanding any stipulation to the contrary.
A. Mortgageable properties under the Chattel Mortgage Law: 1. Shares of stock 2. Interest in business 3. Machinery treated by the parties as personal property subsequently installed on leased land 4. Vesselsbut it is essential that the mortgage is recorded in the office of the Philippine Coast Guard to be effective as to third persons 5. Motor vehiclesbut the mortgage must be registered in the LTO; with respect to vehicles used for public service, the mortgage must also carry the approval of the LTFRB to make it effective against the public and the Board 6. House of mixed materialswhich by its very nature is considered personal property and because it was so expressly designated by the parties 7. House intended to be demolished for what are really mortgaged are materials thereof 8. House built on rented land it did not form part of the land Makati Leasing vs. Wearever, (1983): Parties to a contract may by
CREDIT TRANSACTIONS
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agreement treat as personal property that which by nature would be real property, as long as no interest of third parties would be prejudiced thereby. Tumalad v. Vicencio, (1971): That the parties to a deed of chattel mortgage may agree to consider real property as personal property is good only insofar as the contracting parties are concerned. It is based partly upon the principle of estoppel. The following conditions must be present: It must be expressly stipulated that the contract was a chattel mortgage. The house should merely stand on rented land. Sec. 7 of the Chattel Mortgage Law only requires that the description of the mortgage property be such as to enable the parties to the mortgage or any other person to identify the same after reasonable investigation and inquiry. A pledge, real estate mortgage, or antichresis may exceptionally secure after-incurred obligations so long as these future debts are accurately described. A chattel mortgage, however, can only cover obligations existing at the time the mortgage is constituted. Acme v. CA, (1996): Although a promise expressed in a chattel mortgage to include debts that are yet to be contracted can be a binding commitment that can be compelled upon, the security itself, however, does not come into existence or arise until after a chattel mortgage agreement covering the newly contracted debt is executed.
A. Period within which Registration Should Be Made The law is substantially and sufficiently complied with where the registration is made by the mortgagee before the mortgagor has complied with his principal obligation and no right of innocent third persons is prejudiced. B. Effect of Registration 1. Creates real rights. 2. Adds nothing to mortgage. C. Registration of Assignment of Mortgage Not Required A chattel mortgage may be alienated or assigned to a third person. The debtor is protected if he pays his creditor without actual knowledge that the debt has been assigned. Affidavit of Good Faith Required AFFIDAVIT OF GOOD FAITH is an oath in a contract of chattel mortgage wherein the parties severally swear that the mortgage is made for the purpose of securing the obligation specified in the conditions thereof and for no other purposes and that the same is a just and valid obligation and one not entered into for the purpose of fraud. (Sec. 5, Act 1508) This special affidavit transforms an already valid mortgage into a preferred mortgage. A. Effect of Absence It vitiates a mortgage only as against third persons without notice.
CREDIT TRANSACTIONS
V. RIGHT OF REDEMPTION
A. When the condition of a chattel mortgage is broken the following may redeem: 1. Mortgagor 2. Person holding a subsequent mortgage 3. Subsequent attaching creditor B. An attaching creditor who so redeems shall be subrogated to the rights of the mortgagee and entitled to foreclose the mortgage in the same manner as the mortgagee. C. Redemption is made by paying or delivering to the mortgagee the amount due on such mortgage and the costs and expenses incurred by such breach of condition before the sale.
IV. REGISTRATION IN THE CHATTEL MORTGAGE REGISTER

Under the special law, if the property is situated in a different province from that in which the mortgagor resides, the registration must be in both registers; otherwise, the chattel mortgage is void.
Note: If the chattel mortgage is not recorded, it is nevertheless binding between the parties.
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D. Rights acquired by the second mortgagee and subsequent purchaser: 1. Before payment of debt After a chattel mortgage is executed, there remains in the mortgagor a mere right of redemption and only this right passes to the second mortgagee in case of a second mortgage. The second mortgagee can only recover the property from the first mortgagee by paying him the mortgage debt. 2. After payment of debt The judgment or attaching creditor who purchased the property at the execution sale could only acquire the right of redemption. He is not entitled to the actual possession and delivery of the property without first paying the mortgage debt.
VII. FORECLOSURE MORTGAGE
OF
CHATTEL
A. Manner of Foreclosure 1. PUBLIC SALE 2. PRIVATE SALE - Mortgagor is estopped to question it except on the ground 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 10 days notice to the mortgagor. After foreclosure sale, the right of redemption is no longer available to the mortgagor.
VIII. CIVIL ACTION CREDIT
TO
RECOVER
VI. RIGHT OF POSSESSION

MORTGAGEE
TO
When mortgagee institutes a civil action against the mortgagor for the amount of the loan, he loses his lien on the mortgaged chattel.
After default Creditor has the right to take possession of the mortgaged property. Before default Chattel mortgagee cannot possess the property, otherwise, the contract becomes a pledge. Mortgagor refuses to surrender possession Creditors remedy: 1. action to institute judicial foreclosure; OR 2. action to secure possession as preliminary to the sale Right of possession is conceded/evident An action for replevin may be initiated against the possessor of the property. Right of possession is disputed Servicewide Specialist, Inc. v. CA, (1999): An adverse possessor, who is not the mortgagor, cannot just be deprived of his possession nor be bound by the terms of the chattel mortgage contract, simply because the mortgagee brings up an action for replevin. Claimant, the unpaid seller of the mortgagor, files a claim against the mortgagors mortgagee who forecloses the unpaid goods i. Ownership of the goods is not reverted to the unpaid seller UNLESS sale was invalidated. ii. The obligation to pay the unpaid seller remains with the mortgagor.
IX. RIGHT OF MORTGAGEE RECOVER DEFICIENCY
TO
Action may be brought within 10 years from the time the cause of action accrues, even if it is not upon a written contract. Mortgaged property is subsequently attached and soldMortgagee is entitled to deficiency judgment in an action for specific performance.
CREDIT TRANSACTIONS
California Bus Lines, Inc. v. State Investment House, Inc., (2003): When creditormortgagee assigned his receivables to an assignee, it created an independent and distinct obligation between the debtor-mortgagor and the assignee. Thus, when mortgagee foreclosed on the chattel mortgage, this did not in any way affect debtor-mortgagors obligation to pay the assignee. Such foreclosure extinguished the debt of the debtor-mortgagor only as to the creditor.
X. APPLICATION OF PROCEEDS OF SALE

(in the following order): 1. Costs and expenses of keeping and sale 2. Payment of the obligation secured by the mortgagee 3. Claims of persons holding subsequent mortgages in their order 4. The balance, if any, shall be paid to the mortgagor, or person holding rights under him.
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Chapter V. Pledge
Chapter V. Pledge
This 5th Chapter contains all the important concepts in Pledge as a security transaction. There are TWO MAJOR Chapter: I. LESSONS in this and
Provisions Common to Pledge Mortgage II. Provisions Applicable only to Pledge
I. PROVISIONS COMMON PLEDGE AND MORTGAGE

(Asked in 77, 84, 94, and 04)
TO
A. Essential Requisites (Art. 2085) 1. Constituted to secure the fulfillment of a principal obligation i) Pledge and mortgage are accessory contracts. They cannot exist without a valid obligation ii) They may guarantee a voidable, unenforceable, or a natural obligation (2086) 2. Pledgor or mortgagor must be the absolute owner of the thing pledged or mortgaged i) If not the absolute owner: pledge is void! It is without legal existence and registration cannot validate it. ii) Future property cannot be pledged or mortgaged iii) If share in a co-ownership: limited to the portion which may be alienated by him in the division upon termination of the co-ownership 3. Persons constituting the pledge or mortgage must have the free disposal of their property, or are legally authorized for that purpose i) Act of pledging or mortgaging is an act of strict ownership as it involves an alienation or transmission of real rights in property ii) Free disposal of the property = property must not be subject to any claim of a 3rd person B. Accommodation Pledge or Mortgage 1. Pledgor/mortgagor may be a 3rd person 2. Creditor has the duty to make proper inquiry He is negligent if he relies solely on the representations made by the debtor.
3. If gratuitous, such contract should be strictly construed Contract should be interpreted as to effect the least transmission of rights. (Art. 1378) 4. Liability for deficiency: i) If property is not sufficient to cover the debt, the accommodation pledgor/mortgagor shall not be liable for the deficiency ii) No solidary liability! iii) Accommodation pledgor/mortgagor is not liable for the payment of the principal obligation. He may redeem the mortgaged property by paying only the winning bid price at the public auction sale. C. Indivisibility (Art. 2089) 1. The divisibility of the principal obligation does not affect the indivisibility of the mortgage or pledge 2. Exceptions: i) Where each one of several things guarantees determinate portions of credit ii) Where only a portion of the loan was released iii) Where there was failure of consideration iv) Where there is no debtorcreditor relationship D. All kinds of obligations, whether pure or conditional, may be a secured by a pledge or mortgage. (2091) E. Thing pledged or mortgaged may be alienated 1. Necessarily implied as an inherent element of the transaction 2. Creditor does not automatically become the owner if the obligation is unfulfilled upon the time stipulated. His only remedy is to have the security sold at public auction, and the proceeds will be applied to the payment of the obligation. F. Prohibition Commissorium against Pactum
CREDIT TRANSACTIONS
Art. 2088. The creditor cannot appropriate the things given by way of pledge or mortgage, or dispose of them. Any stipulation to the contrary shall be null and void.
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Chapter V. Pledge
1. Pactum Commissorium: a stipulation whereby the thing pledged or mortgaged or under antichresis shall automatically become the property of the creditor in the event of nonpayment of the debt within the term fixed, even without the public sale or foreclosure required by law. Such a stipulation is null and void! 2. Rationale for prohibition: Amount of the loan is usually much less than the real value of the thing pledged or mortgaged. Contrary to morals and public policy. 3. Elements: i) There is a pledge/ mortgage/ antichresis by way of security for the payment of the principal obligation ii) There is a stipulation for the automatic appropriation by the creditor of the property in the event of non-payment of the obligation within the stipulated period (Arenas vs. Raymundo) What is prohibited is the automatic appropriation! Example: A stipulation providing that the mortgaged property shall be considered in full payment without further action in court in case of nonpayment. 4. TEST IF PACTUM COMMISSORIUM EXISTS: WON there is no need for the creditor to take an extra step before he becomes owner of the property 5. Permissible stipulations: i) Subsequent modification of the original contract ii) Subsequent voluntary concession of the property This amounts to a novation of the contract and to a voluntary sale of the mortgaged property for the amount of the debt. iii) Promise to assign or sell Title to the property remains with the debtor. Promise is merely a personal obligation of the mortgagor and does not bind the property. iv) Authority to take possession of property upon foreclosure
G. Debtor bears the risk of loss of the property mortgaged or pledged. Principal obligation is not extinguished even if the thing is lost. H. A promise to constitute a pledge/mortgage creates no real right Only a personal right: Right of action to compel the fulfillment of the promise. No pledge or mortgage yet. I. Pledge vs. Mortgage
Pledge SUBJECT MATTER: Movables DELIVERY: Property must be delivered to the pledgee Or By common consent, to a 3rd person REQUISITES TO BIND 3RD PERSONS: Description of the thing pledged and of the date of the pledge must appear in a public instrument Mortgage SUBJECT MATTER: Immovables DELIVERY: Delivery not necessary for perfection REQUISITES TO BIND 3RD PERSONS: Must be registered (Otherwise, not valid against 3rd persons)
II. PROVISIONS APPLICABLE ONLY TO PLEDGE

(Asked in 75, 84, 86, 89, 96, and 99)
A. Pledge
1. Contract by virtue of which the debtor delivers to the creditor or to a 3rd person a movable or document evidencing corporeal rights i) Cause or consideration: The principal obligation 2. Purpose: To secure he fulfillment of an obligation with the understanding that when the obligation is fulfilled, the thing delivered shall be returned with all its fruits and accessories 3. A 3rd person who is not a party to the principal obligation may secure such obligation by pledging his own property. He shall have the rights of a guarantor. 4. Kinds i) Voluntary/Conventional: Created by agreement of the parties ii) Legal: Created by operation of law
Conventional Debtor not entitled to the excess (after thing has been sold) unless there is a contrary stipulation Legal Remainder of the price of the sale after payment of the debt and expenses shall be delivered to the debtor
CREDIT TRANSACTIONS
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Chapter V. Pledge
5. Characteristics i) Real contract: Perfected by delivery of the thing pledged ii) Accessory iii) Unilateral: Only the creditor has the obligation to return iv) Subsidiary: Obligation does not arise until the non-fulfillment of the principal obligation which is secured 6. Subject Matter: Limited to personal property i) Movables which are within commerce and are susceptible of possession (Art. 2094) ii) Incorporeal rights (Art. 2095) (1) Evidenced by bills of lading, negotiable instruments, warehouse receipts, shares of stock, etc. (2) What must be delivered: instrument proving the right pledged. If negotiable, must be indorsed. 7. Transfer of possession is essential i) Pledge is a real contract which requires delivery for its perfection ii) Delivery may be actual or constructive, depending on the peculiar nature of the thing pledged 8. Public instrument is necessary for pledge to bind 3rd persons i) Contents (1) Description of thing pledged (2) Date of the pledge ii) Rationale: To forestall fraud iii) A public instrument is one attested and certified by a public officer authorized by law to administer oaths, i.e., notary public
B. Rights and Obligations of the Pledgee

1. Rights i) Right to retain the thing pledged until the debt secured by it is paid ii) Right to be reimbursed for the expenses made for the preservation of the thing pledged iii) Right to apply the fruits, income, dividends or interests earned by the thing pledged to the payment of interest, if owing, and then to the principal iv) Right to bring actions which pertain to the owner in order to recover it from or defend it against 3rd persons v) Right to have the thing pledged to be sold at a public sale.
(1) If there is danger of destruction, impairment or diminution of value, without fault of the pledge (2) Proceeds of the auction shall be a security for the principal obligation vi) Right to claim another thing in substitution or to demand the immediate payment of the obligation, if pledge is received based on the substance or quality of the thing. The remedies are alternative. vii) Right to cause sale of the thing pledged Requisites: (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 public viii)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 must give an acquittance therefor (3) Debtor is not entitled to the excess should the value of the thing pledged be more than the principal obligation ix) Right to bid during the public auction, but not if he is the only bidder x) Right to collect and receive the amount due if a credit which has been pledged becomes due before it is redeemed. Such amount will be applied to the payment of his claim. He must deliver the surplus to the pledgor. xi) Right to choose which of the things pledged shall be sold, unless there is a stipulation to the contrary. 2. Obligations i) Take care of the thing with the diligence of a good father of the family (1) He is liable for loss or deterioration by fraud, negligence, delay, or violation of the terms of the contract ii) Not to deposit the thing pledged with a 3rd person until the debt is paid Except when stipulated otherwise
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Chapter V. Pledge
iii) Not to use the thing pledged without the permission of the owner However, if use is necessary in order to properly care for the thing, pledgee has obligation to use the thing. iv) To promptly advise the pledgor or owner of the results of the public auction.
D. Extinguishment of the Pledge

1. By return of thing pledged i) Because possession by creditor of the thing pledged is an essential requisite in pledge. ii) Pledge is extinguished even if there is a stipulation to the contrary. iii) Possession by the debtor/owner of the thing pledged subsequent to the perfection of the pledge gives rise to the presumption that the pledge has been extinguished. This presumption may be rebutted by evidence to the contrary. 2. By payment of the debt i) A 3rd person who has a right in or to the thing pledged may satisfy the principal obligation as soon as it becomes due and demandable (2117) 3. By renunciation or abandonment of the pledge Note: Pledge is a personal right of the pledge which may be waived Must be in writing Waiver transforms the pledge into a depositary, with the rights and obligations of one. Waiver of pledge will not affect the principal obligation, but waiver of principal obligation carries with it that of the pledge 4. By sale of thing pledged at public auction i) All bids must be for cash ii) Debtor not entitled to the excess if the price of the sale is more than the amount due to the creditor; unless there is a stipulation to the contrary. iii) Creditor is not entitled to recover the deficiency. A contrary stipulation shall be void. Rationale: To compel creditor to hold an honest public sale 5. Other causes: Prescription, loss of thing, merger, compensation, novation, condonation, remission of debt, and those enumerated under the 2nd paragraph of Art. 1231.
C. Rights and Obligations of the Pledgor

1. Rights i) 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 pledgees negligence or willful act ii) Right to demand the thing pledged after substitution with another thing of the same kind and quality if such is in danger of destruction or impairment Requisites: (1) Pledgor has reasonable grounds to fear the destruction/impairment of the thing pledged (2) No fault on the part of the pledgor (3) Pledgor is offering another thing in pledge, of the same kind and quality (4) Pledgee does not choose to exercise his right to cause the thing pledged to be sold at public auction iii) Right to bid at public auction. Pledgor is preferred if he offers the same terms as the highest bidder 2. Obligations i) Liable for damages because of known hidden flaws Requisites: (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.
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Chapter VI. Antichresis

(Asked in 89, 95, 96, and 07)
This 6th Chapter contains important concepts in Antichresis as a security transaction. There are SIX MAJOR LESSONS in this Chapter: I. II. III. IV. V. VI. Definition of Antichresis Characteristics Special requisites Application of the fruits Obligations of the creditor Remedies of creditor in case of nonpayment of debt
II. CHARACTERISTICS
A. Accessory contract 1. It secures the performance of a principal obligation. B. Formal contract 1. The amount of the principal and of the interest shall be specified in writing; 2. Otherwise, the contract of antichresis shall be void (Art. 2134) 3. However, even if the antichresis is void, principal obligation remains valid.
I. DEFINITION OF ANTICHRESIS
Art. 2132. By the contract of antichresis the creditor acquires the right to receive the fruits of an immovable of his debtor, with the obligation to apply them to the payment of the interest, if owing, and thereafter to the principal of his credit. Antichresis PROPERTY INVOLVED: Real Property HOW PERFECTED: Perfected by mere consent, hence a Consensual contract Antichresis PROPERTY INVOLVED: Real Property WHO POSSESSES THE PROPERTY? Property is delivered to the creditor RIGHTS OF THE CREDITOR: The creditor has no real rights over the property BUT He acquires rights to receive the fruits OBLIGATION OF THE CREDITOR: 1. To pay the taxes and charges Unless otherwise stipulated 2. Creditor shall apply all the fruits to the payment of interest, if owing, and thereafter to the principal Pledge PROPERTY INVOLVED: Personal Property HOW PERFECTED: Perfected by delivery of the thing pledged, hence a Real contract Real Mortgage PROPERTY INVOLVED: Real Property WHO POSSESSES THE PROPERTY? Debtor retains possession over the property RIGHTS OF THE CREDITOR: The creditor has a real right over the property BUT He does not have the right to receive the fruits OBLIGATION OF THE CREDITOR: 1.No obligation to pay taxes and charges
III.SPECIAL REQUISITES
A. It can cover only the fruits of an immovable property. B. It is perfected by mere consent. Delivery is not essential as to its perfection, but is necessary for the creditor to receive the fruits. C. The amount of principal and interest must be specified in writing. D. It is not essential that the loan should earn interest in order that it can be guaranteed with a contract of antichresis. Hence, it can secure payment of loans with or without interest, pure or conditional.
IV. APPLICATION OF THE FRUITS

To be an antichresis, there has to be an express agreement that: 1. Debtor will give possession of the property to creditor 2. The creditor will apply the fruits: a. First, to the interest, if any b. Thereafter, to the principal of his credit Measure of application: fruits must be appraised at their market value at the time of the application (Art. 2133)
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V. OBLIGATIONS OF THE CREDITOR

1. The creditor is obliged to pay taxes and charges upon the estate, as well as the necessary expenses for its preservation and repair. (Art. 2135) (Note: the sums spent shall be deducted from the fruits) Exception: a. if otherwise stipulated
2. No such obligation to apply the fruits to the payment of interest and principal
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b. if he compels the creditor to enter again upon the enjoyment of the property, except when there is stipulation to the contrary (Art. 2136) 2. The creditor shall render an account of the fruits to the debtor.
VI. REMEDIES OF CREDITOR IN CASE OF NON-PAYMENT OF DEBT

1. Action for specific performance 2. Petition for the sale of the real property as in a foreclosure of mortgages under Rule 68 of the Rules of Court a. The parties, however, may agree on an extrajudicial foreclosure in the same manner as they are allowed in contracts of mortgage and pledge (Tavera vs. El Hogar Filipino, Inc. 1939) b. The creditor does not acquire ownership for non-payment of the debt within the period agreed upon. Every stipulation to the contrary is void (Art 2137) NOTE: The antichrectic creditor cannot ordinarily acquire by prescription the land given to him. This is because he does not possess the property in the concept of an owner. NOTE: Art. 2085 (last paragraph) and 2089-2091 apply to the contract of antichresis.
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Chapter VII. Deposit

This 7th Chapter discusses the important concepts in Deposit as a security transaction. There are FOUR MAJOR LESSONS in this Chapter: I. II. III. IV. General Provisions Voluntary Deposit Necessary Deposit Judicial Deposit
3. where property saved from destruction w/o knowledge of the owner
C. Principal Purpose:
Safekeeping of the thing delivered. Art 1962 states: If the safekeeping of the thing delivered is not the principal purpose of the contract, there is no deposit but some other contract.
I.
GENERAL PROVISIONS
A. Definition
DEPOSIT is constituted from the moment a person receives a thing belonging to another, with the obligation of safely keeping it and of returning the same. If the safekeeping of the thing delivered is not the principal purpose of the contract, there is no deposit but some other contract. (Art. 1962)
D. Distinctions from Mutuum and Commodatum

1. Deposit vs Mutuum
Purpose Safekeeping or mere custody Depositor can demand the return of the subject matter at will May be both movable & immovable property Consumption of the Subject Matter Lender must wait until the expiration of the period granted to the debtor Only money & other fungible thing
Demandability
EXAMPLE: A restaurant customer entrusts her car to a valet parking attendant, and a corresponding ticket is issued to her as receipt for the car. There is a contract of deposit. The customer entrusted her car to the parking attendant expecting the cars safe return after her meal [Triple V vs. Filipino Merchants, 2005]
Object
B. Characteristics
The contract of deposit is: 1. RealIt is perfected by the delivery of the subject matter. However, Where there is no delivery, there is merely an agreement to deposit which is binding & enforceable upon the parties. Hence, a contract of future deposit is consensual (see Art. 1934 CC). 2. Unilateral If its gratuitous, because only the depositary has an obligation. 3. Bilateral If its for a compensation; because it gives rise to obligs on both the depositary & the depositor. 4. Voluntary as a General Rule. It becomes necessary in the 3 cases in 1996 & 1998 CC and in cases of deposit of goods made by travelers/passengers w/ common carriers, which may also be regarded as necessary. 5. Gratuitous as a General Rule Exceptions: 1. where there is contrary stipulation 2. where depositary engaged in the business of storing goods
EXAMPLE: Debtors borrowed money from creditor, with interest, and labeled such as a deposit. When the debtors bound themselves to refund the amount, notwithstanding the contract being labeled a deposit, there was a real contract of loan. The debtors did not engage to return the same coins received. They were also authorized to make use of the same. [Javellana vs Lim, 1908] 2. Deposit vs Commodatum
Purpose Remuneration Object Purpose Safekeeping May be gratuitous In extrajudicial deposit, movable property only Transfer of the Use Essentially always gratuitous Both movable & immovable property &
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E. Creation of a Deposit
A deposit may be created by the will of the parties, or by virtue of a court order or by law. It is essential that the depositary is NOT the owner of the property. deposited (Art. 1962).
In whose behalf held
Person who has a right
Depositor or 3rd person designated
H. Subject Matter of Deposit

1. 1966 states that only movable things may be the object of a deposit. This excludes incorporeal or intangible property (such as rights or actions). 2. However, judicial deposit may cover immovable property as well because its purpose is to protect the rights of parties to a suit.
F. Extinguishment of Deposit
A deposit is extinguished: 1. Upon the loss or deterioration of a thing deposited; 2. Upon the death of the depositary (if deposit is gratuitous); and 3. Through other provisions extinguishment of obligations in the (novation, merger, etc.) the the on CC
II. VOLUNTARY DEPOSIT A. General Provisions

