Obligations and Contracts

Section 4: Joint and Solidary Obligations

 ART 1207: The concurrence of two or more creditors or two or more debtors in one and same
obligation does not imply that each one of the former has the right to demand, or that each one
of the latter is bound to render, entire compliance with the prestation. There is solidary liability
only when the obligation expressly so states, or when the law or the nature of the obligation
requires solidarity.

KINDS OF OBLIGATIONS ACCORDING TO NUMBER OF PARTIES

1. Individual Obligation – 1 creditor, 1 debtor

2. Collective Obligation – 2/more Creditors, 2/more Debtors (Joint/ Solidary)

JOINT OBLIGATION: “To each own”

- Each debtor answers only for a part of the whole liability

- Each creditor belongs only a part of the correlative rights
- One where the whole obligation is to be paid or fulfilled PROPORTIONATELY by different debtors
and/or is to be demanded PROPORTIONATELY by different creditors.

Examples:

1. A and B are joint debtors of C, D, E and F, who are joint creditors to the amount of P1,000,000. C
may demand only P125,000 from A, and P125,000 from B. D, E, and F, have the same rights as C.
2. A and B are joint debtors of C to the amount of P1,000,000. C can demand only P500,000 from
A, and only P500,000 from B.

SOLIDARY OBLIGATION: “One for all, all for one”

- Solidary or joint; Several obligation
- the relationship between the active and the passive subjects is so close that each of the former
or of the latter may demand the fulfillment of or must comply with the whole obligation
- one where each one of the debtors is bound to render, and/or each one of the creditors has the
RIGHT TO DEMAND FROM ANY DEBTORS, ENTIRE COMPLIANCE with the prestation.

Examples:
1. A and B are solidary debtors of C to the amount of P1,000,000. C can demand the whole
P1,000,000 from A. A in turn, after paying C, can ask reimbursement from B to the amount of
P500,000.

2. A and B are solidary debtors of C, D, E, F, solidary creditors, to the amount of P1,000,000. Any
creditor, like C, can demand from any debtor, like A, the whole P1,000,000. In turn, C has to give
P250,000 each to D, E, and F. B has to reimburse A for P500,000 which is really B’s share of the
obligation.

GENERAL RULE: When there are two or more Dr/Cr, the obligation is JOINT OBLIGATION.
EXCEPTIONS:
a. There is a stipulation in the contract that the obligation is solidary
b. The nature of the obligation requires liability to be solidary Solidary Obligation
c. The law declares the obligation to be solidary

Instances Where the Law Imposes Solidary Liability

(a) Obligations arising from tort
(b) Obligations arising from quasi-contracts
(c) Legal provisions regarding the obligations of devisees and legatees
(d) Liability of principals, accomplices, and accessories of a felony
(e) Bailees in commodatum
May the obligation be joint on the side of the creditors and solidary on the side of the debtors or vice-
versa?
ANS.: Yes. “In such cases, the rules applicable to each subject of the obligation should be applied,
the character of the creditors or the debtors determining their respective rights and liabilities.” (8
Manresa, pp. 201-202).

Examples:
(a) A and B are joint debtors of C, D, E, and F, solidary creditors to the amount of P1,000,000. How much
can C collect from A?
ANS.: C is a solidary creditor, so presumably he can collect the whole debt. But since A is only a
joint debtor, C is entitled to collect only P500,000 from A. Art. 1207 CIVIL CODE OF THE PHILIPPINES

(b) A and B are solidary debtors of C, D, E, and F, joint creditors to the amount of P1,000,000. How much
can C recover from A?
ANS.: Since C is only a joint creditor, he can only recover his share which is P250,000 from A, a
solidary debtor. (NOTE: Had C been solidary creditor, he could have recovered P1,000,000 from A; had A
been a joint debtor, and C, also a joint creditor, C could have recovered only P125,000 from A.)

 ART 1208: If from the law, or the nature or the wording of the obligations to which the preceding
article refers, the contrary does not appear, the credit or debt shall be presumed to be divided
into as many equal shares as there are creditors or debtors, the credits or debts bring
considered distinct from one another, subject to the Rules of Court governing the municipality of
suits.

