ESSENTIALS OF

PHILIPPINE

BUSINESS LAW

NOTES AND CASES

Danny L. Chan
Gilbert» F. Lauengeo
Reginald Alberto B. Nolido
Allan Verman Y. Ong
Eduardo Victor J. Valdez
and
Joseph Sedfrey S. Santiago

RE
ATENEO DE MANILA UNIVERSITY PRESS
 CONTENTS

Preface xxi

OBLIGATIONS AND CONTRACTS

TITLE ONE / Obligations

Chapter One: General Provisions 3

Art. 1156 3
Elements ofan Obligation
Juridical necessity
Art. 1157 5
Art. 1158 7
Art. 1159 8
Art. 1160 8
Negotiorum gestio
Solutio indebiti
Other quasi-contracts
Art. 1161 11
Damages
Instances ofbad faith
Art. 1162 14

Chapter Two: Nature and Effect of Obligations 16

Art. 1163 16
Art. 1164 17
Delivery of the fruits
Art. 1165 18
Thing to be delivered
Determinate thing

V
 Indeterminate thing
Remedies of the Creditor/Obligee
Failure to deliver determinate thing
Failure to deliver indeterminate thing
Liability ofdebtorforfortuitous event
Art. 1166 22
Art. 1167 23
Art. 1168 24
Art. 1169 25
Elements of legal delay or default
Demand on the debtor
Exceptions to the general rule
Effects of delay
Art. 1170 30
Fraud
Negligence
Delay
Contravening the tenor of the Obligation
Damages
Art. 1171 32
Art. 1172 33
Art. 1173 33
Two kinds of negligence
Liability for employee's negligence
Contributory negligence
Art. 1174 37
General rule
Elements of fortuitous event
Exceptions
Art. 1175 41
Art. 1176 41
Art. 1177 42
Art. 1178 43

Chapter Ihree: Different Kinds of Obligations 44

Section 1. Pure and Conditional Obligations 44
Art. 1179 44

vi
 Pure obligations
Conditional obligations
Kinds of conditions
Suspensive conditions
Resolutory conditions
Effects of the occurrence ofa suspensive condition
Effects of the occurrence of a resolutory condition
Art. 1180 50
Art. 1181 50
Art. 1182 51
Art. 1183 51
When conditional obligations are void
Potestative conditions
When potestative condition does not lead to
contract's invalidity
Impossible and illegal conditions
When impossible condition does not lead to
contract's invalidity
Art. 1184 56
Art. 1185 56
Positive and negative suspensive conditions
Art. 1186 57
Constructive fulfillment
Art. 1187 57
Art. 1188 59
Retroactive effect of suspensive conditional
obligations
Rights of a creditor before the fulfillment ofa
suspensive condition
Art. 1189 61
Rules as to loss, deterioration or improvement before
the occurrence of the suspensive condition
Art. 1190 64
Art. 1191 65
Reciprocal obligations
Alternative remedies under Art 1191
Good faith as the basis of the right to rescind

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 Extent ofthe breach ofthe Obligation to allow
rescission
Injuredparty mustgo to court to obtain rescission
Effect of rescission
Art. 1192 69

Section 2. Obligations with a Period 70

Art. 1193 70
Definition of a "period"
Two kinds
Art. 1194 71
Art. 1195 72
Art. 1196 72
Art. 1197 74
When courts can fix a period
Art. 1198 75

Section 3. Alternative Obligation 78

Art. 1199 78
Art. 1200 78
Art. 1201 78
Art. 1202 78
Art. 1203 79
Art. 1204 81
Art. 1205 82
Art. 1206 84
Facultative obligations

Section 4. Joint and Solidary Obligations 87

Art. 1207 87
Art. 1208 87
Art. 1209 87
Joint obligations
Joint divisible obligations
Nature of solidary obligations
How to determine whether the Obligation is solidary
Art. 1210 92

viii
 Art. 1211 92
Art. 1212 93
Art. 1213 93
Art. 1214 94
Art. 1215 95
Condonation/remission before payment
Condonation at the request of one debtor
Art. 1216 96
Art. 1217 96
Art. 1218 97
When a paying debtor cannot demand reimbursement
Art. 1219 99
Art. 1220 99
Art. 1221 100
Art. 1222 100

Section 5. Divisible and Indivisible Obligations 102

Art. 1223 102
Art. 1224 102
Art. 1225 102

Section 6. Obligations with a Penal Clause 103

Art. 1226 103
Art. 1227 103
Art. 1228 104
Art. 1229 104
Art. 1230 104
Penalty does not take the place of the principal
Obligation
Other rules