Art. 1968. A voluntary deposit is that wherein the delivery is made by the will of the depositor. A deposit may also be made by two or more persons each of whom believes himself entitled to the thing deposited with a third person, who shall deliver it in a proper case to the one to whom it belongs.
G. Kinds of Deposit
1. Judicialwhen an attachment or seizure of property in litigation is ordered (Arts. 2005-2008) 2. Extrajudicial (1967): a. Voluntary depositwhen the delivery is made by the will of one of the parties or by 2 or more persons each of whom believes himself entitled to the thing deposited (Arts. 1968-1955) b. NecessaryOne made in compliance with a legal obligation, or on the occasion of any calamity, or by travelers in hotels and inns, or by travelers with common carriers
Creation Purpose Judicial Will of the court To secure ensure the right of a party to property or to recover in case of favorable judgment Generally immovables Always onerous Upon order of the court/ end of Extra-judicial Will of the contracting parties Custody and safekeeping
1. The main difference between a voluntary deposit & a necessary deposit is that in voluntary deposit, the depositor has complete freedom in choosing the depositary, whereas in the latter, there is lack of free choice in the depositor. 2. As a General Rule, the depositor must be the owner of the thing deposited. However, it may belong to another person than the depositor.
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EXAMPLE: Two or more persons claiming to be entitled to a thing may deposit the same with a third person. In such case, the third person assumes the obligation to deliver to the one to whom it belongs. The depositary may bring an action of interpleader to compel the depositors to settle their conflicting claims. Here one of the depositors is not the owner. 3. Except for the delivery of the thing, there are no formalities required (1968).
Subject Matter Cause
Movables May be compensated but generally gratuitious Upon demand of depositor litigation
Return of the thing
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4. EFFECTS OF INCAPACITY Depositary is capacitated; Depositor is incapacitated subject to ALL the obligations of a depositary Depositary must return the property either to: a) the legal representative of the incapacitated, OR b) the depositor himself if he should acquire capacity Depositary is incapacitated; Depositor is capacitated Depositary does not incur the obligations of a depositary Depositary, however is liable to: a) return the thing deposited while still in his possession; AND b) pay the depositor the amount by which he may have benefited himself with the thing or its price subject to the right of any 3rd person who acquires the thing in good faith
was confiscated. Should he be made liable for the loss of the money? NO. Placing the money in the bank with his personal funds did not make the trustee assume a liability different from that under which he would have been if such deposit had not been made nor did he thereby make himself liable to repay the money at all hazards. [Roman Catholic Bishop of Jaro vs. de la Pena (1913)] OTHER OBLIGATIONS: 1. Obligation not to transfer deposit (Art. 1973) a. General Rule. The depositary is not allowed to deposit the thing with a third person. Rationale. A deposit is founded on trust and confidence and it can be supposed that the depositor, in choosing the depositary, has taken into consideration the latters qualification. Exception. The depositary authorized by express stipulation. is
B. Obligations of the Depositary

(Asked in 81, 87, 92, 97) TWO PRIMARY OBLIGATIONS: a. Safekeeping of the object, using as a degree of care the same diligence that the depositary would exercise over his property, EXCEPT if such care is less than that required by the circumstances. RATIONALE: i. Essential requisite of the judicial relation involves the depositors confidence in the depositarys good faith and trustworthiness; ii. The presumption that the depositor took into account the diligence which the depositary is accustomed to with respect to his own property. b. Return of the thing when required even though a specified term of time for such may have been stipulated in the contract EXAMPLE: Trustee mixed the trust fund with his own and deposited such fund in a bank in his personal account. The government arrested the trustee as a political prisoner and the entire deposit
b. Re: Loss of the thing subsequently deposited to a third persons: General Rule. Depositary is liable for loss of the thing deposited when: i. He transfers the deposit with a third person without authority although there is no negligence on his part and the third person; ii. He deposits the thing with a third person who is manifestly careless or unfit although authorized, even in the absence of negligence; or iii. The thing is lost through the negligence of his employees whether the latter are manifestly careless or not. Exception. There is an exemption from liability when the thing is lost without the negligence of the third person with whom he was allowed to deposit the thing if such third person is not manifestly careless or unfit. 2. Obligation not to change the way of deposit (Art. 1974) General Rule. Depositary may change the way of the deposit not
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Exception. If there are circumstances indicating that the depositor would consent to the change. Rationale. This is a situation wherein the depositary would reasonably presume that the depositor would agree to the change if he knows of the facts of the situation. Requisites: a) The depositary must notify the depositor of such change and b) Must wait for the reply of the depositor to such change. Exception: If the delay of the reply would cause danger. 3. Obligation to collect on the choses in action deposited (Art. 1975) a) If the thing deposited should earn interest, the depositary is under the obligation to: i. Collect the capital and interest as they become due; ii. Take such steps as may be necessary to preserve its value and the right corresponding to it. b) A contract for the rent of safety deposit boxes is not an ordinary contract of lease of things, but a special kind of deposit; hence, it is not to be strictly governed by the provisions on deposit [CA-Agroindustrial Dev Corp. vs CA (1993)]. The prevailing rule in the US is that the relation between a bank renting out safety deposit boxes and its customer with respect to the contents of the box is that of bailor and bailee. EXAMPLE: The contents of a safety deposit box were missing. It could be opened by the renters and by the bank. Is the contract one of bailor-bailee or one of lessorlessee? The governing relationship is that of a Bailor-Bailee. This is not a contract of lease because the full and absolute control of the safety deposit box was not given to the renters. This is a special kind of deposit, which according to the prevailing rule, is one of bailor-bailee [ibid.]
4. Obligation not to commingle things if stipulated (Art. 1976) General Rule. The depositary is permitted to commingle grain or other articles of the same kind and quality. Effects: a) The various depositors of the mingled goods shall own the entire mass in common. b) Each depositor shall be entitled to such portion of the entire as the amount deposited by him bears the whole. Exception. When there is a stipulation to the contrary. 5. Obligation not to make use of the thing deposited (Art. 1977) a) General Rule. Deposit is for safekeeping of the subject matter and not for its use Exceptions: a) Expressly authorized by the depositor; b) Such use is necessary for its preservation but limited for the purpose only. c) Unauthorized use will result in liability for damages. In addition, unauthorized use will have the following effects: i. If the thing deposited is nonconsumable: o General Rule. The contract loses the character of a deposit and acquires that of a commodatum despite the fact that the parties may have denominated it as a deposit. o Exception. Safekeeping is still the principal purpose of the contract. ii. Thing deposited is money or other consumable thing: o General Rule. Converts the contract into a simple loan or mutuum. o Exception. Safekeeping is still the principal purpose of the contract, but it becomes an irregular deposit. Bank deposits are in the nature of irregular deposits but they are actually loans governed by the law on loans.
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6. Liability for loss through fortuitous events (Art. 1979) General Rule. If the thing deposited is lost without a fortuitous event, the depositary is presumed at fault. If it was lost through a fortuitous event, the depositary is not liable without his fault. Exceptions: a) If it is so stipulated; b) If he uses the thing without the depositors permission c) If he delays in its return; d) If he allows others to use it, even though he himself may have been authorized to use the same. 7. Relation between bank and depositor (Art. 1980) Fixed, savings, and current deposits of money in banks and similar institutions shall be governed by the provisions concerning simple loan.
CREDIT TRANSACTIONS CIVIL LAW
cannot be executed without opening the box or receptacle. (Necessity) 9. Obligation accessories 1983) to return products, and accessions (Art.
10. Obligation to pay interest on sums converted for personal use (Art. 1983) 11. The depositary who receives the thing in deposit cannot require that the depositor prove his ownership over the thing (Art. 1984) 12. Where a third person appears to be the owner. (Art. 1984) The depositary may be relieved from liability 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 within the period of one month (30 days) 13. Obligation of the depositary when there are two or more depositors. (Art. 1985) a) In cases of a divisible thing and joint depositors each one of the depositors can demand only his share proportionate thereto. b) In cases of an Indivisible thing and solidary depositors rules on active solidarity apply. i) General Rule. Each one of the depositors may do whatever may be useful to the others. (Art. 1212) o Exception. Each of the depositors may not do anything which may be prejudicial to the other depositors. ii) General Rule. The depositary may return the thing to any one of the solidary depositors o Exception. When a demand, judicial or extrajudicial, for its return has been made by one of them in which case delivery should be made to him. c) In cases where there is a stipulation of return to one of the depositors if by stipulation, the thing should be returned to one of the depositors, the depositary is bound to return it only to the person designated although he has not made any demand for its return.
a) Contract of loan deposits in banks are actually loans because the bank can use the same for its ordinary transactions b) Relation of creditor and debtor the relation between a depositor and a bank is that of a creditor and a debtor. 8. Obligation when the thing deposited is closed and sealed (Art. 1981) General Rule. The depositary has the obligation to: a) return the thing deposited when delivered closed and sealed in the same condition; b) pay for damages should the seal or lock be broken through his fault, which is presumed unless proven otherwise; c) Keep the secret of the deposit when the seal or lock is broken, with or without his fault. Exception. The depositary is justified in opening a closed and sealed subject matter a) When the depositary is presumed authorized to do so (the presumption applies if the key has been delivered to him) b) When the instructions of the depositor as regards the deposit
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14. Obligation to return to the person to whom return must be made. (Art. 1986) a) The depositary is obliged to return the thing deposited, when required, to: The depositor; To his heirs or successors; or To the person who may have been designated in the contract. b) If the depositor was incapacitated at the time of making the deposit, the property must be returned to: His guardian or administrator; To the person who made the deposit; To the depositor himself should he acquire capacity.
WITHOUT depositor)
THE
DEMAND
of
the
General Rule. The depositary may return the thing deposited notwithstanding that a period has been fixed for the deposit if: a) The deposit is gratuitous; b) The Rationale is justifiable. If the depositor refuses to receive the thing, the depositary may deposit the thing at the disposal of the judicial authority. Exception. When the deposit is for a valuable consideration, the depositary has no right to return the thing before the expiration of the time designated even if he should suffer inconvenience as a consequence. 18. Depositarys liability in case of loss by force majeure or government order. (Art. 1990) The depositary is not liable in cases of loss by force majeure or by government order. However, he has the duty to deliver to the depositor money or another thing he receives in place of the thing. 19. Liability in case of alienation of the depositarys heir. (Art. 1991) When alienation is done in GOOD FAITH: a) Return the value of the thing deposited b) Assign the right to collect from the buyer. The heir does not need to pay the actual price of the thing deposited. 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 the depositary sold the property of the depositor worth 1000, for 800. The heir of the depositary is bound to return 800 only. If the heir acted in bad faith, he will be liable for 1000 plus damages. He is also criminally liable for estafa.
REDIT TRANSACTIONS CIVIL LAW

c) Even if the depositor had capacity at the time of making the deposit but he subsequently loses his capacity during the deposit, the thing must be returned to his legal representative. 15. Obligation to return at the place of return (Art. 1987) General Rule. At the place agreed upon by the parties, transportation expenses shall be borne by the depositor. Exception: (In the absence of stipulation) At the place where the thing deposited might be even if it should not be the same place where the original deposit was made. 16. Obligation to return upon the time of return. (Art. 1988) General Rule. The thing deposited must be returned to the depositor upon demand, even though a specified period or time for such return may have been fixed. Exceptions: a) When the thing is judicially attached while in the depositarys possession b) When notified of the opposition of a third person to the return or the removal of the thing deposited 17. Right of the depositary to return the thing deposited. (Art. 1989) (NOTE: in this case, it is the depositary who is returning the deposit WITH OR
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20. Depositary may retain the thing in pledge until the full payment of what may be due him by Rationale of the deposit. (Art. 1994) The thing retained serves as security for the payment of what may be due to the depositary by Rationale of the deposit. (see Art. 1965, 1992, 1993). Note: The debt must be contracted prior to the deposit.
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 governed by the law establishing it, and in case of deficiency, the rules on voluntary deposit apply EXAMPLES: The judicial deposit of a thing the possession of which is being disputed in a litigation (Art. 538) The deposit with a bank of public bonds or instruments of credit payable to order or bearer given in usufruct when the usufructuary does not give proper security for their conservation (Art 586) The deposit of a thing pledged when the creditor uses the sme without authority of the owner or misuses it in any other way (Art 2104) Those required in suits as provided by the ROC Those constituted to guarantee contracts with the Government. 2. It takes place on the occasion of any calamity, such as fire, storm, flood, pillage, shipwreck, or other similar events. There must be a causal relation between the calamity and the constitution of the deposit. In this case the deposit is governed by the rules on voluntary deposit and Art. 2168 3. Made by passengers with common carriers, as to those baggage the passengers or their agents carry 4. Made by travelers in hotels or inns (Art. 1998)
C. Obligations of the Depositor

The obligations of the depositor are: 1. to pay the expenses of preservation 2. to pay losses incurred due to character of thing deposited 3. to continue with the deposit after death of depositary if deposit is compensated
1. Obligation to pay expenses preservation. (Art. 1992)
of
2. Obligation to pay losses incurred due to character of thing deposited. (Art. 1993) General Rule. The depositary must be reimbursed for loss suffered by him because of the character of the thing deposited. Exceptions: a) Depositor was not aware of the danger; b) Depositor was not expected to know the dangerous character of the thing; c) Depositor notified the depositary of such dangerous character; d) Depositary was aware of the danger without advice from the depositor.
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B. Liability of the Hotel-Keeper.

The hotel-keeper cannot free himself from responsibility by posting notices to the effect that he is not liable for the articles brought by the guest. (Art. 2003) 1. Any stipulation between the hotelkeeper and the guest whereby the responsibility of the former (as set forth in Art. 1998-2001) is suppressed or diminished shall be VOID. 2. Elements of the liability of keepers of hotels or inns as depositaries with regard to the effects of their guests: a) Keepers have been previously informed about the effects brought by the guests; and
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3. Effect of death of depositor or depositary. (Art. 1995) a) When deposit gratuitous death of either of the depositor or depositary extinguishes the deposit (personal in nature). By the word extinguished, the law really means that the depositary is not obliged to continue with the contract of deposit. b) When deposit for compensation not extinguished by the death of either party.
b) Guests have taken the precautions prescribed regarding their safekeeping. 3. Extent of liability: a) Liability in hotel rooms which come under the term baggage or articles such as clothing as are ordinarily used by travelers b) Include those lost or damages in c) hotel annexes such as vehicles in the hotels garage. 4. The hotelkeeper is liable REGARDLESS of the amount of care exercised in: a) The loss or injury to personal property is caused by his servants or employees as well as by strangers (Art. 2000). b) The loss is caused by the act of a thief or robber done without the use of 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 or robbery by a stranger (not the hotelkeepers servant or employee) with the use of firearms or irresistible force. o Exception: Unless the hotelkeeper is guilty of fault or negligence in failing to provide against the loss or injury from his cause. b) The loss is due to the acts of the guests, his family, servants, visitors. c) The loss arises from the character of the things brought into the hotel. 6. Hotel-keepers right to retain. The hotelkeeper has a right to retain the things brought into the hotel by the guest, as a security for credits on account of: a) lodging; b) supplies usually furnished to hotel guests. o Rationale: It is given to hotelkeepers to compensate them for the liabilities imposed upon them by law. The right of retention recognized in this article is in the nature of a pledge created by operation of law.
IV. JUDICIAL DEPOSITS

A. Definition Judicial deposit takes place when an attachment or seizure of property in litigation is ordered by a court. (Art. 2005) EXAMPLES: 1. when properties are attached by the sheriff upon filing of a complaint (Rule 57, ROC) 2. when a receiver is appointed by the court to administer and preserve the property in litigation (Rule 59, ROC) 3. when personal property is sseized by the 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 the pendency of the litigation or to insure the right of the parties to the property in case of a favorable judgment.
D. The depositary of sequestered property is the person appointed by the court. (Art. 2007) E. Obligations of the depositary:
a) To take care of the property with the diligence of a good father of the family. (Art. 2008) b) He may not be relieved of his responsibility until the litigation is ended or the court so orders. (Art. 2007)
CREDIT TRANSACTIONS
F. Applicable Law.
The Rules of Court (Art. 2009)
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Chapter VIII. Guaranty

This 8th Chapter discusses the important concepts in Guaranty as a security transaction. There are THREE MAJOR LESSONS in this Chapter: I. Guaranty In General Its Nature and Extent II. Effects of Guaranty III. Extinguishment of Guaranty
I. GUARANTY IN GENERAL Its Nature and Extent

Art. 2047 By guaranty a person, called the guarantor, binds himself to the creditor to fulfill the obligation of the principal debtor in case the latter should fail to do so.
A. Characteristics
1. Accessory would not have existed if it wasnt for the principal obligation, which it guarantees 2. Subsidiary & Conditional takes effect only when the principal debtor fails in his obligation, subject to limitations 3. Unilateral i. Gives rise only to a duty on the part of the guarantor in relation to the creditor and not vice versa ii. May be entered into even without the intervention of the principal debtor 4. Guarantor must be person distinct from the debtor i. A person cannot be the personal guarantor of himself ii. But in a real guaranty (i.e., pledge, mortgage), a person may guarantee his own obligation with his own property
ii. Legal imposed by virtue of a provision of law iii. Judicial required by a court to guarantee the eventual right of one of the parties in a case 3. As to consideration: i. Gratuitous guarantor does not receive any price or remuneration for acting as such (2048) ii. Onerous one where the guarantor receives valuable consideration for his guaranty 4. As to person guaranteed: i. Single constituted solely to secure the performance of the debtor of the principal obligation ii. Double or Sub-Guaranty constituted to secure the fulfillment of the guarantor of a prior guaranty 5. As to its scope and extent: i. Definite where the guaranty is limited to the principal obligation only or to a specific portion thereof ii. Indefinite or Simple where the guaranty includes all accessory obligations of the principal, including judicial costs
C. Guaranty Warranty
Distinguished
from
Guaranty Contract by which a person is bound to another for the fulfillment of a promise or engagement of a third party
Warranty An undertaking that the title, quality, or quantity of the subject matter of a contract is exactly what it has been represented to be, and relates to some agreement made ordinarily by the party who makes the warranty
CREDIT TRANSACTIONS
B. Classification of Guaranty
1. Guaranty in its broad sense: i. Personal guaranty is the credit given by a person who guarantees the fulfillment of the principal obligation ii. Real guaranty is property Real mortgage (2124) & Antichresis (2132) guaranty is immovable Chattel mortgage (2140) & Pledge (2093) guaranty is movable 2. As to its origin: i. Conventional constituted by agreement of the parties
D. Guaranty Distinguished Suretyship

Guaranty Guarantors liability arises from an independent agreement to pay the principal obligation, if the primary debtor fails to do so Engagement is a collateral undertaking
from
Suretyship Suretys liability arises from the same principal obligation. He assumes his liability as a regular party party to the undertaking. Charged as an original promisor
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Guaranty Secondarily liable he contracts to pay if the debt cannot be paid by the principal debtor
Only binds himself to pay if the principal debtor cannot or is unable to pay Insurer of the solvency of the debtor Guarantor does not contract that the principal will pay, but simply that he is able to do so
Suretyship Primarily liable directly undertakes to pay the principal obligation once the principal debtor defaults, regardless of the latters solvency and without any need for demand by the creditor to the principal debtor whatsoever or any notice of default Undertakes to pay if the principal does not pay, regardless of his ability to do so Insurer of the debt Surety contracts to pay the creditor without qualification, if the principal debtor does not pay. Hence, the responsibility or obligation assumed by the surety is greater or more onerous than that of a guarantor.
principal debtor or creditor. A consideration moving to the principal debtor will suffice. 3. A married woman, who is a guarantor, binds only her separate property
Art. 2049 A married woman may guarantee an obligation without the husbands consent, but shall not thereby bind the conjugal partnership, except in cases provided by law.
i.
Exceptions o With her husbands consent, bind the community or conjugal partnership property o Without husbands consent, in cases provided by law, such as when the guaranty has redounded to the benefit of the family (70, 71, 94[3], 121[3], 122, 145 FC)
4. A guaranty need not be undertaken with the knowledge of the debtor

Art. 2050 If a guaranty is entered into without the knowledge or consent, or against the will of the principal debtor, the provisions of Articles 1236 and 1237 shall apply.
E. Rules Governing Guaranty

1. A guaranty is generally gratuitous
Art. 2048 A guaranty is gratuitous, unless there is a stipulation to the contrary.
General Rule: Guaranty gratuitous. ii. Exception: When there is stipulation to the contrary i.
is a
2. On the cause of a guaranty contract i. Presence of a cause, which supports the principal obligation The consideration which supports the obligation as to the principal debtor is sufficient consideration to support the obligation of a guarantor or surety.
Severino v. Severino, (1931): A guarantor or surety is bound by the same consideration that makes the contract effective between the principal parties thereto.
ii. Absence of direct consideration or benefit to guarantor Guaranty or surety agreements are regarded valid, despite the absence of any direct consideration received by the guarantor or surety either from the
Guaranty is unilateral exists for the benefit of the creditor and not for the benefit of the principal debtor ii. Creditor has every right to take measures to secure the payment of his credit guaranty can be constituted even against the will of the principal debtor iii. However, with regard to payment made by a third person: o Payment without the knowledge or against the will of the debtor can recover only insofar as the payment has been beneficial to the debtor (1236); cannot compel the creditor to subrogate him in his rights (1237) o Payment with knowledge or consent of the debtor subrogated to all the rights which the creditor has against the debtor (2067) i.
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5. The guaranty must be founded on a valid principal obligation

