Special Lectures on Special Contracts Formatted: Left: 0.5", Right: 0.5", Top: 0.

5", Bottom:
By Uribe 0.5", Width: 8.27", Height: 11.69"

August 27, 2013

CONTRACT OF LEASE

Q1: Limitations on the right of ownership imposed by the owner himself, except:
Answer: Will/succession
Other choices which are wrong: mortage, pledge and lease

3 kinds of lease:
1. Service
2. Things
3. Right

Republic v Bagtas- Claim: contract entered into is commodatum, and the thing was lost due to fortuitous event,
hence, owner should bear the loss.

Characteristics of Contract of lease:

1. Lease of thing/service is essentially onerous
2. a principal contract
3. As to perfection, it’s a consensual contract
4. Bilateral contract, hence, reciprocal obligations may arise therefrom.
5. Nominate

Lease of service distinguished from other contracts involving services. Compare with contract of agency and piece of
work
1. Contract of piece of work, as ruled by SC, the control of the employer/principal over the contractor extends
only to the result of the work. As to the methods of the work is within the control of the contractor.
2. Contract of agency, principal may revoke the agency at anytime upon the will of the principal. In a contract
of lease, the contract expressly provides for “Termination Clause”.
3. A contract of Piece of work is similar with contract of sale because it involves delivery of a thing and a price is
paid. As distinguished, contract of POW (as per Massachusset’s Rule: if the thing to be delivered is solely for
the order of the other party, not manufactured in the ordinary course of business is considered POW.
Reason for distinction: Tax rate on contract of POW differs from sale)

Lease of service requires that there is no principal-agent relationship between the parties.
a. Household service
b. Piece of work
c. Common carrier
d. Personal service of another

Q2: Will the death of the lessee extinguish the lease agreement?
Answer: No, unless there is a stipulation that the rights and obligations of the lessee are intransmissible.

Contract of lease (lease of thing) as ruled by SC is not a purely personal contract, hence, not extinguished by the
death of any other parties.

Essential Elements of contract of lease:

1. Consent
2. Object
3. Cause or consideration

Persons prohibited from entering into contract of lease (if entered into, contract is void, not merely voidable):
1. Spouses cannot lease to each other, same prohibition to enter into contract of sale. Except:
a. the spouses entered into a marriage settlement with complete separation of prop
 b. in case the spouses were able to obtain a decree of separation of property, decree of legal separation is
not necessary.
2. Guardian leasing his property to his ward
3. Agents cannot lease property under his administration
4. Executor/administrator for properties under administration
5. Lawyers/judges for prop of litigants under litigation

Object of a lease of thing- it must not be fungible. Exception: It may be consumable as long as it is merely for
exhibition or as an accessory to an industrial establishment.

Distinguish consumable from fungible thing.

Cause/consideration in a contract of lease must be

1. Lessee: Pay the rent
2. Lessor: Promise re: use and enjoyment of the object of lease

Principle of Greatest reciprocity of interest

Requisites of a contract of lease:

1. No particular form for its validity.
2. For enforceability purposes, as covered by the Statute of Frauds, (Note: a contract of lease with an
immovable property as object, even if performed within 1 year and regardless of amount, is covered by the
statute of frauds…. Check recording… )
3.

Statute of Frauds applies only to wholly executor contracts. Exception is the Doctrine of Part Performance, which
exempts a transaction partially executed from the coverage of the Statute of Frauds.

Q3. Is the lease of entire community of prop in co-ownership an act of administration or an act of ownership? It is
considered an act of ownership if the property is an immovable property and consent of all co-owners is required
when the period of lease is more than 1 year.

In a contract of POW, if there are changes in the plans and specifications as requested by the principal, even no
additional agreement was entered into re: additional pay, both the change and additional price to be paid must be in
writing in order for the contractor to be entitled to the additional compensation.

Spouses Chung v. Ulanday Construction, Inc.- 21 changes in the plans re: construction of the house, and were all
made verbally. Only 2 changes were recognized by the spouses. Verbal agreements as to the changes in the plans
and specs for a piece of work does not bind the principal, hence, the contractor cannot be paid for additional
compensation.

Read Article 1724.

Rights and obligations of the parties in a contract of lease:

Gonzales v Mateo- Gonzales leased a cockpit. During the term of the lease, the cockpit collapsed due to failure to
make the necessary repairs. Who is liable for the injuries resulting from the collapse?

