Pure and Conditional Obligations
A pure obligation is one where its performance of does not depend upon a future or uncertain event, or upon a past event unknown to the parties, resulting in such obligation being immediately due and demandable.
As a sub-set of a pure obligation, a reciprocal obligation is one which arise from the same cause, and which each party is a debtor and a creditor of the other, such that the obligation of one is dependent upon the obligation of the other. Necessarily, the performance of each reciprocal obligation is conditioned upon the simultaneous completion of the other. Hence, both obligations must be performed at the same time.
In a reciprocal obligation, the power to rescind obligations is implied if one of the obligors does not comply with what was incumbent upon him. Thus, in a breach of a reciprocal obligation, the injured party may choose between: (a) the fulfillment of the obligation with damages, or (b) the rescission of the obligation damages. If the fulfillment of the first option becomes impossible after it is chosen, the injured party may still seek rescission. The right to rescission does not prejudice the rights of third persons who may have lawfully acquired the thing. If it cannot be determined who first violated the contract, the agreement is deemed extinguished resulting in either party bearing their own damages.
University of the Philippines v. De Los Angeles
G.R. No. L-28602, 29 September 1970
The University of the Philippines (UP) and Associated Lumber Manufacturing Company, Inc. entered into a logging agreement whereby UP awarded logging concessions in one of its properties in favor of the lumber company in consideration of royalties, forest fees, etc. Sometime after, the lumber company failed to pay the said fees despite demands. To avoid termination of the agreement, the lumber company executed an “Acknowledgment of debt and Proposed Manner of Payments” whereby it was expressly stated therein that UP had “the right and power” to rescind the logging agreement in case of default of the lumber company. Subsequent thereto, the lumber company was in default again. As a result, UP informed the lumber company that it had rescinded the logging agreement. The lumber company claimed that it is only through a judicial declaration that a contract can be rescinded.
HELD: UP had the right to rescind the contract even without a court declaration. The provision granting UP the power to rescind upon default of the lumber company is valid even without any court intervention. “In other words, it is not always necessary for the injured party to resort to court for rescission of the contract.” In exercising the power of rescission, the injured party is required to inform the other party of the termination.
The exercise of such right of rescission is “subject to scrutiny and review by the proper court.” Thus, the other party may challenge the exercise of the right of rescission if the same is not justified. “Then, should the court, after due hearing, decide that the resolution of the contract was not warranted, the responsible party will be sentenced to damages; in the contrary case, the resolution will be affirmed, and the consequent indemnity awarded to the party prejudiced.”
“In other words, the party who deems the contract violated may consider it resolved or rescinded, and act accordingly, without previous court action, but it proceeds at its own risk. For it is only the final judgment of the corresponding court that will conclusively and finally settle whether the action taken was or was not correct in law. But the law definitely does not require that the contracting party who believes itself injured must first file suit and wait for a judgment before taking extrajudicial steps to protect its interest. Otherwise, the party injured by the other’s breach will have to passively sit and watch its damages accumulate during the pendency of the suit until the final judgment of rescission is rendered when the law itself requires that he should exercise due diligence to minimize its own damages (Civil Code, Article 2203).” (Emphasis supplied.)
Best Legal Practices:
Observe care and due diligence in rescinding reciprocal obligations – Considering the caveat in the UP Case, the party exercising the right of rescission should observe care and due diligence in exercising such remedy. If the rescission is not warranted or justified, the said party may be held liable for damages.
Send demand letter and afterwards a notice of rescission – A demand letter should first be sent in order to place the other party in default. Subsequently, a notice of rescission should be sent to the guilty party as the same is required by law.
A conditional obligation is one which requires the happening of an event for a right to be acquired (suspensive condition) for a right to be extinguished (resolutory condition). Consequently, a conditional obligation is one the performance of which depends on an uncertainty (whether the day will come or not).
As a sub-set of a conditional obligation, a suspensive condition is a future event the happening of which results in the acquisition of a right and the creation of the corresponding obligation. Logically, an obligation depending on a suspensive condition may be extinguished once: (a) the time expires; or (b) it has become indubitable that the event will not take place.
Example 1: A car distributor placed an order for 20 luxury cars from a car maker company provided that the latter deliver the goods within 12 months. It was expressly agreed and stipulated in writing that full payment depended on the prompt delivery of the goods. If the cars are delivered within the agreed period, the car company acquires to right to demand full payment for the purchase and its obligation to deliver is extinguished. Conversely, if the cars are not delivered after the expiration of the period, the car distributor’s obligation to pay is extinguished.
Example 2: A museum bought a Picasso painting from an art gallery with the express agreement that full payment will be made only upon delivery. If the painting is delivered, the museum’s obligation to pay arises. If the painting is not delivered because it was burned due to a fire, the museum’s obligation is extinguished as it is indubitable that there will never be a delivery of the painting anymore.