Art. 2052 A guaranty cannot exist without a valid obligation. Nevertheless, a guaranty may be constituted to guarantee the performance of a voidable or an unenforceable contract. It may also guarantee a natural obligation.
i.
Guaranty is an accessory contract it is an indispensable condition for its existence that there is a principal obligation; hence, if the principal obligation is void, it is also void
6. A guaranty may secure the performance of a voidable, unenforceable, and natural obligation i. Voidable contract such contract is binding, unless annulled by a proper court action (1390) ii. Unenforceable contract such contract is not void (1403) iii. Natural obligation the creditor may proceed against the guarantor, although he has no right of action against the principal debtor for the Rationale that the latters obligation is not civilly enforceable; when the debtor himself offers a guaranty for his natural obligation, he impliedly recognizes his liability, thereby transforming the obligation from a natural into a civil one (1423) 7. A guarantee may secure a future debt
Art. 2053 A guaranty may also be given as security for future debts, the amount of which is not yet known; there can be no claim against the guarantor until the debt is liquidated. A conditional obligation may also be secured.
due or owing to the principal by the borrower iv. To secure payment of any debt to be subsequently incurred a guaranty shall be construed as continuing in nature when by the terms thereof, it is evident that the object is to give a standing credit to the principal debtor to be used from time to time either indefinitely or until a certain period, especially if the right to recall the guaranty is expressly reserved v. To secure existing unliquidated debts refer to debts existing at the time of the constitution of the guaranty, but the amount thereof is unknown. The surety agreement itself is valid and binding, even before the principal obligation intended to be secured thereby is born -- just as obligations which are subject to a condition precedent are valid and binding, before the occurrence of the condition precedent.
Dino v. CA, (1992): Under the Civil Code, a guaranty may be given to secure even future debts, the amount of which may not be known at the time the guaranty is executed. This is the basis for contracts denominated as continuing guaranty or suretyship. A continuing guaranty is one which is not limited to a single transaction, but which contemplates a future course of dealings, covering a series of transactions, generally for an indefinite time or until revoked. It is prospective in its operation and is generally intended to provide security with respect to future transactions within certain limits, and contemplates a succession of liabilities, for which, as they accrue, the guarantor becomes liable. A continuing guaranty is one which covers all transactions, including those arising in the future, which are within the description or contemplation of the contract of guaranty, until the expiration or termination thereof. A guaranty shall be construed as continuing when by the terms thereof, it is evident that the object is to give a standing credit to the principal debtor to be used from time to time either indefinitely or until a certain period, especially if the right to recall the guaranty is expressly reserved. Where the contract states that the same is to secure advances to be made from time to time, or obligations now in force or hereafter made, it will be construed to be a continuing one.
CREDIT TRANSACTIONS
Continuing Guaranty or Suretyship i. Future debts, even if the amount is not yet known, may be guaranteed but there can be no claim against the guarantor until the amount of the debt is ascertained or fixed and demandable ii. Rationale: A contract of guaranty is subsidiary. iii. To secure the payment of a loan at maturity guarantor binds himself to guarantee the punctual payment of a loan at maturity and all other obligations or indebtedness, which may become
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8. A guaranty may secure the performance of a conditional obligation i. Principal obligation subject to a suspensive condition the guarantor is liable only after the fulfillment of the condition (1179) ii. Principal obligation subject to a resolutory condition the happening of the condition extinguishes both the principal obligation and the guaranty (1180) 9. A guarantors liability cannot exceed the principal obligation
Art. 2054 A guarantor may bind himself for less, but not for more than the principal debtor, both as regards the amount and the onerous nature of the conditions. Should he have bound himself for more, his obligations shall be reduced to the limits of that of the debtor.
provided for in a bond, for violation of the condition therein. Principals liability may exceed guarantors The amount specified in a surety bond as the suretys obligation does not limit the extent of the damages that may be recovered from the principal, the latters liability being governed by the obligations he assumed under his contract. 10. The existence of a guaranty is not presumed
Art. 2055 A guaranty is not presumed; it must be express and cannot extend to more than what is stipulated therein. If it be simple or indefinite, it shall compromise not only the principal obligation, but also all its accessories, including the judicial costs, provided with respect to the latter, that the guarantor shall only be liable for those costs incurred after he has been judicially required to pay.
General Rule: Guaranty is a subsidiary and accessory contract guarantor cannot bind himself for more than the principal debtor and even if he does, his liability shall be reduced to the limits of that of the debtor. But the guarantor may bind himself for less than that of the principal. ii. Exceptions: Interest, judicial costs, and attorneys fees as part of damages may be recovered creditors suing on a suretyship bond may recover from the surety the ff: (a) interest at the legal rate, (b) judicial costs, and (c) attorneys fees when appropriate, even without stipulation and even if the surety would thereby become liable to pay more than the total amount stipulated in the bond. Interest runs from judicial demand (i.e., filing of the complaint) or from extra-judicial demand (i.e., demand made upon the surety) Rationale: Surety is made to pay, not by Rationale of the contract, but by Rationale of his failure to pay when demanded and for having compelled the creditor to resort to the courts to obtain payment. Penalty may be provided a surety may be held liable for the penalty, i.
i.
Guaranty requires the expression of consent on the part of the guarantor cannot be presumed; to ensure that the guarantor had the true intention to bind himself; to make certain that the guarantor proceeded with consciousness of what he was doing
11. A contract of guaranty is covered by the Statute of Frauds i. Guaranty must not only be expressed, but must be reduced into writing shall be unenforceable by action, unless the same be in writing and subscribed by the party charged or his agent; evidence of the agreement cannot be received without the writing or a secondary evidence of its contents; need not appear in a public document 12. Guaranty strictly construed i. Has to be strictly interpreted against the creditor and in favor of the guarantor not to be extended beyond its terms; still the rule has to yield to the intention of the contracting parties as revealed by the evidence
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13. Acceptance of guaranty by creditor and notice thereof to guarantor i. When necessary mere offers of guaranty & conditional guaranties; not a binding obligation until accepted and until notice of such acceptance by the creditor is given to the guarantor or until the guarantor has knowledge that the creditor has performed the condition and intends to act upon the guaranty ii. When not necessary direct or unconditional promises of guaranty, unless notice of acceptance is made a condition of the guaranty 14. On the guarantor
Art. 2056 One who is obliged to furnish a guarantor shall present a person who possesses integrity, capacity to bind himself, and sufficient property to answer for the obligation which he guarantees. The guarantor shall be subject to the jurisdiction of the court of the place where this obligation is to be complied with. Art. 2057 If the guarantor should be convicted in first instance of a crime involving dishonesty or should become insolvent, the creditor may demand another who has all the qualifications required in the preceding article. The case is excepted where the creditor has required and stipulated that a specified person should be the guarantor.
iv. Selection of Guarantor: Specified person stipulated as guarantor: substitution of guarantor may not be demanded o Rationale: It is part of the agreement and as a party, the creditor is bound by it. Guarantor selected by the principal debtor: debtor answers for the integrity, capacity, and solvency of the guarantor Guarantor personally designated by the creditor: responsibility of the selection should fall upon the creditor because he considered the guarantor to have the qualifications for the purpose
II. EFFECTS OF GUARANTY A. Between Guarantor and Creditor

1. The guarantor has the right to benefit from excussion/exhaustion
Art. 2058 The guarantor cannot be compelled to pay the creditor unless the latter has exhausted all the property of the debtor, and has resorted to all the legal remedies against the debtor.
Requirements: He possesses integrity He has capacity to bind himself He has sufficient property to answer for the obligation which he guarantees ii. Exception: Creditor waives the requirements iii. Qualifications above only need to be present at the time of the perfection of the contract. Subsequent loss of integrity or property or supervening incapacity of the guarantor would not operate to exonerate him of the eventual liability he has contracted. Creditor can merely demand another guarantor with the proper qualifications, except that the creditor may waive such remedy if he chooses and hold the guarantor to his bargain. i.
a. Guarantor only secondarily liable if the principal debtor fulfills the obligation guaranteed, the guarantor is discharged from any responsibility b. All legal remedies against the debtor to be first exhausted includes the bringing of actions for the rescission of fraudulent alienations of property made by the debtor; not sufficient that the debtor appears insolvent
Southern Motors Inc. v. Barbosa, (1956): The right of guarantors to demand exhaustion of the property of the principal debtor exists only when a pledge or a mortgage has not been given as a special security for the payment of the principal obligation.
CREDIT TRANSACTIONS
Exceptions to the benefit of excussion a. As provided in Art. 2059: i. If the guarantor has expressly renounced it waiver is valid but it must be made in express terms ii. If he has bound himself solidarily with the debtor The liability assumed is that of a surety. In
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effect, he renounces in the contract itself the benefit of exhaustion iii. If the debtor becomes insolvent (proven by an unsatisfied writ of execution) - Liability of the guarantor arises. But, insolvency must be actual. It is not sufficiently established by the mere fact that the debtor has been declared insolvent in insolvency proceedings. iv. If debtor absconds or cannot be locally sued creditor is not required to go after a debtor who is hiding or cannot be sued in our courts, and to incur delays and expenses incident thereto; exception: when debtor has left a manager or representative v. If resort to all legal remedies is a useless formality if judicial action would not satisfy the obligation, the guarantor can no longer require the creditor to resort to all such legal remedies against the debtor; not necessary that the debtor be judicially declared insolvent b. If he does not comply with Art. 2060: In order that the guarantor may make use of the benefit of excussion, he must: i. Set it up against the creditor upon the latters demand for payment from him ii. Point out to the creditor: Available property of the debtor the guarantor should facilitate the realization of the excussion since he is the most interest in its benefit Within the Philippines excussion of property located abroad would be a lengthy and extremely difficult proceeding; would not conform with the purpose of a guaranty to provide the creditor the means of obtaining the fulfillment of the obligation Sufficient to cover the amount of the debt c. If he is a judicial bondsman and subsurety (2084) d. Where a pledge or mortgage has been given by him as a special security e. If he fails to interpose it as a defense before judgment is rendered against him
2. The creditor has the right to secure a judgment against the guarantor prior to the excussion a. General Rule: An ordinary personal guarantor may demand exhaustion of all the property of the debtor before he can be compelled to pay b. Exception: Creditor may, prior thereto, secure a judgment against the guarantor. However, the guarantor shall be entitled to a deferment of the execution of the said judgment, until after the properties of the principal debtor have been exhausted. 3. The creditor has the duty to make prior demand for payment to the guarantor a. Demand to be made only after judgment on the debt b. Joining the guarantor in the suit against the principal debtor is not the demand intended by law. Actual demand has to be made. 4. The guarantor has the duty to set up the benefit of excussion 5. The creditor has the duty to resort to all legal remedies a. After the guarantor has fulfilled the conditions required for making use of the benefit of exhaustion, it becomes the duty of the creditor to: Exhaust all the property of the debtor pointed out by the guarantor b. If he fails to do so, he shall bear the loss but only to the extent of the value of the said property. (2061) 6. The creditor has the duty to notify the guarantor in the action against the debtor
Art. 2062 In every action by the creditor, which must be against the principal debtor alone, except in the cases mentioned in Article 2059, the former shall ask the court to notify the guarantor of the action. The guarantor may appear so that he may, if he so desire, set up such defenses as are granted him by law. The benefit of excussion mentioned in Article2058 shall always be unimpaired, even if judgment should be rendered against the principal debtor and the guarantor in case of appearance by the latter.
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a. Notice to the guarantor of the action against the principal debtor is mandatory guarantor must be notified so that he may appear, if he so desires b. Rationale: The purpose of notification is to give the guarantor the opportunity to allege and substantiate whatever defenses he may have against the principal obligation. c. If the guarantor appears still given the benefit of exhaustion even if judgment should be rendered against him and the principal debtor d. If the guarantor does not appear - no longer possible for him to question the validity of the judgment rendered against the debtor 7. A compromise shall not prejudice the person not party to it a. Compromise between creditor and principal debtor benefits the guarantor but does not prejudice him b. Compromise between guarantor and creditor benefits the principal debtor but does not prejudice him 8. Sub-guarantor excussion has a right to
guarantor; necessary to enable the guarantor to enforce the indemnity given in Article 2066; if the guarantor paid a smaller amount to the creditor by virtue of a compromise, he cannot demand more than he actually paid b. When right not available in cases where the guarantor has no right to be reimbursed
Art. 2066 The guarantor who pays for a debtor must be indemnified 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 the creditor; (3) the expenses incurred by the guarantor after having notified the debtor that payment had been demanded of him; (4) damages, if they are due.
2. The guarantor has the duty to notify the debtor before paying the creditor a. If guarantor pays without notification debtor may set up against the guarantor those defenses which he could have set up against the creditor b. If guarantor pays without notification, after the debtor has already made prior payment debtor can set up the defense of previous extinguishment of the obligation by payment c. The guarantor cannot make payment before the obligation has become due d. General Rule: A contract of guaranty being subsidiary in character, the guarantor is not liable for the debt before it becomes due. A guarantor who pays before maturity is not entitled to reimbursement from the debtor, but may collect from the creditor. e. Exceptions: Payment made with the debtors consent Payment subsequently ratified by debtor Creditor becomes insolvent Guarantor was prevented by fortuitous event to advise the debtor of the payment Guaranty is gratuitous The guarantor may proceed against the debtor even before payment has been made General Rule: Guarantor has no cause of action against the debtor
a. Sub-guarantor enjoys the benefit of excussion not only with respect to the principal debtor but also with respect to the guarantor 9. Co-guarantors are entitled to the benefit of division a. In whose favor applicable - several guarantors of only one debtor and for the same debt b. Extent of liability of several guarantors only joint; not liable to the creditor beyond the shares which they are respectively bound to pay c. Exceptions When solidarity has been expressly stipulated; if any of the circumstances enumerated in Art. 2059 should take place
CREDIT TRANSACTIONS
B. Between Debtor and Guarantor

1. The guarantor has the right to be subrogated to the rights of the creditor a. Subrogation (1303) arises by operation of law upon payment by the
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f.
until the former has paid the obligation Exceptions o When he is sued for the payment o In case of insolvency of the principal debtor o When the debtor has bound himself to relieve him from the guaranty within a specified period, and this period has expired o After the lapse of 10 years, when the principal obligation has no fixed period for its maturity, unless it be of such nature that it cannot be extinguished except within a period longer than 10 years o If there are reasonable grounds to fear that the principal debtor intends to abscond; o If the principal debtor is in imminent danger of becoming insolvent Rationale: To enable the guarantor to take measures for the protection of his interest in view of the probability that he would be called upon to pay the debt
III.EXTINGUISHMENT OF GUARANTY
A. When the principal obligation is extinguished, the accessory and subsidiary contract of guaranty is also extinguished 1. Causes of extinguishment of (principal) obligation i. Payment or performance ii. Loss of the thing due iii. Condonation of the debt iv. Confusion or merger of rights of creditor and debtor v. Compensation vi. Novation vii. Annulment viii. Rescission ix. Fulfillment of a resolutory condition x. Prescription 2. Exception guaranty is directly extinguished, while principal obligation remains in force (i.e., release of the guarantor from liability c/o the creditor) B. A guarantor is released from liability if the creditor accepts immovable property or any other thing of value, which the former offered in payment of the debt, regardless if the latter should afterwards lose the same through eviction eviction simply revives the principal obligation but not the guaranty C. If one of many guarantors is released from liability, co-guarantors shall also be released to the extent of the proportionate share of the released guarantor D. A guaranty is extinguished if the creditor extends the time within which the debtor may perform his obligation, without the consent of the guarantor to protect the interest of the guarantor; to prevent the scenario wherein the debtor becomes insolvent during the period of extension and thus deprives the guarantor of his right to reimbursement 1. Where release without consent of guarantor i. Payments due to debtor from third person assigned to creditor if the creditor released the third person from his liability without notifying the
C. As between Co-Guarantors
1. Right to contribution of guarantor who pays (2073) a. Requisites Payment has already been made by one guarantor Payment was made because of the insolvency of the debtor or by judicial demand Paying guarantor seeks to be indemnified only to the extent of his proportionate share in the total obligation b. Effect of insolvency of any guarantor - Share shall be borne by the others including the paying guarantor in the same joint proportion 2. Defenses available to co-guarantors defenses which the debtor would have interposed against the creditor but not those which cannot be transmitted for being purely personal to the debtor 3. Liability of sub-guarantor in case of insolvency of guarantor liable to the co-guarantors in the same manner as the guarantor whom he guaranteed
CREDIT TRANSACTIONS
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ii.
iii.
iv.
v. vi.
guarantor, the creditor is deemed paid and the guaranty is consequently deemed extinguished; if the creditor still accepted the delayed payment of the third person without the consent of the debtor, the creditor is deemed to have extended the period of payment and the guaranty is deemed extinguished Where obligation payable in installments where a guarantor is liable for a series of promissory notes, an extension of time as to one or more notes will not affect his liability for the others; if the whole unpaid balance has become automatically due for failure to pay an installment, the creditor has actually extended the payment of the said installment without the guarantors consent and thus has released him from liability Consent to extension waived in advance by guarantor such a waiver is not contrary to law nor to public policy Payment by guarantor after creditors demand the benefit of excussion and the requirement of consent to extensions of payment are protective devices conferred on the guarantor from any unwarranted enforcement of the guaranty; guarantor may opt not to avail of these defenses by paying the obligation once the demand is made on him by the creditor Extension not granted by creditor on the bond Article 2079 is inapplicable Extension granted to first-tier obligors (principal debtor & surety) does not prejudice second-tier parties (i.e., indemnitors who bound themselves jointly and severally to the surety for the faithful compliance of the surety bond)
matter how short or long the payment period has been extended 3. Extension must be based on a new agreement the extension of the term must be based on some new agreement between the creditor and the principal debtor; mere failure or neglect of the creditor to enforce payment upon maturity does not constitute an extension 4. Diligence on the part of the creditor to enforce his claim if the creditor has done any act whereby the guaranty was impaired in its value, then the guarantor will be wholly or partially released from liability; but in suretyship, the creditor is under no obligation to display any diligence in the enforcement of his rights as a creditor 5. No cause of action against creditor for delay the law does not grant the surety the right to sue the creditor for delay E. Guarantors are released from liability when by some act of the creditor, they cannot be subrogated to the rights, mortgages and preferences of the latter.
CREDIT TRANSACTIONS
2. Prejudice to guarantor and period of extension immaterial it is unimportant whether the extension given was actually prejudicial to the guarantor or not; it does not even
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Chapter IX. Surety
Chapter IX. Surety

This 9th Chapter discusses the important concepts in Surety as a security transaction. There are TWO MAJOR section: LESSONS in this
D. Surety is not entitled to exhaustion but when demanded by the requirements of justice, the principal debtor may be required to pay the insured obligation if he has the necessary amount to comply with the terms thereof E. Undertaking is to creditor, not to debtor surety makes no covenant with the principal debtor; suretys undertaking is that the principal debtor shall fulfill his obligation and that the he shall be relieved from his liability when the obligation secured is performed F. Surety is not entitled to notice of principals default G. Prior demand by the creditor upon the principal not required as soon as the principal is in default, the surety likewise is in default H. Surety is not exonerated by neglect of creditor to sue principal if the surety is dissatisfied with the degree of activity displayed by the creditor in the pursuit of the principal debtor, he may pay the debt himself and become subrogated to all the rights and remedies of the creditor
I. Nature of Suretys Undertaking II. Applicability of Strictissimi Juris Rule
I. NATURE OF UNDERTAKING
SURETYS
Agro Conglomerates, Inc. v. CA, (2000): Suretyship may be defined as a relation which exists where one person (principal or obligor) has undertaken an obligation and another person (surety) is also under a direct and primary obligation or duty to a third person (obligee), who is entitled to but one performance; and as between the two who are bound, the one rather than the other should perform.
A. Liability is contractual and accessory, but direct the surety is directly, primarily and equally bound with the principal as original promisor, although he possesses no direct or personal interest over the latters obligations nor does he receive any benefit therefrom; the surety is bound by the same agreement which binds the principal; it not for the creditor to see to it that the principal debtor pays the debt or fulfills the contract, but for the surety to see to it that the principal debtor pays or performs B. Liability is limited by terms of contract a contract of surety is not presumed; it cannot extend to more than what is stipulated C. Liability arises only if principal debtor is held liable 1. Suretys undertaking presupposes that the obligation is to be enforceable against someone else 2. Surety is bound by a judgment against the principal debtor, even though he was not a party to the proceedings 3. Except if required by the contract, a demand or notice of default is not required to fix the suretys liability 4. Creditor may sue the principal debtor and the surety, separately or together
II. APPLICABILITY OF STRICTISSIMI JURIS RULE

CREDIT TRANSACTIONS
A. Accommodation Surety applicable; an accommodation surety is one who signed the instrument as maker, drawer, acceptor or indorser without receiving value therefore and for the purpose of lending his name; should be protected against unjust pecuniary impoverishment by imposing on the principal debtor duties akin to those of a fiduciary B. Compensated Surety not applicable; compensated sureties are business associations organized for the purpose of assuming classified risks in large numbers for profit; they are secured from all possible losses by counterbonds or indemnity agreements; rules peculiar to suretyship does not apply.
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Chapter X. Concurrence and Preference of Credits
Chapter X. Concurrence and Preference of Credits

This 10th Chapter discusses the important provisions and principles surrounding Concurrence and Preference of Credits. There are FOUR MAJOR LESSONS in this Chapter: I. II. III. IV. V. Concurrence of Credits Defined Preference of Credit Defined General Provisions Classification of Credits Order of Preference of Credits
E. In a co-ownership, where one of the coowners is the insolvent debtor, his undivided share or interest in the property shall be possessed by the assignee in insolvency proceedings. F. Property held by insolvent debtor as trustee of an express or implied trust is excluded from insolvency proceedings.
IV. CLASSIFICATION OF CREDITS

A. Special preferred credits. a. Considered as mortgages or pledges of real or personal property or liens within the purview of legal provisions governing insolvency. b. Taxes due to the State shall first be satisfied. B. Ordinary preferred credits preferred in the order given by law C. Common credits Credits of any other kind or class, or by any other right or title not comprised in Arts. 2241-2244 enjoy no preference.
I. CONCURRENCE
OF
CREDITS
possession by 2 or more creditors of equal rights or privileges over the same property or all of the property of a debtor
II. PREFERENCE OF CREDIT

the right held by a creditor to be preferred in the payment of his claim above others out of the debtors assets
III.GENERAL PROVISIONS
A. Debtor is liable with all his property, present and future, for the fulfillment of his obligations, subject to exemptions provided by law. B. Exempt Property 1. Present property: i. Family home. (Arts. 152, 153 and 155, CC) ii. Right to receive support, as well as money or property obtained by such support, shall not be levied upon on attachment or execution. (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 debts on account of insolvency, is not liable for the unsatisfied claims of his creditors with said property. (Sec. 68 and 69, Insolvency Law, Act 1956) 3. Property in custodia legis and of public dominion. C. Insolvency shall be governed by the Insolvency 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 of the family
V. ORDER OF CREDITS
PREFERENCE
OF
A. Credits which enjoy preference with respect to specific movables exclude all others to the extent of the value of the personal property to which the preference refers. B. 2 or more credits with respect to the same specific movable shall be satisfied pro rata, after payment of duties, taxes, and fees due the State or any of its subdivision. C. Credits which enjoy preference in relation to specific real property or real rights exclude all others to the extent of the value of the immovable or real right to which the preference refers. D. 2 or more credits with respect to the same specific real property or real rights shall be satisfied pro rata, after the payment of the taxes and assessments. E. Excess, if any, shall be added to the free property which the debtor may have, for the payment of other credits. F. Credits which do not enjoy any preference with respect to specific property, and those which enjoy preference as to the amount paid, shall be satisfied according to the ff. rules: 1. Order established by Art. 2244 2. Common credits referred to in Art. 2245 shall be paid pro rata regardless of dates.
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Chapter XI. Special Laws

This 11th Chapter discusses the important provisions and principles in the Warehouse Receipts Law and the Insolvency law There are TWO MAJOR Chapter: LESSONS in this
I. Warehouse Receipts Law II. Insolvency Law
I. WAREHOUSE RECEIPTS LAW