Chapter Four: Extinguishment of Obligations 107

Art. 1231 107

Section 1. Payment or Performance 107

Art. 1232 107
Art. 1233 107

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 Complete delivery
Determinate thing
Indeterminate thing
Money
Complete Performance
Complete non-performance
Exceptions to the integrity or completeness rule
Art. 1234 110
SubstantialPerformance in goodfaith
Art. 1235 112
Obligee's acceptance of incomplete or irregulär
Performance
Partial Performance agreed upon
Debt is partly liquidated and unliquidated
Art. 1236 113
Art. 1237 113
Art. 1238 113
Who pays
Payment by a third person with interest
Third person without interest
What third person can collect
Third party's right to Subrogation
When third person does not intend to be paid
Art. 1239 117
When payment is not valid
Art. 1240 118
To whom payment is made
Art. 1241 119
Defective payments
Payment to an incapacitatedperson
Payment made to a third person
Instances when benefit to creditor need not be proven
Art. 1242 122
Art. 1243 123
When payment to creditor is not valid
Art. 1244 124
Art. 1245 124

x
Art. 1246 125
Art. 1247 125
Art. 1248 125
Art. 1249 126
What is legal tender
Payment with check
Cashier's check
Stale check is not impaired check
Impaired mercantile document
Art. 1250 128
Art. 1251 129
Special ways ofmakingpayments
Art. 1252 130
Art. 1253 131
Art. 1254 131
Application of Payments
Art. 1255 132
Payment by cession
Dation in payment
Art. 1256 134
Tender of payment and consignation
Instances when no tender is necessary
Art. 1257 137
Art. 1258 138
Art. 1259 138
Art. 1260 138
Art. 1261 139

Section 2. Loss of the Thing Due 139

Art. 1262 139
Complete loss of determinate thing
Partial loss of the determinate thing
Exceptions to the "loss ofthe thing" rule
Art. 1263 140
Loss of indeterminate thing
Art. 1264 141
Art. 1265 142

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Art. 1266 142
Impossibility of Performance
Art. 1267 143
Difficulty beyond parties contemplation
Art. 1268 143
Art. 1269 144

Section 3. Condonation or Remission of the Debt

Art. 1270 145
Art. 1271 146
Art. 1272 146
Art. 1273 147
Art. 1274 147

Section 4. Confusion or Merger of Rights

Art. 1275 148
Art. 1276 148
Art. 1277 150

Section 5. Compensation
Art. 1278 151
Kinds of compensation
Art. 1279 151
Legal compensation
Elements
Art. 1280 155
Art. 1281 155
Art. 1282 155
Voluntary compensation
Art. 1283 156
Judicial compensation
Facultative compensation
Art. 1284 157
Art. 1285 157
Effects of assignment on compensation
Art. 1286 157
Art. 1287 159

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 Art. 1288 160
When compensation not proper
Art. 1289 160
Art. 1290 162

Section 6. Novation
Art. 1291 162
Art. 1292 164
Art. 1293 165
Art. 1294 165
Art. 1295 166
Substituting the debtor
Ifthe new debtor is insolvent or does not fulfill the
Obligation
Art. 1296 167
Art. 1297 168
Art. 1298 168
Voidable obligations
Art. 1299 169
Subrogation
Art. 1300 169
Art. 1301 170
Art. 1302 170
Art. 1303 170
Art. 1304 170
Effects of Subrogation

TITLE TWO / Contracts 173

Chapter One: General Provisions

Art. 1305 173
Art. 1306 174
Invalid terms and conditions
Employment contracts
Credit cards
Art. 1307 176
Art. 1308 178

xiii
Art. 1309 178
Art. 1310 178
Art. 1311 179
Only contracting parties are bound to contracts
Transmission of rights and obligations to heirs
Exception to the rule that contracts bind only the
contracting parties
Art. 1312 182
Art. 1313 183
Art. 1314 184
Art. 1315 186
Obligatory force of contracts
Consequences which attach to the contract
Art. 1316 187
Art. 1317 188

Chapter Two: Essential Requisites of Contracts

Art. 1318 189

Section 1. Consent 189

Art. 1319 189
Certain offer
Absolute acceptance
Qualified acceptance
Expression of agreement
Manner ofmaking the acceptance
Art. 1320 193
Art. 1321 194
Art. 1322 194
Art. 1323 194
Art. 1324 195
Difference from right of first refusal
Art. 1325 197
Art. 1326 198
Capacity to give consent
Art. 1327 199
Art. 1328 200

xiv
Art. 1329 200
Art. 1330 200
Art. 1331 202
Mistake
Art. 1332 205
Art. 1333 207
Art. 1334 207
Art. 1335 208
Art. 1336 208
Violence
Intimidation
Art. 1337 211
Undue influence
Contracts of adhesion
Art. 1338 213
Fraud
Art. 1339 217
Art. 1340 218
Art. 1341 219
Art. 1342 219
Art. 1343 220
Extent of the fraud
Mutual fraud
Incidental fraud
Art. 1344 220
Art. 1345 221
Art. 1346 221

