Breaches of obligations, delay, demand, A1169 Civil Code

1. Reciprocal obligations

Reciprocal obligations – refer to obligations “that arise from the same cause, and in which each party is a debtor and a creditor of the other at the same time, such that the obligations of one are dependent upon the obligations of the other. They are to be performed simultaneously, so that the performance by one is conditioned upon the simultaneous fulfillment by the other.” (Megaworld Properties and Holdings, Inc. v. Majestic Finance and Investment Co., Inc., G.R. No. 169694, December 9, 2015, Per Bersamin, J.)

In reciprocal obligations, before a party can demand the performance of the obligation of the other, the former must also perform its own obligation. (Consolidated Industrial Gases, Inc. v. Alabang Medical Center [2013], supra.)

Consolidated Industrial Gases, Inc. v. Alabang Medical Center, G.R. No. 181983, November 13, 2013, Per Reyes, J.:

• Under the subject contracts, CIGI as contractor bound itself to install a centralized medical oxygen and vacuum pipeline system for the first to fifth floors of AMC, which in turn, undertook to pay the contract price therefor in the manner prescribed in the contract. Being reciprocal in nature, the respective obligations of AMC and CIGI are dependent upon the performance of the other of its end of the deal such that any claim of delay or non-performance can only prosper if the complaining party has faithfully complied with its own obligation.

• Here, CIGI complains that AMC refused to abide by its undertaking of full payment. While AMC does not dispute its liability to pay the balance of P1,267,344.42 being claimed by CIGI, it asserts, however that the same is not yet due because CIGI still has not turned over a complete and functional medical oxygen and vacuum pipeline system. CIGI is yet to conduct a test run of the installation and an orientation/seminar of AMC employees who will be involved in the operation of the system. CIGI, on the other hand, does not deny that it failed to conduct the agreed orientation/seminar and test run but it blames AMC for such omission and asserts that the latter failed to heed CIGII’s request for electrical facilities necessary for the test run. CIGI also contends that its obligation is merely to provide labor and installation.

• The Court has painstakingly evaluated the records of the case and based thereon, there can be no other conclusion than that CIGI’s allegations failed to muster merit. The Court finds that CIGI did not faithfully complete its prestations and hence, its demand for payment cannot prosper based on the following grounds: (a) under the two installation contracts, CIGI was bound to perform more prestations than merely supplying labor and materials; and (b) CIGI failed to prove by substantial evidence that it requested AMC for electrical facilities as such, its failure to conduct a test run and orientation/seminar is unjustified.

• For its failure to turn over a complete project in accordance with the terms and conditions of the installation contracts, CIGI cannot demand for the payment of the contract price balance from AMC, which, in turn, cannot legally be ordered to pay. Otherwise, AMC will be effectively forced to accept an incomplete performance contrary to Article 1248 of the Civil Code which states that “u)nless there is an express stipulation to that effect, the creditor cannot be compelled partially to receive the prestations in which the obligation consists.”

2. Delay

Default or mora, which is a kind of voluntary breach of an obligation, signifies the idea of delay in the fulfillment of an obligation with respect to time. In positive obligations, like an obligation to give, the obligor or debtor incurs in delay from the time the obligee or creditor demands from him the fulfillment of the obligation. (Pineda v. De Vegra, G.R. No. 233774, April 10, 2019, Per Caguioam J.)

a. Reciprocal obligations

Article 1169. x x x
In reciprocal obligations, x x x From the moment one of the parties fulfills his obligation, delay by the other begins. (1100a) (CIVIL CODE)

In reciprocal obligations… the general rule is that the fulfillment of the parties’ respective obligations should be simultaneous. Hence, no demand is generally necessary because, once a party fulfills his obligation and the other party does not fulfill his, the latter automatically incurs in delay. But when different dates for performance of the obligations are fixed, the default for each obligation must be determined by the rules given in the first paragraph of [Article 1169], that is, the other party would incur in delay only from the moment the other party demands fulfillment of the former’s obligation. Thus, even in reciprocal obligations, if the period for the fulfillment of the obligation is fixed, demand upon the obligee is still necessary before the obligor can be considered in default and before a cause of action for rescission will accrue. (Solar Harvest, Inc. v. Davao Corrugated Carton Corporation, G.R. No. 176868, July 26, 2010, Per Nachura, J.)