PRESUMPTION OF JOINT OBLIGATION: When there are two or more Dr/Cr, the obligation is JOINT
OBLIGATION.
1. There are as many debts as there are debtors
2. There are as many credits as there are creditors
3. The debts and/or credits are considered DISTINCT and SEPARATE from one another
4. Each debtor is liable only for a PROPORTIONATE part of the debt
5. Each creditor is entitled only to a PROPORTIONATE part of the credit
 This presumption is rebuttable.
 Subject to the RULES OF COURT GOVERNING THE MULTIPLICITY OF SUITS.
- This means that ordinarily one creditor may sue one of the debtors for the latter’s share of the
obligation. But, in view of the fact that the aim of the Rules of Court is to obtain a just, speedy,
and inexpensive determination of every action or proceeding, it would be much better to sue all
the necessary parties at the same time.
- Seek to prevent filing of two or more suits or complaints for a single cause of action or the same
violation of the legal right of the plaintiff.

Synonyms
(a) For joint obligation
1) mancomunada
2) mancomunada simple
3) proportionate
4) pro rata
(b) For solidary obligation
1) joint and several
2) in solidum
3) mancomunada solidaria
4) juntos o separadamente
5) individually and collectively
6) each will pay the whole value
7) together and/or separately
NOTE:
(a) “We promise to pay,” when there are two or more signatures = joint liability.
(b) “I promise to pay,” when there are two or more signatures = solidary liability.
CONSEQUENCES OF JOINT OBLIGATION:
1. Vitiated consent on the part of the debtor does not affect the others.

Example: A and B are joint debtors of C for P1,000,000. A’s consent was obtained by C thru
fraud. B would still be liable for P500,000, while A will not be liable, since the 2 debts are
considered distinct from each other.
2. Insolvency of the debtor does not make others responsible for his share.
3. Demand by the creditor on one joint debtor puts him in default, but NOT the others since the
debts are DISTINCT.
4. When the creditor interrupts the running of the prescriptive period be demanding judicially
from one, the others are not affected. (Therefore, it is possible that the share of one joint debtor has
not prescribed, while those of the others have already prescribed.)
5. Defenses of one debtor are not necessarily available to the others.

KINDS OF SOLIDARITY
I. According to the parties bound
1. Passive Solidarity- solidarity on the part of the debtors, where any one of them can be
made liable for the fulfillment of the entire obligation. It is in the nature of a mutual
guaranty.
2. Active Solidarity- on the part of the creditors, where any one of them can demand the
fulfillment of the entire obligation. Its essential feature is that of mutual representation
among the solidary creditors with powers to exercise the rights of others in the same
manner as their rights.
3. Mixed Solidarity- where each one of the D is liable to render, and each one of the C has
a right to demand, entire compliance with the obligation.
II. According to source
1. Conventional Solidarity – agreed upon the partied
2. Legal Solidarity- imposed by law
3. Real Solidarity- imposed by the nature of the obligation

SOLIDARITY IS NOT PRESUMED. – Solidary obligations are burdensome for they create unusual rights and
liabilities. Solidarity between D increases their responsibility while solidarity between C increases the right
of each C. The law tends to favor the debtors in presuming that they are bound jointly and not solidarily.

 ART 1209: If the division is impossible, the right of the creditors may be prejudiced only by their
collective acts, and the debt can be enforced only by proceeding against all the debtors. If one of
the latter should be insolvent, the others are not liable for his share.

JOINT INDIVISIBLE OBLIGATION: - the obligation is joint because the parties are merely proportionately
liable. It is indivisible because the OBJECT or SUBJECT MATTER is NOT PHYSICALLY DIVISIBLE into different
parts.
- Joint as to the liabilities of the D or right of the C but INDIVISIBLE AS TO COMPLIANCE.

Example: A and B are jointly liable to give C this particular car.

This obligation constitutes the middle ground between a joint obligation and solidary obligation.

CHARACTERISTICS:
1. The obligation is joint but since the object is indivisible, the creditor must proceed against ALL
the joint debtors (Art. 1209), for compliance is possible only if all the joint debtors would act
TOGETHER.
2. Demand must, therefore, be made on ALL the joint debtors.
3. If any one of the debtors does not comply with his monetary obligation for damages. (Art. 1224,
Civil Code; 8 Manresa 237-238).
4. If any of the joint debtors be insolvent, the others shall not be liable for his share. (Art. 1209,
Civil Code).
 (NOTE: The obligation to pay monetary damages is of course no longer indivisible, and
therefore, the creditor may go against each debtor individually, subject to the provisions of the
Rules of Court.)
5. If there be joint creditors, delivery must be made to all, and not merely to one, unless that one
be specifically authorized by the others.
6. Each joint creditor is allowed to renounce his proportionate credit.

