DEAN C.R. DEL CASTILLO

BAR LECTURE 2014 TRANSCRIPT

Sources of Obligation

Let’s start with obligations. Any student of obligations and contracts would always start with the
different sources of an obligation. And I think you know all those five (5) sources of an obligation.
These are: Law, Contracts, Quasi Contracts, Delicts, Quasi Delicts.

The first one, of course, is always law. And of course when we talk about law as a source of an
obligation, it is the law that directly creates the obligation. So you have your tax laws, which provide for
your obligation to pay taxes within a certain period if you earn a certain amount. It is not the law that
creates general principles like the Civil Code because the Civil Code does not create the obligation. It
merely gives you the requirements as well as the elements for a valid obligation, but certainly does not
create the obligation. But your tax laws definitely create an obligation.

The four others - if you will notice and I think I have said this many times in the past – you’re
talking about one which is true and the other one which is fake. The first of course will be contracts
followed by the fake contract or the quasi contract. Then you have delict followed by quasi delict.
Anytime you use the word “quasi,” that means that it is not real; there is something missing. For you to
just remember: there are certain elements of contracts and there are certain elements of delict before they
can be considered as a source of an obligation. One of them is missing in the quasi contract or in the quasi
delict.

As far as contracts are concerned – and I will devote a more extensive discussion of contract
tomorrow - the only unique thing about contracts is that there is a meeting of the minds. There is no
contract unless the parties agreed to the essential terms and conditions of the obligation. It is when two
civil people sit down and agree on an obligation, as well as the elements, and as well as the terms and
conditions of the obligation. In the four other sources of an obligation, you don’t do that. There is no
consent; there is no meeting of the minds.

That is why when you go into quasi-contract, what is the element missing? The element missing
is the meeting of the minds. So you don’t have any agreement with the parties. But what is it really? It is
the case of a unilateral contract. It is valid; it is legal; it is not something that parties have agreed to
beforehand, but it does create certain obligations.

There are two kinds of quasi contracts that we have at the law. You have the case of the
negotiorum gestio and then you have the case of solutio indebiti. These two terms are always discussed
then differentiated from each other.

Negotiorum gestio is that case of the officious manager. Remember the officious manager? He is
the person who takes over the business or property of another person. He is the good Samaritan. He takes
over to save the property or the business of another person in times of emergency without any pre-
existing contractual relationship between the two. If he has an agreement with the owner to save his
property, then certainly that is not a quasi-contract. That is a case of a contract. This one - you see your
friend’s property burning, you go save the property of your neighbor without being asked to.

What are the obligations created in negotiorum gestio? You have two obligations – one on the part of the
officious manager, one on the part of the owner. On the part of the officious manager, his obligation is
to make sure he completes the work until the emergency ceases. This is not urong sulong. As the

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officious manager you have no obligation to do it, but the moment you start doing it you have an
obligation to continue until the emergency ceases; otherwise, you will be held liable for damages for
taking over and then leaving it when the heat turns very high. So that’s not the way it is. On the part of
owner, the obligation created is that he must pay for all the expenses of the officious manager because
he’s doing it out of his own good graces therefore you have to reimburse him.

As far as solutio indebiti is concerned, it is mistake in payment, which means you pay not
knowing that you have no obligation to pay; otherwise, this is something which is created out of the basis
of an obligation. This is no the case of a quasi contract because then there is a case of a pre-existing
agreement. This is the case of mistake in payment. What is the obligation created? The obligation is on
the payee to return what has been paid because it was a mistake.

These sources are exclusive in character. There are no obligations unless it can be sourced from
any of this five.

You have the case of Metropolitan Bank vs. Rosales decided in January early this year where the
Court had the opportunity to say that these are the only sources of an obligation without which you do not
create an obligation. Very briefly, the case of Metropolitan Bank involves a depositor in Metrobank. In
the case of a deposit in a bank, you all know that this is considered as a form of loan, a simple loan, and
therefore the creditor who is the bank depositor is entitled to withdraw his deposit at any time because
he’s the creditor and this is supposed to be a pure obligation. In this case, the bank withheld the bank
deposit of the depositor. What is the reason of the bank? The bank said that there is a hold out agreement
where they have entered into at the time of the bank deposit and under the hold out agreement, the bank
has the right to withhold the bank deposit if it has been found out that you owe the bank something. Of
course you know there is legal compensation that even without disagreement you can do it for as long as
you become debtors and creditors in respect to each other. In this case there was a specific agreement -
the hold out agreement or the offsetting agreement depending on how you want to call it - but it certainly
gives the bank the right to hold on to your deposit if you owe the bank something. In this case the
depositor did not owe the bank any loan or any form of credit accommodation. What was the bank’s
reason? The bank said that the depositor was involved in a scam where the deposit of another depositor
was illegally withdrawn by an impostor and the bank charged that she was the impostor. The reason for
that was that she was found to be in the premises at the time of the illegal withdrawal. So the bank filed a
criminal case against her and withheld her deposit so she went to the court and the court said, you can’t
do that because first, you have to determine whether she owes the bank and for you to determine whether
she owes the bank you only to rely on the five sources of an obligation. This is not one of them. The fact
that you filed a criminal case against her because you’re alleging she’s the impostor because she illegally
withdrew the deposit of another person does not mean the she owes you at that point. There is no decision
yet of the criminal case and therefore she does not owe you anything and you do not have the right of
course to withhold the deposit.

3 Prestations – To Give, To Do or Not To Do

Then you have to talk about creating an obligation out of these five sources. Once the obligation
is created, what is there for the debtor or the obligor to do? This is what we call the prestations. There are
three kinds of prestations. One is to give which involves the delivery of any real or personal property,
whether tangible or intangible – it doesn’t matter – whatever kinds of properties are the subject matter of
the contract or obligation. The second one is the obligation to do which involves the performance of
certain services, and obligation not to do which of course is the opposite when you are prevented from
doing something.

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In the case of services whether you are prohibited from doing something or you are required to
do something, the only requirement that this kind of service be not immoral or illegal that could not have
been the object of any obligation. Other than that you are free to stipulate any kind of services and again
subject only to these three (3) limitations.

As far as obligation to do or not to do is concerned, I think there really is not much to discuss
there because it’s really just the performance of certain services or the abstention of a performance of a
certain service, which you would have done without the obligation. Obviously if you’ve breached it,
which means in an obligation to do, you breach it because you did not do it, or you did not do it exactly in
the manner agreed upon. If it is an obligation not to do, you breach it because you did something that was
prohibited. In most cases of obligations not to do there is no turning back because the moment you do it,
you no longer cannot do it, unless you are talking about certain kinds of services where there is a
possibility of un-doing it like construction, which you can chop off the illegal construction of whatever.
Other than that, there is no turning back if it is a case of an obligation not to do.

Obligations to Give

However, if you talk about obligations to give which involves the delivery of certain property
there are additional obligations that are imposed on the debtor or the obligor if the object of your
obligation is what we call a specific thing. You know the distinction between specific thing and generic
things.

Object of Obligations to Give

If it is generic, that’s okay. The only thing that you have to do is at the end of the period or
whenever you are required to deliver you just deliver something which belongs to the same genus or
species. You always know the saying, “the genus never perishes”. Whatever happens to all the
properties in the same class or genus, you don’t really care, as long as you can deliver, as long as it does
not become obsolete, as long as you are able to deliver anything of the same class or genus at the time you
are obliged to deliver. Obviously there is nothing else for you to do because when you are talking about
generic objects you are talking about multitudes - you are talking about thousands and millions of the
same property. As when your obligation is to deliver a car. There are millions of cars all over this world.
Certainly, there is nothing you can do until such time you are obliged to deliver and for as long as you
deliver something of the same kind or quality belonging to the same genus, you are fine.

But when you talk about specific things because this is one of a kind, it is set apart from the
genus or species from which it belongs, so if you take the example of a car, a car is generic. A red car is
generic. A Toyota car is generic. But the moment you say a red Toyota car with plate number 123456
then it becomes specific. It becomes one of a kind because there’s only one with that plate number unless
you are talking about a fake plate number. As a general rule, you are only talking about only one property
and it is set apart from the genus or species to which it belongs.

Then you have additional liabilities if your obligation is to deliver something specific. What are your
additional liabilities or obligations? In addition to delivering the object when the delivery time comes, you
have the obligation of exercising the diligence of a good father of the family in taking care of that
property and you have to deliver the accessions and the accessories.

Note: if the thing is lost due to fortuitous events, and the thing is generic, the obligation is not
extinguised. In specific things, your obligation is already extinguished.

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Diligence of a good father of a family – what is that kind of diligence? I don’t think you have a
hard and fast rule of a diligence of a good father of a family, but the case law will always tell you that it is
the kind of diligence that you would give to a property if you were the owner of the property. Unless
when a person has promised to deliver or transfer title over a certain property, the tendency is to be laxed
in that property. Anyway, “I am supposed to deliver this to him next month so why will I take care of it?”
That is the reason why the law imposes the obligation for you to take care of the property with the
diligence of a good father of a family because if something happens to that one of a kind property and you
are unable to deliver in full and orderly condition, you become liable for damages. This is precisely from
the time when the obligation is created up to the time you are supposed to deliver or actually have
delivered. That period of time is where you exercise diligence.

Accessions and accessories - of course, are those are added to the property at the time the
obligation was entered into, unless there are stipulations that say that accessions and accessories are not
included.

When you talk about accessions, they become part of the property, as you’ve learned that on the law on
the property, because it is something which attaches to property and becomes part of the property and
therefore you have to deliver that.

Accessories are different from accessions such that these are “added” things. What is the rule? Same as
accession—at the time of the obligation, these are included unless you specifically say that these are not
included.

Note: Accessions and accessories are not applicable in obligations to do or not to do.

Fruits in Obligation to Give

The more controversial one is, of course, the obligation to deliver fruits in addition to the
accessories and accessions. You know the three kinds of fruits – the natural fruits, the industrial fruits,
and the civil fruits. We do not make any distinction. Anything that that one-of-a-kind property earns in
the form of fruits—you have to deliver generally to the person to whom you have promised to deliver the
object.

When does this [the obligation to deliver fruits] actually take place? What period of time do you
account for the fruits? 3 situations: pure, suspensive period, suspensive condition.

If it is a pure obligation, then it is demandable at once therefore as a general rule: once you enter
the obligation it demands immediately. There are no fruits to account for, really, because you deliver
immediately.