SCOPE All warehouses, whether private, bonded or not. public or
APPLICATION The special law applies to warehouse receipts issued by a warehouseman as defined in Sec. 58(a); while the Civil Code, to other cases where receipts are not issued by a warehouseman. WHO MAY ISSUE WAREHOUSE RECEIPTS Only a warehouseman; but a duly authorized officer or agent of a warehouseman may do so. Warehouseman: Person lawfully engaged in the business of storing goods for profit. Receipts not issued by a warehouseman, although in the form of warehouse receipts, are not warehouse receipts 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 other warehouses. 2. Date of issue and receipt: Indicates prima facie the date when the contract of deposit has been perfected and when the computation of storage charges shall begin. 3. Consecutive number of receipt: To identify each receipt with the goods for which it was issued. 4. Person to whom goods are deliverable: Determines the persons who shall prima facie be entitled lawfully to the possession of the goods deposited. 5. Rate of storage charges: Consideration for the contract from the point of view of the warehouseman.
6. Description of goods or packages: For identification purposes. 7. Signature of warehouseman: Best evidence of the fact that the warehouseman has received the goods and has bound himself to assume all obligations connected therewith. 8. Warehousemans ownership of or interest in the goods: To prevent abuses in the past when warehouseman issued receipt on their goods. 9. Statement of advances made and liabilities incurred (if present): To preserve the lien of the warehouseman over the goods he stores or the proceeds thereof in his hands Effect of omission of any of the essential terms: 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 for misdelivery in Sec. 10, not giving statutory notice in case of sale of goods in Sec. 33 and 34). b. Exemption from liability and negligence. c. Those contrary to law, morals, good customs, public order or public policy.
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DEFINITIONS 1) Negotiable receipt: Receipt in which it is stated that the goods received will be delivered to the bearer or to the order of any 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 will be delivered to the depositor or to any other specified person. A negotiable warehouse receipt is not a negotiable instrument in the same 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,
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the word DUPLICATE shall be placed on the face of the receipt except the one first issued. Effect: The warehouseman shall be liable for damages for failing to do this to any one who purchased the subsequent receipt (1) for value, and (2) supposing it to be an original, even though the purchase be after delivery of the goods by the warehouseman to the holder of the original receipt.
FAILURE TO MAKE RECEIPT NONNEGOTIABLE 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 value AND (2) supposing it to be negotiable, may at his option treat it as negotiable. CONSTRUCTION OF WAREHOUSE RECEIPTS: Liberal construction of the law in favor of bona fide holders. This has no application to actions against any party other than a warehouseman. OBLIGATION AND RIGHTS OF A WAREHOUSEMAN UPON THEIR RECEIPTS Principal obligations of a warehouseman 1. To take care of the goods, and be liable for failure to exercise care; but he is not liable for loss or injury which could not have been avoided, unless there is a stipulation to the contrary. 2. To deliver the goods to the holder of the receipt or the depositor upon demand, accompanied with: a. An offer to satisfy the warehousemans lien: Because a warehouseman may refuse delivery until his lien is satisfied b. An offer to surrender the receipt: For the protection of the warehouseman and to avoid criminal liability; this is subject to waiver. c. A offer to sign when the goods are delivered, an acknowledgment that they have been delivered.
But warehouseman may still refuse delivery on the grounds of some lawful excuse: a. Sec. 10 1. he has been requested by the person lawfully entitled to the goods not to make delivery; 2. he has information that the delivery about to be made was to one not lawfully entitled to the goods; b. Sec. 16: He has acquired title to the goods which was derived from 1. transfer made by the depositor at the time of the deposit for storage or subsequent thereto 2. the warehousemans lien c. Sec. 18: If there are several claimants to the goods d. Sec. 21: If the goods were lost and he had no fault e. Sec. 36: He has already lawfully sold the goods
Persons to whom the goods must be delivered 1. Persons lawfully entitled to the possession of the goods or its agent 2. Persons entitled to deliver under: a. a non-negotiable receipt; or b. with written authority 3. person in possession of a negotiable receipt (which was lawfully negotiated) o A warehouseman does not have a cause of action against a person to whom he misdelivered the thing, unless the depositor sues him.
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ACTS FOR WHICH A WAREHOUSEMAN IS LIABLE (1) Failure to stamp duplicate on copies of a negotiable receipt (Sec. 6 and 15) When more than one negotiable receipts are issued for the same goods, the word duplicate must be plainly placed by the warehouseman upon the face of every such receipt except the 1st. In such case, the warehouseman warrants: a. that the duplicate is an accurate copy of the original receipt b. such original receipt is uncancelled at the date of the issue of the duplicate
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The duplicate imposes no other liability upon the warehouseman.
(2) Failure to place non-negotiable on a non-negotiable receipt (Sec. 7) (3) Misdelivery of the goods (Sec. 10) a. To one not lawfully entitled to possession o Liable for conversion (unauthorized assumption and exercise of the right of ownership over goods belonging to another through alteration or the exclusion of the owners right) b. To a person entitled to delivery under a non-negotiable receipt or written authorization OR person in possession of a negotiable receipt o Still liable for conversion if: 1. prior to delivery, he had been requested NOT to make such delivery 2. he had received notice of the adverse claim or title of a 3rd person (4) Failure to effect cancellation of a negotiable receipt upon delivery of the goods (Sec. 11) This is applicable ONLY to negotiable receipts but NOT to a situation where there was a valid sale in accordance with Sec. 36 a. When the goods are delivered already: Failure to cancel will make him liable to any one who purchased for value in good faith such receipt b. When only some of the goods were delivered: Failure to cancel or to state plainly in the receipt that some goods were delivered will make him liable to any one who purchased for value in good faith such receipt (5) Issuing receipt for non-existing goods or misdescribed goods (Sec. 20) General Rule: A warehouseman is under obligation to deliver the identical property stored with him and if he fails to do so he is liable. Exception: If the description consists merely of marks or labels upon the goods or upon the packages containing them, etc., the warehouseman is not liable even if the goods are not of the kind as indicated 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 the receipt but if such was lost, a competent court may order the delivery of the goods only: a. upon proof of the loss or destruction of the receipt; and b. upon giving of a bond with sufficient securities The warehouseman is still liable to a holder of the receipt for value without notice since the warehouseman can secure himself in the bond given. (7) Failure to take care of the goods (Sec. 12) (8) Failure to give notice in case of sales of goods to satisfy his lien (Sec. 33) or because the goods are perishable and hazardous (Sec. 34) EFFECTS OF ALTERED RECEIPTS a. Alteration immaterial: whether fraudulent or not, authorized or not, the warehouseman is liable on the altered receipt according to its original tenor; b. Alteration material: but it was authorized, the warehouseman is liable according to the terms of the receipts as altered; c. Material alteration innocently made: though unauthorized, the warehouseman is liable on the altered receipt according to its original term; d. Material alteration fraudulently made: warehouseman is liable according to the original tenor to a: 1. purchaser of the receipt for value without notice; and 2. to the alterer and subsequent purchasers with notice ( BUT his liability is limited only to delivery as he is excused from any other liability) Even a fraudulent alteration cannot divest the title of the owner of stored goods and the warehouseman is liable to return them to the owner. But a bona fide holder acquires no right to the goods under a negotiable receipt which has been stolen or lost or which the indorsement has been forged. WITH REGARD TO OWNERSHIP a. Ownership is not a defense for refusal to deliver
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The warehouseman cannot refuse to deliver the goods on the ground that he has acquired title or right to the possession of it unless such is derived: 1. directly or indirectly from a transfer made by the depositor at the time of the deposit for storage or subsequent thereto; 2. from the warehousemans lien b. Adverse title of a 3rd person is not a defense for refusal to deliver by a warehouseman 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 a valid sale of the goods (Sec. 36) DUTY OF WAREHOUSEMAN WHEN THERE ARE SEVERAL CLAIMANTS The warehouseman may either: a. Investigate and determine within a reasonable time the validity of the claims, and deliver to the person whom he finds is entitled to the possession of the goods o Effect: He is not excused from liability in case he makes a mistake b. He may bring a complaint in interpleader o Effect: a) he will be relieved from liability in delivering the goods to the person whom the court finds to have better right; b) he is liable for refusal to deliver to the rightful claimant when it is required to have an interpleader; c. He may not do (a) and (b) o Effect: He will be liable after a lapse of a reasonable time, of conversion as of the date of the original demand for the goods. This does NOT apply to cases where the warehouseman himself makes a claim to the goods. COMMINGLING OF DEPOSITED GOODS General Rule: A warehouseman may not mingle goods belonging to different depositors.
Exception: In case of fungible goods of the same kind and grade provided: a. he is authorized by agreement b. he is authorized by custom Effects: a. each depositor shall own the entire mass in common and entitled to his portion b. warehouseman is severally liable to each depositor for the care and redelivery of their portion as if the goods had been kept separate
ATTACHMENT OR LEVY ON NEGOTIABLE RECEIPTS A warehouseman has the obligation to hold the goods for the owner or for the person to whom the negotiable receipt has been duly negotiated. Therefore, the goods cannot be attached or levied upon under an execution, unless: a. the document be first surrendered; or b. the negotiation is enjoined, or c. 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 the person depositing is not the owner of the goods or one who has not the right to convey title to the goods binding upon the owner. REMEDY OF CREDITOR WHOSE DEBTOR OWNS A NEGOTIABLE RECEIPT Attachment of the negotiable receipt, not on the goods. The goods themselves cannot readily be attached or levied upon by ordinary legal process EXTENT OF WAREHOUSEMANS LIEN a. lawful charges for 1. storage, and 2. preservation of the goods b. lawful claims for 1. money advanced 2. labor 3. interest 4. weighing 5. insurance 6. cooperating 7. transportation c. other charges and expenses in relation to such goods d. Reasonable charges and expenses for notice and advertisements of sale
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e. sale of the goods where defaults has been made in satisfying the lien EXTENT OF THE LIEN WHEN A NEGOTIABLE RECEIPT HAS BEEN ISSUED a. charges for storage and preservation of the goods b. other charges expressly enumerated (from b, c, d and e above) although the amount is NOT stated For claims not specified, the warehouseman shares pro rata with the other creditors of the depositor the balance of the proceeds of the sale for the satisfaction of the claims. GOODS SUBJECT TO LIEN a. goods of the depositor who is liable to the warehouseman as debtor wherever such goods are deposited; b. goods of other persons stored by the depositor who is liable to the warehouseman as debtor with authority to make a valid pledge A warehouseman has NO lien on goods belonging to another and stored by a stranger in fraud of the true owners right. The lien may be lost through: a. voluntarily surrendering possession of goods - constitutes a waiver or abandonment o A warehouseman may NOT claim a lien on other goods of the same depositor for unpaid charges on the goods surrendered if the goods were delivered to him under different receipts. b. wrongfully refusing to deliver the goods to a person who holds the receipt or the depositor upon DEMAND accompanied with: 1. an offer to satisfy the warehousemans lien (because a warehouseman may refuse delivery until his lien is satisfied) 2. an offer to surrender the receipt a. for the protection of the warehouseman and to avoid criminal liability b. this is subject to waiver 3. an offer to sign when the goods are delivered, an acknowledgment that they have been delivered
REMEDIES FOR A WAREHOUSEMAN 1. Even if without lien, all remedies allowed by law to a creditor against his debtor for collection of charges; 2. By refusing to deliver the goods until his lien is satisfied; 3. All remedies allowed by law for the enforcement of a lien against personal property and recovery of any deficiency in case it exists after the sale of the property; 4. By causing the extrajudicial sale of the property and applying the proceeds to the value of the lien PROCESS A. Written notice to the person on whose account the goods are held or to persons who claim an interest in the goods containing: a. itemized statement of warehousemans lien showing the sum due and when it became due b. brief description of the goods c. a demand that a claim be paid on or before a day mentioned, not less than 10 days from: 1. delivery of notice if personally delivered 2. time when notice should reach its destination if sent by mail d. statement that if the claim is not paid, the goods will be advertised for sale and then sold at a specified time and place B. After the time for payment of the claim if the notice has elapsed, the sale will be advertised stating: a. a description of the goods to be sold b. the name of the owner or person on whose account the goods were held c. time and place of the sale C. Publication: a. if there is a newspaper published in the place of sale: once a week for 2 consecutive weeks and the sale not held less than 15 days from the time of the 1st publication b. if there is no newspaper: posted at least 10 days before the sale in not less than 6 conspicuous places in the place of sale D. Sale itself in: a. place where the lien was acquired b. if such place is manifestly unsuitable for the purpose, at the nearest suitable place E. From the proceeds of the sale: a. the warehouseman shall satisfy his lien
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b. including the reasonable charges of notice, advertisement and sale c. the balance shall be held by the warehouseman and delivered on demand to the person to whom he should deliver it F. Any time before the goods are sold, any person may pay the warehouseman for his lien and the other expenses. The warehouseman shall deliver the goods to that person if he is entitled under this Act, to the possession of the goods on payment of the charges. Otherwise, the warehouseman shall retain ownership of the goods. PERISHABLE AND HAZARDOUS GOODS Warehouseman will give notice to owner or person in whose name the goods are stored: a. to satisfy his lien b. to remove the goods c. failure to do a &b will give the warehouseman authority to sell the goods without advertising d. if sale is not possible, he may dispose of the goods in any lawful manner without liability Proceeds of the sale shall be disposed of in accordance with the process in the sale of the goods. EFFECTS OF SALE a. warehouseman is NOT liable for nondelivery even if the receipt was given for the goods when they were deposited be negotiated b. when the sale was made without the publication required and before the time specified by law, such sale is void and the purchaser of the goods acquires no title in them NEGOTIATION AND TRANSFER OF RECEIPTS Negotiable receipts negotiable by delivery: 1. if the goods are deliverable to the bearer; or 2. when indorsed in blank; or 3. person to whose order the goods are delivered or by a subsequent indorsee indorsed it to bearer
II. INSOLVENCY LAW

INSOLVENCY state of a person whose liabilities are more than his assets. It is the inability of a person to pay his debys as they become due in the ordinary course of business. Balance Sheet Test relative condition of a mans assets and liabilities that the former if all made immediately available, would not be sufficient to discharge the latter. Equity Test a person may be insolvent although he may be able to pay his debts at some future time on a settlement and winding up of his affairs. INSOLVENCY vs. BANKRUPTCY The only distinction between insolvency and bankruptcy is a matter of terminology and the source of the laws relating thereto. Either a bankruptcy or insolvency statute may operate to discharge a debt as well as release the debtor from imprisonment, and either may operate on the petition of the debtor or that of his creditors. INSOLVENCY PRIMARILY GOVERNED BY THE CC Insolvency shall be governed by special laws insofar as they are not inconsistent with the CC. Insolvency is thus primarily governed by the CC and subsidiarily by the Insolvency Law. The Insolvency Law is intended to cover the entire subject of insolvency and bankruptcy and must be treated as a complete body of law upon the subject. PURPOSES OF INSOLVENCY LAW: 1. To effect an equitable distribution of the bankrupts property among his creditors; and 2. To benefit the debtor in discharging him from his liabilities and enabling him to start afresh with the property set apart to him as exempt. 3. The regulatory and unifying influence of the law on credit transactions and business usage throughout the country.
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WHAT MAY BE PERMITTED OF A DEBTOR BY THE INSOLVENCY LAW 1. Petition the court to suspend payments; 2. To be discharged from his debts and liabilities by voluntary or involuntary insolvency proceedings. SUSPENSION OF PAYMENTS postponement, by court order, of the payment of debts of one who, while possessing sufficient property to cover his debts, foresees the impossibility of meeting them when they respectively fall due. PURPOSE To suspend or delay the payment of debts the amount of which is not affected although a postponement is declared. BASIS Probability of the debtors inability to meet his obligations when they respectively fall due, despite the fact that he has sufficient assets to cover all his liabilities. REQUISITES OF PETITION FOR SUSPENSION 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 the state of suspension of payments RULE ON DOUBLE MAJORITY IN THE MEETING OF CREDITORS Majority shall be: 1. Two thirds (2/3) of the creditors voting 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 an insolvent debtor owing debts exceeding the amount of P1,000.00 may apply to be discharged from his debts and liabilities by petition to the RTC of the province or city in which he has resided for six months next preceding the filing of the petition.
DISTINCTIONS BETWEEN SUSPENSION OF PAYMENTS AND INSOLVENCY

Suspension of Payments Suspend or delay the payment of debts Debtor has sufficient property to pay his debts Amount of indebtedness is not affected Insolvency Discharge the debtor from the payment of debts Debtor does not have sufficient property to pay all his debts The creditors receive less than their credits, and in case where there are preferences, some creditors may not receive any amount at all In case of involuntary insolvency, three or more creditors are required
Purpose
Sufficiency of property Effect on amount of debt
Number of creditors required
Number of creditors is immaterial
EFFECT OF COURT ORDER DECLARING DEBTOR INSOLVENT 1. All the assets of the debtor not exempt from execution are taken possession of by the sheriff until the appointment of a receiver or assignee. 2. The payment to the debtor of any debts due to him and the delivery to the debtor or to any person for him of any property belonging to him and the transfer of any property by him are forbidden. 3. All civil proceedings pending against the insolvent debtor shall be stayed. 4. Mortgages or pledges, attachments or executions on property of the debtor duly recorded and not dissolved are not affected by the order. B. INVOLUNTARY INSOLVENCY an adjudication of insolvency may be made on the petition of three or more creditors, residents of the Philippines, whose credits or demands accrued in the Philippines, and the amount of which credits or demands are in the aggregate of not less than P1,000.00
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DISTINCTIONS INSOLVENCY INSOLVENCY
BETWEEN VOLUNTARY AND INVOLUNTARY

Voluntary Insolvency One creditor is sufficient Filed by insolvent debtor the Involuntary Insolvency Three or more creditors are required Filed by three or more creditors who possess the qualifications required by law Debtor must have committed one or more of such acts of insolvency Amount must not be less than P1,000.00 (aggregate) Petition must be accompanied by a bond An order of adjudication granted only after a hearing Length residence immaterial of is
Number of creditors Who may petition
3. Secured creditors unless they surrender their security or lien to the sheriff or receiver or unless they shall first have the value of such security fixed 4. Holders of claims for unliquidated damages arising out of pure tort. EFFECTS OF ASSIGNMENT 1. Assignee takes the property in the plight and conditions that the insolvent held it. 2. Upon appointment, the legal title to all the property of the insolvent is vested in the assignee, and the control of the property is vested in the court. 3. All actions to recover all the estate, debts, and effects of the insolvent shall be brought by the assignee and not by the creditors. 4. The assignment shall: a. Dissolve any attachment levied within one month next preceding the commencement of insolvency proceedings; b. Vacate and set aside judgment entered in any action commenced within 30 days immediately prior to the commencement of insolvency proceedings; c. Vacate and set aside execution issued thereon; d. Vacate and set aside any judgment entered by default or consent of the debtor within 30 days prior to the commencement of insolvency proceedings BOND OF THE ASSIGNEE After his election, the assignee is required to give a bond for the faithful performance of his duties. Purpose: 1. To establish his official character 2. To establish his right to sue in that capacity The bond is solely for the benefit of the creditors of the insolvent, and that third persons have no remedy against the sureties if the assignee, purporting to be as such, wrongfully takes property from such third persons and converts it to his own use. PROPERTIES OF INSOLVENT THAT PASS TO THE ASSIGNEE 1. All real and personal property, estate, and effects of the debtor, including all deeds, books, and papers in relation thereto; 2. Properties fraudulently conveyed;
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Acts of insolvency
Debtor must not be guilty of any of the acts of insolvency (Sec. 20) The amount of indebtedness must exceed P1,000.00 Bond is required not
Amount of debt
Posting of bond Ex parte adjudication
Residency duration to vest jurisdiction in courts Requirement of hearing
An order of adjudication may be granted ex parte Petition is filed in the RTC of the province or city where the debtor has resided for six months Court issues the order of adjudication declaring the petitioner insolvent upon the filing of the voluntary petition
The debtor is not adjudicated insolvent until after hearing of the case
ASSIGNEE person elected by the creditors or appointed by the court to whom an insolvent debtor makes an assignment of all his property for the benefit of his creditors. CREDITORS NOT ENTITLED TO VOTE IN THE ELECTION OF ASSIGNEE 1. Those who did not file their claims at least two days prior to the time appointed for such election 2. Those whose claims are barred by the statute of limitations
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3. Right of action for damages to real property 4. The undivided share or interest of the insolvent debtor in property held under co-ownership PROPERTIES OF INSOLVENT THAT DO NOT PASS TO THE ASSIGNEE 1. Property exempt from execution; 2. Property held in trust; 3. Property of the conjugal partnership or absolute community except insofar as the debtors obligations redounded to the benefit of the family. 4. Property to which a mortgage or pledge exists unless the creditor surrenders his security or lien. 5. After-acquired property except fruits and income of property owned by the debtor 6. Non-leviable assets like life insurance policy which do not have any cash surrender value 7. Right of action for tort which is purely personal in nature. POWERS OF THE ASSIGNEE 1. To sue and recover all the estate, debts, and claims belonging to or due to the debtor; 2. To take into his possession all the estate of the debtor except property exempt from execution; 3. In case of non-resident or absconding or concealed debtor, to demand and receive of every sheriff all the property and money in his possession belonging to the debtor. 4. To sell, upon order of the court, any estate of the debtor which has come into his possession; 5. To redeem all mortgages and pledges and to satisfy any judgment which may be an encumbrance on any property sold by him. 6. To settle all accounts between the debtor and his debtors subject to the approval of the court; 7. To compound, under the order of the court, with any person indebted to such debtor; 8. To recover any property fraudulently conveyed by the debtor. CREDITORS LIABILITY FOR FRAUDULENTLY ASSIGNING HIS CREDIT A creditors transfer or assignment of his credit to another without the knowledge and at the back of other creditors of the insolvent may be a
shrews surprise move that enables the transferor creditor to collect almost if not the entire amount of the said creditor. REMEDY OF THE ASSIGNEE: SECTION 37 OF THE INSOLVENCY LAW: The creditor coming within this purview is liable to an action by the assignee for double the value of the property so embezzled or disposed of, to be received for the benefit of the insolvents estate. Section 37 constitutes a sort of penal clause which shall be strictly construed. When Sec. 37 does not apply: Not applicable where what has been disposed of is the creditors own credit and not the insolvents property. DIVIDENDS IN INSOLVENCY Dividends in insolvency parcel if the fund arising from the assets of the estate, rightfully allotted to a creditor entitled to share in the fund, whether in the same proportion with other creditors or in a different proportion. It is paid by the assignee only upon order of the court. CLASSIFICATION AND PREFERENCE OF CREDITORS PREFERENCE an exception to the General Rule. By it, one person is given a superior right or claim over another. Hence, the law on preferences is strictly construed. (The General Rule is that the purpose of insolvency proceeding is the equitable distribution of the insolvents assets among the debtors creditors.) RULES ON ORDER OF DISTRIBUTION 1. The priorities fixed by law govern 2. The claims which are given priority must be paid in full in the order of their priority, before the general creditors receive anything. 3. Creditors claiming preference must sufficiently establish their credits and their right to preference to entitle them to such preference. ORDER OF DISTRIBUTION 1. Equitable claims under Sec. 48; 2. Preferred claims with respect to specific movable property and specific immovable property under Art. 2241 and 2242 of the CC. 3. Preferred claims as to unencumbered property of the debtor which shall be
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paid in the order named in Art. 2244 of the CC. 4. Common or ordinary credits which shall be paid pro rata regardless of dates under Art. 2245 of the CC. With reference to specific movable and immovable property of the debtor, the taxes due the State shall first be satisfied. The preferred claims enumerated in Art. 2241 and 2242 are considered as mortgages and pledges of real or personal property or liens within the purview of the Insolvency Law.
2. To waive his right under the security or lien thereby, share in the distribution of the assets of the debtor; 3. To have the value of the encumbered property appraised and then share in the distribution of the assets of the debtor with respect to the balance of his credit. WAIVER release or surrender of the claim to 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. COMPOSITION An agreement, made upon a sufficient consideration, between an insolvent or embarrassed debtor and his creditors, whereby the latter for the sake of immediate or sooner payment, agree to accept a dividend less than the whole amount of their claims, to be distributed pro rata, in discharge and satisfaction of the whole debt.
Composition Designates an arrangement between a debtor and the whole body of his creditors (or at least a considerable portion of them) for the liquidation of their claims by the dividend offered. Accord An agreement between a debtor and a single creditor for a discharge of the obligation by a part payment or on different terms.
EQUITABLE CLAIMS UNDER THE INSOLVENCY LAW Section 48 of the Insolvency Law: Any property found among the property of the insolvent, the ownership of which has not been conveyed to him by legal and irrevocable title, shall not be considered to be property of the insolvent and shall be placed at the disposal of its lawful owners, on order of the court on petition of the assignee or any creditor whose right to the estate of the insolvent has been established. 1. Paraphernal property belonging to the wife of the insolvent; 2. Property held by the insolvent on deposit, administration, lease, or usufruct; 3. Merchandise held by the debtor on commission; 4. Negotiable instruments for collection or remittance; 5. Money held by the debtor for remittance; 6. Amounts due the insolvent for sales or merchandise on commission; 7. Merchandise bought by the insolvent on credit where no delivery is made or where the right of ownership or possession has been retained by the seller; 8. Goods or chattels wrongfully taken by the insolvent or the amount of the value thereof. ALTERNATIVE RIGHTS OF SECURED CREDITOR 1. To maintain his right under his security or lien and ignore the insolvency proceedings it is the duty of the assignee to surrender to him the property encumbered;
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REQUIREMENTS FOR A VALID OFFER OF COMPOSITION 1. The offer of the terms of composition must be made after the filing in court of the schedule of property and submission of his list of creditors; 2. The offer must be accepted in writing by a majority of the creditors representing a majority of the claims which have been allowed; 3. It must be made after depositing in such place designated by the court, the consideration to be paid and the costs of the proceedings; and 4. The terms of the composition must be approved or confirmed by the court.
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WHEN COURT MAY CONFIRM A COMPOSITION 1. 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 of the duties which would create a bar to his discharge; and 3. The offer and its acceptance are in good faith and have not been made or procured in a manner forbidden by the Act. EFFECTS OF CONFIRMATION OF COMPOSITION 1. The consideration shall be distributed as the judge shall direct; 2. The insolvency proceedings shall be dismissed; 3. The title to the insolvents property shall revest in him; and 4. The insolvent shall be released from his debts. 5. The substitution, in a certain sense, composition for the insolvency proceedings. 6. A lawful composition and its performance by the insolvent has the same effect of a written discharge, although no written discharge is granted. 7. For all legal and practical purposes, the insolvency ended on the date of the confirmation of composition and the firm was restored to its status quo. It reacquired its personality. Its properties ceased to be in custodia legis. WHEN CONFIRMATION MAY BE SET ASIDE 1. 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 such composition. DISCHARGE The formal and judicial release of an insolvent debtor from his debts with the exception of those expressly reserved by law. WHEN AN INSOLVENT DEBTOR MAY APPLY FOR A DISCHARGE General Rule: A debtor may apply to the RTC for a discharge at three months to one year after the adjudication of insolvency.
Exception: The property of the insolvent has not been converted into money without his fault, thereby delaying the distribution of dividends among the creditors in which case the court may extend the period.
DEBTS RELEASED BY A DISCHARGE 1. All claims, debts, and liabilities, and demands set forth in the schedule; and 2. All claims, debts, liabilities and demands which were or might have been proved against the estate in insolvency DEBTS NOT RELEASED BY DISCHARGE 1. 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 while acting in a fiduciary capacity; 4. Debt of any person liable for the same debt, 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 will make the law a means of avoiding the enforcement of the obligation) 7. Discharged debt but revived by a subsequent new promise to pay (Rationale: Discharge does not end the moral obligation to pay) 8. Debts which have not been duly schedules in time for proof and allowance. Exception: The creditors had notice or actual knowledge of the insolvency proceedings 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 in insolvency. 1. Releases the debtor from all claims, debts, liabilities and demand set forth in the schedule or which were or might have been proved against his estate in insolvency.
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2. Operates as a discharge of the insolvent and future acquisitions but permits mortgages and other lien 3. It is a special defense which may be pleaded and be a complete bar to all suits brought on any such debts, claims, liabilities or demands. 4. It does not operate to release any person liable for the same debts, for or with the debtor, either as partner, joint contractor, indorser, surety, or otherwise. 5. The certificate of discharge is prima facie evidence of the fact of release, and the regularity of such discharge. Remedy of guarantor or surety when debtor declared judicially insolvent: File a contingent claim in the insolvency proceeding, if his rights as such guarantor or surety are not to be barred by the subsequent discharge of the insolvent debtor from all his liabilities.
Exception: In cases mentioned in the Insolvency Law Deposit of money to ones credit on a bank does not create any preference. Rationale: The estate of the depositor is not diminished for there is an obligation on the part of the bank to pay the amount of the deposit as soon as the depositor may see fit to draw a check against it.
WHEN DISCHARGE MAY BE REVOKED Discharge may be revoked by the court which granted it upon petition of any creditor: 1. Whose debt was proved or provable against the estate in insolvency, on the ground that the discharge was fraudulently obtained; and provided, 2. The petition is filed within one year after the date of the discharge. FRAUDULENT PREFERENCES AND TRANSFERS TRANSFER includes the sale and every other and different modes of disposing of or parting with property, or the possession of property, absolutely or conditionally, as a payment, pledge, mortgage, gift, or security. WHEN PREFERENTIAL TRANSFER EXISTS 1. There must be a parting of the insolvents property; 2. For the benefit of the creditor; 3. Consequent diminution of the insolvents estate; 4. With the result that such creditor receives a greater proportion of his claim than other creditors of the same class. General Rule: A debtor is not prohibited from paying one creditor in preference to another
WHEN FRAUDULENT PREFERENCE EXISTS FRAUDULENT PREFERENCE when the debtor procures any part of his property to be attached, sequestered, or seized on execution or makes any payment, pledge, mortgage, assignment, transfer, sale or conveyance of any part of his property, whether directly or indirectly, absolutely or conditionally, to any one under the following 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 a petition by or against the debtor; 3. It is made with a view to giving preference to any creditor or person having a claim against him; and 4. The person receiving a benefit thereby has reasonable cause to believe: a. That the debtor is insolvent; b. That the transfer is made with a view to prevent his property from coming to his assignee in insolvency, or to prevent the same from being distributed ratably among his creditors, or to defeat the object of or any way hinder the operation or evade the provisions of the Insolvency Law. *Date of registration of sale of real property should determine whether the sale was prohibited by the Insolvency Law or not. WHEN PRESUMPTION OF FRAUD EXISTS 1. If such payment, pledge, mortgage, conveyance, sale, assignment or transfer is not made in the usual and ordinary course of business of the debtor; or 2. If such seizure is made under a judgment which the debtor has confessed or offered to allow, that fact shall be prima facie evidence of fraud. EQUAL EXCHANGE NOT A PREFERENCE An exchange of securities within the thirty-day period is not a fraudulent
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preference under the law, even when both parties know that the debtor is insolvent, 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 are substantially equal.
WHEN RECEIVER MAY BE APPOINTED Anytime before the election of an assignee, when it appears by the verified petition of a creditor: 1. That the assets of the insolvent or a considerable portion thereof have been pledged, mortgaged, transferred, assigned, conveyed, or seized on legal process in violation of Sec. 70; 2. That it is necessary to commence an action to recover the same; The receiver shall deliver all the property, assets, or effects remaining in his hands to the assignee who shall be substituted for him in all pending actions or proceedings.
WHEN FRAUDULENT TRANSFER EXISTS 1. Any payment, pledge, mortgage, conveyance, sale, assignment, or transfer of property of whatever character; 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 RECOVER PROPERTY OR ITS VALUE The creditors of the insolvent are not authorized to institute an independent action. In all actions or proceedings to set aside or nullify fraudulent preferences or transactions as VOID, the assignee appears for, and represents the general creditors. EFFECT OF DEATH OF INSOLVENT DEBTOR 1. Death after the order of adjudication the proceedings shall be continued and concluded in like manner and with like validity and effects as if he had lived. 2. Death before the order of adjudication the proceedings shall be discontinued. Remedy: File claims in the proper testate or intestate proceedings
WHEN PETITION MAY BE DISMISSED At anytime before the appointment of an assignee: 1. Voluntary petition upon the application of the debtor, if no creditor files written objections; 2. Involuntary petition a. Upon the application of the petitioning creditors; or b. By written consent of all creditors filed in court, in which case, the proceedings may be dismissed at any time. After the appointment of an assignee, dismissal is not allowed without the consent of all parties interested in or affected thereby. WHEN APPEAL MAY BE TAKEN TO THE SUPREME COURT From an order granting or refusing: 1. An adjudication in insolvency and in the latter case, from the order fixing the amount of costs, expenses, damages, and attorneys fees allowed the debtor; 2. A creditors claim when the amount in dispute exceeds P300.00 3. A claim for property not belonging to the insolvent, presented under Sec. 48 (equitable claims) 4. Settling an account of an assignee; 5. Setting apart homestead or other property claimed as exempt from execution. 6. A discharge to the debtor.
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Table of Contents
AGENCY
Chapter I. NATURE, FORM AND KINDS OF AGENCY A. Definition B. Purpose C. Characteristics D. Essential Elements E. Determination of Existence F. Agency vs. Similar Contracts G. Kinds Chapter II. OBLIGATIONS OF THE AGENT A. To Carry Out the Agency B. To Act Within the Scope of His Authority C. To Advance Necessary Funds D. To Act in Accordance with Instructions E. To Prefer Principals Interest over Personal Interest F. Not to Loan to Himself without Principals Consent G. To Render Account and Deliver Things Received by Virtue of Agency H. To be Responsible for Substitutes I. To Pay Interest J. To Answer for His Fraud/ Negligence K. Special Obligations of Factor/ Commission Agents Chapter III. LIABILITIES OF THE AGENT A. Liability to Third Persons B. Liability to the Principal C. Liability of Two or More Agents Chapter IV. OBLIGATIONS OF THE PRINCIPAL A. To Comply with the Obligations Contracted by the Agent B. To Advance Necessary Sums and Reimburse the Agent C. To Indemnify Agent for Damages D. To Pay the Agents Compensation E. Be Solidarily Liable 134 134 134 134 134 135 135 137 141 141 141 142 142 142 142 143 143 143 143 143 145 145 145 146 147 147 148 148 148 149 Chapter V. EXTINGUISHMENT OF AGENCY A. Expiration of the Period for which It was Constituted B. Death, Civil Interdiction, Insanity, Insolvency C. Withdrawal of the Agent D. Accomplishment of the Object of the Agency E. Revocation F. Dissolution of the Firm/Corp. which Entrusted/Accepted the Agency 150 150 150 150 150 150 151
AGENCY
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Chapter I. Nature, Form and Kinds of Agency
Agency
FACULTY EDITOR