Answer: General rule, lessor should make the necessary repairs, unless stipulated to be borne by the lessee. Hence,
Gonzales is liable due to the stipulation made.

Note: The lessor is not obligated not to allow establishment of similar business adjoining to the premise to the
lessee, unless expressly stipulated in the contract of lease.

Rights of the parties in relation to the improvement upon expiration of the period of the lease (NOTE: always
consider the option availed by the lessor to determine the rights of the lessee):
1. If improvement is made in good faith (one is considered in good faith
 2. If improvement is in bad faith, the lessee will not be reimbursed nor be allowed to remove if the lessor
opted to appropriate it.
In answering similar questions like the foregoing:
1. Determine the option taken by the lessor to know the appropriate rights of the lessee. If lessor opted the
lessee to vacate the premise, it depends on the nature of the improvement. If useful/necessary, lessee will
have the right to remove the improvement even it will cause damage to the thing leased. If merely for
ornamentation, lessee can only remove improvement if it will not cause damage to the thing leased.
2. Is the improvement a mere ornamentation or useful/necessary to the premise?

If improvement is constructed with the knowledge of the lessor without any objection, lessee is regarded as builder
in good faith. In this case, the lessor can appropriate the improvement but pay the value appropriate to a builder in
good faith (refer to civil code).

Note: Construction of a chapel in a leased lot is considered by jurisprudence as a useful/necessary improvement, not
mere ornamentation. Hence, if lessor demands lessee to vacate the premise, the latter may remove the same even it
will cause damage to the leased premise.

Collapse of a building due to inferior quality of materials used. Who is liable? Contractor if he covers purchase of
materials. If made by the owner, contractor is not liable.

The architect maybe held solidarily liable with the contractor if building collapsed due to faulty design. In this case,
the owner can demand for reconstruction, which maybe done by another contractor at the expense of the debtor,
with claim for damages.

Lessee may have the right to seek for reduction of rental.

In a lease of rural land, lessee may request for reduction of ½ of the rental in case of extraordinary fortuitous event,
not mere ordinary FE. Among flood, typhoon and earthquake, earthquake is the answer. Flood maybe considered
extraordinary if it is unusual. Other extraordinary fortuitous events:
1. War
2. Pestilence

Note: reduction of the rent is further conditioned that the harvest received is less than ½ of the usual harvest.

Demand for extension of the lease is not allowed even in case of extraordinary fortuitous event. At the least,
reduction in the rental or suspension of the lease term may be availed.

Right of first refusal- is granted to the lessee by stipulation, this is not a right granted by law. This is different from
option to buy. RFR can be exercised only if the lessor sells the leased premise.

If lessor sold the property without giving the lessee chance to exercise his RFR, the remedy is rescission in case buyer
thereto is in bad faith (he must have knowledge of the right of refusal available to the lesee). Otherwise, rescission is
not available as a remedy.

Manila Int’l airport v Avia Filipinas- Avia is the lessee who entered into a contract of lease with Manila Int’l Airport
with stipulation that “laws effective as of the time the contract is entered into”. Despite the expiration of the original
lease period, Avia continued to pay the old rate. But the lessor already issued a memo increasing the rental to all its
tenants. SC ruled that any modification of the contract must be in writing. Hence, the rental payments made by Avia
despite denial of access thereto, was ordered by the court to be paid back to them by Manila.

By law, the lessee has the right to sublease, unless by stipulation, he is prohibited by the other party to do so.

By law, the lessee cannot assign the lease, unless allowed by stipulation.

If the contract of lease is silent as to the foregoing, the lessee can sublease but cannot assign by operation of law.
The assignment herein prohibited by law is the assignment of the lease (principal/main lease). Assignment by a sub-
lessee of the sublease to another lessee is not covered by the prohibition.

If the lessee has an agreement with a third person to transfer his right over the lease, without the knowledge of the
lessor. Is this valid?
1. Determine the nature of the agreement between the lessee and third person. Is it merely a sublease or an
assignment of the lease? SC provided for the rules is as follows:
a. If there is an absolute transfer of right where in the lessee disassociate himself from the lease contract,
and third person becomes the new lessee (absolute transfer of right), this is construed as an assignment.
b. If the agreement still vests with the lessee the right to the lease (even only for 1 day), it is still considered
sublease, not assignment. If there are restrictions/limitations set by the lessee to the third person, still
has control over the lease, hence, mere subleasing.
A property subject of lease was subsequently sold, will the new buyer honor the contract of lease with the existing
lessees? Yes, if the lease contract is known to the buyer, or if it was stipulated in the contract of sale or when the
lease is registered.