GR in pure obligations: The delivery of the thing gives rise to the obligation to deliver fruits. During the
interim period of the demand and the delivery, the creditor has the personal right to the object, and to the
fruits.

When you are talking about a suspensive condition and a suspensive period there is a certain
interregnum from the time the obligation was entered into up to the time that you actually are required to
deliver. This is where you have to have the accounting for the fruits. What are the rules?

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In suspensive conditions [uncertain happening]: You are required to deliver fruits if it is a unilateral
obligation to deliver only from the time the condition is fulfilled. Which means that from today to the
time condition is fulfilled, you do not have an obligation yet; you do not have the obligation to account
for the fruits. When the condition happens, if you deliver it immediately, then there’s no need to account
for fruits because you do deliver immediately and all fruits after that belong to the creditor or obligee.

If it is something reciprocal in character, the obligation is reciprocal as in the case of contract of sale
buyers and sellers are mutually bound to deliver to each other, you have the provision that says that fruits
are mutually compensated. This means that regardless if peso per peso you, or each of the parties, don’t
have to make an accounting of the fruits. That’s mutually compensated and therefore there is no
obligation to deliver fruits, unless of course you delay delivery, which means the time the obligation to
deliver arises up to the time that you actually deliver, then you must account for the fruits because
technically that is already the property of the creditor but you did not deliver. But during the period where
you are waiting for the happening of the condition, if it’s mutual, it’s mutually compensated and therefore
there is no more obligations to deliver fruits.

In suspensive period [happening is certain]: There is still no agreement on this.

2 school of thoughts. There’s a school of thought that says that if it is a suspensive period, you follow the
same rule as a supsensive condition which means that you account for fruits only from the time the period
arises. The other school of thought says that you have an obligation from day one, the time the obligation
has perfected and therefore it is just the delivery that is supposed to be suspended therefore you have the
obligation from the date the obligation has been entered into. You have to distinguish that because in
suspensive condition you don’t know when you have an obligation because suspensive condition means
that is not certain when condition will happen. In the period it is certain that period would arise so the
argument for those pursue this line of thought is that from Day 1, you already had an obligation to deliver
and it is only suspended until the arrival of the period and therefore it should not be considered as the
same in the case of a suspensive condition. Take your pick. Whatever’s the school of thought you want to
follow.

Note: Dean Del follows that the obligation to deliver fruits arises from the time the obligation is
instituted.

On the issues of suspensive condition, I just want to mention that there are a number of cases
that had been decided by the Court that talks about contracts to sell versus contracts of sale. And I think
today after all of those decisions by the Court, including, of course, the most recent one which is the case
of Optimum Development Bank Case decided late December last year. The Court reiterated the position
that if it is a contract to sell, it is subject to a suspensive condition. And a suspensive condition is of
course the whole payment of the whole purchase price by the buyer. If it is a contract of sale, it is
considered as a resolutory condition which means that from the moment that there is a contract of sale,
you transfer immediate possession and ownership to the buyer but if he is not able to completely complete
his installment payments that is the happening of the resolutory condition, in which case the obligation
terminates.

The decision of the Court in the case of contracts to sell would be of course relevant because of the
application of Article 1191. Art. 1191 is that provision that talks about reciprocal obligations where the
remedy of resolution or cancellation is considered as implied. This means you are cancelling an already
existing obligation because, if you recall, 1191 is a remedy for breach. There’s no breach if there is no
obligation in the first place, so you don’t talk about resolutions or cancellation based on 1191 if your
contract is a contract to sell. Because if it is a contract to sell, it is subject to a suspensive condition. If the

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suspensive condition of full payment does not happen, there is no obligation that becomes effective. And
therefore there is nothing to resolve or cancel based on Article 1191.

Remedies for Breach of Obligation

Once you have an obligation and it is not performed in accordance with the terms of the
obligation, you do have what you call a breach. For lawyers and future lawyers, I guess the thing that you
have to be aware of is what do you do when clients come to you. There is a breach that is why clients are
coming to you. They know there is a breach, hence they ask what they can do. So you lay down the
options.

• Specific Performance
• Damages
• Substitute Performance
• Rescission/Cancellation

Specific Performance

Specific performance means you are requiring him to deliver or to perform the obligation, which
it has breached. This is something where you have something of confidence. In here, you ask the court to
compel the debtor to deliver the thing sibject of an obligation.

Let me make the analysis here. If you are seeking a remedy of specific performance, that means you still
have the confidence in your debtor that he can deliver or perform. Otherwise, you are going for
cancellation or resolution. You want him to do it. So there’s a specific performance and because he did
not do it on time, then you have of course the additional remedy of damages.

Does this apply to Obligations to Do or Not to Do? You might purposely see discussions about specific
peformances not being available in obligations to do. It’s not. It is still an available remedy in an
obligation to do but for most people it is not an effective remedy. If he has an obligation to perform a
certain service, if he has breached then that means he doesn’t want to do it. So a remedy of specific
performance will probably result in same thing with him saying, “I don’t want to do it.” So it is still a
remedy because it is possible that if he sues for specific performance because he knows that he will have
obligations and can be confirmed by a judicial judgment, he’ll probably just do it. But there is nothing in
the law that says that the remedy of specific performance must not apply to obligations to do or not to do.
It’s just that it is not an effective remedy.

Can this be availed with resolution or cancellation? Simulteneously, no. Specific performance versus
resolution or cancellation are two inconsistent provisions. So you choose. BUT successively, yes.

So you sue for specific performance and he fails to deliver or to perform you can shift gears and do
resolution or cancellation. You can either do it in the alternative. But as far as doing it the other way
around (cancellation then specific performance), that’s a little questionable. The moment you ask for the
decision or cancellation, you are cancelling the obligation. It means there is no more an obligation. It is
inconsistent with the remedy or resolution or cancellation because, as I said, in specific performance, you
ask the debtor to perform. In resolution or cancellation, you are asking that the obligation be cancelled,
that there must be mutual restitution between the parties. “Just cancel it, okay. And give me back
whatever I paid you.” I think you’ve done that in some of the instances in your life where you go to a

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tailor and he is not able to do it, cancel na lang. Give me back the money. That’s essentially what happens
in a resolution or cancellation.

Substitute Performance

In addition to those remedies, you know of course the damages can always be asked either alone
or together with any other remedies. The other remedies can be called substitute performance. This
pertains substitution of the person, not the obligations itself. Substitute performance means I want the
obligation to be done but I don’t think you can do it. So I will ask somebody else to do it and I will charge
you for that cause.

It is limited in application. Substitute performance is an available remedy except in certain instances:

• If it’s a prestation to give, then it is not applicable in an obligation to deliver specific objects.
Why? Because it’s one of a kind. Therefore, not anybody can just deliver that specific object.
• Obligation not to do. You can’t say “my friend will not do it” but “I will do it” – it’s personal.
When you say an obligation nothing to do and you impose it on the debtor, you don’t want the
debtor to do. I don’t care about the other people so you cannot say that I will now substitute
performance if it is not an obligation not to do.
• Personal obligations. That means, for example, you ask Marian Rivera to perform on stage and
the reason why you want her to do it because you are a fan of Marian Rivera. Obviously Karylle
cannot do it.

Resolution/Cancellation

The remedy of resolution and cancellation is something that is available, and it is implied in
reciprocal obligations, which means that you don’t have to agree on it but it doesn’t mean that it is not
available in obligations which are not reciprocal in character except that it is not reciprocal in character it
has to be agreed upon by the parties as to remedies in the event that there is a breach. The difference
between 1191, which is – you know, we talk legal here, we talk like lawyers here – 1191 involves
resolution or cancellation. A lot of people especially the layman would talk about rescission. But
rescission is different. It’s that which is found under the rescissible contract. We’d discuss that tomorrow
and based on Art. 1381 to 1384. It is not predicated on breach. It is predicated on economic prejudice
omission. But 1191 on resolution or cancellation is predicated on breach. You sue for resolution or
cancellation because the obligation has been breached. The wealth of jurisprudence will tell you that 1191
resolution or cancellation is an ultimate remedy. Therefore because it is an ultimate remedy, it is about
cancelling the obligation. Forget it! As my lola would say, “magsulian ng kandila.” Forget what we have
talked about what we talked about that’s why we’re cancelling. So it’s an ultimate remedy therefore it
requires substantial breach.

When you talk about substantial breach, you don’t talk about failing to pay few pesos or few
hundred pesos here and there. It’s not a case where, you know, he just forgot, to put, you know,
something to your gown, or whatever your outfit is. So it’s a question of whether there is a case of
substantial breach, obviously this is a case-to-case basis. This is factual as to whether there is a substantial
breach. If the breach is found to be slight, except when you are talking about obligations where time is of
the essence (when time is of the essence, any slight breach is considered substantial which will allow you
to ask resolution o cancellation). So if it’s not a case of substantial breach in a case where the case
considered slight based on the factual circumstances of the case, the remedy involved or allowed by the
courts generally is to just give you just an additional period to make up for the difference. Still you don’t
make up the difference within the additional period, and then it is the time the creditor or obligee to be
permitted to resolve or to cancel the obligation.

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What if it is only a slight breach? The courts would allow the breaching party to comply with the
obligation with additional time. If you fail to comply, then the obligation can be cancelled.

To give To do Not to do
Specific Performance Specific property- it is Technically, yes. But Cannot apply
not exactly prohibited, not effective since what
generally yes. Unless if ayaw nya talaga?
the property is not BUT it is not
available then you can involuntary servitude
compel specific since he agreed to do it
performance initially.

Generic- Yes
Damages Available Available Available
Substitute Performance Generic- always Generally, yes. Cannot apply
available. You can
always ask someone Except purely personal
else to do it. services (things that
only the specific debtor
Specific- No. If it is to do).
specific, then most
probably it is owned by
a speicifc personhence it
cannot be done by
anybody. (1165)

Recission/Cancellation Substantial breach only Available, if you think Cannot apply. You can
the debtor can no longer no longer cancel since
For reciprocal do the obligation. once it is breached, no
obligations, it is implied more obligation to
(1191), hence, it does cancel.
not need to be
stipulated. Remember that there is
a breach here if you do
If unilateral, it can only the thing you should not
be invoked if it is do.
stipulated.
In all cases, substantial
breach is needed.

However, for reciprocal

and time is of the
essence, a slight breach
can be considered
substantial breach.