1) No delay if other party is non-compliant

Article 1169. x x x
In reciprocal obligations, neither party incurs in delay if the other does not comply or is not ready to comply in a proper manner with what is incumbent upon him. (1100a) (CIVIL CODE)

3. Demand

Article 1169. Those obliged to deliver or to do something incur in delay from the time the obligee judicially or extrajudicially demands from them the fulfillment of their obligation. x x x (1100a) (CIVIL CODE)

Demand – refers to the legal right to insist on the performance of an obligation to make it due and demandable.

Judicial demand – refers to demand made through a court.

Extrajudicial demand – refers to demand made via outside juridical processes or means, such as a lawyer’s demand letter.

Demand may be judicial — if the creditor files a complaint against the debtor for the fulfillment of the obligation. (Pineda v. De Vega, G.R. No. 233774, April 10, 2019, Per Caguioa, J.)

[Demand is] extrajudicial — if the creditor demands from the debtor the fulfillment of the obligation either orally or in writing. (Pineda v. De Vega [2019], supra.)

a. Default

Demand is necessary to make the obligation due and demandable, as well as to give rise to the effects of default.

Pineda v. De Vega, G.R. No. 233774, April 10, 2019, Per Caguioa, J.:

• While delay on the part of respondent was not triggered by an extrajudicial demand because petitioner had failed to so establish receipt of her demand letter, this delay was triggered when petitioner judicially demanded the payment of respondent’s loan from petitioner. While the CA was correct in observing that default generally begins from the moment the creditor demands the performance of the obligation, and without such demand, judicial or extrajudicial, the effects of default will not arise, it failed to acknowledge that when petitioner filed her complaint dated June 10, 2005, such filing constituted the judicial demand upon respondent to pay the latter’s principal obligation and the interest thereon. Respondent, having thus incurred in delay (counted from the filing of the complaint), is liable for damages pursuant to Article 1170 of the Civil Code.

Solar Harvest, Inc. v. Davao Corrugated Carton Corporation, G.R. No. 176868, July 26, 2010, Per Nachura, J.:

• In the first quarter of 1998, [the Buyer] entered into an agreement with [the Seller], Davao Corrugated Carton Corporation, for the purchase of corrugated carton boxes, specifically designed for [the Buyer’s] business of exporting fresh bananas, at US$1.10 each. The agreement was not reduced into writing. To get the production underway, [the Buyer] deposited, on March 31, 1998, US$40,150.00 in [the Seller’s] US Dollar Savings Account with Westmont Bank, as full payment for the ordered boxes.

• Despite such payment, [the Buyer] did not receive any boxes from [the Seller]. On January 3, 2001, [the Buyer] wrote a demand letter for reimbursement of the amount paid. On February 19, 2001, [the Seller] replied that the boxes had been completed as early as April 3, 1998 and that [the Buyer] failed to pick them up from the former’s warehouse 30 days from completion, as agreed upon. [the Seller] mentioned that [the Buyer] even placed an additional order of 24,000 boxes, out of which, 14,000 had been manufactured without any advanced payment from [the Buyer]. [The Seller] then demanded [the Buyer] to remove the boxes from the factory and to pay the balance of US$15,400.00 for the additional boxes and ₱132,000.00 as storage fee.

• [SC RESOLUTION] Evident from the records and even from the allegations in the complaint was the lack of demand by [the Buyer] upon [the Seller] to fulfill its obligation to manufacture and deliver the boxes. The Complaint only alleged that [the Buyer] made a “follow-up” upon [the Seller], which, however, would not qualify as a demand for the fulfillment of the obligation.