If the contractor to a piece of work is obliged also to buy the materials, not only the services, in case of failure of the
contractor to pay the supplier of the materials, can the owner of the building be held liable to pay the same? Yes,
even if the owner already paid the contractor in full, if payment was made before the obligation became due. Even if
the owner does not owe anything from the contractor, but payment was made earlier than the supposedly due date,
it may be taken as a sign of bad faith on the part of the owner in order to escape any liability with the supplier of the
materials.

Owner may be held solidarily liable in case of workmen’s claim in case there is no performance bond was posted to
insure that the contractors will faithfully pay the workers’ compensation.

Read Article 1659 of the civil code.

Acceptance by the lessor of rental payment does not constitute an abandonment of the ejectment case. The mere
fact of previous non-payment of rental which made the lessor filed an ejectment suit is without prejudice for the
lessee to pay the rental.

Effect of the lost of a thing subject of a lease agreement extinguishes the contract if:
1. There is total loss due to fortuitous event
2. If partial lost, lessee has the options either to rescind (which extinguishes the contract) or continue with the
contract but ask for the proportionate reduction of the rental.- no such thing as automatic extinguishment of
the obligation.

Under what circumstances would there be an implied new lease (tacita reconduccion)?
1. Period of the lease had already expired
2. There is no notice for the termination of the contract from either the lessor or lessee
3. Lessee continued in possession for a period of at least 15 days after the expiration of the contract.

In case of implied renewal of the lease, it will be deemed renewed on a monthly basis. Hence, it may be terminated
at the end of the contract.
Viegely Samelo v Manotok Services, Inc.- Justice Brion- Article 1670. In implied new lease, not all the terms and
conditions in the original contract is binding. Even the original period of lease is not the same. Term of the implied
new lease will be based on the frequency of payment of rental. Original period of the contract is not deemed
renewed. All other terms and conditions in the original contract which are germane to the contract of lease are
deemed renewed, hence considered in full force and effect in the new lease. Example: not germane to the contract
of lease- option to purchase provided during the period of the original lease.

Cebu Bionic Builders Supply, Inc.

Issues:
1. Whether a new contract of lease between petitioners and DBP was perfected?
2. Whether petitioners
Read Article 1682 and 1687

CONTRACT OF AGENCY

Proxies in a baptismal or wedding ceremonies for godparents , is there a contract of agency? No. the proxy is not
considered an agent of the real godparent.

Article 1868

Contract of Agency requires execution of a juridical act, it pertains to a legal relationship, it does not cover social
relationship. Social or political representations are not covered by the Contract of Agency.

Characteristics of a Contract of Agency:

1. Preparatory contract- intended to enter into another contract
2. Accessory contract
3. Consensual, perfected by mere consent
4. Not essentially an onerous contract. However, the burden to prove that it is gratuitous lies on anyone who
claims the same. The law presumes contract of agency as one for compensation. (significance of proving it’s
a gratuitous contract by the agent- in case the agent caused damage to the principal due to fraud or fault of
the agent, the liability is mitigated by the fact that the Agency was entered into gratuitously.
5. Relationship is representative in character.
6. Fiduciary in character- based on trust and confidence

As differentiated from negotiorum gestio, this is created by operation of law, unlike agency created by agreement
between the parties.

In contract of partnership, there is a new juridical entity created while in agency, none.

Agency as distinguished from contract of POW and partnership. Partnership can be extinguished by the unilateral act
of any of the contracting parties (exception to the principle of mutuality of contract). Control by the principal goes
only to the results, in agency, even the modes of performing the obligations is controlled by the principal. If the
property is transferred to the agent, there is no transfer of ownership.

There can be a contract of agency by estoppel.

Apparent or ostensible Agency

Express Agency- agreed in writing

Implied Agency:
1. Implied consent given by the principal
2. Implied consent given by the agent

Mere silence of a principal despite a person already represents him, despite no written authority to do so, is deemed
implied agency.

