Pure and Conditional Obligations

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What constitutes pure obligations – A pure obligation is one the performance of which “does not depend upon a future or uncertain event, or upon a past event unknown to the parties”, and thus it is immediately due and demandable.[1]

Same; Reciprocal obligations – Reciprocal obligations are “those 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.”[2] Consequently, the performance of each reciprocal obligation is conditioned upon the simultaneous completion of the other such both must be performed at the same time.[3]

Same; Same; Implied power to rescind – In reciprocal obligation, the power to rescind obligations is implied if one of the obligors does not comply with what was incumbent upon him.[4] Thus, the injured party may choose between: (a) the fulfillment of the obligation with damages, or (b) the rescission of the obligation damages. [5] In the event that fulfillment of the second option becomes impossible after it is chosen, the injured party may still seek rescission.[6] The right to rescission does not prejudice the rights of third persons who may have lawfully acquired the thing. [7] If it cannot be determined who first violated the contract, the latter is deemed extinguish resulting in either party bearing their own damages.”[8]

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 As a result, UP informed the lumber company that it had rescinded the logging agreement. The lumber company claimed that it is only through a judicial declaration that a contract can be rescinded.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 make put the other party in default. Subsequently, a notice of rescission should be sent to the guilty party as the same is required by law.

Conditional obligations – Conditional obligations are those which have to happen for the purpose of acquisition of rights (suspensive condition), as well as extinguishment or loss of rights already acquired (resolutory condition).[9] A conditional obligation is one whose performance depends on an uncertainty (whether the day will come or not).[10]

Same; Suspensive condition and resolutory condition – A suspensive condition is a future event the happening of which results in the acquisition of a right.[11] The obligation is extinguished if: (a) the time expires; or (b) it has become indubitable that the event will not take place.”[12] Conversely, if the condition is for some event not to happen at a determine time, the obligation is effective: (a) from the moment the time indicated has elapsed; or (b) if it becomes evident that the event cannot occur. [13] If the parties did not fix a time, the condition will be considered fulfilled “at such time as may have probably been contemplated, bearing in mind the nature of the obligation.”[14]

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.

Same; Resolutory condition – A resolutory condition is a future event the happening of which results in the extinguishment or loss of the right already acquired depends.[15] 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.”[16]

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.

Void and voidable conditions – The following conditions are void: (a) a potestative condition or one wherein the fulfillment depends upon the sole will of the debtor;[17] and (b) a condition not to do an impossible thing.[18] Meanwhile, an obligation is 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.[19]

Condition fulfilled if obligor voluntarily prevents fulfillment – A condition is considered fulfilled if the debtor/obligor voluntarily prevents its fulfillment.[20] A conditional obligation which has been fulfilled retroacts to the day of its constitution, as well as its effects.[21] If the obligation carries recpriocal prestations upon the parties, the fruits and interests are deemed mutually compensated during the pendency of the condition.[22] 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.[23]

Rights of the creditor prior to the fulfillment of the condition – Prior to the fulfillment of the condition, the creditor has the right to initiate proper actions in order to preserve his right.[24] On the other hand, the debtor is allowed to recover what he has paid by mistake prior to the happening of the suspensive condition.[25]

Same; Rules to be observed if condition is for suspending efficacy of obligation to give – 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:[26]

  • If the thing is lost without the fault of the debtor, the obligation is be extinguished;[27]
  • 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;[28]
  • When the thing deteriorates without the fault of the debtor, the impairment is to be borne by the creditor;[29]
  • 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;[30]
  • If the thing is improved by its nature, or by time, the improvement inures to the benefit of the creditor;[31] and
  • If it is improved at the expense of the debtor, he has no other right than that granted to the usufructuary.[32]

Same; Rules if conditions are to extinguish obligation to give – 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.[33] In the event of the loss, deterioration or improvement of the thing, the party who is bound to return is to observe the rules mentioned in the earlier paragraph.[34]

[1] CIVIL CODE, Paragraph 1, Article 1179.

[2] Antonio R. Cortes v. Hon. Court of Appeals, et al., G.R. No. 126083, 12 July 2006.

[3] Ibid.

[4] CIVIL CODE. Paragraph 1, Article 1191.

[5] Ibid. Paragraph 2, Article 1191.

[6] Ibid. Paragraph 2, Article 1191.

[7] Ibid. Paragraph 4, Article 1191.

[8] Ibid. Article 1192.

[9] Ibid. Article 1181.

[10] Ibid. Paragraph 4, Article 1193.

[11] Ibid. Article 1181.

[12] Ibid. Article 1184.

[13] Ibid. Paragraph 1, Article 1185.

[14] Ibid. Paragraph 2, Article 1185.

[15] Ibid. Article 1181.

[16] Arroryo v. De Lima, et al., G.R. No. 199034, 199046, 13 December 2011, Dissenting Opinion of Mr. Justice Antonio T. Carpio; See also Paragraph 2, Article 1193, Paragraph 2, Article 1179, and Paragraph 2, Article 1193, Civil Code.

[17] CIVIL CODE. Article 1182.

[18] Ibid. Paragraph 2, Article 1183.

[19] Ibid. Paragraph 1, Article 1183.

[20] Ibid. Article 1186.

[21] Ibid. Paragraph 1, Article 1187.

[22] Ibid.

[23] Ibid.

[24] CIVIL CODE, Paragraph 1, Article 1188.

[25] Ibid. Paragraph 2, Article 1188.

[26] Ibid. Article 1189.

[27] Ibid. Article 1189 (1).

[28] Ibid. Article 1189 (2).

[29] Ibid. Article 1189 (3).

[30] Ibid. Article 1189 (4).

[31] Ibid. Article 1189 (5).

[32] Ibid. Article 1189 (6).

[33] Ibid. Paragraph 1, Article 1190.

[34] Ibid. Paragraph 2, Article 1190.

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