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What then is Art. 1191? 1191 is a principle in action, a remedy that is undertaken or can be
invoked by a creditor or obligee whenever there is a substantial breach. I will, as far as, contract to sell
is concerned – I think we have discussed that - if it is a contract to sell, there is no resolution or
cancellation by reason of payment because non payment is condition of a suspensive condition for the
effectivity of that obligation. If it is not effective yet, there is no resolution of the cancellation to even
speak of it.

Causes of Breach
Dolo, Culpa, Fortuitous Events

When we talk about breach, what would be the natural consequence of the breach assuming of
course you have chose your remedy, and we determine how much the liability of the debtor or the obligor
who has committed the breach. You look at the different scales. Is this guy guilty of dolo? Or is he just
guilty of culpa? Or the reason why he was not able to perform is because there was a fortuitous event?
That is the scale, the pendulum swinging from one side to another. The one based on dolo is the worst-
case scenario. There is one based on culpa, the middle-ground, and there is one on fortuitous event in the
right wing corner. Whenever we talk about right, whoever is most conservative – he has no liability.

What is dolo? Dolo has not been defined as somebody who is scheming or a devil or a demon that
wants to inflict upon injury on you. It is dolo simply because there is awareness; there is knowledge of the
obligation and notwithstanding the knowledge and the awareness of this obligation he deliberately
breaches the obligation. Of course people are in bad faith are in the same boat because people in bad faith
must know they have an obligation and they just deliberately not perform the obligations as in the case of
dolo. What is the liability of a person guilty of dolo? He’s liable for all the consequences of his action
whether foreseen or unforeseen. Which means even if he did not foresee that you would lose a lot of
money because of unrealized profit, he will be liable for unrealized profit by reason of the dolo.

In the middle you have the case of the culpa and you all know that culpa means negligence. He is
not the bad kind, but he is the burara guy. He is the one who is disorganized and therefore forgets all his
obligations. It is just carelessness. It’s negligence. It’s not because he has intellectual awareness. It is
because he has forgotten that there are things he ought or could have foreseen. And therefore his liability
is limited to those consequences, which he ought or would have foreseen.

In a scale of things that is probably less guilty of dolo, all the right hand wing, you have the case
of the person who is prevented from performing as a result of fortuitous events.

Defense against Breach: Fortuitous Events

Fortuitous events as you all know are beyond the control of the debtor. Because it is beyond the
control of the debtor, he incurs no liability. The challenge is to determine whether this is a case of a
fortuitous event. There are of course elements. I always like the keyword: IFIN.
• It must be independent of the debtor’s will; it must be independent of human will (see
Metrocontrast case)
• F is because it is something that would not be foreseen or even if foreseen it is unavoidable;
• and the third one is the other I which must character that it renders it impossible for the debtor to
perform; it has to be a case where the event has been rendered beyond the power to perform which
means it becomes impossible for you to perform. Like you have to come to class a certain time but
you all know the condition of the roads – there’s a heavy downpour like yesterday and there are
floods. The reason you don’t arrive on time is because of the floods – that’s an example of a

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fortuitous event. That is why in those instances you are excused from the performance of an
obligation.
• the last one letter N there is no contributory negligence.

The most recent case of Metrocontrast vs. Allied Bank (not clear on the former) decided
December late last year, is a case involving fortuitous events. You have lots and lots of cases involving
fortuitous events. In this case, the only reason… the strange thing when the court in this case defined
fortuitous events, the first I which would normally would describe as something independent of the
debtor’s will, the court actually described it as independent of human will. It is a narrower concept of
fortuitous events whether it is intentional or not, I’d like to believe it is not. If you say independent of
human will, you are talking about acts of God. Certainly fortuitous events do not only involve acts of
God. It also involves acts of man, for as long as it is not the debtor and it is not something that he can
control. It talks about independent of the human act.

So what happened in this case? This is where the debtor who owes the bank a huge amount of money.
The bank assisted him. The bank said that you have to dispose some of your assets. The bank actually
participated in the negotiation and even approved a memorandum of agreement entered into by the debtor
with the prospective buyer. And the agreement is out of the proceeds of the sale, you will pay the bank. It
so happened that the buyer ______ (remained?) therefore the MOA was not fulfilled and the debtor did
not have money to pay the bank. So when the bank sued him for the payment of the obligation, he said,
that’s fortuitous events. I was supposed to go with the proceeds of the sale to pay you so therefore it is the
case of a fortuitous events therefore I should be excused from paying the obligation because I
participated. You even know the MOA and you approved the sale. Since he did not pay, then it is a case
of a fortuitous event.

The Court said this is not a case of a fortuitous event. Those are different contracts – the loan in the bank
and the MOA. Even if the bank had approved the MOA and we had even consented and encouraged the
MOA, the bank is not liable for the ________ of the obligation of the prospective buyer. The Courts said
that this is not something which is not independent of human will. You treat those two contracts
separately. They will not amount to fortuitous events so therefore you still have to pay the bank.

Over the years you have a lot of cases that dealt with fortuitous events signifying or involving
many significant events in our lives.

One was generated a lot of court cases involving fortuitous events was the Asian Financial Crisis of 1997.
So many cases. Most were real estate developers. We started with Phil Estate. There was of course Mega
World. And the other developers who invoked the Asian Financial Crisis as fortuitous events, which
excuse them from liability for failure to deliver the units which they have pre-sold. There was a time, I do
not know if you recall, a lot of these developers, and they still do pre-sell it today, if they are not able to
deliver, they have all these sort of excuses. The Asian Financial Crisis was a convenient excuse for them.
All of the cases the Court has decided: it is not fortuitous events. The Court has reasoned out in all of
these cases that it is not something which is considered unforeseen. It may be something which is drastic
because you have interest rates going up tremendously – exchange rates, peso plummeting down – but it
is not a case of an unforeseen event. And in fact, the Courts have cautioned and had told that developers,
you cannot use this as a fortuitous event because developers of real estate projects who are into pre-
selling are the masters of projections. You do a lot of financial projection when you build the
condominium of many stories high, you know exactly how much the cost of money is and how much the
exchange rate is, so you cannot claim that this is a case of a fortuitous event because they are, of course,
masters of currency projections. That was what the Court has said.

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The other case, which has generated a lot of cases, would be the Martial Law. You have a lot of those
cases from the Free Press to the Solid Bank, etc., where debtors have used the Martial Law regime as an
excuse for not paying that obligation. The Court again consistently, with no exception to this, has said
that Martial Law is not a fortuitous event with respect to those persons who have monetary obligations
especially to banking institutions. They are not directly affected. It is not, you know, the Marcos Regime
has confiscated your property therefore you are unable to pay. You still have an obligation and you cannot
use Martial Law as a fortuitous event.

The end which I always to cite is the Victoria Milling case where you have an obligation that extends
over a certain period, say, in the 10 year period. In the middle of the ten-year period, say, where you have
one or two years where you weren’t able to deliver because your plan burned out. This is the case where
they have to deliver to Victoria Miling, you know, those cases, which were made of wood before.
Because the plan burned down for a certain period within the 10-year period, they were not able to
deliver. What does the creditor or the obligee do? He says that because you were unable to deliver for two
years, then we should extend to a period for another two years so you deliver for two more years. Court
said: No. Because when you are excused from a performance within a certain two-year event because of
fortuitous event, you are excused from performance. It will not amount to extending the period of
obligation because in fortuitous events, you do not have an obligation – you are excused from the
performance of an obligation.

In Tagaytay Realty Case, “increased cost of materials” is not a fortuitous event since it is something
unforeseen especially if you’re in a business which often deals with these materials.

Usurious Transactions (Art. 1177)

Usurious transactions cannot take place today because now, there is no maximum interest
imposed by law/BSP. Usurious transaction means imposing interest beyond that imposed by law. But,
there is no reason for the BSP to not impose a maximum interest in the future.

Kinds of Obligations

As far as obligations are concerned, you talk about the different kinds of obligations. Let’s do the
classification. You have pure, you have conditional, and you have a period. Then you classify conditional
obligation and obligations with a period to suspensive and resolutory, and then you classify the conditions
and the period to that which is purely potestative, casual and mix. It is a combination of all these different
facts.

Pure
Pure means no conditions, no terms, no if’s, no but’s. The moment you entered to the obligation,
theoretically the very next second, the creditor can demand payment because it is something payable on
the dot (demandable upon the constitution of the obligation). In lost cases, you don’t talk about accessory
obligations. You pay the moment there is a demand.

*But not only pure obligations are demandable at once. i.e. Resolutory conditions.

11
  

Conditional

You talk about conditional obligations and what do you have under the law? It is conditional if
your obligation is dependent on the happening of a future and certain events. Those two words must come
together – future AND uncertain. Any combination that does not result in future and uncertain will give
you a period.

With a Period

In the case of a period, the period is of course something where there is the happening of a
certain… where you can demand the fulfillment of an obligation. What does “certain” mean? It can mean
that it is something that is sure to happen. So therefore, even when you don’t know that it will happen,
even if you talk about combining future but you combine it with certainty, it is a period.

Then you have the case of the something that is not future, so that means that it is a past event. If
it is a past event, and it is uncertain, it is also a period because something in the past cannot be a condition
and what is this past event that can be uncertain? The past event of course is something that has already
happened and therefore it cannot be the future but the parties do not know of it. The uncertainty is not in
the happening in the condition. The uncertainty is in the knowledge of the parties. Those two instances
where you don’t have the complete combination of being future plus certain always falls back to a period
which means it is future but it is certain in most _______ (mumbles) but as sure as the sun sets at night, or
you know, as sure as death comes in a future time even you don’t know when it will come – that’s a
period. If it is something that has happened in the past, it is a past event but unknown to the parties, then it
is considered as a period.

Many will forget and I hope you don’t, that there is a third kind of obligations within a period.
This is the obligation which is payable when able. (Art. 1180) When your friend borrows money, “Pare,
babayaran kita pag nagkatrabaho ako.” These are the payable ables. Having a job is not a condition. If
your friend borrows money and say he will pay you when he has the means has to do so, payable when
able, when he gets his job, that is not considered as a condition, but is considered as a period. Which
means that you cannot determine exactly when the period comes, you go to Court and the Court will fix
the period for you. (Art. 1197)

Suspensive and Resolutory

A condition suspends but does not obligate. A period is sure to happen; there is suspension but it
is something that is sure to happen. As far as suspensive condition is concerned, the happening is the one
that gives rise to the efficacy of the obligation. It suspends the obligation. If it is a resolutory condition, it
is effective immediately but can terminate at some future time upon the happening of some uncertain
event. It is possible that your obligation can continue forever and ever if the condition does not happen.