As to 2 persons present, 1 delivers an SPA to the other person, the other receiving the same was just silent after
receipt thereof, it may be deemed acceptance, hence, implied agency is created.

As between persons who are absent, silence of the other party will not be taken as acceptance of agency.

Scope of authority
Even in the general power of authority, the principal stated that he withholds the agent with no power from him and
that the agent may execute such acts as he may consider appropriate, the agent is deemed authorized to perform
acts of administration on behalf of the principal.

For an agent to lease a real property for more than 1 year, a Special Power of Attorney from the principal is required.

A minor agent who entered into a contract of sale on behalf of the principal with a third person, the minority cannot
be attacked to make the contract of sale voidable because:
1. The contract of sale is between the principal and third person
Minority of the agent can nullify the agency, but not the contract of sale.

Not all lawful acts can be delegated to an agent, example, making of an affidavit or a will (exception: lawyer drafting
the will which is allowed by the law on succession)

Can a member of BOD of a corporation delegate his right to vote to an agent? Proxy is allowed only in stockholders’
meeting, not during regular or special meetings.

Form of authority of an agent:

1. For the validity, none,
2. For the enforceability, if the act is not performed within 1 year, it must be in writing.

If the authority of the agent is orally made, but the law required it to be in writing, what is invalidated is not the
contract of agency, but the contract entered into by the agent on behalf of the principal.

Agent authorized to sell a parcel of land (the law did not state immovable/real property) and his authority is not in
writing, the contract of sale, even in a public instrument or notarized, is void.

Agent selling a condo unit on behalf of the principal, this is not covered by the foregoing rules, there must be an SPA
to be enforceable.

Sale of a watch, but authority of agent is not in writing. The sale will be covered by Art. 1878. Hence, SPA is required.
1878 also covers sale of any immovable except parcel of land.

Agent paid the supplier, without SPA from principal/or agent paid the debt of the principal to a creditor- for the
payment with supplier, yes it binds the principal because it is a mere act of administration. With the 2nd case,
payment to the bank, it doesn’t bind the principal, hence, latter may recover the amount paid to the bank by the
agent.

If object of contract of lease is merely personal, regardless of the number of years, the agent may bind the principal,
no need for an SPA. However, in case of contract of lease involving real prop, SPA is required. Except: the principal is
the lessee, no need for an SPA.

If an agent entered in to contract of lease, do not consider only Art. 1878 but also the Statute of Frauds. Despite
having complied with all the requirements of Art. 1878 but failed to put it in writing as required by the statute of
fraud, it is enforceable.

Spouses Miniano Dela Cruz v Ana Marie Concepcion

Letter of Authority need not be in a public instrument. Mere letter is sufficient.

SPA- It must always be in writing

Read Article 1874

Death of any of the parties extinguishes the contract of agency

Twin obligations of the agent

1. To act w/in his authority
3 ways to determine this:
a. Thru the SPA (agent authorized to sell the prop of the principal, he sold the prop of the principal but the
latter only acquired properties after the authority was granted. SC ruled that any property that belongs or
will belong to the principal will be covered by the authority granted to the agent even if the authority was
granted prior acquisition of said property.
b. Act is w/in or outside scope of authority- if the agent sold a property beyond the price more than what was
agreed with the principal. Effect: The law provides that the authority of the agent is not deemed exceeded if
it becomes more advantageous to the principal. Reason why principal might question the agent: he has a
buyer who is willing to buy more than the sp made by the agent, or changed his mind and doesn’t want to
sell the prop anymore.

Authority to receive check does not include authority to encash. The same requires separate SPA.

Authority to hire lawyer includes authority to pay the lawyer.

Implications of acting beyond scope of authority by the agent:

a. Principal- contract is unenforceable against the principal. Exception:
a.1 if principal ratifies the contract
a.2 if principal contributed to make the third party believe that he is solidarily liable with the agent
a.3 limitation on the authority of the agent is not known by the third persons
b. As to third person- agent is liable to said third person. Except:
b.1 if principal ratifies
b.2 agent gave notice to third person as to the limit of the authority
b.3 third person is aware that the agent is not authorized

Note: even if the contract is void, but agent promised to the third person that he will get the ratification
of the principal.

2. Acting in representation of the principal

Sargasso Construction & Dev’t Corporation v Philippine Ports Authority –Having acted without approval of the board,
no authority, hence does not bind the corporation.