Example:

A, B, and C are jointly liable to give a particular car worth P1.2 million in favor of D, E, F, and G. A is insolvent
and the debtors, therefore, cannot purchase the car to give to the creditors. D and E have renounced their
rights. The debtors are not in default. How much can each of the creditors get from each of the debtors?

ANS.: Since this is a joint and indivisible obligation and since the car cannot be given, it is
converted into an obligation to give indemnity for damages. Since this is a joint obligation, each debtor is
proportionately liable and each creditor is only entitled to his proportional credit.

P1.2M divided by 3 = P400,000 (the total debt of each debtor)

P 400,000 divided by 4 = P100,000 (the credit belonging to each joint creditor, not from each joint debtor).

A is insolvent, and his share will not be included in the liability of B and C.

Therefore:
(a) D and E having renounced their rights, they get nothing.
(b) F has not renounced his right, so he can get P100,000 from B and P100,000 from C. Over A, F has the
rights of creditor over an insolvent debtor.
(c) G has exactly the same rights as F.

 DEMAND BY ONE JOINT CREDITOR IS NOT A DEMAND BY THE OTHERS. - still it should be borne in
mind that the credits are still independent of one another

 ART 1210: The indivisibility of an obligation does not necessarily give rise to solidarity. Nor does
solidarity of itself imply indivisibility.

INDIVISIBILITY
- Refers to the object/prestation
- Only the debtor guilty of breach of
obligation is liable for damages
- Can exist although there is only 1 D&C
- Others are not liable in case of insolvency
of 1D
SOLIDARITY
- Refers to the juridical/ legal tie bet. parties
- All of the debtors are liable for the breach
committed by a D
- There must be at least 2D/2C
- Other debtors are proportionately liable

 ART 1211: Solidarity may exist although the creditors and the debtors may not be bound in the
same manner and by the same periods and conditions.

KIND OF SOLIDARY OBLIGATION ACCORDING TO THE LEGAL TIE:

1. UNIFORM: when the debtors are bound by the same stipulations and clauses
2. NON-UNIFORM or VARIED: when the parties are not subject to the same stipulations.

Example of a case when solidarity may exist even when the creditors and the debtors are not bound in the
same manner:
A and B solidarily bound themselves to pay a total of P1,000,000 to C, D, and E subject to the
following conditions and terms: C’s share will be due at the end of the year; D will get his share only if he
passes the bar; and E will get his share only after he (E) has painted the house of X. Here, the obligation is
still solidary.
In the example given, when will this solidary obligation be due and demandable?
ANS.: The obligation is still solidary but C’s share will only be due and demandable at the end of
the year, and E and D’s shares will be due and demandable only upon the fulfillment of the condition.

Supposing the obligation is to be subject to different terms and conditions, the following is the solution:
The creditor may recover that part which is pure and unconditional, and should leave in suspense or
pending, the right to demand the payment of the remainder until the expiration of the term or the
fulfillment of the condition. Solidarity is still preserved by recognizing in the creditor the power, upon the
fulfillment of the condition or the expiration of the term, of claiming from any or all of the debtors, that
part of the obligation effected by these conditions.’’ (Scaevola,
Codigo Civil Comentado y Concordado, Vol. 19, pp. 800-801)

The rule is that the whole solidary obligation can be recovered from ANY of the solidary debtors MINUS the share of
those with unmatured conditions or terms.

 ART 1212: Each one of the solidary creditors may do whatever may be useful to the others, but
not anything which may be prejudicial to the latter

Acts of Solidary Creditor Useful/ Prejudicial to Others

A solidary creditor may do any act BENEFICIAL or USEFUL to the others but he cannot perform any
act prejudicial to them. If he performs such act and as a result the obligation is extinguished, he shall be
responsible to the others for damages.

THEORY OF MUTUAL AGENCY: right of one to act for and in the name of the others

Example of Beneficial Act — To interrupt the running of prescription, the act of one solidary creditor in
making a judicial demand upon any of the solidary debtors is sufficient. The law provides that: “The
prescription of actions is interrupted when they are filed before the Courts.” (Art.1155, 1st clause, Civil
Code).

Example of Prejudicial Acts — should not be performed, otherwise, there will be liability for damages.
However, in the case of remission or condonation (which is really prejudicial), the solidary creditor is
allowed to so remit, and the obligation is extinguished, without prejudice to his liability to the other
creditors. (See Art. 1215, Civil Code).