In the case of the resolutory period, or the suspensive period, what is the difference? If it is a
suspensive period, you know exactly why there is a fine line when obligation becomes demandable. It is
sure that you will have an obligation, but it may not be to your certainty as to when it will exactly happen
– but it will happen. As the sun sets during the night, it will happen. It is a certain event and therefore and
it is sure to happen. In the case of a resolutory period, it is also immediately demandable.

What is the difference between that and the resolutory condition? The resolutory condition, you don’t
know whether it will all terminate. If it is a resolutory period, you know at some future time your

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agonies will end. Your obligation is finite. It has an end. It will terminate upon the arrival of the
resolutory period.

Potestative, Casual, Mix

If it is a suspensive condition, it can be potestative, casual or mix.

As far as potestative is concerned, it is dependent on solely on the will of one of the parties
whether the debtor or the creditor or the obligor. It is considered as casual if it is dependent on the will of
the third person or if dependent on chance. Certainly not on the parties. Anyone who is not a party is a
third person. If it is a mixed condition when of course it has the combination of either protestative on the
part of either party and combined with either the will of a third person or combined with chance or a
computation of all three. Just as the key, you can do all sorts of combination.

The only one you must keep away from is the combination that it is purely potestative on the part
of the debtor and it is a suspensive condition (purely potestative + on the part of a debtor + suspensive).
What is the effect? Both obligation and condition are considered as void. Conclusion: there is no
obligation.

If the obligation provides that it can be terminated through notice, there is nothing legally wrong even if
the notice is dependent on the debtor. Likewise, if a lessee, in a lessor-lessee obligation, can terminate the
lease by giving a notice 30 days before it becomes effective, such is not void.

Can you have a potestative resolutory condition? Yes.

Illegal, Immoral, Impossible Conditions

GR: The parties can stipulate whatever condition.

Exception: Triple I (Immoral, Illegal, Impossible)

What is the effect? Will it be void? It will depend on whether your obligation is postivie or
negative. Positive if is it is an obligation to give or to do. Negative if not to give or not to do.

If positive, then there is a Triple I condition, then both obligation and condition is void. But an exception
to this is a gratuitous obligation. For example, donation with an illegal condition. In this case, only the
condition is void, not the obligation.

If negative obligation, and there is triple I condition, the condition is deemed not to exist. The obligation
subsists.

Condition Coupled with a Term

This is a condition which must happen within a certain period. The legal effects of such condition
will depend on whether or not the condition is positive or negative.

An example of a positive condition is, “I will give you 1M if you pass the bar in 2 years,” where the
period is for the fulfillment of the condition. “I will buy your land if your are able to obtain the title
within 1 year.”

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If the condition is fulfilled before the end of the stipulated period, then obligation arises. But if the period
lapses without the condition happening, then the obligation is extinguished. Likewise, if you are certain
that the condition will not happen, for example, the government takes over the property within the 1 year
period, then the obligation is extinguished, as well.

Provisions that may apply during the period between the institution of the obligation and the
condition/period (1189 and 1169)

When thing is lost/deteriorates/improves before condition is fulfilled (1189)

Art. 1189 only applies to obligation to give specific things. This cannot apply to generic things
because loss of the thing does not prevent the fulfillment of the obligation. It does not apply also to
obligations to do/not to do because in these cases, it is up to the court to decide on what to do with the
obligation.

Note: The liability that may be incurred by the debtor under 1189 can only be enforced if the condition
indeed happens.

Loss Impairment Improvement

Debtor’s If debtor’s fault that it is
fault completely lost, the debtor
must pay damages.
Damages is equal to the
value of the thing sold plus
other additional damages on
the creditor. Why damages?
Well, if specific
performance/substitute
performance, these remedies
are not effective since there
is nothing to give.
The creditor has the option
to accept the impaired thing
or not.
He may ask for specific
performance and damages,
or rescission plus damages.
If debtor improves it, the
debtor only has usufructuary
rights to the improvement,
meaning the debtor can use
such improvements before the
condition happens.
He is obliged to deliver the
improvements with the thing
but he can remove such
improvements if thing will not
be damaged.
Note that he is not entitled to
payment of expenses used for
improvements.

Creditor’ If lost due to creditor, then If impaired due to creditor,

s fault that means the creditor then he has no choice but to
prevented the fulfillment of accept the thing in its
the obligation. This results to impaired condition.
the release of debtor of his
obligation. (constructive
fulfillment)

Neither If due to fortuitous event, If due to nature/time, the If the improvement is not due
then the obligation is impairment is borne by the to the debtor or the creditor,
extinguished. creditor. then it inures to benefit of the
creditor.

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The liabilities under 1189 is totally distinct from other liabilities that the creditor may be liable
for in case of destruction of property during the time that the condition has not happened yet. At this time,
the debtor is still the owner.

The responsibility under 1189 exists because the debtor has the responsibility to take care of the
thing before the condition is fulfilled. Once the condition is fulfilled, the obligation retroacts to the time
of the institution of the obligation. Thus, the debtor cannot raise the defense that the obligation is
suspended during the time of the loss/impairment.

Exceptions to Retroactivity Rule

1. Fruits in Suspensive Condition (1187)
2. Prescription: If subject to prescription, the cause accrues only from the time that the condition is
fulfilled, hence, it is an exeption to the rule of retroactivity.

Now, if retroactivity cannot be used for fruits and prescription, then what is the use of Art. 1187? It is
precisely for 1189.

Do you apply 1189 to resolutory obligations? Yes. Hence, during the time that you have the
thing until the time that you have to return the specific thing, you are also obliged to take care of the
thing. If you fail to do such, 1189 applies.

When in Default (Art. 1169)

So as far as any of these obligations are concerned, whether pure, conditional, with a term or with
a period, what makes the debtor in default doesn’t matter whether you have pure or conditional or
obligations with a period. The general rule is you incurred default and this is relevant of course when
having to pay for penalties and interest, you incur in default as a general rule only when there is a
demand. For conditional obligations and obligations with a period, that demand can be made by the
creditor only after the happening of the condition or the arrival of the term. Any demand before then
would be considered as a premature demand and void and you can totally disregard it because it does not
place you in default.

There are exceptions when demand is not necessary to place you in default (1169):

One is when you talk about a stipulation or a law that says demand is not necessary. For
stipulations, you know, anything, it doesn’t have to come to any particular word for as long as it conveys
the principle that demand is not necessary to place you in default. You have to spot all those different
terms for which lawyers craft. Demand not necessary. Demand waived. And so forth and so on. When it
comes to provisions of law, you also have to watch out. I don’t think provisions of law would say demand
is not necessary. They just slap you with penalties immediately if you don’t fulfill your obligations on the
time it is due. Take your tax law. If you don’t pay taxes on April 15, tax laws will not say demand is not
necessary. It simply says that if you don’t pay on April 15, you have a 25 percent surcharge or 25 percent
interest. What does that mean? That means that demand is not necessary. Government has not issued a
demand for you to pay taxes. Never will they issue that demand, but the moment you fail to pay on a due
date, and there is an immediately a slapping of penalty or interest, then it means demand is not necessary.

Another is in those instances when time is of the essence. I want you to distinguish this from the
first one. You will see a lot of contracts where the lawyers will say time is of the essence. So what does
that mean? Does that fall under number 1? Or does it fall under number 2? The moment you stipulate that

15
  

demand is not necessary, or that time is of the essence which means that demand is not necessary, it falls
under number 1. It is in number 2 where you talk strictly about time being of the essence, that means that
there are no unwritten or spoken words. It is based on the nature of obligations where parties pursue that it
is not necessary to make their demand because you know exactly when that obligation must be fulfilled. I
always like to use the example of the wedding gown. You go to your couturier. My wedding is on
October 15. Obviously I don’t have to make a demand for you to deliver to me before Oct 15 because you
know by the nature of the obligation that time is of the essence so this is something where there is no
stipulations because if there are you just use number 1. The second one will talk about, of course, the turn
to determine based on the factual milieu of its case. The facts and conditions really point to the fact that
demand is not necessary.

As far as the third one is concerned, this is when the Court has said and of course the law
confirms this, that demand would be useless because it has rendered it beyond debtor to perform. In that
Megaworld case, the Court has actually said that in the case of the developers who were not able to
construct the units as they promised, the Courts said that the demand is not necessary. Why? Because
these developers never even constructed the units so it is not within their power to perform and therefore
demand is not necessary to place them in default.

Obligations with a Period: When debtor loses the benefit of period

In so far as obligations to the period is concerned, you all know the rule. The basic rule:
whenever there is a period, the period is for the benefit of the debtors and creditors. The debtor
cannot be compelled to pay before the arrival of the period. The creditor cannot collect before the arrival
of the period, and demand before the arrival period is considered as a premature demand. Of course as far
as the debtor is concerned, if he wants to pay before that and the creditor wants to accept, there nothing
wrong with that. Certainly what is prohibited is when the creditor to insist the debtor pay before the
arrival of the term. Conversely, debtors cannot also compel creditors to accept their payment before their
term arrives. But as a matter of law, you cannot compel him to accept payment before arrival even when
you are willing to pay the interest for the rest of the remaining period. He just didn’t say no because the
law says the right to refuse. He is right, therefore he cannot be compelled to accept payment.

So as far as giving the benefit of the period is concerned, you have the principle in law that allows
the parties, or the law, to give the benefit of the period either to debtor or creditor. It is not useful to give
the benefit of the period to the creditor because why will the debtor agree that, you know, collect for me
even before the arrival of the period? However if it is voluntary agreed upon and you have that in a lot of
the lease contracts where some of the lessors would say, “If my children get married, and you need the
apartment, then you can terminate their lease”. This is for the benefit of the creditor. As you said, this is
not useful. In this case, the creditor can demand the payment from the debtor before the arrival of
the period.

In many cases, the benefit of the period is of course granted to their debtor. Any statement that
says payable on or before, payable within, payable not later than – those are indications that the benefit of
the period is granted to the debtor. Why is the benefit granted to debtor? Because the debtor can now pay
even before the arrival of the period, but he cannot be compelled to pay before the arrival of the period. It
is on or before; it is within not later than; this means he can pay before the arrival of the period. Certainly
he cannot be compelled to pay before the arrival of the period. You will not see any provision in the Code
that talks about the creditor losing the benefit of the period simply because there is no consequence if he
loses the benefit of the period. He simply has to wait out. There is a specific provision in the Code that
talks about the debtor about losing the benefit of the period. That provision will not apply whether or not
he has the benefit of the period or you’re using the general provision that it is both for the benefit of the

16
  

debtors and creditors. In each case, the effect is the same. The debtor will be compelled to pay even
before the arrival of the period. If it is a case of an installment, same, he will be required to pay the full
amount without of course granting him the benefit of having to do it in certain periods of amortizations or
installments. Whenever you see the term accelerating the period, it only means that the debtor must now
pay and cannot wait for the arrival of the period.