SUBJECT EDITORS
LECTURES Edel Cruz

HEAD

-------Kae Guerrero
SALES Michelle Dy
LEAD WRITER
-------Leo Zulueta
Rania Joya
Kristine Bongacaron Viktor Fontanilla

WRITERS

A. B. C. D. E. F. G. DEFINITION PURPOSE CHARACTERISTICS ESSENTIAL ELEMENTS DETERMINATION OF EXISTENCE AGENCY V SIMILAR CONTRACTS KINDS
A. DEFINITION [Art. 1868, CC]

By the contract of agency, 1. a person (agent) binds himself 2. to render some service or to do something in representation or on behalf of another (principal), 3. with the consent or authority of the latter.
iii. 3rd person claiming the benefit of the rule colludes with agent to defraud principal. Note: The theory of imputed knowledge ascribes the knowledge of the agent, to the principal, not the other way around. The knowledge of the principal cant be imputed to its agent. [Sunace Internatl Mgt. Services v. NLRC, 2006]
C. CHARACTERISTICS
(CNPPU/B) 1. Consensual: perfected by mere consent 2. Nominate: has its own name 3. Preparatory: purpose is the execution of a juridical act in relation to a third person 4. Principal: can stand by itself without need of another contract 5. Unilateral if gratuitous: creates obligations for one of the parties; Bilateral if for compensation: gives rise to reciprocal rights and obligations
B. PURPOSE
1. The purpose of agency is to extend the principals personality. 2. What acts may be delegated General Rule: What a man may do in person, he may do thru another. Exceptions: 1. Personal acts 2. Criminal acts 3. Theory of imputed knowledge General Rule: Knowledge of agent imputed to principal Exceptions: i. Agents interests are adverse to those of the principal; ii. Agents duty is not to disclose information;
D. ESSENTIAL ELEMENTS
1. Essential Elements (CORS) [Rallos v Felix Go Chan, 1978] i. Consent, express or implied, of the parties to establish the relationship ii. Object is the execution of a juridical act in relation to a third person iii. Agent acts as a Representative and not for himself
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iv. Agent acts within the Scope of his authority 2. Important Consent considerations under
Intent to establish agency essential General Rule [Victorias Milling v CA, 2000]: On the part of the principal there must be an actual intention to appoint or an intention naturally inferable from his words or actions; On the part of the agent, there must be an intention to accept the appointment and act on it. Exception: One who clothes another with apparent authority as his agent, and holds him out to the public as such, cant be permitted to deny the authority of such person to act as his agent, to the prejudice of innocent third parties dealing with such person in good faith. [Macke v Camps, 1907]
of agency.Against the agent, the third person has the obligation to determine existence and scope of agency.The person dealing with the agent must also act with ordinary prudence and reasonable diligence. If he knows or has good reason to believe that the agent is exceeding his authority, he cannot claim protection. [Harry Keeler Electric v Rodriguez, 1922]
F. AGENCY CONTRACTS
VS.
SIMILAR
1. Partnership i. An agent acts not for himself, but for his principal; a partner can act for himself, for his firm, and for his partners ii. Parity of Standing Test A partnership generally presupposes a parity of standing between the partners, in which each party has an equal proprietary interest in the capital or property contributes & where each party exercises equal rights in the conduct of the business. [Sevilla v CA, 1988] 2. Independent Contractor (IC)
Agency 1. Control The agent acts under the control and instruction of the principal. IC The IC is authorized to do the work according to his own method, without being subject to the other partys control, except insofar as the result of the work is concerned. Employer not liable for torts committed by the independent contractor.
E. DETERMINATION OF EXISTENCE OF AGENCY

1. Designation controlling. by parties is not
2. Fact of existence If relations that constitute agency exist, there is agency regardless of whether or not the parties understood the exact nature of the relation. 3. No presumption of existence Agency must exist as a fact. Exceptions: i. When agency arises ipso jure ii. To prevent unjust enrichment 4. Intention of the parties to create i. The nature of the contract depends on the intention of the parties as gathered from the whole scope and effect of the language employed. ii. As between principal and 3rd person, however, agency may exist without the direct assent of the agent. Note Keeler Rule: Against the principal, the agent has the obligation to determine existence and scope
2. Liability for tort Principal is liable for torts committed by the agent within the scope of his authority. 3. Subagents Agents of the agent can be controlled by the principal
The employees of the contractor are not the employees of the employer of the contractor
AGENCY
3. Lease of Service
Agency 1. Basis Basis representation Lease of Service is Basis is employment
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2. Purpose Execution of a juridical act in relation to a third person 3. Authorized Acts The agent is destined to execute juridical acts (creation, modification or extinction of relations with third parties) 4. Discretion Agent exercises discretionary powers. 5. Parties 3 parties: Principal, agent and the 3rd person with whom the agent contracts
Execution a piece of work or rendering of service
Lease of services contemplate only material acts.
5. Parties Agent in with thing is bound according instructions principal; ii.
dealing received to act to the of his
Buyer can deal with the thing as he pleases, being the owner.
Agency to Buy v Sale

Sale The buyer acquires ownership for himself. Buyer cannot adjust the price already agreed upon.
Lessor ordinarily performs only ministerial functions. 2 parties: and lessee. Lessor
Agency to Buy 1. Ownership of goods The agent acquires ownership in behalf of the principal 2. Changes in price Generally, any change in the price should be borne by the principal 3. Payment The agent pays the purchase price in behalf of the principal
Buyer pays the price
4. Lease of Property
Agency 1. Control The agent acts under the control and instruction of the principal. 2. Things involved Agency may involve things other than property 3. Binding power Agent can bind the principal Lease of Property Lessee is controlled by lessor not the
6. Guardianship
Agency 1. Person represented Agent represents a capacitated person 2. Source of authority Agent is appointed by the principal and can be removed by the latter. 3. Control The agent acts under the control and instruction of the principal. 4. Discretion Agent exercises discretionary powers. 5. Binding power Agent can make the principal personally liable. Guardianship A guardian represents an incapacitated person. Guardian appointed court. is the
Lease of only property
property involves
by
Lessee cannot bind the lessor
5. Sale i. Agency to Sell vs. Sale

Agency to Sell 1. Ownership of goods Agent receives the goods as the goods of the principal 2. Payment Agent delivers proceeds of the sale to the principal 3. Return of goods Generally, the agent can return the goods in case he is unable to sell them to a third person 4. Discretion Agent exercises discretionary powers. Sale Buyer receives the goods as owner
Guardian is subject to directions of ward but must for the benefit of latter
not the the act the
Lessor ordinarily performs only ministerial functions. Guardian has no power to impose personal liability on the ward.
AGENCY
Buyer price
pays
the
generally, buyer cannot return the goods bought
Lessor ordinarily performs only ministerial functions. Page 136 of 177
G. KINDS 1. As to Manner of Creation

i. Express a. Agent has been by the principal b. Agency may be unless the law form. [Art. 1869, actually authorized oral or in writing, requires a specific CC]
information, and in the latter case with regard to any person. The power shall continue to be in full force until the notice is rescinded in the same manner in which 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 any interest therein is through an agent, the authority of the latter shall be in writing; otherwise, the sale shall be void. [Art. 1874, CC] Note: It is not necessary that the real property to be sold be precisely described in the written authority of the agent. It is sufficient if the authority is so expressed as to determine without doubt the limits of the agents authority. [Jimenez v Rabot, 1918]
ii. Implied a. Agency may be implied from: the acts of the principal; his silence or lack of action; his failure to repudiate the agency knowing that another person is acting on his behalf without authority [Art. 1869, CC] b. Acceptance by the agent may be implied 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 be implied between persons who are present if the principal delivers his power of attorney to the agent and the latter receiver it without objection [Art. 1871, CC] d. Rule on acceptance of the agency between persons who are absent: [Art. 1872, CC] General Rule: Acceptance cannot be implied from the silence of the agent Exceptions: when the principal transmits his POA to the agent, who receives it without any objection; when the principal entrusts to him by letter or telegram a POA with respect to the business in which he is habitually engaged as an agent, and he did not reply to the letter e. When there is estoppel: If a person specially informs another or states by public advertisement that he has given a power of attorney to a third person, the latter thereby becomes a duly authorized agent, in the former case with respect to the person who received the special
3. As to cause or consideration
Agency may be onerous or gratuitous General Rule: Agency is presumed to be for compensation [Art. 1875, CC] Exception There is proof to the contrary [Art. 1875, CC]
4. As to extent of business covered

i. Universal all acts that the principal may personally do, and which he can lawfully delegate to another the power of doing. [Mechem, Sec. 58] ii. General comprises all the business of the principal [Art. 1876, CC] iii. Special comprises on or more specific transactions [Art. 1876, CC]
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General Agency 1. Scope of authority All acts connected with the business or employment in which he is engaged.
Special Agency
Specific acts in pursuance of particular instructions or with restrictions necessarily implied from the act to be done. 2. Nature of service authorized Involves continuity of No continuity of service. service. 3. Extent to which agent may bind principal May bind his principal Cannot bind his by an act within the principal in a manner scope of his authority beyond or outside the although it may be specific acts which he contrary to the latters is authorized to special instructions. perform. 4. Termination of authority Apparent authority Duty imposed upon does not terminate by the 3rd party to the mere revocation of inquire makes his authority without termination of the notice to the 3rd party. relationship as between the principal and agent effective as to such 3rd party, unless the agency has been entrusted for the purpose of contracting with such 3rd party. 5. Construction of principals instructions Merely advisory in Strictly construed as nature. they limit the agents authority.
performed, shall have binding effect on the principal [2 Am. Jur. 30] b. Purpose Not to define the agents authority, but to evidence such authority to 3rd parties c. Interpretation General Rule Power of Attorney should be strictly construed Exception When strict construction will destroy the very purpose of the power d. Special Power of Attorney an authority granted by the principal to the agent where the act for which it is drawn is expressly mentioned. [Strong v. Repide, 1906] A special power can be included in a gen. power of attorney, either by giving authority for all acts of a particular character or by specifying therein the act/transaction for which a special 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 of administration b. to effect Novations which put an end to obligations already in existence at the time the agency was constituted c. Compromise, to submit questions to arbitration, to renounce the right to appeal from a judgment, to waive objections to the venue of an action or to abandon a prescription already acquired d. to Waive any obligation gratuitously e. to enter into any contract by which the ownership of an Immovable is transmitted or acquired either gratuitously or for a valuable consideration f. to make Gifts, except customary ones for charity or those made to employees in the business managed by the agent; g. to Loan or borrow money, unless the latter act be urgent and indispensable for the preservation of the things which are under administration
5. As to authority conferred
1) Agency may be couched in general or specific terms a. Couched in general terms [Art. 1877, CC] If couched in general terms, it comprises only acts of administration, EVEN IF: the principal states that he withholds no power; or he states that the agent may execute such acts as he may consider appropriate; or the agency should authorize a general and unlimited management b. Couched in specific terms authorizing only the performance of specific act/acts 2) Power of Attorney a. Definition Written authorization to an agent to perform specified acts in behalf of his principal which acts, when
AGENCY
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h. to Lease any real property to another person for more than one year i. to Bind the principal to render some service without compensation j. to bind the principal in a contract of Partnership k. to Obligate the principal as a guarantor or surety l. to create or convey Real rights over immovable property m. to accept or repudiate an Inheritance n. to Ratify or recognize obligations contracted 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 a document is titled as a general power of attorney, the requirement of special power of attorney is met is there is a clear mandate from the principal specifically authorizing the performance of the act [Bravo-Guerrero v Bravo, 2005] ii. What SPA to sell/mortgage does not include [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 not authorize submission to arbitration. [Art. 1880, CC] iv. The power to legally compel the payment of debts owing to the principal is an express grant of the right to bring suit for the collection of such debts. [Germann & Co v Donaldson, 1901] v. A power of attorney to loan and borrow money and to mortgage the principals property does not carry with it or imply that that the agent has a legal right to make the principal liable for the personal debts of the agent. [BPI v De Coster, 1925] vi. Unless the contrary appears, the authority of an agent must be presumed to include all the necessary and usual means of carrying the agency into effect. [Macke v Camps, 1907].
vii. Effect of lack of SPA where one is required It is neither accurate not correct to conclude that the absence of SPA (where one is required by law) renders the contract entered into by virtue of said SPA void. The contract is merely unenforceable. [Dungo v Lopena, 1962, citing Art. 1403(1), CC]
6. As to nature and effects

i. Ostensible or Representativeagent acts in the name and representation of the principal ii. Simple or Commissionagent acts in his own name but for the principals account iii. Agency by Estoppelthere is no agency, and the alleged agent seemed to have apparent or ostensible, but not real, authority to represent another
Apparent Authority Though not actually granted, principal knowingly permits or holds out the agent as possessing the necessary powers to act in a certain way. Agency by Estoppel Where the principal, by his negligence, permits his agent to exercise powers not granted to him, even though the principal may have no notice or knowledge of the conduct of the agent. Agency by Estoppel There is no actual agency; thus without rights & duties as an agent. If caused by the principal, he is responsible. If caused by the agent, he is responsible. Provided, 3rd person in good faith.
Implied Agency There is actual agency; thus with rights & duties as an agent. Principal alone is liable.
iv. Agency by Ratification a. Conditions for ratification (CaPDECK) 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.
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b. Effects of ratification With respect to the agent: It relieves the agent from liability. He may also recover compensation. With respect to the principal: He assumes responsibility for the unauthorized act, as fully as if the agent had acted under original authority; but he is not liable for acts outside the authority approved by his ratification. With respect to 3rd persons: They are bound by ratification. They cannot question agents authority.
Ratification Rests on intention Affects the entire transaction from the beginning. The substance of ratification is confirmation of unauthorized acts or conduct after it has been done. Estoppel Rests on prejudice Affects only relevant parts of the transaction. The substance of estoppel is the principals inducement to another to act to his prejudice.
The agent should also have acted within 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 principal is undisclosed and contract involved things belonging to the principal. Even if the principal is undisclosed and the contract involved things belonging to the principal, the third person who contracted with the agent has a right of action not only against the principal but also against the agent, when the rights and obligations which are the subject matter of the litigation cannot be legally and juridically determined without hearing both of them. In such case, the agent being a necessary party to the full and complete determination of the case which originated from his act should be included in the case as defendant. [Beaumont v Prieto, 1921]
7. As to kinds of principal
i. Principal may be: a. Disclosed b. Partially disclosed third persons are unaware of principals identity c. Undisclosedagent acts in his own name
ii. General Rule [Art. 1883, CC] If the principal is undisclosed (agent acts in his own name): a. the agent is the one directly bound in favor of the person with whom he has contracted, as if the transaction were his own b. the principal has no right of action against the persons with whom the agent has contracted; neither have such persons against the principal. Exception [Art. 1883, CC] i. When the contract involves things belonging to the principal ii. Exception qualified by National Bank v Agudelo, 1933 For the principal to be bound by the act of an agent who contracted in his [agents] own name, it is not sufficient that the contract involved things belonging to the principal.
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Chapter II. Obligations of the Agent

A. TO CARRY OUT THE AGENCY B. TO ACT WITHIN THE SCOPE OF HIS AUTHORITY C. TO ADVANCE NECESSARY FUNDS D. TO ACT IN ACCORDANCE WITH INSTRUCTIONS E. TO PREFER PRINCIPALS INTEREST OVER PERSONAL INTEREST F. NOT TO LOAN TO HIMSELF WITHOUT PRINCIPALS CONSENT G. TO RENDER ACCOUNT AND DELIVER THINGS RECEIVED BY VIRTUE OF AGENCY H. TO BE RESPONSIBLE FOR SUBSTITUTES I. TO PAY INTEREST J. TO ANSWER FOR HIS FRAUD/NEGLIGENCE K. SPECIAL OBLIGATIONS OF FACTOR/COMMISSION AGENTS
opportunity to take the necessary steps to meet the situation. 5. When the agency shouldnt be carried out [Art. 1888, CC] An agent shall not carry out an agency if its execution would manifestly result in loss or damage to the principal.
B. TO ACT WITHIN THE SCOPE OF HIS AUTHORITY [Art. 1881, CC]

1. Authority is the power to act within the scope of his assignment on his principals behalf with binding effect on the latter 2. When agent acting within the scope of his authority i. When he is performing acts which are conducive to the accomplishment of the purpose of the agency [Art. 1881, CC] ii. If the agency has been performed in a manner more advantageous to the principal than that specified by him [Art. 1882, CC] iii. If he lends money to the agency at the current rate of interest, in case he has been empowered to borrow money. [Art. 1890, CC] iv. Insofar as third persons, when the agents act is within the terms of the power of attorney, as written, even if the agent has in fact exceeded the limits of his authority according to an understanding between the principal and the agent. [Art. 1900, CC] Note: 1) A 3rd person with whom the agent wishes to contract on behalf of the principal may require the presentation of a power of attorney [Art. 1902, CC] 2) The scope of the agents authority is what appears in the written terms of the power of attorney. While third persons are bound to inquire into the extent or scope of the agents authority, they are not required to go beyond the terms of the written power of attorney. [Siredy Enterprises, Inc. v CA, 2002]
A. TO CARRY OUT THE AGENCY

1. Obligation to carry out the agency he accepted [Art. 1884, CC] i. The agent is bound by his acceptance to carry out the agency own ii. He shall be liable for damages that the principal may suffer due to his non-performance 2. Obligation to finish business begun on principals death [Art. 1884, CC] The agent must finish the business already begun on the death of the principal, should delay entail any danger 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 the custody and preservation of the goods forwarded to him by the owner until the latter should appoint an agent or take charge of the goods ii. However, the owner must act as soon as practicable either by appointing an agent or by taking charge of the property 4. Obligation to continue agency should he withdraw [Art. 1929, CC] The agent, even if he should withdraw from the agency for a valid reason, must continue to act until the principal has had reasonable
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3. Effect when agent acts within the scope of 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 with whom he contracts Exception: He expressly bound himself [Art. 1897, CC] If he exceeds the limits of his authority without giving such party sufficient notice of his powers [Art. 1897, CC] He acted in his own name; except if the contract involves things belonging to the principal [Art. 1883, CC]
he himself was, or ought to have been aware (Art. 1899, CC) 5. Authority v Instructions
Authority The sum total of the powers committed or permitted to the agent Relates to the subject (biz/transaction) with which the agent is empowered to deal or act. Limits of authority to operate vs those who have/are charged with knowledge of them. Instructions Only a private rule of guidance to the agent Refers to the manner or mode of agents action with respect to matters within the permitted scope of action. Binding only on the principal and agent
C. TO ADVANCE THE NECESSARY FUNDS [Art. 1886, CC]