 ART 1213: A solidary creditor cannot assign his rights without the consent of the others

ASSIGNMENT BY SOLIDARY CREDITOR OF HIS RIGHTS

- GR: A solidary creditor CANNOT ASSIGN HIS RIGHTS to a third person in the ABSENCE OF CONSENT
given by other creditors.
- EX: He is allowed if all the others consent.

 If the assignment is made to a co-creditor, the consent of the other creditors in not necessary.

REASON: MUTAL AGENCY AND MUTUAL CONFIDENCE

 ART 1214: The debtor may pay any one of the solidary creditors; but if any demand, judicial or
extrajudicial, has made by one of them, payment should be made to him.

GR: Debtor must pay to any of the solidary creditors

EX: Payment must be made to solidary creditor who made a demand (judicial/extrajudicial)
- Payment to any other creditor will not extinguish the obligation except insofar as the payee’s
share is concerned

 ART 1215: Novation, compensation, confusion or remission of the debt, made by any of the
solidary creditors or with any of the solidary debtors, shall extinguish the obligation without
prejudice to Art 1219.
The creditor who may have executed any of these acts, as well as he who collects the
debt, shall be liable to others for the share in the obligation corresponding to them.
NOVATION: - modification of the obligation by changing the object or principal conditions, or by
substituting the person of the debtor, or by subrogating the person of the debtor, or by subrogating a
third person in the right of the creditor.

COMPENSATION: - takes place when two persons, in their own right, are creditors and debtors of each
other.
- May be total or partial, depending on the amount involved
- Total compensation automatically extinguishes the obligation, whether known or unknown to the
parties

CONFUSION (MERGER): - takes place when the characters of the creditor and debtor are MERGED in the
same person.

REMISSION (WAIVER): - act of liberality whereby a creditor CONDONES the obligation of the debtor
- Cr: “forget about the whole thing” to Dr
- May be total or partial

(Read examples: Paras)

 ART 1216: The creditor may proceed against any one of the solidary debtors or some or all of
them simultaneously. The demand made against one of them shall not be an obstacle to those
which may be subsequently be directed against the others, so long as the debt has not been fully
collected.

- N/A to Joint Obligations because in this kind of obligation failure to collect from one joint debtor
his share does not authorize the creditor to proceed against the others, regarding the insolvent
debtor’s share
- RULE: Any one or some or all of the solidary debtors simultaneously, may be made to pay the debt
so long as it has not been fully paid.
- The choice is left to solidary creditor to determine against whom he will enforce collection.

Effect of Not Proceeding against All

If the creditor sues only one, or two, or several of the debtors (but not all) there is no waiver against
those not yet sued. They may be proceeded against later.

 ART 1217: Payment made by one of the solidary debtors extinguishes the obligation. If two or
more solidary debtors offer to pay, the creditor may choose which offer to accept.
He who made the payment may claim from his co-debtors only the share which
corresponds to each, with the interest for the payment already made. If the payment is made
before the debt is due, no interest for the intervening period may be demanded.
When one of the solidary debtors cannot, because of his insolvency, reimburse his share
to the debtor paying the obligation, such share shall be borne by all his co-debtors, in proportion
to the debt of each.

PAYMENT: - one of the ways by which an obligation is extinguished and consists in the delivery of the
thing or the rendition of the service which is the object of the obligation.

EFFECTS OF PAYMENT:
1. Between the solidary D&C – payment (in full) extinguishes the obligation
 However, the creditor for his protection is given the right to choose which offer to accept if
two/more D offer to pay.
 Interest- from the date of payment (No interest if paid before due date)

2. Among solidary debtors- REIMBURSEMENT - from his co-debtors for their proportionate shares
 In case of insolvency of any of the SD, the others assume the share of the insolvent one pro rata
  Obligation of others to reimburse him arises only from the time payment is made
 Ex: Art 1218

3. Among solidary creditors- the receiving C is liable to other C for their responding shares

 ART 1218: Payment by a solidary debtor shall not entitle him to reimbursement from his co-
debtors if such payment is made after the obligation has prescribed or become illegal.