So you have all these provisions.

Very briefly, the first one is when the debtor becomes insolvent. This is putting salt into injury.
Why do you make the period…why do you cut out the debtor’s period if he becomes insolvent? Not so
much because you want to put more misery on the hands of the debtor. He remains insolvent, then you
want him to pay for the arrival of the period. The only reason for this is the provision is essentially a
creditor-friendly provision. You are protecting the creditors because whenever a person becomes
insolvent, especially in a town like in Manila, where everybody talks about who is defaulting their
obligations, you will see that all these vultures will stick down or stoop down on debtors who are of
course proud to be insolvent, so everybody will now try to have the piece of the carcass - whichever is left
of your assets. If you have a period and you have to wait out the period, you’ll get bones at the end of
that, everybody else will attach to the properties of the debtors. That’s the reason why period is
accelerated unless of course it is secured, the creditor with the period is protected by the security. In
these cases, you don’t need to go into insolvency proceedings if you have security. You can just wait out
the period.

The two next provisions talk about security. One, if you have promised to deliver security and
you did not furnish the security, then the creditor is entitled to collect immediately. This is not even a case
where the debtor can substitute.

The next one talks about security also. But that involves an obligation that has been created or
security has been perfected. That after the security has been perfected, the security is either impaired due
to the fault of the debtor or completely lost due to fortuitous events in which case the creditor can
accelerate the period unless the debtor is able to come up with a substitute security of the same kind
or the same quality.

I hope you know the difference between the two (2) and (3). In the second one, there is in fact
security that has been established. You know the difference if the security is impaired. Mere impairment
because of the fault of the debtor – you accelerate the period. In the case of the fortuitous event, it has to
be a case of total loss before the creditor can accelerate the period because that’s not something within
the control of the debtor. For the first one, the security is not yet established. You have violation of any
undertaking because you promise to do something in consideration of the period and that’s a cause for
accelerating.

And in the case where the debtor attempts to abscond. You know what absconding means? I
mean this is something you take up also in remedial law. Absconding means when a debtor flees and the
reason why his fleeing is because he wants to evade his responsibility under his obligations. So this is the
mere attempt. Do not wait until he has actually absconded because you have nothing to recover at that
point in time. Any indication, and you use remedial law provision on indications of when a debtor
attempts to abscond, like he has sold his properties, booked one way tickets, so in that point in time, you
can accelerate the payment of the obligation because if you wait longer, he will not be there to pay your
obligation.

17
  

The last one is based on contractual agreements. When there is an acceleration clause. This
only happens when you talk about installments. Failure to pay two or more installments is a cause of
accelerating the payment and that is because of contractual stipulation.

In these cases, the consequence is the full obligations becomes due and demandable.

Fixing a Period (Art. 1197)

GR: The paries stipulate the period.

Exception: The court will fix the period.
• Parties did not fix a period, but it can be shown that the parties intended to have a period. The
Court here merely interprets the intention of the parties as to what period is intended.
• When the period depends upon the will of the debtor.

Multiple Obligations

Multiple Prestations: Conjunctive, Alternative and Facultative

So let’s talk about obligations, which are considered as multiple. We have multiple obligations
either because there are multiple prestations or because there are multiple parties. When you talk about
multiple perstations, what do you have? You have what we call the conjunctive obligations. We have the
alternative. Then you have the facultative.

Conjunctive simply means you have several prestations and all of them are to be delivered
before the obligation is extinguished. You do one and you don’t the other – you have not fulfilled your
obligations – you are still in breach of your obligation. The principle is that it is indivisibilible, it is in the
completeness in the several things you have to do all or deliver all or perform all before the obligation
can be extinguished.

Alternative means there are several choices. You choose a new one and that will extinguish the
obligation. Okay, what’s the rule with respect to the alternative obligations? Alternative obligations - if
there is nothing stipulated then your default provision is that the choice is with the debtor. If you want to
give the choice to the creditor, then there has to be stipulation that the creditor has the right to make a
choice.

So very briefly, what are the rules in alternative obligations?

There are several alternatives. And you don’t know at the beginning which one is due. Remember not all
of them is due; only one of them is due. It is the debtor who has the right to make the choice. This is a
right granted to him and all he does is to notify the creditor. The moment he notifies the creditor, the
choices has been made, then that is the obligation. The creditor cannot object to it, unless the right of
choice is given to the creditor, then he simply he has to wait for the creditor to make the decision once it
has been made then it is irrevocable – that becomes the principal obligation. No more choices for that
point in time.

If the debtor who has the right to make a choice does not make the choice, the rule is that the creditor
merely proposes. The creditor has no right unless it is given to him so his only right is to propose, which
means he will say: “I will apply” or “I will make this choice.” Okay? And if that is accepted by the
debtor, then it is the debtor who actually has the choice. It is only a suggestion or choice that has been

18
  

given or suggested by the creditor. And if there is none, then of course this is something that can be, of
course, delivered on the basis of what he actually gives and accepted by the creditor, or if the creditor
issues a receipt and say, this is it, then a final choice has been made, and once a final choice has been
made, then it can no longer be changed. The case of a third person being given the choice - is it possible
for you to give it to a third person? They usually give it to an expert. Yes it can be done as long as the
person agrees and the moment the third person makes the choice and notifies the debtor. That’s it. No
more changing at that point of time because it ceases to be an alternative obligation at that point.

The right of the debtor/creditor to choose is not a matter of consent--- but of notification.

Rules on loss before the choice is made

If creditor has the right of choice (1205)

1. if one is lost due to debtor – claim from those subsisting or the price of that destroyes + damages
2. everything is destroyed due to debtor – may claim the price of any of those destroed + damahes
3. if some is lost is due to creditor – then he can choose from the remaining
4. if everything is lost due to creditor – debtor is released from obligation (1202)
5. fortuitous event and all are lost – extinguished

**note here the creditor can still choose those that have been destroyed due to the fault of debtor by
claiming the price

debtor’s choice
1. if debtor lost/destroyed some – D can choose from remaining
2. if debtor lost everything – damages?**
3. fortuitous event and some remain – D can choose from remaining
4. FE and lost everyrthing –extinguised
5. If one thing remains, it becomes a pure obligation, hence, if that last thing is destroyed, then
the besis of the damages is the value of the last thing that was destroyed.

If it is something that is considered as facultative, then you have a principal obligation, then what
you call as substitutes. This is not something where you have different choices to be made. If it is faculty
here, there is a principal and there is a substitute. The only person who can make the substitution is the
debtor. It is not possible to give this to the creditor. (no matter the stipulation is—such stipulation is
invalid.)If the debtor does not make any substitution, then it is the principal obligation that is due if he
decides to make the substation, he has to do this before he delivers the principal obligation then you
elevate the substitute at the level of the principal and that becomes the only obligation.(Anytime before
the obligation is extinguished)

1. The loss of the principal here due to FE extinguished the O. The creditor cannot compel the
delivery of the substitutes.
2. If the principal is lost due to debtor – the D is liable to pay damages based on the thing lost
3. If the principal is lost due to C – C prevented D to perform the O. Debtor is released.
4. If substitute is lost before the substitution is done – no effect

Multiple Parties: Joint and Solidary

What is important is talking about multiple parties. When talking about multiple parties, you have
the side of the debtor or side of creditor two or more people. It could be two debtors, one creditor, two
creditors, one debtor, two or more debtors or two or more creditors.

19
  

What then is the classification of the obligation in these cases because of multiplicity? You have
classification based on the liability of the parties because obviously all those are creditors and debtors and
the liability is one you look at. It can either be a joint obligation or a case of a solidary obligation. One is
the liability side, which is the side of the debtors. Another is the credit side, which is that of the creditors.

When we talk about joint or solidary, we talk about joint and solidary credit. It is the right of the
creditors to collect. The default provision in the absence of a stipulation or any provision of law, there is
the case of the joint obligation or a joint credit the moment you see two or more names in either or both
sides. In the case of joint obligation/joint credits, you just divide the obligation into as many number
of joint debtors and as many number of joint creditors that there are. It's sharing is generally equal
unless there is a stipulation on how much sharing would be in so far each of the debtors are concerned. In
joint obligation, debtors do not care about what happens to the rest. He only cares for his share. For all he
knows, all the other joint debtors can buy the insolvent. He will not be required bother to care for them.
This is the insensitive part in becoming a joint debtor.

On the side of the joint creditor, again, I don't care if you were able to collect your share or not. I
am only going to collect my share and when I've collected my share, it's bye-bye everybody! So as far as
joint debtors and joint creditors are concerned, you know, you don't even have to look out for the rest but
only for your share. So the rule in the case of the joint debtor, the relationship is only made to pay for my
share. No matter what happens with the rest of the world or of the joint debtors, I don't care! They can
become insane, they can become insolvent, I am shielded. Blinders. I can only be required to pay for my
share. If it's a joint credit, then, again, when I collect my share, I can walk out, forget the rest of the world,
and that is already considered as sufficient.

In the case that you want a solidary obligation, don't be silent. Because solidary obligation either
requires a stipulation or it may fall under in any of the instances when the law provides for solidary
liability like in the case of the engineer, the contractor, and the architect in a building. They are all
solidarily bound. But other than that, you have to make a stipulation and a decree. That is in the case of a
solidary liability or solidary credit.

I always like the Ronquillo Case. It is an old case but it gives you all the terms to indicate a
solidary obligation. The most common are jointly and severally. Be careful with the terms. When you use
individually and collectively together, that's a solidary obligation. When you use individually alone----
solidary obligation. When you use collectively alone---- solidary obligation. When you use separately----
solidary obligation. When you use distinctly---- solidary obligation. Then you have a negotiable
instrument where you promise to pay in a promissory note and you have several names signing under the
word "I," that's a solidary obligation. So be careful with the words you use because any of those words
can denote for a solidary obligation. If you want a joint obligation, don't say anything. The moment is
silent and it is considered a joint obligation.