• [The Buyer]’s witness also testified that they made a follow-up of the boxes, but not a demand. Note is taken of the fact that, with respect to their claim for reimbursement, the Complaint alleged and the witness testified that a demand letter was sent to [the Seller]. Without a previous demand for the fulfillment of the obligation, [the Buyer] would not have a cause of action for rescission against [the Seller] as the latter would not yet be considered in breach of its contractual obligation.

• Even assuming that a demand had been previously made before filing the present case, [the Buyer]’s claim for reimbursement would still fail, as the circumstances would show that [the Seller] was not guilty of breach of contract.

• As correctly observed by the CA, aside from the pictures of the finished boxes and the production report thereof, there is ample showing that the boxes had already been manufactured by [the Seller]. There is the testimony of Estanislao who accompanied Que to the factory, attesting that, during their first visit to the company, they saw the pile of [the Buyer’s] boxes and Que took samples thereof. Que, [the Buyer]’s witness, himself confirmed this incident. He testified that Tan pointed the boxes to him and that he got a sample and saw that it was blank. Que’s absolute assertion that the boxes were not manufactured is, therefore, implausible and suspicious.

• In fact, we note that [the Seller’s] counsel manifested in court, during trial, that his client was willing to shoulder expenses for a representative of the court to visit the plant and see the boxes. Had it been true that the boxes were not yet completed, [the Seller] would not have been so bold as to challenge the court to conduct an ocular inspection of their warehouse. Even in its Comment to this petition, [the Seller] prays that [the Buyer] be ordered to remove the boxes from its factory site, which could only mean that the boxes are, up to the present, still in [the Seller’s] premises.

• We also believe that the agreement between the parties was for [the Buyer] to pick up the boxes from [the Seller’s] warehouse, contrary to [the Buyer]’s allegation. Thus, it was due to [the Buyer]’s fault that the boxes were not delivered to TADECO.

• [The Buyer] had the burden to prove that the agreement was, in fact, for [the Seller] to deliver the boxes within 30 days from payment, as alleged in the Complaint. Its sole witness, Que, was not even competent to testify on the terms of the agreement and, therefore, we cannot give much credence to his testimony.

• Surely, without such authority, TADECO would not have allowed [the Seller] to deposit the boxes within its premises.

• In sum, the Court finds that [the Buyer] failed to establish a cause of action for rescission, the evidence having shown that [the Seller] did not commit any breach of its contractual obligation. • As previously stated, the subject boxes are still within [the Seller’s] premises. To put a rest to this dispute, we therefore relieve [the Seller] from the burden of having to keep the boxes within its premises and, consequently, give it the right to dispose of them, after [the Buyer] is given a period of time within which to remove them from the premises.

Development Bank of the Philippines v. Guariña Agricultural and Realty Development Corporation, G.R. No. 160758, January 15, 2014, Per Bersamin, J.:

• [B]y its failure to release the proceeds of the loan in their entirety, DBP had no right yet to exact on Guariña Corporation the latter’s compliance with its own obligation under the loan. Indeed, if a party in a reciprocal contract like a loan does not perform its obligation, the other party cannot be obliged to perform what is expected of it while the other’s obligation remains unfulfilled. In other words, the latter party does not incur delay.

• Still, DBP called upon Guariña Corporation to make good on the construction works pursuant to the acceleration clause written in the mortgage contract (i.e., Stipulation No. 26), or else it would foreclose the mortgages.

• DBP’s actuations were legally unfounded. It is true that loans are often secured by a mortgage constituted on real or personal property to protect the creditor’s interest in case of the default of the debtor. By its nature, however, a mortgage remains an accessory contract dependent on the principal obligation, such that enforcement of the mortgage contract will depend on whether or not there has been a violation of the principal obligation. While a creditor and a debtor could regulate the order in which they should comply with their reciprocal obligations, it is presupposed that in a loan the lender should perform its obligation – the release of the full loan amount – before it could demand that the borrower repay the loaned amount. In other words, Guariña Corporation would not incur in delay before DBP fully performed its reciprocal obligation.