GR: When a SD pays the obligation, he is entitled to reimbursement

EX: a. Obligation has already prescribed
Obligation already extinguished= no
b. Becomes illegal
more obligation to be complied with
PRESCRIPTIVE PERIODS
I. 10 YEARS
1. Written contract
2. Obligation created by law
3. Upon judgment (Art 1144)
II. 6 YEARS
1. Oral Contract
2. Quasi-contract
III. 4 YEARS
1. Injury to the right of the plaintiff
2. Quasi-delict
 Statute of limitations may be superseded or modified by a contract between the parties.

 ART 1219: The remission made by the creditor of the share which affects one of the solidary
debtors does not release the latter from his responsibility towards the co-debtors, in case the
debt had been totally paid by anyone of them before the remission was effected.

PURPOSE: To prevent fraud and to give justice to the paying debtor

 Since payment extinguishes the obligation, there is nothing more to remit.
Remission √ if it’s previous to the payment

 ART 1220: The remission of the whole obligation obtained by one of the solidary debtors, does
not entitle him to reimbursement from his co-debtors.

- Applies only when the whole obligation is remitted

- Remission is essentially gratuitous. It is really a donation.
Example
A and B are solidary debtors of C to the amount of P1, 000,000. C remitted the whole obligation
when A offered to pay. A here cannot get any reimbursement from B since after all, A did not pay
anything to C. To allow the contrary would be to induce fraud and to countenance partiality.

 ART 1221: If the thing has been lost or if the prestation has become impossible without the fault
of SD, the obligation shall be extinguish.
If there was fault on the part of any one of them, all shall be responsible to the creditor,
for the price and the payment of damages and interest, without prejudice to their action against the
guilty or negligent debtor.
If through fortuitous event, the thing is lost or the performance has become impossible
after one of the SD has incurred in delay through the judicial or extra-judicial demand upon him by the
creditor, the provisions of the preceding paragraph shall apply.

Effect of Loss or Impossibility

(a) If without fault (before delay) — no liability.
(b) If with fault — there is liability (also for damages and interest).
(c) Loss because of a fortuitous event AFTER default — here, there will be liability because of the
DEFAULT. (All SD responsible even for a fortuitous event)
  ART 1222: A SD may, in actions filed by the C, avail himself of all defenses which are derived from
the nature of the obligation and of those which are personal to him, or pertain to his own share.
With respect to those which personally belong to the others, he may avail himself thereof only as
regards that part of the debt for which the latter are responsible.

Defenses in Actions Filed

This Article applies in ACTIONS fi led by the creditor.

(2) Kinds of Defenses

(a) Those derived from the nature of the obligation (this is a complete defense).
Examples:
1) Lack of consideration or cause
2) Absolute simulation (as when the contract is totally fictitious)
3) Illegal consideration
4) Extinguishment of the obligation (as when the whole debt has been paid, remitted, or
has prescribed)
5) Non-fulfillment of the suspensive condition (if made upon the whole object or upon
all the debtors)
6) Statute of Frauds
7) When ALL the debtors were incapacitated to give consent (such as unemancipated
minors, insane, idiots, persons under a hypnotic spell)
8) When there are VICES OF CONSENT (vitiated consent) on the part of ALL the debtors
(such as when all were forced or intimidated or unduly influenced or were led into error)

(b) Those personal to the debtor sued. (This is a complete defense generally, but if the defense is non-
fulfillment yet of a condition or the non-arrival yet of the term, this is only a PARTIAL defense, that is,
he will still be liable except for his own share in the meantime). (See Inchausti v. Yulo, 34 Phil. 987).
Examples:
1) Vitiated consent (as when he was forced, etc.) — COMPLETE defense.
2) Incapacity to give consent (as when he is a minor) — COMPLETE defense.
3) Non-fulfillment of condition imposed regarding his share (PARTIAL defense, unless
provided otherwise).
4) Non-arrival of term (regarding his share — PARTIAL defense — unless provided
otherwise).

(c) Those personal to the others — same as (b) — (Partial defense regarding share of others involved).

Section 5: Divisible and Indivisible Obligations

 ART 1223: The divisibility or indivisibility of the things that are the object of obligations in which
there is only one debtor and only one creditor does not alter or modify the provisions of
Chapter 2 of this Title.

DIVISIBLE OBLIGATION: - one the object of which, in delivery or performance, is capable of partial
fulfillment.

INDIVISIBLE OBLIGATION: - one the object of which, in its delivery or performance, is not capable of
partial fulfillment.

Test of distinction:
1. Purpose of the obligation or the intention of the parties.
- Even though the object or service may be physically divisible, an obligation is indivisible if so
provided by law or intended by the parties.
2. If object is not physically divisible = always indivisible obligation

 An obligation is presumed indivisible where there is only 1D and 1C.