As far as the solidary debtors and creditors, what is the basic rule? If you are a solidary debtor,
you can be made to pay the full amount of the obligation. If you are a solidary creditor, you can collect
the full amount of the obligation. Whatever you pay or collect is not all yours because the moment you
pay for the full amount of the obligation, you can turn around and collect the pro-rated share of the
solidary debtors. In case of the creditors, you collect the full amount. The obligation of the solidary
creditor is to distribute the pro-rated share of the other solidary creditors.

They are in a solidary liability or solidary credit situation but once the obligation is fully paid, end
of story. And then the next phase begins. A solidary debtor who pays will be entitled to collect the pro-

20
  

rata share of the other solidary debtors. At that point, it's as if they are joint debtors because you divide
the shares of the others into whatever is the agreement or if none, the one that is equal to the solidary
debtors. At that point, they are like joint debtors except for one thing: when one of the solidary debtors is
insolvent and cannot pay for his share, of course it's unfair for the solidary debtor who paid the full
amount of the obligation if he cannot collect from this one. So this is the scenario that is not in the nature
of a joint obligation because in that point in time, all the solidary debtors will have to contribute to the
share of the insolvent debtor. As far as the creditors are concerned, the creditors must, of course, defer to
whoever collects the full amount of the obligation; he must deliver the pro-rata share of the others.

In the case of the Heirs of Franco vs. Spouses Gonzales, decided in late 2012, the Court has
ruled – and this is a classic ruling – that if the debtors liability is joint and solidary, the creditor has the
right to choose which among the solidary debtors he wants to pursue against. The choices are entirely his.
There are no rules for this. He can make them chop chop and collect a portion here and a portion there
and collect any amount from any of the solidary debtors. The only rule that he has to follow is that the
moment he has collected the full amount of the obligation, he has to stop. He does not have to follow
equal sharing among the solidary debtors. He does not have to follow the sharing among the solidary
debtors because he can collect the full amount from any of the solidary debtors. But once it’s collected in
full - end of story. He can no longer sue any of the solidary debtors. He may change his mind, if he wants
to. As long as he does not collect, he can shift to the other. He can be as fickle minded as he wants. You
reverse it when it’s the case of the solidary credit when you have creditors who are solidarily bound. The
debtor or debtors must honor the first demand made by one of the solidary creditors. You don’t pay to any
other creditor except to the person who first who made the demand; otherwise, you’ll make an erroneous
pay.

As far as the creditor is concerned, in the case of the solidary debtors, he can pick and he can
change his manner for anytime for as long as he has not yet able to collect the full amount of the
obligation. He may sue one and if decides he doesn’t want because he has no money; he may sue the
other one. As long as he does not collect the full amount here, he may shift efforts and go against the
others solidary debtors. But in the case of solidary credit, you as a debtor are obligated to pay to the
creditor who has made the first demand and if you pay to other creditors who are not the first person to
make the demand, then that is erroneous payment.

Notes:
Solidary obligation

Claiming from a deceased solidary debtor can also be done, but as long as it is within the prescriptive
period (2 years) for claiming of estate. If PP has lapsed, claim from the other debtor.

BUT, if you are a soldiary debtor and you already paid the debt, and one solidary debtor died… you can
claim from the estate as long as it is within the PP. But if PP already lapsed, can you claim from other
solidary debtors like that in the case of insolvency? NO. because no law/provision provides for such.

Read the Ronquillo case.

It is okay to proivde a stipulation that states that one crediot can only collect. If you pay to other creditors,
erroneous payment.

If no stiplation, the creditor who makes the demand is entitled to payment. Otherwise, errouneous
payment. (So creditors compete with each other)

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Active Solidarity- on the part of the creditor

Passive Solidarity – on the part of the debtor

Solidary Defenses

1. from the obligation himself, complete defense

-prescription, extinguished, payment
– it completely exonerates you, it is a
-the other solidary debtors would likewise be released from the obligation

2. not from the obligation (personal defenses), partial defense

-consent was vitiated, Art. 1211 (when debtors are covered by different conditions). In art. 1211, if your
period has not arrive, you can raise the defense of the term, hence you can not pay your share yet. BUT, if
your co-debtor’s condition is already due, you cannot raise the defense of period. You will pay the whole
obligation less your share.
-in these cases, you can share the personal defenses of your other co-debtors
-only those persons whose consent was vitiated/incapacitated can raise the defense
-hence, they are the ones who will be exonerated, others will still pay

After extinguishment – REIMBURSEMENT FROM CO-DEBTORS

Payment – yes you can reimburse

Exception: illegal, prescribed, cause of breach
Novation: You can reimburse based on the the novated terms. So if discounted, the discounted amount
Compenation, Confusion: You can still reimburse cause technically you still paid
Condonation: no reimbursement cause that’s unjust enrichment

Solidary Debtor vs. Surety

Many times there has been confusion as to whether you are a solidary debtor or a surety. The
features of the solidary debtor and the surety are sometimes very difficult to distinguish from the other.
So what’s the distinction between a solidary debtor and a surety? A solidary debtor is a principal debtor.
He is principal together with the rest of the other solidary debtors. There are on equal footing; not one is
not ahead of the other because they are all principal debtors. A surety is not a principal debtor. A surety’s
liability is only subsidiary in character so that means there is somebody ahead or on top of him which is
the principal debtor. In the case of the surety, his liability is conditioned on the principal debtor not
paying the obligation. There’s no exclusion here because he is not a guarantor, he is a surety he pays
whenever the principal does not pay. In the case of the principal debtor pays whenever there is a suit or a
demand because he can be made to pay the full amount the full obligation. If the solidary debtor pays, his
next step is to turn around and collect the prorate (?) the shares of others less his share – because he has a
share.

The case of the surety, he turns around and collects the full amount of the obligation from the principal
debtor because he is just a surety. He is not a debtor. So the only guarantees are the payment (the moment
he pays and turns around and collects from the principal debtor).

And of course when you talk about solidary debtor, any extension of time is totally irrelevant for him. If
the creditor extends the period for payment of another solidary debtor, it doesn’t mean that he benefits
from the extension. He can still be made to pay the full amount of obligation. But the case of the surety

22
  

you all know that the principal is the extension of time granted by the creditor to the principal debtor
releases the surety from any obligation if the extension of time is made without his consent.

And the last, the case of the solidary debtor, of course can be made the full account of the obligation but
as a surety he can certainly limit his liability and can even be less than the obligation of the principal
debtor.

There have been a few cases decided recently on the basis of the liability of a surety. We’ll take
up some of them. This is with respect to the extension of time.

In case of Tidcor vs. Asia Faces Corporation decided in February early this year, the Court has
actually taken into account the fact that if you’re talking about any extension of time to release a surety, it
has to be an extension of time granted by the creditor to the principal debtor without the consent of the
surety. It is between the creditor and the debtor, and the creditor says, you principal debtor you can pay
me next month. If this is not with the consent of the surety, the surety is released from all obligations.

In case of Tidcor, the creditor extended the time for payment of Tidcor and Tidcor was not the principal
debtor. Tidcor in fact guaranteed or issued a letter of guarantee, guaranteeing the surety bonds issued to
secure the payment of the obligation of the principal debtor. The court said, “you are not a principal
debtor”. “You are only guaranteeing the surety bonds. He is not a surety. But he guarantees the surety
bonds. Therefore, even if there is an extension of time granted to you, it doesn’t benefit the person who
issued the surety bonds, but because this is not an extension of time granted between the creditor and the
principal debtor.

The other case which is more recent which is the case Satellite Networks vs. UCPB Insurance. In
this case, what was the issue? There was a surety and of course the surety guaranteed the payment of the
principal obligation. What happened is that of course when the principal debtor cannot pay, the creditor
proceeded against the surety. The surety however was told by the principal debtor not to pay. Why?
Because the loan that he guaranteed or was a surety of, said that in case of disagreement, the parties
should proceed to arbitration first. What surety involved is you cannot sue me directly because there is an
arbitration clause between you and the principal debtor and you have not proceedd to arbitration before
going after me.

This is where the Court discussed what it called the complementarity contracts consumed together
principle. This is a complementary contract construed together principle, which according to the Court
means that if it is an accessory contract, it is considered as part of the principal obligation. The Court then
proceeded to dissect this and said that this is not applicable to the case of surety agreements. In the case of
surety agreements, you have a contract, an obligation as a surety, directly to the creditor. Yours is not an
accessory contract. It is another a contract where you guaranteed obligation of a principal debtor. You
have no right to participate in the terms and conditions of the principal obligation because you are not a
party to the contract. You have a different contract that you guarantee the obligation of another person
directly with a creditor. Therefore when there is an arbitration procedure, arbitrational agreement in the
principal debt, you cannot benefit from that. The Court insisted that in the case of a surety before making
a demand or collecting against the principal debtor, it is possible for creditor to go against the surety
because this is separate contract, this is a direct obligation of the surety to the creditor and even if the
reason why he did not pay is because the principal debtor not to pay. It is not an excuse from his liability
because not being a party to the principal contract; he cannot make any referral to arbitration. Only a
party to the contract can do that.

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Solidary Debtor Surety

1. Principal debtor Liability is subsidiary; can be made to pay only
when principal debtor does not pay
2. pays for full amount and seeks reimbursement of If he pays the full amount, recover the FULL
share of other solidary debtors amount from principal debtors
3. Extension of time grnted to other solidary Extension of time granted by the creditor to
debtors w/o his consent does not release him principal debtor w/o his consent releases him
4. can be made to pay the full amount Can bind himself for less than amount of the
obligation

Extinguishment of Obligations

So those are the things you probably will have to consider in the case of solidary obligations. Let
me go of course to the grounds for the termination or the extinguishment of an obligation.

There are several grounds provided under the Code. Remember this is not exclusive: payment
performance, loss of thing due, compensation, confusion, and you have the case of ______ (?). There are
other grounds for termination, like mutual desistance, happening of a resolutory condition, and there other
laws provide for extinguishment of specific kinds of obligations. So these are just the main kinds of
extinguishment of an obligation.

We start with the big one: the payment or performance. Any lawyer would tell you that
payment does not only mean that you are going to deliver money to your creditor. Monetary obligation is
one aspect of any obligation obtained or performed. Payment of performance involve delivery or payment
of money, or delivery of the object which is the object of the communication, and then of course can
involve performance of certain services.

Let’s talk about the rules on payment.