• Considering that it had yet to release the entire proceeds of the loan, DBP could not yet make an effective demand for payment upon Guariña Corporation to perform its obligation under the loan. According to Development Bank of the Philippines v. Licuanan, it would only be when a demand to pay had been made and was subsequently refused that a borrower could be considered in default, and the lender could obtain the right to collect the debt or to foreclose the mortgage. Hence, Guariña Corporation would not be in default without the demand.

b. When demand is not necessary

Article 1169. x x x
… the demand by the creditor shall not be necessary in order that delay may exist:
(1) When the obligation or the law expressly so declare; or
(2) When from the nature and the circumstances of the obligation it appears that the designation of the time when the thing is to be delivered or the service is to be rendered was a controlling motive for the establishment of the contract; or
(3) When demand would be useless, as when the obligor has rendered it beyond his power to perform. x x x (1100a) (CIVIL CODE)

Demand is not necessary:

1) When there is an express stipulation to that effect;

2) Where the law so provides;

3) When the period is the controlling motive or the principal inducement for the creation of the obligation; and

4) Where demand would be useless. (Rivera v. Sps. Salvador, G.R. No. 184458, January 14, 2015, Per Perez, J.)

[For Nos. 1 and 2], it is not sufficient that the law or obligation fixes a date for performance; it must further state expressly that after the period lapses, default will commence. (Rivera v. Sps. Salvador [2015], supra.)

1) Express stipulation

Demand is not necessary when there is an express stipulation.

Rivera v. Sps. Salvador, G.R. No. 184458, January 14, 2015, Per Perez, J.:

• We refer to the clause in the Promissory Note containing the stipulation of interest:

It is agreed and understood that failure on my part to pay the amount of (₱120,000.00) One Hundred Twenty Thousand Pesos on December 31, 1995. (sic) I agree to pay the sum equivalent to FIVE PERCENT (5%) interest monthly from the date of default until the entire obligation is fully paid for.

• which expressly requires the debtor (Rivera) to pay a 5% monthly interest from the “date of default” until the entire obligation is fully paid for. The parties evidently agreed that the maturity of the obligation at a date certain, 31 December 1995, will give rise to the obligation to pay interest. The Promissory Note expressly provided that after 31 December 1995, default commences and the stipulation on payment of interest starts.

• The date of default under the Promissory Note is 1 January 1996, the day following 31 December 1995, the due date of the obligation. On that date, Rivera became liable for the stipulated interest which the Promissory Note says is equivalent to 5% a month. In sum, until 31 December 1995, demand was not necessary before Rivera could be held liable for the principal amount of ₱120,000.00. Thereafter, on 1 January 1996, upon default, Rivera became liable to pay the Spouses Chua damages, in the form of stipulated interest.

2) Law

Demand is not necessary when the obligation or the law expressly so declares.

If so provided for by law, such as a legal provision stating that an obligation becomes due and demandable without need of a demand, then the obligor of such obligation will be in default.

3) Period is controlling

Demand is not necessary when from the nature and the circumstances of the obligation it appears that the designation of the time when the thing is to be delivered or the service is to be rendered was a controlling motive for the establishment of the contract.

Examples:

1) Obligation to deliver a wedding cake is time-sensitive, i.e., on the day of the wedding;

2) Obligation to render medical assistance during a life-threatening emergency; or

3) Obligation to provide shelter during a calamity, e.g. typhoon or earthquake.

3) Demand would be useless

Demand is not necessary when a demand would be useless, as when the obligor has rendered it beyond his power to perform.

Examples:

1) A seller who loses a determinate or specific car to a theft or robbery prior to delivery thereof the buyer;

2) A dancer who is permanently incapacitated due to a leg injury before a performance; or

3) A photographer who loses eyesight resulting in ability to use a camera for a shoot.

References

Chapter 2 – Nature and Effects of Obligations, Title I, Book IV, Republic Act No. 386, Civil Code

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