Article 1898-

Contract of adhesion- valid contract

Appointment by the agent of a sub-agent- allowed because the agent is not considered to have disassociated himself
from the agency.

Appointment by the agent of a substitute- the law does not prohibit the agent to do so, provided he is not prohibited
by the principal. If damage is caused to the principal due to the act of the substitute, the principal has a direct cause
of action against the substitute (even there is no privity of contract between them).

Commission Agent- failure to sell the goods, general rule, he will be held liable. Exception: exercise of due diligence.
The agent is not an insurer of the success of the business of the principal.

Guarantee commission agent- liable to sell, collect proceeds and assumes the risk of collection.

If by stipulation, the parties bound themselves solidarily, but the agent acted beyond the scope of his authority, the
solidary liability will not apply.

If agent entered into a contract with a determinate thing and principal likewise entered into another person for the
same determinate thing, what prevails is the contract that was entered into first (priority in time, priority in rule- in
contract of lease). In case of contract of sale, the aforesaid rule is not applicable. The law on double sale will apply. If
both the parties acted in good faith, the agent is not liable but only the principal.
Modes of extinguishment (6 – see civil code)
1. Loss of the thing due- in case of robbery, if proven without any contributory negligence on the part of the
agent, with or without final conviction, the agent may interpose this defense to extinguish the contract of
agency.
2. Novation
3. Death
4. revocation

Most bar favourites:

1. death- death of the agent extinguishes the contract of agency.

General Rule: Death of the principal extinguishes the contract of Agency. Exception is (Art 1930- third
person, despite knowledge of the death of the principal proceeded with a transaction with the agent).

Check recording # 18 53: (rule on simultaneous sale by the heir and agent to 2 different persons involving 1
and the same property of the deceased principal)

Note: The rules on double sale apply only in case both contracts are valid sales.

2. Revocation- principal can revoke the authority of the agent at will, even if the agency is one with a period
because this contract is based on trust and confidence. If revocation was made in bad faith, the principal
maybe liable under the Abuse of Trust Principle (example: the principal and third person agreed to remove
the agent, by revoking the authority, in order to reduce the price arising from the supposed commission of
the agent)

Art. 1927- 3 circumstances when principal cannot revoke agency:

1. Bilateral contract depends upon the agency
2. Agency is a means of fulfilling an obligation that has been contracted
3. Agent is a managing partner as per articles of partnership

Agency coupled with interest- agency is constituted as a means of fulfilling an obligation that has already been
contracted.- cannot be revoked.

LAW ON PARTNERSHIP

Money given as a financial assistance does not necessarily create a partnership.

Characteristics:

1. Preparatory contract
2. Essentially onerous
3. Also a juridical entity like a corporation but general partner is liable to the liability of the partnership, unlike
in corp, stockholders are not generally liable to the liability of the corporation.

Partnership distinguished from co-ownership- the latter is created not only by agreement of the parties but by
law

Essential elements

Persons prohibited to enter into partnership:

1. Those prohibited from making donations to each other are prohibited to enter into a universal partnership
(hence, a husband and wife can form a limited partnership to engage in real estate business, with the wife
being a limited partner. Limited partnership is a particular partnership, not a universal partnership.)

While a corporation can enter into a joint venture agreement, it cannot enter into any kind of partnership.
 An oral partnership is valid if no immovable property is contributed or the money contributed is less than 5k.
Despite failure to comply with the formality required upon the creation of partnership, this is without
prejudice to the right of third persons against the partnership.

Partnership for particular undertaking

Classes of Partners:
1. Limited partner- no right to participate in the mgmt and control of the partnership

Determination whether partner is limited or general is applicable only in a limited partnership because in
general partnership, all partners are general partners.

Substantial non-compliance- ex. No certificate of registration of the partnership. Failure to indicate the
names of the general partners in the certificate. What is the effect of substantial non-compliance? It is a
valid limited partnership as between or among the partners but as to third persons in good faith, it will
be treated as a general partnership.

Capitalist partner is prohibited from entering into a business which is similar or related to the business of
the partnership.

An industrial partner cannot be engaged in any kind of business without the consent of the other
partners.