Basic principles of Payment or Performance

If you read the case of Alonzo vs. San Juan which was decided in the late 2010’s, the Court has
actually laid down the basic principles of payment of performance. Just two things. It talks about identity
and integrity. Some of the commentators would add the third one which is the indivisibility. In the Alonzo
case, it limits it to two and includes the indivisibility together with the principle of integrity.

The principle of identity simply means that the same thing agreed upon the obligation must be
delivered to the creditor or the obligee when the obligation to deliver comes. Even when you offer
something, which is more valuable than what you have promised to deliver, the creditor has the right to
refuse on the principle of identity. You promised to deliver a Toyota car at the end of the time when you
want to deliver and you deliver the Mercedez Benz, I don’t want Mercedez Benz because you committed
to deliver to me a Toyota. But of course if the creditor wants to accept, then he may. The only thing we
are saying: we cannot compel a creditor to accept something which is different from what has been agreed
upon.

The principle of integrity talks about the prestation being fulfilled completely. Some of the
commentators would use this as the principle of indivisibility but Alonzo says it is part of integrity. It
must be fulfilled completely and in the manner strictly agreed upon between the parties to the obligation.

24
  

The rule of integrity, meaning you have to deliver completely and exactly the same thing agreed upon,
admits two exceptions. You have of course the exception of the 1234, 1235 and the third exception the
principle of Rebus Sic Stantinibus.

The first exception in the case of Art. 1234 is the principle of substantial performance in good
faith, which means that you have not completely delivered or performed as long as it is substantial and
you are doing it in good faith, then you have the right to insist that this be accepted by your creditor.
Please remember that 1234 is different from 1235, because 1235 is incomplete performance but the
creditor accepts as it is full performance, hence in effect he waives the performance of what you have not
fulfilled because it is considered as substantial—but needs not to be substantial because as long as he
waives then it becomes a form of waiver. But 1234 requires substantial performance so that means that
there is a factual determination as to whether this is already substantial and this is the basis of the
principle why you need to substantial performance before you can ask for resolution or cancellation
which is the legal basis for that. As long as you can prove that you are in good faith, I owe you 1000
pesos, I paid 950 and I tell you “sorry this is not the only money I have now”. Can you accept it?
Theoretically, under the principle of integrity, it cannot be refused. If the creditor decides to accept it
without waiving the right to collect the fifty, then this is considered as a substantial performance and good
faith. That means the creditor cannot ask for resolution and cancellation at that time because this is a
slight breach and the Courts will allow additional periods for the creditor to collect the fifty peso and the
fifty pesos is not waived but because substantial performance and good faith, you cannot resolve or cancel
the obligation as of yet. You need additional time and the Court can grant that. This is what the law means
when “less damages as may be suffered by the obligee.” Not the case of the waiver.

Art. 1235 is waiver. This is the classic case of Azcona vs. Jamande (?). This is cited in all your
textbooks when the creditor actually receives a payment, which is less than the payment of obligation, and
he issues a receipt saying, as per contract. That means he considers this as full payment of performance
under the contracts. Therefore under the same example the 50 pesos is waived.

The principle of rebus sic stantinibus in the case of Osmena vs. SSS involving the PCSI bank,
the BDO shares, where the Court said that this is something has been so difficult that is manifestly
beyond the intention of the parties so this will in fact excuse the parties on the principle of rebus sic
stantinibus.

Of course there are rules with respect to who pays and who accepts.

Under rules of integrity there is a payer and the payee. The payer if he is the debtor at the time of
payment – we talk about personalities at time of the payment is made because you can have may have a
silence of credits and you can have transfer of obligations – so if it is the debtor who pays, then the
creditor must accept; otherwise it’s the case of a moral et sepiende.

If it is the third person who pays and he is interested in the fulfillment of obligation, the creditor
must accept the delivery of the payment. Again, it is the case of a moral et sepiende if he does not accept.

If it is the third person who is interested in the fulfillment of obligation who pays after the
fulfillment is of course abrogated to the rights of the creditor, which means he steps into the shoes of the
creditor and is now entitled to sue the debtor for the amount that he has paid. When you talk about
persons interested in the fulfillment of the obligation, this has been defined to mean a person who is a
person damaged is not paid like in the case of guarantors or sureties. If the guarantors or sureties offer to
pay even before a demand has been made against them, the creditor must accept and from the moment the
creditor accepts, the surety or guarantor steps into the shoes of the creditor. This is the case of full

25
  

subrogration and will now step into the shoes of the creditor and collect what he has paid against whom
the person who is the debtor in an obligation.

Then we have a third person who is not interested in the fulfillment of an obligation. In this
case, the creditor is not compelled to legally accept. I just want to emphasize here that for most creditors,
they don’t care which pays the obligation as long as they get paid – this is his right. But he is not
supposed to be compelled to accept it if it’s coming from any Dick, Tom, and Harry because it might
come from some illegal other sources. You are not a debtor or a guarantor or the surety so the creditor can
refuse to accept that.

After you have a third person making the payment, if it is a person who is interested in the
fulfillment of an obligation, you have full subrogation of rights and whenever you say subrogation, you
literally step into the shoes of the creditor and you can sue for the full collection and you can foreclose
any mortgage or any informal security because it is as if you are the new creditor.

If it is a third person who is not interested in the fulfillment of the obligation, assuming the
creditor accepts it then we determine what his rights against the debtor. If paid with the knowledge and
consent of the debtor then he has full reimbursement and subrogation rights because I asked your
permission and you told me to pay so therefore I pay, I collect whatever I paid from you, and of course
including the subrogation rights, stepping into the shoes of the creditor. If the debtor does not consent or
does not have knowledge of the payment, then what is he rule? The third person who pays is only
entitled to beneficial reimbursement which means up to the amount that the debtor has been benefited.

As to when and where you have to pay, the question of when - it depends on whether you
have a pure, conditional or obligation within a period. If it’s pure, you pay immediately upon demand.
If it’s conditional, then you pay after happening petition. If after a period, you pay after arrival of period,
subject to service of demand because demand is the one that places you in default.

The question of where to pay – follow these rules. One, look at the stipulation. If there is any
stipulation on where to pay, i.e. you have to go to office of creditor, then follow stipulation. If no
stipulation, the rule is to go and collect from the debtor at the place of the residence of the debtor. So it is
now the creditor making singil going to the house or office of the debtor and asking that the payment be
made. It is not for the debtor to go to the creditor; it is for the creditor to collect from the debtor, in
absence of a stipulation where payment should be made. If there is a provision in the law that says that
if the debtor in bad faith changes his place of residence that means that he has only somebody to borrow
money from you and if time to pay, he relocates to Timbuktu. Even if it is done in bad faith, what is the
rule? Does it mean the creditor has to wait until he pays? The creditor is still obligated to go to Timbukto.
The only thing that gives him in addition to the right to collect be cause of the debtor is that he can charge
damages for the expenses of going to the place of the debtor in order to collect it. It doesn’t shift. It ‘s
simply that you are entitled to collect whatever expenses you may incur as a result of the change in the
residence in bad faith. So much for that. If it’s an obligation to give specific things, what is the rule?
Civil Code is very specific – it has to be paid or delivered at the place where the specific thing was
located at the time of the constitution of the obligation. There. Anyway, these are preliminaries.

Let me go to the special rules of payment including monetary obligations. I want to

concentrate the remaining minutes to talk about monetary obligations especially because of the case of
Nakar vs. Valerie Frames (?). It is something that has been very significant. You have a lot of other
cases that affect these. These are the changes that made on the . This is the case. You remember the with
respect to the Eastern Petroleoum case. What are we talking about? This is with respect to monetary
obligations and what you should pay and how much interest you should pay? So I think you’ll probably

26
  

take this up when you take up in credit transactions but it does have bearing as far as obligations are
concerned and you feel strongly about you know, there might be some tilting towards this issue of
monetary obligations because it is relevant today.

What are the rules? You used to have the Eastern Shipping Lines Doctrine and it has been there
for quite some time. Recently there have been changes. Namely, these are Republic vs. De Guzman in
2011, then you have BSP Circular 799, which became effective July 1st 2013, and then you have the
case of Nakar vs. Frames (?) which was decided by the Court in August 2013 immediately after the
effectivity of BSP Circular 799.

Forbearance of Money and Interest

How does this work? First, we always had the discussion on what is loans, forbearance of money,
goods, and credits, versus which those are not loans or forbearance of money goods, credit. We all know
what loans is - simple loans, simple mutum (?), transfer of ownership, of funds lend from the creditor to
the debtor. There’s always been some disagreement with respect to forbearers of money, goods or credits.
The definition came in Torres vs. Pangan (?), decided in 2012, when the Court has said that when you
talk about forebearance of money, goods or credits, this is something that happens when a person agrees
or acquiesces to the temporary use of his money, goods or credit pending the fulfillment of certain events
or conditions. So that’s what you call forbearance of money, goods, or credit. In a loan, you really transfer
ownership of the property. If it’s forbearance, you allow him to use money, property, or goods or credits
pending fulfillment the certain forbearance or conditions – very thin line actually demarcating the two.

With the new events, the issues on the forbearance of money goods and credits have become
academic. What is the most important? The interest is now because of BSP Circular 799, which brought
down to 6 percent interest. We used to be talking about 12 percent. The reason for this is the many years
ago, market rates were 60, 70 percent. The market range now is 2 percent, 3 percent, 4, 5, 6 – the 12
percent has become overly onerous. BSP Circular 799 has reduced it to 6 percent.

Let’s talk about payment of money. If it is a loan, then the obligation is of course to pay back
that loan and the real obligation is, of course, to pay back the principal because that is what you borrowed,
and that is what you pay. You transfer ownership upon the effectivity of the loan and you return the same
amount of money – not the same deal or coins, but equivalent amount of money when you are required to
pay. With respect to payment of interest, obviously with regard to payment of money, there is the interest
component, which is either because of the use of money because of the penalty because you did not pay
on time.

Interest for the Use of Money

The first type of interest is when interest is paid for the use of money. Certainly the bankers do
not lend money because, you know, they want you to have the money. They want you the money because
of interest on the money. You are not in default, but you use their money so you have to pay interest. If
you talk about loans or forbearance of money, goods, and credits, principal is always due and owing from
debtors. With respect to interest, the first rule is that there has to be stipulation in writing. In absence of
any stipulation in writing, the creditor cannot collect any interest but can certainly collect the principal. If
there is a stipulation in writing to pay interest but rate is not stipulated then it is the legal rate of interest.
Effective July 1st 2013, the legal rate of interest is 6 percent but please remember as decided in Nakar and
in the subsequent cases that the Court has said that this is prospective in character. For the loan, for the
use of money where there is agreement, it is still 12 percent up to june 30, 2013. But staring July 1, 2013,
it is 6 percent. No retroactive effect.