General Rule: Agent bound to advance necessary funds, should there be a stipulation to do so Exception: When the principal is insolvent
E. TO PREFER INTEREST OF PRINCIPAL OVER PERSONAL INTEREST

1. Rule in case of conflict of interest General Rule: The agent shall be liable for damages if, there being a conflict between his interests and those of the principal, he should prefer his own. [Art. 1889, CC] Exceptions The principal waives the benefit of the rule, provided he does so with full knowledge of the facts. The interests of the agent are superior 2. Agent prohibited from purchasing property of principal The following persons cannot acquire by purchase, even at a public or judicial auction, either in person or through the mediation of another: Agents, the property whose administration or sale may have been entrusted to them, unless the consent of the principal has been given; [Art. 1491(2), CC]
D. TO ACT IN ACCORDANCE WITH PRINCIPALS INSTRUCTIONS

1. Obligation to act in accordance with principals instructions In the execution of the agency, the agent shall act in accordance with the instructions of the principal. [Art. 1887, CC] 2. Obligation in the absence of instructions Agent shall do all that a good father of a family would do, as required by the nature of the business [Art. 1887, CC] 3. When private orders and instructions not binding to third persons Private or secret orders and instructions of the principal do not prejudice third persons who have relied upon the power of attorney or instructions shown them. [Art. 1902, CC] 4. Effect when agent acts in accordance with principals orders Principal cannot set-up the ignorance of the agent as to circumstances whereof
F. NOT TO LOAN TO HIMSELF WITHOUT PRINCIPALS CONSENT IF HE HAS BEEN AUTHORIZED TO LEND MONEY AT INTEREST
[Art. 1890, CC] 1. If the agent has been authorized to lend money at interest, he cannot borrow it without the consent of the principal.
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2. BUT, if he has been empowered to borrow money, he may himself be the lender at the current rate of interest.
the obligations which the latter has contracted under the substitution. [Art. 1893, CC]
G. TO RENDER ACCOUNTS AND DELIVER THINGS RECEIVED BY VIRTUE OF THE AGENCY

1. Obligation to account and deliver [Art. 1891, CC] Every agent is bound to: i. render an account of his transactions; and ii. deliver to the principal whatever he may have received by virtue of the agency, even though it may not be owing to the principal. 2. Effect of failure to comply If he fails to do so or uses the money/property for his own use, the agent is liable for estafa [Art. 315, RPC] 3. Contrary stipulation void Every stipulation exempting the agent from the obligation to render an account shall be void [Art. 1891, CC] 4. When inapplicable (SLIM) i. Solutio indebiti ii. A right of Lien exists in favor of the agent. iii. The agent or broker Informed the principal of the gift or bonus or profit he received from the vendee, and the principal did not object. iv. If the agent or broker acted only as a Middleman with the task of merely bringing together the vendor and vendee [Domingo v Domingo]
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 so 2. those which he owes after the extinguishment of the agency
J. TO ANSWER FOR HIS NEGLIGENCE OR FRAUD [Art. 1909,

CC] 1. The agent is responsible not only for fraud, but also for negligence 2. Liability shall be judged with more or less rigor by the courts, according to whether the agency was or was not for a compensation
K. SPECIAL OBLIGATIONS OF FACTOR/ COMMISSION AGENTS

1. Definition one whose business is to receive & sell goods for a commission, and is entrusted by the principal with its possession [Mechem on Agency] 2. Obligations of a commission agent i. Responsibility for goods received [Art. 1903, CC] a. He shall be responsible for the goods received by him in the terms and conditions and as described in the consignment b. To avoid liability, he should make a written statement of the damage and deterioration suffered by the same upon receiving them ii. Obligation when handling goods of the same kind and mark with different owners [Art. 1904, CC] He should distinguish the goods by countermarks, and designate the merchandise respectively belonging to each principal. iii. Obligation not to sell on credit without express consent [Art. 1905, CC] The commission agent cannot, without the express or implied consent of the principal, sell on credit. Should he do so: the principal may demand from him payment in cash
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H. TO BE RESPONSIBLE SUBSTITUTES [Art. 1892, CC]
FOR
1. When the agent responsible for the acts of his substitute i. when he was not given the power to appoint one; or ii. when he was given such power, but without designating the person, and the person appointed was notoriously incompetent or insolvent. 2. The agent may appoint a substitute if the principal has not prohibited him from doing so. All acts of the substitute appointed against the prohibition of the principal shall be void. 3. Principal may also bring an action against the substitute with respect to
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but the commission agent shall be entitled to any interest or benefit, which may result from such sale. iv. Obligation to inform the principal of sale made on credit, if authorized to do so [Art. 1906, CC] a. Should the commission agent, with authority of the principal, sell on credit, he shall so inform the principal, with a statement of the names of the buyers. b. Should he fail to do so, the sale shall be deemed to have been made for cash insofar as the principal is concerned. v. Obligation to indemnify principal for damages for failure to collect the credits of his principal when they fall due [Art. 1908, CC] General Rule: The commission agent who does not collect the credits of his principal at the time when they become due and demandable shall be liable for damages Exception If he proves that he exercised due diligence for that purpose vi. Additional obligations should he receive a guarantee commission (del credere commission) [Art. 1907, CC] a. Bear the risk of collection b. Pay the principal the proceeds of the sale on the same terms agreed upon with the purchaser 3. Ordinary Agent v Commission Agent
Ordinary Agent Acts for and in behalf of the principal. Need not have possession of the goods of the principal. Commission Agent Acts in his own name or in that his principal. Must be in possession of the goods of the principal.
4. Broker v Commission Agent [Pacific Commercial v Yatco, 1939]

Broker Has no custody or possession of the thing he disposes; merely acts as an intermediary between the sellers and the buyer. Maintains no relation with the thing which he purchases or sells. Commission Agent Engaged in the purchase and sale, for a principal, of personal property which has to be placed in his possession and disposal. Has a relation with the principal (buyers or sellers) and the property which is the object of the transaction.
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Chapter III. Liabilities of the Agent

A. LIABILITY TO THIRD PERSONS B. LIABILITY TO THE PRINCIPAL C. LIABILITY OF TWO OR MORE AGENTS
ii. the two contracts are incompatible with each other iii. the agent acted in bad faith iv. agent shall be liable for damages to third person whose contract must be rejected
A. LIABILITY TO THIRD PERSONS

1. Agent not personally liable as a general rule An agent who acts as such is not personally liable to the party with whom contracts [Art. 1897, CC] 2. When agent personally liable to person he contracted with i. When he acts in his own name, except when the contract involves things belonging to the principal [Art. 1883, CC] ii. If he expressly binds himself [Art. 1897, CC] iii. If he exceeds the limits of his authority without giving such party sufficient notice of his powers [Art. 1897, CC] Note: Third persons cannot set up the fact that the agent has exceeded his powers if the principal has ratified, or has signified his willingness to ratify the agents 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 the limits of his powers; AND d. The agent undertook to secure the principals ratification. Note: Under Art. 1898,CC, the contract shall be void if the principal does not ratify the contract and the party with whom the agent has contracted is aware of the limits of the powers granted by the principal. 3. Agent liable for damages to third persons under Art. 1916 & 1917, CC i. When two persons contract with regard to the same thing, one of them with the agent and the other with the principal;
B. LIABILITY TO THE PRINCIPAL

1. Damages due to non-performance of agency The agent is liable for the damages which, thru his non-performance, the principal may suffer [Art. 1884, CC] 2. Damages for preferring personal interest to that of principal The agent shall be liable for damages if, there being a conflict between his interests and those of the principal, he should 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 the principal may suffer by reason of the withdrawal of the agent; Exception: The agent should base his withdrawal upon the impossibility of continuing the performance of the agency without grave detriment to himself. 4. Responsibility if solidarity has been agreed upon [Art. 1895, CC] Each of the agents is responsible for: i. the non-fulfillment of agency; and ii. for the fault or negligence of his fellows agents, Exception: When the fellow agents acted beyond the scope of their authority in case of fault or negligence. Note: Exception applies only to the second case. 5. Responsibility for acts of substitute under Art. 1892, CC The agent shall be responsible for the acts of the substitute: i. when he was not given the power to appoint one; or ii. when he was given such power, but without designating the person, and the person appointed was notoriously incompetent or insolvent.
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6. Responsibility for fraud or negligence The agent is responsible not only for fraud, but also for negligence, which shall be judged with more or less rigor by the courts, according to whether the agency was or was not for compensation. [Art. 1909, CC] 7. Interest under Art. 1896, CC The agent owes interest on: i. the sums he has applied to his own use from the day on which he did so ii. those which he owes after the extinguishment of the agency 8. For Commission Agents, failure to comply with obligations laid down in Art. 1903-1908, CC
C. LIABILITY OF TWO OR MORE AGENTS

1. Liability is joint as a general rule [Art. 1894, CC] General Rule: Responsibility of two or more agents, even though they have been appointed simultaneously, is joint. Exception: Solidarity is expressly stipulated 2. Responsibility if solidarity has been agreed upon [Art. 1895, CC] Each of the agents is responsible for: i. the non-fulfillment of agency; and ii. for the fault or negligence of his fellows agents, except when the fellow agents acted beyond the scope of their authority in case of fault or negligence. Note: Exception applies only to the second case.
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Chapter IV. Obligations of the Principal

A. TO COMPLY WITH THE OBLIGATIONS CONTRACTED BY THE AGENT B. TO ADVANCE NECESSARY SUMS AND REIMBURSE THE AGENT C. TO INDEMNIFY AGENT FOR DAMAGES D. TO PAY THE AGENTS COMPENSATION E. BE SOLIDARILY LIABLE
A. TO COMPLY WITH THE OBLIGATIONS CONTRACTED BY THE AGENT

1. Obligations principal is bound to comply with i. obligations which the agent may have contracted within the scope of his authority [Art. 1910, CC] ii. obligations which the agent may have contracted beyond the scope of his authority but were ratified expressly 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 principal 3) He must ratify the acts in its Entirety 4) The act must be Capable of ratification 5) He must have had Knowledge of material facts. iii. When an agent acts in his own name, but the contract involves things belonging to the principal, the contract must be considered as entered into between the principal and the third person. [Art. 1883, CC; Sy-Juco and Viardo v Sy-Juco, 1920] iv. The principal is solidarily liable with the agent who has exceeded his authority if the former allowed the latter to act as though he had full power. [Art. 1911, CC] v. If two persons contract simultaneously with agent & principal for the same thing: a. Contract of prior date prevails b. If applicable, follow the rule on double sales in Art. 1544, CC. [Art. 1916, CC]
2. Liability if 2 persons contract simultaneously with agent & principal for the same thing [Art. 1917-1917, CC] i. When two persons contract with regard to the same thing, one of them with the agent and the other with the principal ii. two contracts are incompatible with each other iii. the agent acted in good faith iv. the principal shall be liable for damages to the third person whose contract must be rejected 3. Principal not liable in the following cases: i. Void or inexistent contracts under [Art. 1409, CC] ii. Sale of a piece of land or any interest therein & the authority of the agent is not in writing [Art. 1874, CC] iii. Acts of the substitute appointed against the prohibition of the principal [Art. 1892, CC] iv. Art. 1898, CC Requisites a. agent contracts in the name of the principal b. he exceeds the scope of the his authority c. the principal does not ratify the contract d. the party with whom the agent contracted is aware of the limits of the powers granted by the principal; & e. the agent did not undertake to secure the principals ratification v. Agent has no authority or acted beyond the scope of his authority [Arts. 1403(1); 1910, CC; Dungo v Lopena, 1962] vi. When the agent acts in his own name, persons with whom the agent has contracted have no right of action against the principal, except when the contract involves things belonging to the principal. [Art. 1883, CC] vii. Unenforceable contracts under Art. 1403, CC
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B. TO ADVANCE THE NECESSARY SUMS AND REIMBURSE THE AGENT

1. Obligation to advance sums [Art. 1912, CC] The principal must advance to the agent, should the latter so request, the sums necessary for the execution of the agency. 2. Obligation to reimburse [Art. 1912, CC] i. Should the agent have advanced them, the principal must reimburse him therefor, even if the business or undertaking was not successful, provided the agent is free from all fault. ii. The reimbursement shall include interest on the sums advanced, from the day on which the advance was made. 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 to avail himself of the benefits derived from the contract; iii. When the agent incurred them with Knowledge that an unfavorable result would ensue, if the principal was not aware thereof; iv. When it was Stipulated that the expenses would be borne by the agent, or that the latter would be allowed only a certain sum. Note: Under Art. 1236(2), CC, whoever pays for another may demand from the debtor what he has paid, except that if he paid without the knowledge or against the will of the debtor, he can recover only insofar as the payment has been beneficial to the debtor. 4. Agents right to retain in pledge object of agency should principal fail to reimburse him i. The agent may retain in pledge the things which are the object of the agency 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 isnt entitled to the excess in case the thing was sold to satisfy his claim, and the proceeds are more than his claim [Arts. 2115, 2121, CC]. Also he must possess the thing lawfully in his capacity as agent [2 C.J.S. 457]
C. TO INDEMNIFY THE AGENT FOR DAMAGES

1. Obligation to pay indemnity for damages [Art. 1913, CC] The principal must indemnify the agent for all the damages which the execution of the agency may have caused the latter, without fault or negligence on his part. 2. Agents right to retain in pledge object of agency should principal fail to pay him indemnity i. The agent may retain in pledge the things which are the object of the agency 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 isnt entitled to the excess in case the thing was sold to satisfy his claim, and the proceeds are more than his claim [Arts. 2115, 2121, CC]. Also he must possess the thing lawfully in his capacity as agent [2 C.J. 457]
D. TO PAY THE COMPENSATION
AGENTS
1. Agency is presumed to be for a compensation, unless there is proof to the contrary. [Art. 1875, CC] 2. Compensation of brokers i. Since the brokers only job is to bring together the parties to a transaction, it follows that if the broker does not succeed in bringing the mind of the purchaser and the vendor to an agreement with reference to the terms of a sale, he is not entitled to a commission. [Rocha v Prats, 1922] ii. Doctrine of Procuring Cause When a party is not the efficient procuring cause in bringing about a sale, he is not entitled to the
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stipulated brokers commission. [Inland Realty v CA, 1997] iii. However, for the purpose of equity, an agent who is not the efficient procuring cause is nonetheless entitled to his commission, where he, notwithstanding the expiration of his commission, nonetheless took diligent steps to bring back together the parties, such that a sale was consummated. [Prats v CA] iv. If the principal breaks off from negotiations with a buyer brought by the agent in order to deliberately deal later with the buyer personally, this is evident bad faith. In such case, justice demands compensation for the agent. [Infante v Cunanan, 1953]
E. BE SOLIDARILY LIABLE
1. With agent, if agent acted beyond scope of authority and principal allowed him to act as though he had full powers Even when the agent has exceeded his authority, the principal is solidarily liable with the agent if the former allowed the latter to act as though he had full powers. [Art. 1911, CC] 2. With person who appointed an agent with him for a common transaction If two or more persons have appointed an agent for a common transaction or undertaking, they shall be solidarily liable to the agent for all the consequences of the agency. [Art. 1915, CC]
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Chapter V. Extinguishment of Agency

A. EXPIRATION OF THE PERIOD FOR WHICH IT WAS CONSTITUTED B. DEATH, CIVIL INTERDICTION, INSANITY, INSOLVENCY C. WITHDRAWAL OF THE AGENT D. ACCOMPLISHMENT OF THE OBJECT OF THE AGENCY E. REVOCATION F. DISSOLUTION OF THE FIRM/CORP. WHICH ENTRUSTED/ACCEPTED THE AGENCY
C. WITHDRAWAL OF THE AGENT

General Rule Agent may withdraw from the agency by giving due notice to the principal [Art. 1928, CC] But: If the principal should suffer any damage by reason of the withdrawal, the agent must indemnify him therefor; Exception: If the agent based his withdrawal upon the impossibility of continuing performance of the agency without grave detriment to himself. [Art. 1928, CC] The agent, even if he should withdraw from the agency for a valid reason, must continue to act until the principal has had reasonable opportunity to take the necessary steps to meet the situation. [Art. 1929, CC]
(EDWARD) [Art. 1919, CC]
A. EXPIRATION OF FOR WHICH CONSTITUTED
THE IT
PERIOD WAS
When the agency was created for a specific period of time, and the period has expired, it is automatically terminated.
B. DEATH, CIVIL INTERDICTION, INSANITY, INSOLVENCY

i. General Rule: Death extinguishes agency Exceptions: a. Agency constituted in the common interest of the principal and of the agent or in the interest of a 3rd person who has accepted the stipulation in his favor. [Art. 1930, CC] b. Anything done by the agent, without knowledge of the death of the principal or of any other cause which extinguishes the agency, is valid and fully effective with respect to 3rd persons who may have contracted with him in good faith. [Art. 1931, CC] c. Agent must finish business already begun on the death of the principal, should delay entail any danger. [Art. 1884, CC] ii. Obligation of heirs of agent upon agents death [Art. 1932, CC] a. They must notify the principal of the agents death b. They should adopt such measures as the circumstances may demand in the interest of the principal in the meantime.
D. ACCOMPLISHMENT OF THE OBJECT OR PURPOSE OF THE AGENCY E. REVOCATION

i. Principal may revoke the agency at will as a general rule General Rule: The principal may revoke the agency at will, and compel the agent to return the document evidencing the agency. Such revocation may be express or implied. [Art. 1920, CC] Exceptions: a. The right of the principal to terminate the authority of his agent is absolute and unrestricted, except only that he may not do so in bad faith [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 of partnership and his removal from the management is unjustifiable.
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Note: Powers of attorney falling under 1927 cannot be revoked at the pleasure of the principal, but may be revoked for a just cause, such as when the attorney-in-fact betrays the interest of the principal. (Coleongco v Claparols, 1964) A mere statement in the power of attorney that it is coupled with an interest is not enough. In what does such interest consist must be stated in the power of attorney. (Del Rosario v Abad, 1958) Irrevocability of the contract cannot affect 3rd persons and is obligatory only on the principal who executed the agency. (New Manila Lumber v Republic, 1960) ii. Revocation may be express or implied a. Express principal clearly and directly makes a cancellation of the authority of the agent in writing or orally b. Implied The appointment of a new agent for the same business or transaction revokes the previous agency from the day on which notice thereof was given to the former agent, without prejudice to the provisions Art. 1921 and Art. 1922, CC [Art. 1923, CC] The agency is revoked if the principal directly manages the business entrusted to the agent, dealing directly with third persons. [Art. 1924, CC] A general power of attorney is revoked by a special one granted to another agent, as regards the special matter involved in the latter [Art. 1926, CC]
iii. When revocation makes principal liable for damages a. If there is a period stipulated in the agency contract, the agent may still revoke the agents authority at will; but principal will be liable for damages. b. No period fixed: principal liable if the agent can prove the former acted in bad faith. iv. Effect of revocation with respect to 3rd persons [Arts. 1921-1922,CC]
Agency to contract with specific persons Wont prejudice 3rd persons until notice is given them. Notice must be personal. Agency to contract with general public Wont prejudice those in good faith & w/o knowledge. Notice may be personal.
v. Revocation in case of solidary principals [Art. 1925, CC] When two or more principals have granted a power of attorney for a common transaction, any one of them may revoke the same without the consent of others.
F. DISSOLUTION OF THE FIRM OR CORPORATION WHICH ENTRUSTED OR ACCEPTED THE AGENCY
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Table of Contents
PARTNERSHIP
Chapter I. NATURE, CREATION, KINDS OF PARTNERSHIP A. Essential Features B. Characteristics C. Distinctions D. Rules to Determine Existence E. How Partnership is Formed F. Partnership Term G. Classes of Partners H. Kinds of Partnerships Chapter II. OBLIGATIONS OF THE PARTNERSHIP/PARTNERS AMONG THEMSELVES A. To Make the Contributions as Promised B. Pay Damages Due to Partners Fault C. Bear Risk of Loss D. Manage the Partnership E. Render Full Information F. Liability for Partnership Contracts G. Solidary Liability with Partnership H. Reimbursement Chapter III. OBLIGATIONS OF PARTNERSHIP/PARTNERS AS TO THIRD PERSONS A. Operate under a Firm Name B. Bound by Partnership Admission C. Bound by Notice to Partner D. Liable for Acts of the Partnership Chapter IV. RIGHTS OF PARTNERS A. Share in Losses and Profits B. Associate Another in His Share C. Access Partnership Books D. Obtain Formal Account E. Property Rights F. Convey Real Property Chapter V. RIGHTS OF PARTNERSHIP Chapter VI. DISSOLUTION AND WINDING UP A. Definitions B. Causes for Dissolution C. Consequences of Dissolution D. Partner's Liability Chapter VII. RIGHTS OF PARTNERS UPON DISSOLUTION A. Right to Wind Up B. Right to Damages for/to Continue Business on Wrongful Dissolution 154 154 154 154 155 155 156 156 157 C. Right to Lien or Retention, To Stand in Place of Creditor, To Be Indemnified D. Right of Retiring/Deceased Partner E. Right to Account Chapter VIII. RULES ON SETTLEMENT Chapter IX. LIMITED PARTNERSHIP I. Definition II. Forming/Amending a Limited Partnership III. Limited Partner A. Contribution B. Liabilities of a Limited Partner 1. To the Partnership 2. As Trustee for the Partnership 3. Liabilities to Partnership Creditors & Other Partners a. Contributes Services b. Surname in Firm Name c. False Statement d. Control of Business e. Prohibited Transactions f. Non-Compliance with Requisites for Formation 4. Liabilities to Separate Creditors C. Rights of Limited Partners 1. Common Rights of Limited & General Partners 2. Loan Money & Transact Business 3. Return of Contribution 4. Share of Profits 5. Assign Interests 6. Effect of Death of a Limited Partner 7. Person Erroneously Believing Hes a Limited Partner IV. General Partner V. Dissolution VI. Settling of Accounts After Dissolution
PARTNERSHIP
168 169 169 170 171 171 172 173 173 173 173 173 173 173 173 173 174 174 174 174 174 174 174 174 175 175 176 176 176 176 177
158 158 159 159 159 160 160 161 161
162 162 162 162 162 163 163 163 163 163 163 165 165 166 166 166 166 167 168 168 168
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Chapter I. Nature, Creation, Kinds of Partnership
Partnership
FACULTY-STUDENT EDITORIAL BOARD AND LECTURES COMMITTEE
PARTNERSHIP
Prof. Rommel Casis

FACULTY EDITOR

SUBJECT EDITORS
LECTURES Edel Cruz

HEAD

-------Kae Guerrero
SALES Michelle Dy
LEAD WRITER
-------Leo Zulueta
Rania Joya
Kristine Bongacaron Viktor Fontanilla