A partner maybe compelled to give additional contribution if expressly stipulated in the articles of
partnership by mere consent of majority of the partners. If no such stipulation, can he sell? If he is a
capitalist… If he is an industrial partner, he cannot be compelled to sell his share. (check recording No.
19 36

If there is a new partner, and the partnership incurred a debt, will the new partner be liable? It depends
as to when the liability was incurred. If incurred prior joining of the new partner, he will be liable only up
to the extent of his capital contribution (check recording)

Managing partner

Art. 1792

Property rights of the partners:

1. Partner’s right to specific property of the partnership
2. Partner’s interest in the partnership
3. Right to participate in the management of the business

Any stipulation excluding one from sharing in a profit is a void stipulation.

If there is no stipulation as to profit sharing or stipulation is void, distribute profits in proportion to capital
contribution. In case of industrial partner, give him first the just and reasonable value for his services then distribute
the rest among the capitalist partners.

Pactum Leonina- stipulation in a contract of partnership w/c excludes one or more partners from any share in the
profits.

Partner’s creditors cannot levy property of the partnership. Otherwise, the rule is different

Partners may assign their interest in the partnership to third persons. The assignee will only be entitled to the share
to which the assignor partner is entitled.
Each managing partner may bind the partnership of a decision where there is no other opposition by another
managing partner, even other non-managing partners oppose the same.

In case there is an opposition by another managing partners, decision of the majority of the managing partner will
prevail. If majority cannot be met because the other managing partner does not want to vote, the controlling
interest of the 2 opposing managing partners will be taken into consideration.

Solidary management- each one of the managing partners may separately execute all acts of administration (if no
stipulation in the articles of inc specifies their respective duties).

Obligations of partners among themselves and remedies

1. Money
2. Property- determine what was contributed.
a. If property- in case of loss, partnership will bear the loss
b. If use only- as a rule, partner who owns it bears the loss. Exception (partnership liable)
- If thing delivered is fungible
- Thing cannot be kept without deteriorating

Rules on sharing of losses (refers to the situation when partnership’s assets is no longer enough to settle the
liabilities):
1. Determine any stipulation as to sharing of losses
a. If all partners have share in the losses. An industrial partner may still share in the losses despite the fact
that it did not contribute any capital.
b. Agreement excluding a partner from losses
b.1 if capitalist- void stipulation
b.2 if industrial- valid as among the partners but as to partnership’s creditors, this is a void stipulation,
hence, can be demanded by the creditors to pay but can seek reimbursement from the capitalist
partners.
2. W/out such agreement as to losses:
a. But there is an agreement as to sharing of profits- follow the profit sharing ratio
b. If no agreement as to profits and losses- based on capital contribution (hence, industrial partner, being
without any capital contribution, does not share in the losses)

Share of the partners after exhausting assets of the partnership is Pro rata.

Dissolution of Partnership

Read Article 1840

Effect of the death of partnership- it does not terminate the partnership, it merely dissolves it.

Note: In general partnership, death of a general partner does not dissolve because all other surviving partners
remain as general partners, hence, the general partnership susbsists.

In a limited partnership, if one of the general partner dies, it does not necessarily dissolve the partnership. If articles
of partnership provides that in case of death of the general partner, one of the limited partner will succeed as
general partner.

If a limited partner dies, it does not necessarily dissolve the partnership if the executor can appoint a substitute
limited partner.

Effect of dissolution: the partner’s authority to bind the partnership or other partners ceases.
Exception:
Assignment of interest to a third person can be done by the partner even without the consent of the other partner.
As an assignee, he does not become a partner.

Read the grounds for dissolution of partnership (generally classified into judicial and extrajudicial).

Partnership at will- if partner acted in good faith, no liability as to damages and he can dissolve the partnership at
anytime.

The objectives in the articles of partnership do not qualify the partnership as one of particular undertaking.

Involuntary dissolution- for law firms, it normally takes place when the partner lawyer is subsequently appointed as
a court judge or justice or become a member of the cabinet member. Hence, partnership is dissolved.

For a partner who is subsequently elected as a senator, it will not dissolve the partnership because a senator is not
absolutely prohibited from practicing law. Only personal appearance before a tribunal is not allowed (which includes
signing of a pleading).

Insanity- one which is permanent in character. It must affect the partner’s performance of his obligations.

Gross misconduct- examples:

1. Refusal to allow a partner to participate in the management of the partnership
2. Fraud
3. Refusal to distribute profits of the partnership
4. Misappropriation of the funds of the partnership

Note: slight misconduct is not a ground to dissolve a partnership

CREDIT TRANSACTIONS

Not all credit transactions are bailment. Credit transactions may or may not require actual delivery of the object for
the perfection of the contract.