Section 2. Object of Contracts 225

Art. 1347 225
Things within commerce of men
Existence of object andfiiture things
Rights as object of contracts
Future inheritance
Service
Art. 1348 227
Art. 1349 228

XV
 Section 3. Cause of Contracts 229
Art. 1350 229
Art. 1351 230
Cause of contracts
Cause distinguished from motive
Cause in different types of contracts
Art. 1352 233
Absence or want of cause
Unlawful clause
Art. 1353 233
Art. 1354 234
Art. 1355 234

Chapter Three: Form of Contracts 236

Art. 1356 236
Art. 1357 236
Art. 1358 236
General rule on the form of contracts
Exceptions to the rule
Form required for validity
Form needed for enforceability
Contracts that need to be in public instrument

Chapter Four: Reformation of Instruments 242

Art. 1359 242
Art. 1360 242
Art. 1361 242
Art. 1362 243
Art. 1363 243
Art. 1364 243
Art. 1365 243
Art. 1366 243
Art. 1367 243
Art. 1368 243
Art. 1369 244
Distinguishedfrom annulment

xvi
Chapter Five: Interpretation of Contracts 246
Art. 1370 246
Art. 1371 246
Art. 1372 246
Art. 1373 246
Art. 1373 246
Art. 1374 246
Art. 1375 246
Art. 1376 246
Art. 1377 247
Art. 1378 247
Art. 1379 247

Chapter Six: Rescissible Contracts 249

Art. 1380 249
Requisites for the rescission ofa contract
Art. 1381 252
Art. 1382 252
Lesion
Proving lesion
Badges or signs of fraud
Art. 1383 258
Art. 1384 259
Rescission as a subsidiary remedy
Beneficiary and extent ofthe rescission
Art. 1385 260
Art. 1386 260
Effects of rescission
When rescission is not an option
Art. 1387 262
Art. 1388 263
Art. 1389 264

Chapter Seven: Voidable Contracts 264

Art. 1390 264
As distinguishedfrom rescissible contract

xvii
 Causes for defective consent
Art. 1391 266
Art. 1392 267
Art. 1393. 268
Art. 1394. 269
Art. 1395 269
Art. 1396 269
Who can make ratification
Art. 1397 269
Art. 1398 270
Art. 1399 270
Art. 1400 271
Art. 1401. 271
Art. 1402 272
Effects ofloss ofthing to be returned

Chapter Eight: Unenforceable Contracts 273

Art. 1403 273
Kinds of unenforceable contracts
Contract entered into on behalf of someone without
authority or in excess of authority granted
Power of attorney defined
Sample ofa special power of attorney
Contracts violating the Statute ofFrauds
Type of memorandum required
Contracts under the Statute ofFrauds
A contract entered into when both parties are
incapacitated
Art. 1404 287
Art. 1405 287
Art. 1406 287
Art. 1407 287
Art. 1408 287

Chapter Nine: Void Contracts 288

Art. 1409 288
Art. 1410 291

xviii
 Art. 1411 292
Art. 1412 292
Restitution in void contracts
Art. 1413 294
Art. 1414 294
Art. 1415 295
Art. 1416 295
Art. 1417 297
Art. 1418 297
Art. 1419 297
Art. 1420 298
Art. 1421 298
Art. 1422 298

BUSINESS ORGANIZATION

TITLE ONE / Sole Proprietorship 301

TITLE TWO / Partnership 305

A. Requisites of a partnership 305

B. When a written public Instrument is required 306
Effect of non-registration with SEC
C. Distinct personality of the partnership 307
D. Who may be a partner 308
Industriell and capitalistpartners
E. Rights and obligations of partners 309
F. Management of the partnership 310
G. Advantages and disadvantages of partnerships 311

TITLE THREE / Corporation 313

A. Legal Attributes of Corporations 313

1. Artificial being
2. Created by Operation oflaw
3. Right of succession

xix
 4. Powers and attributes and properties author-
ized by law or incidental to its existence
5. Advantages and disadvantages of corporations
B. Corporate Finance 319
Capital
Kinds ofshares
C. Procedures and requirements for incorporation 322
1. Subscription stage
2. Drafting of the Articles
3. Other Pre-Incorporation Arrangements
4. Filing of Documentary Requirements.
5. Indorsement to Regulatory Agencies
6. Issuance of Certificate of Incorporation
D. Kinds of Corporations 328
1. Based on place of incorporation
2. Based on legal status
3. Based on nature
E. Governance of the Corporation 330
F. Powers and duties of the corporations directors 331
Directors'fiduciary duty
G. Rights of shareholders 335
1. Voting rights
2. Right to receive dividends
3. Pre-emptive rights
4. Information rights
5. Appraisal rights
6. Right to file derivative suit
7. Rught to choose directors
H. Dissolution and winding up of a corporation 338
I. Close corporations 339

TITLE FOUR / Cooperatives 341

References 343

About the Authors 365

XX