WRITERS

A. B. C. D. E. F. G. H. ESSENTIAL FEATURES CHARACTERISTICS DISTINCTIONS RULES TO DETERMINE EXISTENCE HOW PARTNERSHIP IS FORMED PARTNERSHIP TERM CLASSES OF PARTNERS KINDS OF PARTNERSHIPS
When an unlawful partnership is dissolved by a judicial decree, the profits shall be confiscated in favor of the State, without prejudice to the provisions of the Penal Code governing the confiscation of the instruments and effects of a crime) 6. The primary purpose is to obtain profits and divide the same among the parties o
Art. 1767. By the contract of partnership two or more persons bind themselves to contribute money, property, or industry to a common fund, with the intention of dividing the profits among themselves. Two or more persons may also form a partnership for the exercise of a profession. (1665a)
B. CHARACTERISTICS
1. 2. 3. 4. 5. 6. 7. 8. Fiduciary Nominate Consensual Bilateral/multilateral Principal Onerous Preparatory Profit oriented
A. ESSENTIAL FEATURES
(CVC-J-Lo) 1. There must be a valid contract 2. The parties must have legal capacity 3. A mutual contribution of money, property, or industry to a common fund 4. It has a separate juridical personality (Art. 1768 CC) Note: Associations and societies, whose articles are kept secret among the members, and wherein any one of the members may contract in his own name with third persons, shall have no juridical personality, and shall be governed by the provisions relating to coownership. (1775) 5. Has a lawful object (Art. 1770, CC) A partnership must have a lawful object or purpose, and must be established for the common benefit or interest of the partners.
C. DISTINCTIONS
Partnership Created by mere agreement of the parties; May be organized by only two persons Juridical personality commences from the moment of execution of the contract of partnership May exercise any power authorized by the partners as long as it is not contrary to law, etc. Corporation Created by operation of law Requires at incorporators; least 5
Personality commences from SECs issuance of the certificate of incorporation
Can exercise such powers expressly granted by law or incident to its existence
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Partnership If no agreement as to mgt. - every partner is an agent of the partnership A partner as such may sue a copartner who mismanages Has no right of succession The partners are liable personally and subsidiarily for partnership debts Based on delectus personam May be established for any period of time stipulated May be dissolved at anytime by the will of any or all partners Governed by the Civil Code
Corporation Power to do business is vested in the board of directors/ trustees Suit against the board/director who mismanages must be brought in the corp.s name Has right of succession The stockholders are liable to the extent of the shares subscribed by them Not based on delectus personam May not be formed for a period exceeding 50 years May be dissolved only with the consent of the state Governed by Corporation Code the
Representation Profits
Partnership There is mutual agency Must be stipulated upon
Co-ownership There is no mutual agency Must always depend upon proportionate shares and any stipulation to the contrary is void.
PARTNERSHIP
D. RULES TO EXISTENCE
DETERMINE
Art. 1769. In determining whether a partnership exists, these rules shall apply: General Rule: Persons who are not partners to each other are not partners as to third persons. Exception: partnership by estoppel. Co-ownership and sharing of gross returns dont 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
Creation
Partnership Always created by a contract
Juridical Personality
Purpose Duration
Has separate, distinct juridical personality Realization profits
Co-ownership Gen., created by law, may exist even without a contract Has no juridical personality
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 or real 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 property signed by the parties and attached to the instrument (1773) 2. Where the capital is at least P3,000, in money or property The contract must appear in a public instrument which must be recorded in the SEC. (Art. 1772, CC) But a partnership has a juridical personality and is liable to third persons even if this requirement is not complied with.
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of
Transfer of Interests
Power to act with Third Persons Dissolution
No limitation upon the duration is set by law Need unanimous consent of partners to make assignee of interest a partner A partner may bind the partnership Death or incapacity of a partner dissolves the partnership
Common enjoyment of a thing or right Property cant be undivided for more than 10 years A co-owner can dispose of his share without the consent of the others A co-owner cant represent the coownership Death or incapacity of a co-owner doesnt dissolve the coownership
F. PARTNERSHIP TERM
Commencement of the partnership: General Rule: A partnership begins from the moment of the execution of the contract, Exception: When otherwise agreed upon by the parties A Partnership may either be for Fixed Term At Will Until termination is demanded according 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 particular undertaking o It is continued after the termination of such term or particular undertaking without any express agreement Effect: o The rights and duties of the partners remain the same as they were at such termination, so far as is consistent with a partnership at will (1785) Prima facie evidence of continuation: o Continuation of the business by the partners without any settlement or liquidation of the partnership affairs (1785)
5. As to state of survivorship a. Surviving continues to be a partner after dissolution due to death of a partner b. Deceased 6. As to effect of expulsion a. Expelled (Art. 1840[6], CC) b. Expelling 7. As to nature of contribution a. Capitalist contribute money or property b. Industrial contribute industry/labor. 8. As to liability a. General/Real liability extend to separate property (Art. 1776, CC) b. Limited/Special only to extent of contribution (Art. 1843, CC) c. Capitalist-Industrial 9. As to management a. Managing manages the firms affairs b. Silent doesnt participate in management c. Liquidating winds up the affairs after dissolution 10. Other special classifications a. Subpartner related only to the regular partner (Art. 1804, CC) b. Retiring withdraws/retires from the partnership
Industrialist Partner Contributes his industry Cannot engage in any business for himself Receives a just and equitable share Capitalist Partner Contributes money or property Cant engage in the same or similar enterprise Shares in profits according to agreement thereon; if none, pro rata to his contribution 1. stipulation as to losses 2. if none, the agreement as to profits 3. if none, pro rata to contribution
PARTNERSHIP
Contribution Prohibition to engage in other business Profits
G. CLASSES OF PARTNERS
1. As to membership a. Real a contributing member b. By estoppel/Quasi-partner not really a partner but represents himself as one 2. As to continuation of business affairs after dissolution a. Continuing b. Discontinuing 3. As to value of contribution a. Majority b. Nominal 4. As to nature of membership a. Original b. Incoming
Losses
Exempted as to losses as between partners but it is liable to 3rd persons without prejudice to reimbursement from the capitalist partners
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H. KINDS OF PARTNERSHIPS
1. As a. b. 2. As a. b. 3. As a.
b.
General v. Limited Partnership

General All partners are general partners liable for partnership obligations pro rata with all their property after exhaustion of partnership assets Limited Formed by two or more partners, with one or more general partners and one or more limited partners
4. As a.
b.
5. As a. b. 6. As a.
b. 7. As a. b.
to nature Commercial/trading Professional to duration With a fixed term At will (Art. 1785, CC) to legality of existence De jure has complied with all the necessary requisites for lawful establishment (Arts. 1772, 1773, CC) De facto failed to comply with the requisites to representation to others Ordinary/real really exists between & among the partners themselves and as to third persons Ostensible/by estoppel deemed one only in relation to transacting third persons (Art. 1825, CC) to publicity Open known to the public Secret to its object Universal (Art. 1777, CC) i. As to all present property (Art. 1778, CC) ii. As to profits (Art. 1780, CC) Particular (Art. 1783, CC) to partners liability General liable pro rata (Art. 1816, CC) or solidarily (Arts. 1822-1824, CC) Limited (Art. 1843, CC)
Of all profits Title to property of each partner does not pass to the partnership Comprises those acquired by industry or work
PARTNERSHIP
Types of Universal Partnerships

Of all present property Includes title to all present property (Art 1778) Does not include future property acquired by gratuitous title
Note: In case of doubt, the article of universal partnership shall only constitute a universal partnership of profits. (1781) Who are prohibited from entering into universal partnerships: those prohibited from giving donations (Art. 1782, CC), such as: 1. legally married, common law spouses (Art. 87, FC) 2. parties guilty of adultery/concubinage 3. criminals convicted for the same offense in consideration of the same 4. a person & a public officer (or his wife, descendants, ascendants) by reason of his office (Art. 739, CC)
Partnership and Partner by Estoppel Requisites of Partner By Estoppel: 1. The person a. represents himself as a partner of an existing partnership or of two or more persons not actual partners, or b. consents to another representing him as a partner of an existing partnership or of two or more persons not actual partners, 2. Third person relied on the misrepresentation, unaware of the deception. 3. On the faith of the misrepresentation, the 3rd person gave credit to the actual/apparent partnership. 4. The person representing or consenting to the representation is liable: a. as an actual member if a partnership liability results b. pro rata with other persons when no partnership liability results(Art. 1825, CC) Partnership by estoppel: composed of the alleged partner and the partnership itself. It arises when all the members of the existing partnership consented to the representation (Art. 1825, CC). The person becomes an agent of the existing firm and his act/obligation binds the firm. No real partnership is created by estoppel. Its only insofar as 3rd persons are involved and for the purpose of protecting them that the principal of estoppel is recognized. As to liability resulting from the representation: 1. when all the members consent, partnership obligation results 2. if not all consent, only a joint obligation of the one representing and of those who consented results Corporation by estoppel: all persons are liable as general partners (Sec. 21, Corp. Code). A de facto partnership is created.
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Chapter II. Obligations of the Partnership/Partners Among Themselves

A. TO MAKE THE CONTRIBUTIONS AS PROMISED B. PAY DAMAGES DUE TO PARTNERS FAULT C. BEAR RISK OF LOSS D. MANAGE THE PARTNERSHIP E. RENDER FULL INFORMATION F. LIABILITY FOR PARTNERSHIP CONTRACTS G. SOLIDARY LIABILITY WITH PARTNERSHIP H. REIMBURSEMENT
1. Made by experts chosen by the partners 2. According to current prices, subsequent changes being for the account of the partnership Obligation with respect to contribution of money, and money converted to personal use Sanctions: Partner becomes the firms debtor for interest and damages from the time of his failure to contribute or from time of conversion (Art. 1788, CC) When money or property has been received by a partner for a specific purpose and he later misappropriated it, such partner is guilty of estafa. (Liwanag v CA, 2008) Bring to partnership capital credit received Equal contribution by general partners: capitalist partners shall contribute equal shares to the capital of the partnership (Art. 1790, CC). Obligation of capitalist partner to contribute additional capital To contribute additional capital in case of imminent loss, requisites: 1. There is an imminent loss of the business 2. There is a need to contribute additional capital to save the venture 3. Capitalist partner refuses deliberately to contribute an additional share 4. There is no agreement to the contrary If refused to contribute: the partner must sell his interest in the partnership to the other partners (Art. 1791, CC) Industrial partner is exempted from contributing. Obligation of collecting managing partner Requisites: 1. 2 separate credits, both demandable, 2. one credit is owed to the partnership,
PARTNERSHIP
A. TO CONTRIBUTE
Obligation with respect to contribution of property Partner is a debtor: for whatever he had promised to contribute thereto (Art. 1786, CC) Partner is a warrantor for contributions of specific & determinate things: hes bound to warrant vs. eviction (Art. 1786, CC) Liability for undelivered fruits: property is fruit-producing, the fruits werent delivered at the execution of the contract or any specified time(Art. 1786, CC). No demand is necessary. Remedy for breach of warranty: partnership may recover indemnity from contributing partner. If the partnership wouldnt have been constituted had it not been for the contribution, the other partners 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 a family (Art. 1163, CC) to indemnify the partnership for damages caused to it by delay in contribution of property (Art. 1170, CC) Appraisal of goods or property contributed Rule when contribution is in goods (1787) Appraisal must be made in a manner prescribed in the contract of partnership In the absence of stipulation
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3. the other to the collecting partner whos a managing partner. Managing partner should: If issued receipt for own account only apply the sum to the 2 credits in proportion to their amounts Issued receipt for partnerships account apply whole sum to partnerships credit (Art. 1792, CC)
D. MANAGEMENT PARTNERSHIP
OF
THE
General Rules: right of management is primarily governed by agreement of the partners Right to manage may either be: exercised by all the partners, or limited to a certain number of partners called managing partners Management is entrusted to specified partners If right is conferred in the articles of partnership (1800) Manager may execute all acts of administration despite the opposition of other partners unless he is in bad faith Power is irrevocable without just or lawful cause. The vote of the controlling interest of the partners is necessary for revocation. If power is granted after constitution of partnership: may be revoked at anytime o reason: in the first case, management is part of the consideration the law assumes that partners would not have entered into the partnership unless management was conferred on a specific partner. In this case, there is no such assumption. (JBL Reyes) Two or more partners are appointed as managers (1800, 1801) General rule: each one may separately act for the partnership if there is opposition, decision of majority of the managing partners prevails in case of a tie, matter is to be decided by the controlling interest. If there is a stipulation that managers must act jointly one cannot act without the consent of the others concurrence of all managers is necessary for validity of the acts even in the absence or disability of any of them unless there is imminent danger or grave or irreparable injury to the partnership.
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PARTNERSHIP
Obligation of partner who receives share of partnership credit Partner shall give to the partnership what he received if: a debtor made a partial payment of his debt to the partnership a partner received his share of the credit and the others havent the debtor later becomes insolvent, (Art. 1793, CC). Cf. 1792: in 1793 theres only 1 debt where the partnership is the creditor.
B. PAY DAMAGES
Liability for damages due to partners fault: The damages cant be compensated with the profits & benefits he may have earned for the partnership by his industry (Art. 1794, CC). Mitigation of liability: if through his extraordinary efforts in other activities unusual 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
Risk is borne by partner Risk is borne by partnership Risk is borne by partnership Risk is borne by partnership Risk is borne by partnership
Specific & determinate things, not fungible where only usufruct is contributed Specific & determinate things, with ownership transferred to partnership Fungible things which cant be kept without deteriorating (consumable) Things contributed to be sold Things brought and appraised in the inventory
No specification as to management: Rules: (1803) 1. all partners are considered agents and the act of anyone bind the partnership 2. important alterations in the immovable property of the partnership, even if useful, need the consent of all the partners if refusal to give consent is prejudicial to the partnership, courts intervention may be sought Every partner is considered an agent of the partnership for the purpose of its business and any act of the agent for apparently carrying on the usual business of the partnership binds the partnership. Partnership is not bound by the partners act even if for apparently carrying on in the usual business of the partnership (1818) when: 1. partner has no authority to act, and 2. third person dealing with him knew that the partner had no authority Acts of the partner not apparently carrying out the business of partnership does not bind partnership unless: (1818) 1. authorized by other partners, or 2. other partners have abandoned business for the the the
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 material facts within his knowledge relating to/affecting partnership affairs (Art. 1821, CC).
PARTNERSHIP
F. LIABLE FOR CONTRACTS
PARTNERSHIP
Liability of partnership & partners for partnership contracts: Pro rata, with all their property (Art. 1816, CC). The private property of the partners cant be seized for satisfaction of partnership debts until all the partnership assets have been exhausted. for the contracts which may be entered into: 1. in the name and for the account of the partnership 2. under its signature and 3. by a person authorized to act for the partnership. (1816) The exemption of an industrial partner from paying losses relates exclusively to the settlement of the partnership affairs among the partners themselves, and not with the partners liabilities to 3rd persons (La Compania Maritima v Munoz, 1907). While the liability of the partners are joint in transactions entered into by the partnership, a 3rd person who transacted with the partnership can hold partners solidarily liable for the whole obligation if the 3rd persons case falls under Arts. 1822-1823 (Muasque v. CA, 1985). Partner acting in his own name: he is solely liable General Rule: stipulation against pro rata liability is void Except: such stipulation is valid by & among the partners (Art. 1817, CC) Art. 1817 vs. 1799: it is permissible to stipulate among partners that a capitalist partner will be exempted from
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Acts not usual in the business of partnership: (1818) (ADD-CESR) 1. Assign the partnership property in trust for creditors or on the assignee's promise to pay the debts of the partnership; 2. Dispose of the good-will of the business; 3. Do any other act which would make it impossible to carry on the ordinary 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.
liability in excess of the original capital contributed; but wont be exempted insofar as his capital is concerned (Paras). Liability of a newly-admitted partner: Obligations contracted before his admission: liable only up to his share in the partnership property unless theres a contrary stipulation (Art. 1826, CC). Obligations contracted after admission: liable as an ordinary original partner. Liability of outgoing partner: When he gives notice of his retirement or withdrawal, hes freed from liability on contracts entered into thereafter but still liable on existing incomplete contracts He is liable for goods sold & delivered after his retirement/withdrawal if the sale was pursuant to a contract made before such retirement/withdrawal
partners are concerned, the partnership is answerable. Liability for money misappropriated covers: 1. Interest 2. Damages
PARTNERSHIP
Extent of liability: firm is liable to the same extent as the partner (Art. 1822, CC) & all partners are solidarily liable with the firm (Art. 1824, CC). The liability of partners under the Workmens Compensation Act also solidary. If their responsibility was merely joint and one became insolvent, the amount awarded would only be partially satisfied, which is contrary to the laws purpose (Liwanag v. Workmens Compensation Commission, 1959) (1796)
H. REIMBURSEMENT
The partnership is responsible to every partner for: 1. amounts disbursed on behalf of the partnership plus interest from the time the expense is made 2. obligations contracted in good faith in the interest of the business 3. risks in consequence of management
G. SOLIDARILY PARTNERSHIP
LIABLE
WITH
The partnership and the partner are solidarily 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 or with the authority of the copartners even if the act wasnt connected with the partnership business; 3. loss/injury is caused to a 3rd person by the wrongful act/omission; 4. 3rd person isnt 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 or property and the same is misapplied by the partner while in the custody of the said partner. Exceptions are without prejudice to the guilty partner being liable to the other partners, but as far as third
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Chapter III. Obligations of the Partnership/Partners as to Third Persons
Chapter III. Obligations of Partnership/Partners as To Third Persons

A. B. C. D. OPERATE UNDER A FIRM NAME BOUND BY PARTNERSHIP ADMISSION BOUND BY NOTICE TO PARTNER LIABLE FOR ACTS OF THE PARTNERSHIP
while he was still a partner or then present to his mind The partner who acquired it has reason to believe that it be the subject of the business, and couldve communicated it to the acting partner (Art. 1821, CC)
PARTNERSHIP
D. LIABLE FOR PARTNERSHIP
ACTS
OF
A. OPERATE UNDER A FIRM NAME

(1815) The firm name may or may not include the name of one or more of the partners Persons, not being members of the partnership, include their names in the firm name, are liable as partners (1825) Use of deceased partners name in law firm: permissible as long as its indicated in the firms communications that the partner is deceased (Rule 3.02, CPR) limited partners surname shall not appear in the firm name unless its also the surname of a general partner before the limited partner became such, the business had been carried on under a name in which his surname appeared (Art. 1846, CC)
B. BOUND BY ADMISSION
PARTNERSHIP
Requisites to be admissible against the partnership: 1. it must be connected with partnership affairs 2. it is within the scope of the partners authority (Art. 1820, CC) 3. it is made during the firms existence Exception: when a partner makes admissions for himself only without purporting to act for the partnership Admission by a former partner not admissible in evidence against the partnership. (Congco vs. Trillana, 1909)
All partners, including the industrial partner, are liable pro rata with their own properties after partnership properties 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 usual course of business or consented to by all partners Any stipulation against this liability is void as against third persons but valid among the partners (1817) An industrial partner is liable to third persons but as between the partners, he is not liable for losses (1797) Partners are individually liable after partnership assets are exhausted Contracts for which partners are liable pro rata with their individual property: those entered into in the name and account 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 to perform a partnership contract.
C. BOUND BY NOTICE TO KNOWLEDGE OF PARTNER

OR
Notice to the partner relating partnership affairs Knowledge acquired by a partner whos acting in a particular matter, acquired
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Chapter IV. Rights of Partners

A. B. C. D. E. F. SHARE IN LOSSES AND PROFITS ASSOCIATE ANOTHER IN HIS SHARE ACCESS PARTNERSHIP BOOKS OBTAIN FORMAL ACCOUNT PROPERTY RIGHTS CONVEY REAL PROPERTY
B. ASSOCIATE ANOTHER IN HIS INTEREST IN THE PARTNERSHIP

Every partner may associate another person with him in his share, but the associate shall not be admitted into the partnership without the consent of all the other partners, even if the partner having an associate should be a manager. (1804)
PARTNERSHIP
A. SHARE IN LOSSES AND PROFITS

With agreement Without agreement OF PROFITS According to agreement 1. Share of capitalist partner is in proportion to his capital contribution 2. Share of purely industrial partner is not fixed - as may be just and equitable under the circumstanc es OF LOSSES According to agreement 1. If sharing of profits is stipulated apply to sharing of losses 2.If no profit sharing stipulated losses shall be borne according to capital contribution 3.Purely industrial partner not liable for losses
C. ACCESS BOOKS
TO
PARTNERSHIP
Partnership books: open to inspection of all 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 days throughout the year, not merely during some arbitrary period of a few days chosen by the managing partners (Pardo v. Lumber Co., 1924)
D. OBTAIN FORMAL ACCOUNT

Gen. rule: a partner isnt entitled to a formal account, save in dissolution Basis: his right of access to the books Except: 1. if hes wrongfully excluded from the business/possession of the property by his co-partners 2. if the right exists by agreement 3. when the partner derives any profit as provided in Art. 1807 4. whenever other circumstances render it just & reasonable (Art. 1809, CC)
In the absence of stipulation, the Industrial Partner is:(1797) not liable for losses as for profits, receives such share as is equitable under the circumstances if he contributes capital, he receives an additional share in the proportion to the capital If a third person is entrusted with the designation of shares and profits (1798) designation is valid unless manifestly inequitable partner cannot impugn the decision when: he has begun to execute the same, or he has not impugned it within 3 months from knowledge Designation entrusted to one of the partners is void. (1798) Stipulation which excludes a partner from the profits or from sharing in the losses is void (Art. 1799, CC).
The right of a partner to demand an accounting exists as long as the partnership exists. The prescription period begins to run only upon the dissolution when the final accounting is done (Fue Leung v. IAC,1989).
E. PROPERTY RIGHTS
Property rights (Art. 1810, CC): 1. in the specific partnership property 2. in the partnership, and 3. to participate in the management
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Partnership property
capital
vs.
partnership
Conveyance of partners entire interest: doesnt, of itself, dissolve the partnership (Art. 1813, CC)
PARTNERSHIP
Capital With a constant value Includes only the actual capital contributed & promised to the partnership
Property Value varies, in accordance with market value Includes the contribution & all property later acquired on the partnerships account
Partners are co-owners of specific partnership property: the incidents are 1. A partner has an equal right with his co-partners to possess specific property for partnership purposes if excluded from this, can seek a formal accounting (Art. 1809, CC) or judicial dissolution (Art. 1831, CC) 2. A partners right in specific property cant be assigned except when all partners assign their rights in that property 3. A partners right in specific property isnt subject to attachment/execution except on a claim against the partnership 4. A partners right in specific property isnt subject to support payment (Art.1811, CC) Property used by the partnership: a partner may: 1. contribute only the use of property 2. allow partnership to use his separate property 3. hold the title to partnership property in his own name without having it belong to him Property acquired by a partner with partnership funds: partnership property Except: 1. contrary intention appears 2. property was acquired after dissolution but before winding up Partners interest in the partnership: his share in the profits & surplus (Art. 1812, CC). This may be assigned, attached, & subject to payment of support as there was already a liquidation of the partnership affairs. The assignee is only entitled to the profits assigned.
Rights of the transferee or assignee To receive in accordance with his contract the profits accruing to the assigning partner To avail of the usual remedies provided by law in the event of fraud in the management To receive the assignors interest in case of dissolution; may require an account from the date only of the last account agreed to by all the partners.
What assignees cannot do Interfere in management; the
Require information account
any or
Inspect any of the partnership books.
Enforcement of a judgment vs. a debtorpartners interest (Art. 1814, CC): the judgment creditor may 1. Apply for an order charging the partners interest with payment of the unsatisfied amount of the final judgment with interest 2. Have a receiver appointed 3. Have the court make an order as the circumstances render it necessary Redemption: a partner or more may redeem the interest charged at any time before the foreclosure with 1. their separate property 2. with partnership property, with the consent of all partners whose interests arent charged/sold (Art. 1814, CC)
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Chapter V. Rights of Partnership
F. CONVEY REAL PROPERTY

(1819)
Title in partnership name Any partner may convey under partnership name Conveyance passes title but partnership can recover unless: 1)The partner who sold it was carrying on in the usual way the business of the partnership hence binding the partnership; or 2) Buyer had no knowledge of the lack of authority of the seller Conveyance does not pass title but only equitable interest. Provided that: The partner who sold it was carrying on in the usual way the business of the partnership hence binding the partnership Conveyance passes title but partnership can recover unless: 1)The partner who sold it was carrying on in the usual way the business of the partnership hence binding the partnership; or 2) Buyer had no knowledge of the lack of authority of the seller Conveyance does not pass title but only equitable interest. Provided that: The partner who sold it was carrying on in the usual way the business of the partnership hence binding the partnership Passes all their rights in such property
Chapter V. Rights of Partnership

A. ACQUIRE IMMOVABLES
PARTNERSHIP
Immovables/an interest therein may be acquired in the partnership name, and title so acquired can only be conveyed in the partnership name (Art. 1774, CC). Cf Art. 1819: see table
Title in partnership name Conveyance in partner's name
B. PREFERENCE OF CREDITORS
Preference: partnership preferred to creditors of partners (Art. 1827, CC). creditors individual
Remedy of private creditors of partners: seek the attachment/public sale of the shares
Title in the name of one or more but not all the partners and the record does not disclose the right of the partnership - The partners in whom the title stands may convey Title in the name of one or more or all partners or in third person in trust for the partnership Conveyance in partner's name or in partners name Title in the names of all the partners Conveyance by all partners
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Chapter VI. Dissolution and Winding Up