Distinguish commodatum and mutuum-

Commodatum- the thing is delivered to the other party only for the use thereof
Mutuum- delivery of the thing but requires payment in cash or in kind of the same kind.

How to answer question requiring distinctions:

1. Start with the nature/concept
2. State the characteristics
3. Object of the transaction
4. Effects

Distinguish usufruct and commodatum- focus on the rights of the usufructuary and bailee. Both usufruct and
commodatum maybe constituted over consumable goods. Commodatum normally involves a non-consumable
goods. Both may likewise be constituted over immovables.

Usufructuary – entitled to both use and fruits

Distinguish consensual from real contracts. Cite examples for each kind.

Commodatum and mutuum- credit transactions which are considered principal contracts. Others are considered
accessory contracts.
In commodatum- object is non-fungible but consumables may likewise be an object though, normally it is being
constituted to non-consumables.

Rules on reimbursement of expenses

Lost/damage on the thing in commodatum- if due to the bailee, he will be liable. In case of fortuitous events, the
baillee is not liable. Exceptions:

Precarium- special kind of commodatum where the bailor may demand the return of the thing

If commodatum is with a fixed period, even it was made gratuitously, the bailor cannot demand for the return
before the expiration of the said period. Exception:
1. In case of urgent need by the bailor. After the urgency ceases, the bailor should return the thing (hence, Formatted: List Paragraph, Numbered + Level: 1 +
commodatum is merely suspended) Numbering Style: 1, 2, 3, … + Start at: 1 + Alignment: Left +
Aligned at: 0.25" + Indent at: 0.5"
2. Bailee committed an act of ingratitude (grounds those enumerated under the law on donation)

In simple loan (mutuum)- payment of interest is required when expressly stipulated in writing (compensatory
interest). No presumed interest.

6%- legal rate for loan/forbearance of money (as amended by BSP circular as of July 2013). This is a uniform rate
applicable to all obligations requiring interest payment.
Usury law is merely suspended. Hence, parties may stipulate on the interest rate but it must not be one which is
unconscionable, excessive and exorbitant as per SC ruling on decided cases.

24% is not considered exorbitant per SC ruling.

3% per month is considered excessive/exorbitant.

Collection of interest without stipulation in writing is invalid. It amounts to solutio indebiti because the creditor
receives something (interest) which he is not rightfully entitled to.

To give effect to an escalation clause in a contract, it must be with valid basis.

Under the BSP circular, a bank can increase rates only once a year.

A deposit made in compliance with a legal obligation is a necessary deposit.

Article 1962

Kinds of deposit:
1. Judicial- immovables Formatted: List Paragraph, Numbered + Level: 1 +
2. Extrajudicial- cover movables only Numbering Style: 1, 2, 3, … + Start at: 1 + Alignment: Left +
Aligned at: 0.25" + Indent at: 0.5"

Deposits of grains/rice- if no instruction was made by the depositor not to comingle the grains with other grains
deposited with the depositary, the thing deposited will be regarded by the depositary as fungible, hence, may
release to the depositor grains from the mass deposit.

GUARANTY

GR: guarantor has the right of excussion, except when he solidarily binds himself with the principal.

In case of a sub-guarantor, his liability comes in only when the guarantor is fully exhausted.

Benefit of division- applies when there are 2 or more guarantors. Each guarantor can only be held liable as to his
share. In the absence of any agreement, they will share equally. (same principle of joint obligation applies)
When guarantor pays the debt without the consent of the principal debtor, he cannot subrogate over the rights of
the creditor. Instead, he will only be entitled to the amount that benefited the principal debtor.