KINDS OF DIVISION:
1. QUALITATIVE DIVISION- based on quality, irrespective of quantity
2. QUANTITATIVE DIVISION- based on quantity rather than on quality
3. INTELLECTUAL/MORAL/IDEAL DIVISION- one which exists only in the minds of the parties

KINDS OF INDIVISIBILITY:
1. LEGAL INDIVISIBILITY: where a specific provision of law declares as indivisible, obligations which,
by their nature, are divisible.
2. CONVENTIONAL INDIVISIBILITY: - where the will of the parties makes as indivisible, “
3. NATURAL/ABSOLUTE INDIVISIBILITY:- the nature of the object does not admit of division.

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

Here the object is indivisible and yet the parties are merely bound jointly.
Example: Mila and Ligaya are jointly bound to give a specific car to Jose.

EFFECT of NON-COMPLIANCE : The obligation is converted into one for damages. (Monetary)

Example: Mila and Ligaya promised jointly to give a specific car worth P2,400,000 to Jose. In the meantime,
the car is with Honda Motors Co. Mila’s share is, therefore, P1,200,000. If Mila, because of gambling, does
not have the money, but Ligaya has P1,200,000 it is clear that they cannot get the car from Honda Motors
Co. So they also cannot comply with their obligation of delivering the car to Jose. Here, the obligation to
give the car is converted to a monetary obligation to give P2,400,000 to Jose. Ligaya is not responsible for
Mila’s insolvency, so she is duty bound to give only P1,200,000. Mila will be indebted to Jose for her share
of P1,200,000.

Suppose in the preceding problem, the obligation was SOLIDARY and INDIVISIBLE, what would be the
effect?
ANS.: Jose can demand the whole car or its price of P2,400,000 from Ligaya alone, but Ligaya can
later recover reimbursement from Mila.

 The creditor cannot ask for specific performance or rescission because there is no cause of action
against the other debtors who are willing to fulfill their promises.

 ART 1225: For the purposes of the preceding articles, obligations to give definite things and those
which are not susceptible of partial performance shall be deemed to be indivisible.
When the obligation has for its object the execution of a certain number of days of work,
the accomplishment of work by metrical units, or analogous things which by their nature are
susceptible of partial performance, it shall be divisible.
However, even though the object or service may be physically divisible, an obligation is
indivisible if so provided by law or intended by the parties.
In obligations not to do, divisibility or indivisibility shall be determined by the character
of the prestation in each particular case.

Section 6: Obligations with a Penal Clause

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

PENAL CLAUSE: - an accessory undertaking to assume greater liability in case of breach. It is attached to
obligations in order to insure their performance.
 - It is a COERCIVE MEANS to obtain compliance from the debtor.

DUAL PURPOSE OF PENAL CLAUSE:

In case of
1. To insure the performance of the obligation (Reparation)
non-
2. To substitute a penalty for the indemnity for damages and the payment of interests.
compliance
(Punishment)

KINDS OF PENAL CLAUSE:

A. Legal Penal Clause- when imposed by law
B. Conventional Penal Clause
C. Subsidiary — when only the penalty may be asked
D. Joint — when both the principal contract and the penal clause can be enforced.
PENAL CLAUSE CONDITION
- Constitutes an obligation although an - Do not
accessory
- Demandable in default of the - Never demandable
unperformed obligation/ jointly with it

GR: Penalty takes place of the indemnity for damages and the payment of the interests in case of non-
compliance.
- Other amounts are renounced – arising from the same breach
EX:
1. When there is express stipulation to the effect that damages or interest may still be recovered,
despite the presence of the penalty clause;
2. When the debtor refuses to pay the penalty imposed in the obligation;
3. When the debtor is guilty of fraud or dolo in the fulfillment of the obligation. The reason for the
third exception is clear: there can be no renunciation of an action to enforce liability for future
fraud because, as we have seen, this is against public policy and against the express provisions of
the law.

Example: X promised to construct a house for Y. The contract carried a penal clause that in case of
non- compliance, X would have to pay a penalty of P100, 000.00. X did not construct the house, and
as a consequence, Y suffered damage in the amount of P40, 000.

In this case, the penalty of P100,000 shall be paid. Y cannot recover more than P100,000, the
penalty stipulated, even if X proves that the damages suffered by Y is only P40,000.