A. B. C. D. DEFINITIONS CAUSES FOR DISSOLUTION CONSEQUENCES OF DISSOLUTION PARTNER'S LIABILITY
A. DEFINITIONS
Dissolution change in the partners relation caused by any partner ceasing to be associated in the carrying on of the business (Art. 1828, CC). Termination when all the affairs of partnership are liquidated and partnership is definitely ended. It is final settlement of accounts of partnership. (JBL Reyes) the the the the
Involuntary (grounds) 1. business becomes unlawful 2. specific thing promised perishes before delivery to the partnership, the use and enjoyment of which has been transferred to the partnership 3. death of a partner 4. insolvency of any partner or the partnership 5. civil interdiction of any partner Judicial 1. Decree of court upon application (1831) i. application by partner (grounds) insanity of any partner incapacity of any partner to perform his part of the contract partner guilty of conduct prejudicial to the partnership business wilfull breach of agreement by any partner business can only be carried out with loss ii. application by purchaser of partnership interest may be allowed in the following cases: termination of term or undertaking partnership is at will and interest of partnership is assigned
PARTNERSHIP
Winding up process of liquidation of partnership affairs, between dissolution and termination. (JBL Reyes) Effect of dissolution: partnership continues until winding up is completed (Art. 1829, CC). Effect of dissolution on the partners: 1. they cant evade prior obligations 2. generally theyre spared from new obligations to which they didnt consent, unless these are essential for the winding up (Testate Estate of Mota v. Serra, 1925)
B. CAUSES FOR DISSOLUTION

Voluntary 1. without violation of the agreement between the partners (1830) i. termination of the term or particular undertaking ii. express will of any partner in good faith, when the partnership is at will iii. express will of all partners who have not assigned their interests or suffered them to be charged iv. bona fide expulsion of any partner in accordance with the agreement 2. in contravention of the agreement, by express will of one partner effects partner is liable for damages; other partners may continue the business
C. CONSEQUENCES OF DISSOLUTION
Except as necessary for winding up, dissolution terminates all authority of the partners to act for the partnership (1832) Partnership is not bound by any act of a partner when dissolution is not by the act, insolvency or death of a partner dissolution is by such act, insolvency or death and the partners acting have knowledge thereof acts not connected with winding up Partnership is not bound with respect to third persons (1834) business become unlawful partner dealing with third party becomes insolvent partner has no authority to wind up
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Partner can bind the partnership even after dissolution(1834) acts appropriate to winding up third person is in good faith and without knowledge of dissolution: i. third person who extended credit to the partnership ii. third person who knew the existence of the partnership
who continue the business of the dissolved partnership 6. Any partner wrongfully causes a dissolution 7. When a partner is expelled When applicable: a partnership is dissolved due to change in membership but the remaining partners continue the business without liquidation. Effect: unpaid old creditors of the dissolved partnership automatically become creditors of the new partnership. New partners liability: satisfied out of partnership property only, unless with a contrary stipulation Not only the retiring partners but also the new partnership itself which continued the business of the dissolved one, are liable for the debts of the prior partnership. A withdrawing partner remains liable to a 3rd party creditor of the old partnership (Singsong vs. Isabela Sawmill, 1979).
PARTNERSHIP
D. PARTNERS LIABILITY
if partner transacts business with third persons notwithstanding death or insolvency of a co-partner, liability shall be satisfied out of partnership assets alone if: partner was unknown as partner to third person partner is unknown and inactive in partnership affairs partner still has existing liabilities to the partnership at the time of the dissolution (1835) dissolution does not discharge a partner discharged only by agreement among partner, creditor and the person or partnership continuing the business in case of death: individual property is liable for obligation of the partnership incurred while he was a partner, subject to prior payments of individual debts. Liability of person/partnership continuing the business (Art. 1840,CC) Contemplates 7 situations: 1. when any partner is admitted into an existing partnership 2. when any partner retires and assigns his rights in partnership property to two or more partners or third persons 3. when all but one partner retire and assign their rights to the remaining partner 4. any partner retires or dies without any assignment of his right in partnership property 5. All the partners or their representatives assign their rights in partnership property to one or more third persons who promise to pay the debts and
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Chapter VII. Rights of Partners Upon Dissolution

A. RIGHT TO WIND UP B. RIGHT TO DAMAGES FOR/TO CONTINUE BUSINESS ON WRONGFUL DISSOLUTION C. RIGHT TO LIEN OR RETENTION, TO STAND IN PLACE OF CREDITOR, TO BE INDEMNIFIED D. RIGHT OF RETIRING/DECEASED PARTNER E. RIGHT TO ACCOUNT
in like manner indemnify him against all present or future partnership liabilities.
PARTNERSHIP
A partner who has caused the dissolution wrongfully shall have the right: If the business is not continued Each partner may have the partnership property applied to the payment of the firms debt Surplus is applied to payment in cash of the net amount owed to the respective partners subject to payment of damages If the business is continued the right as against his copartners and all claiming through them in respect of their interests in the partnership, to have the value of his interest in the partnership, less any damage caused to his copartners by the dissolution, ascertained and paid to him in cash, or the payment secured by a bond approved by the court, to be released from all existing liabilities of the partnership; but in ascertaining the value of the partner's interest the value of the good-will of the business shall not be considered.
A. RIGHT TO WIND UP
(1836) Based on: Agreement No agreement the partners who have not wrongfully dissolved the partnership the legal representative of the last surviving partner, not insolvent Any partner, his legal representative or his assignee, upon cause shown, may obtain winding up by the court.
B. RIGHT TO DAMAGES FOR/TO CONTINUE BUSINESS ON WRONGFUL DISSOLUTION

General Rule: Each partner may have the partnership property applied to the payment of the firms debt Surplus is applied to payment in cash of the net amount owed to the respective partners Each partner who has not caused dissolution wrongfully shall have the right, as against each partner who has caused the dissolution wrongfully, to damages for breach of the agreement. The partners who have not caused the dissolution wrongfully, if they all desire to continue the business in the same name either by themselves or jointly with others, may do so, during the agreed term for the partnership and for that purpose may possess the partnership property, provided they secure the payment by bond approved by the court, or pay any partner who has caused the dissolution wrongfully, the value of his interest in the partnership at the dissolution, less any damages recoverable
C. RIGHT TO LIEN OR RETENTION, TO STAND IN PLACE OF CREDITOR, TO BE INDEMNIFIED

Where a partnership contract is rescinded on the ground of the fraud or misrepresentation of one of the parties thereto, 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 partnership property after satisfying the partnership liabilities to third persons for any sum of money paid by him for the purchase of an interest in the partnership and for any capital or advances contributed by him; To stand, after all liabilities to third persons have been satisfied, in the place of the creditors of the partnership for any payments made
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by him in respect of the partnership liabilities; and To be indemnified by the person guilty of the fraud or making the representation against all debts and liabilities of the partnership.
PARTNERSHIP
D. RIGHT OF RETIRING/DECEASED PARTNER

(1841) Factual Situation: any partner retires or dies, and the business is continued without any settlement of accounts as between him or his estate and the person or partnership continuing the business Rights: he or his legal representative as against such person or partnership may have the value of his interest at the date of dissolution ascertained either: receive as an ordinary creditor an amount equal to the value of his interest in the dissolved partnership with interest; or, at his option or at the option of his legal representative, receive in lieu of interest, the profits attributable to the use of his right in the property of the dissolved partnership; The provision shall not apply if there is an agreement between the parties. (1842) The right to an account of his interest shall accrue to any partner, or his legal representative as against the winding up partners or the surviving partners or the person or partnership continuing the business, When right accrues: At the date of dissolution, in the absence of any agreement to the contrary.
E. RIGHT TO ACCOUNT
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Chapter VIII. Rules on Settlement
Chapter VIII. Rules on Settlement (1839)

The rules for distribution wont apply if theres a contrary agreement between the partners. Rule of preference in the payment of partnership liabilities: 1. those owed to creditors other than partners 2. those owed to partners other than capital and profits 3. those owed to partners in respect of capital 4. those owed to partners in respect of profits When assets are insufficient to satisfy liabilities: the partners are required to contribute, based on contributed capital. If refuses to contribute a petition in court may be filed for its enforcement. If partner is dead contribution may be enforced against his private property through the administrator Doctrine of Marshalling of Assets: If there are claims over both partnership assets & partners individual properties, both in custody of the court for distribution: 1. Partnership creditors are preferred with regard to partnership property 2. Individual creditors are preferred with respect to individual properties of partners. 3. Anything left from either goes to the other. Order in case of insolvency of a partner or his estate (in case of death): 1. Separate creditors 2. Partnership creditors 3. Partners who gave contributions Liquidation needed. The business profits cant be determined by taking into account the result of 1 transaction instead of all the transactions had, thus the need for a general liquidation before a partner may claim a specific sum as his share of the profits (Sison v. McQuaid, 1953).
No return of shares without dissolution & liquidation, because the firms outside creditors have preference over the firms assets and the firms property cant be diminished to their prejudice (Magdusa v. Albaran, 1962).
PARTNERSHIP
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Chapter IX. Limited Partnership

I. DEFINITION II. FORMING/AMENDING A LIMITED PARTNERSHIP III. LIMITED PARTNER A. CONTRIBUTION B. LIABILITIES OF A LIMITED PARTNER 1. TO THE PARTNERSHIP 2. AS TRUSTEE FOR THE PARTNERSHIP 3. LIABILITIES TO PARTNERSHIP CREDITORS & OTHER PARTNERS i. CONTRIBUTES SERVICES ii. SURNAME IN FIRM NAME iii. FALSE STATEMENT iv. CONTROL OF BUSINESS v. PROHIBITED TRANSACTIONS vi. NON-COMPLIANCE WITH REQUISITES FOR FORMATION 4. LIABILITIES TO SEPARATE CREDITORS C. RIGHTS OF LIMITED PARTNERS 1. COMMON RIGHTS OF LIMITED & GEN. PARTNERS 2. LOAN MONEY & TRANSACT BUSINESS 3. RETURN OF CONTRIBUTION 4. SHARE OF PROFITS 5. ASSIGN INTERESTS 6. EFFECT OF DEATH OF A LIMITED PARTNER 7. PERSON ERRONEOUSLY BELIEVING HES A LIMITED PARTNER IV. GENERAL PARTNER V. DISSOLUTION VI. SETTLING OF ACCOUNTS AFTER DISSOLUTION
4. The limited partners arent personally liable for obligations beyond their contribution (Arts. 1845, 1848, 1856 CC) 5. Obligations/debts are paid out of partnership assets and the gen. partners separate assets 6. Limited partners may get back their capital contributions subject to conditions 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 the profits without the risk of personal liability
General Partner Personally liable for partnership obligations If manner of mgt. not agreed upon, all general partners have an equal right in business mgt Cash, property or industry Proper party to proceedings by/against partnership Limited Partner Only to the extent of his capital contributions No participation in management
PARTNERSHIP
Extent liability
of
Right to participate in management
Contribution Proper party to proceedings by or against the partnership
I. DEFINITION
Limited partnership: formed by 2/more persons, in accordance with the requirements of law, composed of 1/more general partners & 1/more limited partners (Art. 1843, CC). Limited partners are not bound by the partnerships 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 liable to creditors (Arts. 1848, 1850 CC) 3. 1/more limited partners contribute to the capital & share in the profits but dont manage the business
Name in firm name Prohibition to engage in other business
Name may appear in firm name Prohibited
Cash or property only, not industry Not proper party to proceedings by/against partnership unless: 1. he is also a gen. partner 2. where the object of the proceedings is to enforce a limited partner's right against or liability to the partnership Name must appear in firm name No prohibition
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Effect of retirement death insanity or insolvency Assignability of interest in partnership
General Partner Dissolves the partnership
Limited Partner Different effect; rights transferred to legal rep. Assignable
Dissolution and Winding Up
Gen. Partnership Rules governing are Art. 18281842
Limited Partnership Rules governing are Art. 18601863
PARTNERSHIP
Not assignable Gen. Partnership May be constituted in any form, except where immovable property or real rights are contributed, a public instrument shall be necessary
II. FORMING/AMENDING A LIMITED PARTNERSHIP

Two or more persons desiring to form a partnership shall: 1. Sign and swear to a certificate which shall state the following items enumerated in Art. 1844 2. File for record the certificate in the Office of Securities and Exchange Commission A limited partnership is formed if there has been substantial compliance in good faith with Art. 1844 When the cert. of partnership may be amended: (CSAAG CFCTM) 1. Change in partnership name or in the amount/character of contribution of any limited partner 2. Substitution of a limited partner 3. Additional limited partner is admitted 4. Admission of a general partner 5. Gen. partner retires, dies, becomes insolvent or insane, or under civil interdiction & the business is continued: a. Under a right so to do stated in the certificate, or b. With the consent of all members 6. Change in the character of business 7. False/erroneous statement in the cert. 8. Change in the time as stated in the cert. for the dissolution of the partnership or return of a contribution 9. Time is fixed for dissolution or return of a contribution 10. The Members want to change a statement in the cert. to make it more accurate (Art. 1864, CC) Requirements to amend: 1. Must be in writing, under oath, & set forth clearly the change desired 2. Signed & sworn to by all the members, including the new members & assigning members 3. The cert., as amended, must be filed in the SEC (Art. 1865, CC)
Creation
Limited Partnership Partners must: (1) Sign and swear to a certificate which shall state the items enumerated in Art. 1844 and (2) File for record the certificate in the Office of the Securities and Exchange Commission 1/more gen. partners and 1/more limited partners Name must include the word Limited (SEC Memo Circ. #14-00)
Composition
Only general partners Must contain the word Company (SEC Memo Circ. #14-00) unless its a professional partnership Every partnership shall operate under a firm name, which may or may not include the name of one or more of the partners.
Firm name
The surname of a limited partner shall not appear in the partnership name unless: (1) It is also the surname of a general partner, or (2) Prior to the time when the limited partner became such, the business has been carried on under a name in which his surname appeared.
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When the certificate shall be cancelled: 1. When the partnership is dissolved 2. When all limited partners cease to be such (Art. 1864, CC) Requirements to cancel: 1. Must be in writing 2. Signed by all the members 3. Filed with the SEC; if cancellation is court-ordered, a certified copy of the order shall also be filed (Art.1865, CC)
Even if a limited partner rightfully received back his contribution to capital, he remains liable to the partnership for any sum necessary to discharge the liabilities of the partnership to creditors who: extended credit or whose claims arose before such return.
PARTNERSHIP
3. Liabilities to partnership creditors & other partners a. Contributes services (Art. 1845, CC) Effect: 1. The limited partner: i. Will be considered an industrial & general partner or ii. If the certificate states that hes a limited partner, he will be a general partner & limited partner at the same time. 2. He divests himself of the privilege of limited liability & will be exposed to all the liabilities of a gen. partner.
III.LIMITED PARTNER
Who may be limited partners: A partnership no A gen. partnership may be changed into a limited one, & a partner in the former gen. partnership may be a limited partner in the limited partnership formed.
A. Contribution
May be cash or property, but not services.
B. Liabilities of a Limited Partner

Gen. rule: not liable as a gen. partner. His liability is limited to the extent of his contribution to the partnership.
b. Surname in firm name (Art.1846, CC) Gen. rule: the surname of a limited partner shall not appear in the partnership name If used in firm name, he is liable as a gen. partner to creditors who didnt know that he isnt a gen. partner.
1. To the partnership (Art. 1858, CC) i. Difference between his actual contribution & that stated in the certificate as having been made ii. Unpaid contributions which he agreed to make at specified future time & on the conditions stated in the certificate 2. As Trustee for the Partnership: 1) Specific property which he committed but didnt contribute, or which he contributed but was wrongfully returned to him 2) Money/property wrongfully paid or conveyed to him Liabilities of a limited partner can be waived or compromised only by the consent of all the members. However: This shall not affect the right of a creditor who: extended credit or whose claim arose after the filing & before a cancellation/ amendment of the certificate.
c. False statement (Art. 1847, CC) If a person suffers loss by reliance on the false statement in the certificate, he may hold liable any party to the certificate who knew the statement to be false: At the time he signed the certificate, or Subsequently but within a sufficient time before the reliance to enable him to amend or cancel the certificate
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d. Control of business (Art. 1848, CC) He becomes liable as a gen. partner without acquiring the rights of one. Control here contemplates active participation in the business and not just having the option to exercise control. Transactions (Art.
The interest may be redeemed with the separate property of any gen. partner but not with partnership property. (Art. 1862, CC) This is different from the rule in general partnership where the interest can also be redeemed with partnership property. (Art. 1814, CC)
PARTNERSHIP
e. Prohibited 1854, CC)
C. Rights of Limited Partners

1. Common rights of limited & gen. partners (Art. 1851, CC) i. ii. iii. iv. v. vi. vii. Demand that partnership books be kept at the principal place of business Inspect & copy any of the books Demand true & full info of all things affecting the partnership Demand a formal account whenever circumstances render it just and reasonable Resort to the court for the dissolution and winding up of the business Receive a share of the profits or other compensation by way of income Demand the return of his contribution provided assets are more than the liabilities
Prohibited transactions of limited partners: 1. Receiving/holding as collateral security any partnership property 2. Receiving any payment, conveyance, or release from liability if it will prejudice the rights of 3rd persons If prohibited acts are performed: Presumption of fraud on the creditors. But the law doesnt absolutely prohibit the taking as collateral security of the property, as the prohibitions are modified by the requirement of sufficient assets to discharge the partnership obligations. Non-compliance with requisites for formation (Art. 1844 par.2, CC) If there is no substantial compliance: the partnership becomes a general partnership with respect to 3rd persons the members are liable as general partners.
f.
2. Loan money & transact business (Art. 1854, CC) Limited partner allowed to loan money, transact business because the relationship between the limited partner & partnership isnt based on trust & confidence. There is no conflict of interests. Unless he is also a general partner, he is entitled to a pro rata share of the partnership assets together with the general creditors.
4. Liabilities to separate creditors Right of creditors of a limited partner to petition a court of competent jurisdiction to: Charge the interest of the indebted limited partner with the payment of the unsatisfied amount of the claim Appoint a receiver to preserve the interest Make all other orders as the circumstances would require
3. Return of contribution (Art.1857,CC) Conditions for return: 1. All liabilities to non-partner creditors had been paid, or there are sufficient assets to satisfy them, or 2. All members consent, unless the limited partner desiring the return has lawfully demanded the return of his contribution, or
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3. The certificate had been cancelled or amended as to reflect the withdrawal/reduction of contribution. When return may be demanded: 1. On the dissolution of the partnership 2. On the arrival of the date specified in the certificate 3. On the lapse of 6 months from notice in writing to all other members if no time is specified General rule: return of contribution is in cash, except: if theres a statement to that effect in the certificate or all partners consent
5. Assign interests (Art. 1859, CC) A limited assignable. partners interest is

PARTNERSHIP
Substituted limited partner: a person admitted to all the rights of a limited partner who has died or assigned his interest in a partnership He has all the rights and powers of a limited partner Subject to all restrictions & liabilities of his assignor except: those he was ignorant of when he became a limited partner and couldnt be ascertained in the certificate An assignee who does not become a substituted limited partner has: No right to require any information or account of partnership transactions No right to inspect partnership books Only entitled to receive the assignors share of the profits or other compensation by way of income Only entitled to the return of the assignors contribution The assignee shall have the right to become a substituted limited partner if 1. all the members consent, or 2. the assignor is empowered in the articles of partnership, and he gave the assignee the right to be a substituted limited partner. In either case, it is still required that the certificate be amended (Art. 1865, CC) and registered with the SEC.
Dissolution, upon petition of limited partner: 1. When he rightfully but unsuccessfully demands the return of his contribution 2. The other liabilities of the partnership have not been paid pr property is insufficient for payment and the limited partner would otherwise be entitled to the return of his contribution In case of several limited partners: Members may agree to give priority to 1/more limited partners, and This must be stated in the certificate of partnership. The preference covers 1. return of contributions, 2. compensation, and 3. other matters where some benefit is granted (Art. 1855, CC). In the absence of such statement, all the limited partners shall stand upon equal footing.
4. Share of profits (Art. 1856, CC) When the assets exceed liabilities (except those to limited & general partners), a limited partner may recover his share in the profits/compensation by way of income stipulated in the certificate.
That the assignee has become a substituted limited partner doesnt relieve the assignor from liabilities to the partnership under Art. 1858, as a trustee, or for false statement in the certificate.
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6. 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 the estate 2. If the deceased had assigned his interest in the partnership, the executor or administrator may constitute the assignee a substituted limited partner if the deceased was empowered to do so The deceased limited partners estate is liable for all the deceaseds obligations & liabilities to the partnership as a limited partner
6. Continue the business with partnership property on the death, retirement, insanity, civil interdiction or insolvency of a gen. partner, unless the power is granted in the certificate 7. Admit a person as a limited partner, unless the right is granted in the certificate (Art. 1850, CC)
PARTNERSHIP
V. DISSOLUTION
When a limited partnership may be dissolved: 1. The misconduct of a general partner 2. Fraud on the limited partner by the general partner 3. The retirement, death, insolvency, insanity, or civil interdiction of a general partner, except: if the business is continued by the remaining general partners i. 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 firms original term 7. When the limited partner demanded the return of his contribution but was unjustifiably denied (Art. 1857, CC) 8. The causes in Arts. 1830 & 1831. If dissolved by expiration of the fixed term, the notice of dissolution need not be given since the papers filed in the SEC are notice to the world. If dissolved by express will of the partners, the certificate should be cancelled, and dissolution isnt effected until there has been compliance with this requirement.
7. Person erroneously believing hes a limited partner (Art. 1852, CC) A person who has contributed capital erroneously believing that he has become a limited partner: Does not become a general partner, or Become bound by the obligations of the partnership, if: he exercises the rights of a limited partner on ascertaining his mistake he promptly renounces his interest in the profits of the business
IV. GENERAL PARTNER

A general partner shall have all the rights and powers and is subject to all the restrictions and liabilities of a partner in a partnership without limited partners. General partners cant, without the written consent or written ratification of all limited partners, do the ff: (ACAPACA) 1. Any act in contravention of the certificate 2. Confess judgment 3. Any act which would make it impossible to carry on the partnership business 4. Possess partnership property, or assign their rights in specific partnership property for other than a partnership purpose 5. Admit a person as a gen. partner
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VI. SETTLING ACCOUNTS DISSOLUTION
AFTER
Order of priority in the payment of liabilities (Art. 1863, CC): 1. Those owed to creditors, in the order of priority provided by law (Arts. 2236-2251, CC), except those to limited partners on account of their contribution & to general partners 2. Those to limited partners in respect to their share of the profits and other compensation by way of income in their contributions 3. Those to limited partners in respect of their capital contributions 4. Those to general partners other than for capital and profits 5. Those to general partners in respect to profits 6. Those to general partners in respect to capital General partners have the duty & power to wind up the partnerships affairs If theres no agreement, the limited partners shall share in the partnership assets and profits in proportion to the respective amounts of their claims (Art. 1863, CC).
PARTNERSHIP
- end of Partnership - end of Civil Law Vol. 1 -
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Chapter I. General Provisions

Prof. Rommel Casis

CIVIL LAW Cez Villavert Michelle Dy

LECTURES Edel Cruz

ACADEMICS COMMITTEE Samantha Poblacion

OBLIGATIONS and CONTRACTS Rory Lambino

Chapter I. General Provisions

II. SOURCES OF OBLIGATIONS

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

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Chapter I. General Provisions

Lawful Voluntary Unilateral

Proof of guilt beyond reasonable doubt Can never be compromised

Effect of Acquittal on Civil Actions

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Chapter II. Nature and Effects of Obligations

Chapter II. Nature and Effects of Obligations

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Chapter II. Nature and Effects of Obligations

Purpose is to evade the normal fulfillment of the obligation

Purpose is to secure the consent of another to enter into the contract

Results in the breach of an obligation

Gives rise to a liability for damages, a crime, or a quasi-delict (Prof. Labitag)

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Chapter II. Nature and Effects of Obligations

EXTENT OF DAMAGES TO BE AWARDED

NELIGENCE IN CULPA CONTRACTUAL AND CULPA AQUILIANA

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Chapter II. Nature and Effects of Obligations

II. FORTUITOUS EVENT

RULES ON MORA, DELAY OR DEFAULT

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Chapter II. Nature and Effects of Obligations

III. REMEDIES TO CREDITORS

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Chapter II. Nature and Effects of Obligations

IV. USURIOUS TRANSACTIONS RULES ON INTEREST

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Chapter III. Different Kinds of Obligations

Chapter III. Different Kinds of Obligations

I. PURE & CONDITIONAL OBLIGATIONS

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Chapter III. Different Kinds of Obligations

obligee, but always subject to the threat or danger of extinction

Condition and obligation is valid

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Chapter III. Different Kinds of Obligations

Impairment to be borne by the creditor

II. RECIPROCAL OBLIGATIONS:

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Chapter III. Different Kinds of Obligations

Term/Period and Condition Distinguished

IV. ALTERNATIVE OBLIGATIONS

WHEN COURT Art.1197)

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