In the alternative, a suspensive condition may depend on a negative event or that something does not happen at a determine time. In this case, the obligation is effective: (a) from the moment the time indicated has elapsed; or (b) if it becomes evident that the event cannot occur. If there is no stipulated time, the suspensive condition is considered fulfilled at such time as what they may have probably contemplated taking into consideration the nature of the obligation.
Reyes v. Tuparan
G.R. No. 188064, 01 June 2011
Plaintiff Mila A. Reyes filed a complaint against defendant Victoria T. Tuparan for rescission of contract with damages. Plaintiff, defendant, and FSL Bank entered into an executed a Deed of Conditional Sale with Assumption of Mortgage, whereby defendant bound herself to assume the loan and mortgage payments of plaintiff with the bank. The payments made by defendant would be considered as purchase price of the mortgaged property. After defendant failed to pay several amortizations to the bank, plaintiff filed this suit. One of the issues raised was whether plaintiff and defendant had entered into a contract of sale.
HELD: Plaintiff and defendant entered into a contact to sell, and not a contract of sale. The plaintiff’s obligation to sell the subject properties becomes demandable “only upon the happening of the positive suspensive condition” – which is the defendant’s full payment of the purchase price. Until defendant makes full payment, there is no breach of contract as plaintiff does not have yet any obligation to turn over the title.
As a sub-set also of a conditional obligation, a resolutory condition is a future event the happening of which results in the extinguishment or loss of a right already acquired. Otherwise stated, a resolutory condition automatically grants the exercise of a right and creates the corresponding obligation subject to the happening of the event that may result in the termination of the right or obligation.
Example: A clothing company engaged a celebrity as its product ambassador so long the latter does not endorse a particular rival business. If the celebrity is caught promoting the products of that rival business, the clothing company may terminate the contract as the resolutory condition took effect.
Best Legal Practices:
State in plain, clear, and categorical language the consequences for suspensive or resolutory conditions – If a contract comes with it a suspensive or a resolutory condition, these conditions should be stated in plain, clear, and categorical language in order to effectively communicate the consequences of the happening of the event.
Send notice of rescission in case of happening of resolutory condition – As the happening of a resolutory condition entitles the innocent party to rescission, the requirement of notice of rescission should be observed.
While conditional obligations are allowed, some are void as in these cases: (a) a potestative condition or one wherein the fulfillment depends upon the sole will of the debtor resulting in injustice to the creditor; or (b) a condition not to do an impossible thing as it simply cannot be done.
Meanwhile, an obligation may be annulled if: (a) it depends on impossible conditions; (b) it is contrary to good customs or public policy; and (c) it is prohibited by law.
Whether a condition is suspensive or resolutory, such condition is considered fulfilled if the debtor voluntarily prevents its fulfillment. A conditional obligation which has been fulfilled retroacts to the day of its constitution, including its effects. If the obligation carries reciprocal prestations upon the parties, the fruits and interests are deemed mutually compensated during the pendency of the condition. If the obligation is unilateral, the debtor is to appropriate the fruits and interests received except as otherwise may have been intended by the parties through the inference of the nature and circumstances of the obligation.
Example: A realty company engaged the services of a construction firm for the purpose of building a townhouse. The two businesses agreed to a progress billing wherein payment will be made for every phase completed. To be entitled to the remaining balance, the last phase involves the painting of the townhouse. If the realty company refuses to have it painted regardless of the reasons despite having agreed to it, the construction firm’s obligation to paint is considered fulfilled. The latter may demand for the release and payment of the remaining balance.
Further, prior to the fulfillment of the condition, the creditor has the right to initiate proper actions in order to preserve its right. On the other hand, the debtor is allowed to recover what has been paid by mistake prior to the happening of the suspensive condition.
If the conditions were imposed for the purpose of suspending the efficacy of an obligation to give, the following are the rules to be observed in case of improvement, loss, or deterioration of the thing during the pendency of the condition:
(1) If the thing is lost without the fault of the debtor, the obligation is extinguished;
(2) If the thing is lost through the fault of the debtor, he is obliged to pay damages; it is understood that the thing is lost when it perishes, or goes out of commerce, or disappears in such a way that its existence is unknown or it cannot be recovered;
(3) When the thing deteriorates without the fault of the debtor, the impairment is to be borne by the creditor;
(4) If it deteriorates through the fault of the debtor, the creditor may choose between the rescission of the obligation and its fulfillment, with indemnity for damages in either case;
(5) If the thing is improved by its nature, or by time, the improvement inures to the benefit of the creditor; and
(6) If it is improved at the expense of the debtor, he has no other right than that granted to the usufructuary.
In addition to the above rules, if the conditions are designed to extinguish an obligation to give, the parties are required to return to each other what they have received upon the happening of the conditions. In case of loss, deterioration or improvement of the thing, the party bound to return is to observe the rules mentioned in the earlier paragraph.