The penalty substitutes the indemnity for the damage of P40,000, unless there is a stipulation to
the contrary, in which case Y may also recover the damages proved by him.

If X refuses to pay the penalty, Y may recover legal interest thereon, the interest representing new
damages brought about by the non-payment of the penalty.

If X is guilty of fraud (not mere fault) in the fulfillment of his obligation, he is also liable for the
damage caused thereby in conformity with Art 1171. Proof of the fraud and the existence and amount
of damages is incumbent upon Y. But Y need not to prove fraud to recover the penalty.

May Any Penalty Be Demandable?

ANS.: No. The penalty may be enforced only when it is demandable in accordance with the provisions of
the Civil Code, one of which states that the penalty may be reduced if it is iniquitous or unconscionable.
Obligations with a Penal Clause Distinguished from Examples from the Facultative and the Alternative
Obligations

(a) Obligations with a penal clause

Example: Gloria is obliged to give me a diamond ring. If she fails to do so, she must give P700,000.
(NOTE: Ordinarily, Gloria cannot excuse herself from the duty of giving me the ring by simply paying
P700,000. For her to substitute the penalty, she must be expressly given the right to do so.)

(b) Facultative obligation

Example: Gloria is obliged to give me a particular diamond ring. However, if she so desires, she may
instead give me P700,000.
(NOTE: Here, Gloria is clearly and expressly allowed to make the substitution. If the ring is lost by a
fortuitous event, she is excused from giving me the substitute of P700,000, for indeed the principal
obligation has been extinguished.)

(c) Alternative obligation

Example: Gloria is obliged to give me either a particular diamond ring or P700,000.
(NOTE: Here, the choice given to Gloria is absolute. If, however, the ring is lost by a fortuitous event, she
is still obliged to give me the P700,000.)

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

RULES ON PENALTY:

1. PENALTY NOT SUBSTITUTE FOR PERFORMANCE

GR: Debtor cannot just pay the penalty instead of performing the obligation.
- Cannot substitute the Penalty for the principal obligation
- If otherwise: it changes the nature of the obligation to ALTERNATIVE OBLIGATION

EX: If the right is expressly granted.

 Implied grant is not sufficient

Example
A promises to finish a certain piece of work within six months. The contract stipulates that in case
he does not build the house at all, he is supposed to forfeit the sum of P1,000,000. In this case, as a general
rule the contractor cannot just give the sum of P1,000,000 as a substitute for his non-performance of the
obligation. It must be remembered that as a general rule, therefore, the penal clause is not supposed to
substitute the performance of the principal obligation. He may, however, be expressly granted by the
creditor the right to refrain from the execution of the contract by a forfeiture of the penalty.

2. PENALTY CLAUSE PRESUMED SUBSIDIARY

GR: The creditor does not have this right to demand fulfillment of the obligation and the penalty
at the same time.

EX: Such a right has been CLEARLY granted to him. e.g: Payment of loans- penalty is joint

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

- All that the creditor has to prove, to enforce the penalty, is the violation of the obligation by the
debtor.
 - Not necessary to adduce evidence to prove losses and damages suffered by the creditor or the
extent of the same.
- Creditor may enforce the penalty whether the suffered damages or not. But he cannot recover
more than the stipulated penalty even if he proves the amount of his damages exceeds the
penalty.

“In this jurisdiction contracts are enforced as they are read, and parties who are competent to contract
may make such agreements within the limitations of the law and public policy as they desire, and the
courts will enforce them according to their terms. A penalty imposed for the breach of a contract not to
sell shares of stock for one year will be enforced if the agreement is broken, no matter whether the person
seeking to enforce the penalty has suffered damages or not.” (Lambert vs. Fox)

 ART 1229: The judge shall equitably reduce the penalty when the principal obligation has been
partly or irregularly complied with by the debtor. Even if there has been no performance, the
penalty may also be reduced by the courts if it is iniquitous or unconscionable.

PENALTY MAY BE REDUCED BY THE COURTS

1. Partial performance
2. Irregular performance
3. When penalty is iniquitous or unconscionable

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

Principle: Accessory follows the principal. (Not vice versa)

 If only the penal clause is void, the principal obligation remains valid and demandable. – Penal
clause is just disregarded. The injured party may recover indemnity for damages as if no penalty
has been stipulated. (PO is independent)
 If the principal is void = the penal clause is VOID. – The PC cannot stand alone without the principal
obligation.