27
  

Interest in Penalty

If you are not of course… even if there is no stipulation in writing but you are considered in
default, which means, you pay interest in penalty, what is the rule?

1st obligation in the penalty clause –you collect whatever is agreed upon the penalty clause. The
rule is the penalty agreed upon assumes and subsumes all the other damages that the creditor will suffer as
the result of your default. Which means that whenever there is a penalty agreed upon, and usually is in the
form of percentage, it takes into account all the damages and therefore you cannot collect any other thing
unless there is a stipulation that you pay penalty in addition to interest. The word in addition is very
important in the absence of the words denoting the fact that you can collect interest in addition to penalty.
You can collect only penalty because the penalty includes all forms of interest and damages. Without the
penalty clause, what is it that you can collect? You can collect the legal rate of interest starting from the
time of default. As far as default is concerned, it concerns the making of the demand and it can be judicial
or extra judicial demand. Here there is no penalty so the law will still come in even when there is no
stipulation to pay interest. The 6 percent legal interest is collected because you are considered as in
default.

Then you have the rule in compounding interest. This is interest over interest agreed upon.
Compounding of interest can only be collected if there is a stipulation or when there is a judicial demand.
When you talk about the penalty clause or an interest clause for the use of money, remember this is
always subservient to the right of the court to consider the interest as something which is unconscionable.
The right of the court is predicated on that. In the case of Heirs of Franco vs. Gonzales, the loan agreed
upon bore interest at the rate of 5.5% monthly, and obviously that was too much. The Court said that was
unconscionable. When the Court declared it, the Court imposed the legal rate of interest. At that time it
was 12% but the Court made the distinction: the legal rate of interest up to June 30 2013, which is 12%
from that of July 1, 2013 which is 6%.

The case of the judgment debts which is what Eastern Shipping Lines is all about. This is
where Nakar and the rest of the cases all come in. The old rule in Eastern is that in the case of judgment
debts that are not based on loans, forbearance of money, goods, or credits, and many of these involve torts
where in the beginning you don’t know how much the obligation is. If you go to Eastern Shipping, the
Court actually said that you don’t know whether there’s an obligation until there’s a decision at the
first instance. No interest from time of demand but interest running from the finality of judgment and
fixed it at 6% because not based on loan or forbearance of money.

How is this decision affected? The case of Republic vs De Guzman decided in 2011 where court
said that you don’t immediately fix it at time of the decision of the first instance because there are
obligations, though not based on loans or forbearance of money, where you can determine with certainty
how much the obligation is even before a judgment may be rendered. You’re talking about torts and
hospital expenses and the receipts —the Court said you could determine with reasonable certainty how
much the obligation is. If it can be determined with reasonable certainty - and the case of Nakar is very
emphatic on this - how much obligation is, the interest running from date of judicial or extrajudicial
demand. If it’s a case that you can’t determine with certainty, then apply Eastern Shipping Lines doctrine,
which is a time when there is a decision from the first instance. That’s just the commencement. This one
would be 6% from judicial or extrajudicial demand, if you can determine with certainty, or if not, from
the time of finality of the judgment. But from the time the judgment becomes final, it becomes a loan or
forbearance of money. But based on BSP Circular 799, this is 6 pecent. Remembe that BSP 799 has no
retroactive application, which means that all interest due after the finality of judgment which became final

28
  

before July 1st, 2013 will be charged at 12%. Anything after July 1st, 2013, will be charged at 6 percent.
The ruling of the court and it has been consistent with the three cases after BSP Circular 799 was made
effective – it will apply only on judgment debts where judgments have become final and executor after
July 1st, 2013. Before that, it will be charged at 12% interest.

The other thing I noticed in the case of Nakar is the constant reference of the Court that with
respect to the time of judicial or extra judicial demand, where you can determine the amount of obligation
with certainty, when the demand has been paid, the use of 6 percent is always qualified “at the
discretion of the court.” Hence, it is not obligatory as the Courts are concerned and based on the
discretion. If they do decide to apply it, then it would be at a maximum of 6 percent. When discretion of
the Court, I take that to mean that the Court can say one is not entitled to 3 percent. The 6% is certainly
the maximum there.

As far as the newer cases are concerned, PNB vs. Spouses Manalo decided early this year in
February where the Court said that the 6% legal interest applies to judgment which have become final and
executory after July 1st, 2013.

The second rule applies strictly to monetary obligations would be the rule you would have to pay
with legal tender (?) which is the Philippine peso and excludes any form of checks, personal checks,
manager’s checks etc – these are not considered as legal tender. If you have an obligation the creditor
may refuse to accept your check because that is not legal tender. But the Court has ruled in several cases
that if you pay in check and the creditor accepts it, then he is estopped from claiming later on that it’s not
legal tender. You have to refuse or state your objection at the first opportunity and once you accept the
check you can no longer later on say – “I am not paid something not legal tender. Once accepted, creditor
is not compelled to accept payment of check, but he can accept it. If he decides to accept it, then effect of
payment is only comes from time when check is encashed. The Banks would tell you it must be within
clearing time, but if within Metro Manila, it could be cleared within 24 hours. If it’s cleared, you get
credit from the time you deposit the check. While effect is time of clearance, then you are deemed to have
been paid from the time you have given check to creditor. If dishonored, then that means that you are
already defaulted. If you pay at the last date of payment because your check is in fact dishonored.

What is the rule on stale checks? Stale checks are those not presented for payment within a
period of six months. What is the consequence of a stale check? The banks do not accept it for deposit.
But what does it do? Does it mean that your obligation is already extinguished because the creditor has
neglected to deposit the check for more than 6 months? No. If you give a check today, which is the date
you are obliged to pay, he does not deposit it, and you are not default because you give him the check at
the time it was due. No penalties, no interest. And had he deposited it time for payment, he would have
gotten it on day it was due. If it becomes because he kept in drawer, no one is prejudiced, but the creditor
is not yet paid and therefore the creditor can ask you to pay again. Don’t say that because the obligation
has been stale, obligation has been extinguished – being stale is not the source of extinguishment of
obligation. It’s just that you’re not liable for any penalties or interest because creditor has check and he
could have gotten payment on time. But if it becomes stale, then creditor has the right to pay you again in
another check and another obligation has not been extinguished. The only time it is considered
extinguished is because his failure to deposit his check on time has resulted in your account being charged
because the check was taken by other people, who were able to take money away from your account. If
money is in account, you are not paid but you are not in default. If for any reason, the check falls into the
wrong hands and was able to encash the check, then you are deemed paid because it has been taken out of
your account. It is only when the value of the check is impaired because of the negligence of the failure of
the creditor to present payment on time. That is the only time you consider it paid, because money taken

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away from your account. But if because he was late, then there is no prejudice, no impairment to the value
of the check, then it is not the fault or extinguishment of obligation.

Then, of course, legal tender means having to pay in the required denominations. Let’s talk
about coins. You owe bank 1 million pesos. Can you go to bank and you dump coins? You pay a penalty
through all coins. In the Philippines, you cannot do that. Legal tender for coins is only if your coin is
below 1 pesos which means the denomination of centavos. You can only discharge your obligation of a
maximum of 100 pesos. For 1 peso, 5 pesos and 10 peso coins, you may discharge obligation to 1000
pesos. No more 2 peso coins. Those are the denominations which can be considered as legal tender. What
about payment in foreign currency? The Uniform Currency Act has been repealed, effective 1996.
Forget about that. Today, if it is stipulated by the parties, then you may stipulate in foreign currency. But
remember it requires stipulation. If no stipulation, then the legal tender must be used which is Philppine
pesos.

The last rule, which is specifically unique to monetary obligations, is the rule on the
extraordinary inflation or deflation. Inflation means there is an extraordinary increase in the value of
goods that you money can purchase. This is not dependent on the exchange rates between the Phil peso
and the US dollar. It may have bearing but no direct connection with the inflation rate. How do
economists and the monetary officials measure the inflation rate? We do have what do what we call the
basket of basic goods where you have the values. You use the money you have to try to determine how
much you have you can buy in the basket of goods your money can buy at a certain point in time? When
you borrowed money in 2010. You borrowed 100 pesos at that time may buy, say, corn, sugar, oil and
other basic commodities. If you borrowed 100 pesos in 2010, you determine how much 100 pesos can
buy out of basket of goods.

If obligation is to repay in 2014, you use your 100 pesos and see how much of the basket of
goods you can buy with 100 pesos. If you can still buy the same amount of goods 100 pesos buy in 2010,
then you have zero inflation rate. You have to pay 100 pesos. If you determine that after four years after
2010, your 100 pesos can only buy 1 half in 2010, then you have a 100 percent inflation rate. Is that
extraordinary inflation? Not necessarily. Somebody has to declare that is a case of extraordinary inflation.
If there is no declaration, then in a case of extraordinary inflation, you still pay 100 pesos. Creditor mas
lugi because his 100 pesos which could buy so much goods at that time can only buy half now of what he
could buy before. But that’s what happens because there is no declaration of extraordinary inflation and
inflation. Assuming there is a declaration, then you have to keep your creditor whole. If you pay him 100
pesos today and there is a declaration of extraordinary inflation, you only pay him half of what you’ve got
in 2010. To keep creditor whole, the rule on extraordinary inflation means that you have to pay back the
value of money you got at the time loan has not been paid until such time you can repay it. If there’s a
declaration of extraordinary inflation today, you pay 200 pesos because that is the value of the 100 pesos
you got in 2010. That is how you apply in simplistic terms.

Who makes the declaration of extraordinary inflation or deflation? In one old Citibank case
the obiter states that Bangko Sentral determines it. The other cases said that this is a judicial
determination of what is extraordinary or what is not extraordinary because the Citibank case certainly
said that the BSP is the monetary authority that monitors inflation rate but not necessarily declare if
extraordinary or not. They just publish the inflation rate from one point in time to another point time. You
have to determine if based on a prior period. What is the inflation rate from August to September? What
is the difference? There’s always a reference point. In the case of monetary obligation, it is the date when
you obtain the loan or the monetary obligation. When there is a high inflation rate, is it extraordinary?
When no declaration, you just pay the same amount. If there is a declaration, keep creditor whole and you
have to pay back the whole currency at the time of the obligation.

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