Personal guaranty:
1. Guaranty Formatted: List Paragraph, Numbered + Level: 1 +
2. Suretyship Numbering Style: 1, 2, 3, … + Start at: 1 + Alignment: Left +
Aligned at: 0.25" + Indent at: 0.5"

Real guaranty- requires delivery of the property

1. Pledge Formatted: List Paragraph, Numbered + Level: 1 +
2. Mortage Numbering Style: 1, 2, 3, … + Start at: 1 + Alignment: Left +
Aligned at: 0.25" + Indent at: 0.5"
3. antichresis

Pledge- ordinarily, physical delivery of the thing pledged must be made. Except: extraordinary circumstance when
constructive delivery suffices. Ex. Delivery of a key of a house

Distinguish contract of pledge from chattel mortgage

Distinguish contract of real estate mortgage from contract of sale with right to repurchase- it is an accessory contract

Absence of an affidavit of good faith- makes the chattel mortgage unenforceable against third persons

Pledge is void if it was constituted before the pledgor acquired ownership. It is likewise void when the pledgor is
suffering civil interdiction because he doesn’t have free disposal of the thing pledged which is a requirement in a
contract of pledge. If pledgor’s consent was vitiated, the pledge is merely voidable.

A contract of pledge binds third persons only if there had been delivery already and the contract is in a public
instrument and the latter must be dated.

In a contract of pledge of a carabao which bears offspring during the contract of pledge, the offspring will belong to
the pledgor if expressly stipulated. Otherwise, the offspring will belong to the pledgee.

CHATTEL MORTGAGE- its object is movables. However, the parties may agree to execute a chattel mortgage with an
immovable property (ex. Building) as an object. Effect: as between the parties, this is a valid contract. The mortgagor
himself cannot question the validity of the CM by reason of estoppel. As against third persons, the CM is void.

Characteristics of Pledge and Chattel Mortgage

Check the application of indivisibility principle in a real estate mortgage.

Pactum commissorium

Distinguish the different kinds of guaranty as to:

1. right to use Formatted: List Paragraph, Numbered + Level: 1 +
2. pactum commissorium Numbering Style: 1, 2, 3, … + Start at: 1 + Alignment: Left +
Aligned at: 0.25" + Indent at: 0.5"
3. indivisibility

Stipulation: In case of default of the mortgagee in a chattel mortgage, the parties may stipulate for the delivery of a
security to answer any liability that will arise from said default.

Antichresis- the parties usually agree that the thing must be in the possession of the creditor.

Prenda- akin to antichretic arrangement than a mortgage because the mortgage is entitled to possession plus the
fruits.

Pactum commissorium- void stipulation. The contract of mortgage remains to be valid, only the stipulation as to PC is
void. Remedy of the creditor is to foreclose the property, not to automatically appropriate the same.
PC as distinguished from dation en pago

A stipulation which requires the debtor to execute a document to transfer ownership over the security given to the
creditor is valid. It does not constitute PC.

Likewise, selling the security as duly authorized by the debtor which does not lead to automatic appropriation of
property by the creditor is a valid stipulation. It does not constitute PC.

Elements of PC
1. property mortgaged as security in case of non-payment of the principal obligation Formatted: List Paragraph, Numbered + Level: 1 +
2. automatic appropriation by the creditor in case of default of payment Numbering Style: 1, 2, 3, … + Start at: 1 + Alignment: Left +
Aligned at: 0.25" + Indent at: 0.5"

If creditor availed the option of specific performance, he waives his right to avail other remedies.

Right to recover deficiency:

 If security is foreclosed and sold at public auction- deficiency in the proceeds of sale as against the Formatted: List Paragraph, Bulleted + Level: 1 + Aligned at:
0.5" + Indent at: 0.75"
outstanding obligation of the debtor is recoverable from the latter.
 Exception: Pledge, deficiency is not recoverable from the debtor even there is a stipulation as to
recovery of deficiency (void stipulation). In case of excess, it will not be returned to the debtor. However,
if there is a stipulation as to return of excess to the debtor, it will be returned to the latter.

In chattel mortgage, deficiency can be recovered from the debtor even if not stipulated. Exception: recto law

In Real Estate Mortgage, banks and other financial institutions must exercise extra care and effort to check on the
authenticity of the title presented to them for the REM. Unlike an ordinary creditor, mere good faith (mere reliance
to the title presented) suffices.

Inadequacy of the bid price does not invalidate the forced or execution sale of properties. In extrajudicial foreclosure
of mortgage, the mortgagee may recover deficiency from the mortgagor.

Right of redemption as distinguished from equity redemption. It is available after the sale while the latter is available
before the auction sale.

Period of redemption- 1 year from the registration of the sale. If sale not registered, right to redeem is open to avail

Continuing guaranty- allows REM to secure payment of a loan even if it was constituted after the execution of the
contract of loan.

Know the preference of credits- tax –no.1 priority