CHAPTER 4
EXTINGUISHMENT OF OBLIGATION
GENERAL PROVISIONS

 ART 1231: Obligations are extinguished:

1. By payment or performance
2. By the loss of the thing due
3. By the condonation or remission of the debt
4. By the confusion or merger of the rights of the creditor and debtor
5. By compensation
6. By novation

Other causes of extinguishment of obligations, such as annulment, rescission, fulfillment of a

resolutory condition, and prescription, are governed elsewhere in this Code.

Section 1: Payment or Performance

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

PAYMENT: a legal mode of extinguishing an obligation which consists of:

a. Delivery of money
b. Performance in any other manner of an obligation.
(Example: giving of a thing, other than money, the doing of an act or not doing of an
act)
For payment to properly exist, the creditor has to accept the same, expressly or implicitly. Payment, for
valid reasons, may properly be rejected.

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

When is debt considered paid? (Requisites for VALID payment)

1. IDENTITY: the very thing or service contemplated must be paid
2. INTEGRITY: fulfillment must be COMPLETE.

Burden of proof:
1. Creditor- valid debt exists
2. Debtor- prove that he has paid the same
e.g: presentation of receipt

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

SUBSTANTIAL PERFORMANCE IN GOOD FAITH

- In case of substantial performance, the creditor is benefited. So the obligor should be allowed to
recover as if there had been a strict and complete fulfillment, less damages suffered by the
obligee. This last condition affords a just compensation for the relative breach committed by the
obligor.

- Inasmuch as substantial performance in good faith may already be equivalent to “fulfillment” or

“payment,” it follows that the right to rescind (mentioned in Art. 1191) cannot be used simply
because there have been slight breaches of the obligation. In fact, such right to rescind is not
absolute, and therefore the Court may even grant, at its discretion, a period to a person in default,
within which the obligation can be fulfilled.

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

GR: Incomplete or irregular performance do not extinguish the obligation. (Art 1233)
EX: When the creditor accepts the performance knowing its incompleteness or irregularity.

Reason: The presence of WAIVER and ESTOPPEL.

Requisites:
1. The creditor knows that the performance is incomplete or irregular
2. He accept the performance without expressing any protest or objection.

The word “accept,” as used in Art. 1235 of the Civil Code, means to take a satisfactory or sufficient,
or agree to an incomplete or irregular performance.
In the case at bar, the mere receipt of a partial payment is not equivalent to the required acceptance
of performance as would extinguish the whole obligation. (De Castro vs CA)

 ART 1236: The creditor is not bound to accept payment or performance by a third person who
has no interest in the fulfillment of the obligation, unless there is a stipulation to the contrary.
Whoever pays for another may demand from the debtor what he has paid, except that if
he paid without the knowledge or against the will of the debtor, he can recover only insofar as
the payment has been beneficial to the debtor.

RIGHT TO REFUSE PAYMENT BY A THIRD PERSON

GR: Creditor is not bound to accept payment by a third person

EX:
1. If there is a stipulation allowing this
 2. If the third person has an interest in the fulfillment of the obligation (co-debtor, guarantor, even
joint debtor)

Payment by a Third Person (BAR)

The third person may pay:
a. With the knowledge and consent of the debtor. (Here, the payor is entitled to
REIMBURSEMENT and SUBROGATION to such rights as guaranty, penalty clause, or
mortgage.) (See Art. 1237; see also De Guzman v. Santos, 68 Phil. 371).

b. Without the debtor’s knowledge or against his will. (Here, the payor is not entitled to
subrogation; moreover, he is allowed only BENEFICIAL REIMBURSEMENT.)

(Example: If X pays for Y’s transportation fare, without Y’s knowledge, or against Y’s will, and later
discovers that Y was entitled to HALF-FARE, X can recover only said half-fare, even if he had paid the
FULL FARE. This is clearly the fault of X.)

[NOTE: In the example given, can X recover Y’s halffare from the creditor?
HELD: No, for this is not solutio indebiti (for said halffare was really due). X’s right is against Y, the
debtor, for said half-fare. (See Bank of P.I. v. Trinidad, 42 Phil. 223 and Monte de Piedad v. Fernando
Rodrigo, 63 Phil. 312). The remaining half-fare, which was NOT even due the creditor, is of course
undue payment or solutio indebiti and may properly be recovered from the creditor.

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

One who pays without the knowledge of the debtor has no right to subrogation

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