Bar Question (1988)

Novation
Suppose that under an obligation imposed by a final judgement, the liability
of the judgement debtor is to pay the amount of P6,000 but both the
judgement debtor and the judgement creditor subsequently entered into a
contract reducing the liability of the former to only P4,000 is there and
implied novation which will have the effect of extinguishing the judgement
obligation and creating a modified obligatory relation? Reasons.
SUGGESTED ANSWER: There is no implied novation in this case. We see no
valid objection to the judgement debtor and the judgement creditor in
entering into an agreement regarding the monetary obligation of the former
under the judgement referred to. The payment by the judgement debtor of
the lesser amount of P4,000, accepted by the creditor without any protest
or objection and acknowledged by the latter as in full satisfaction of the
money judgement, completely extinguished the judgement debt and
released the debtor from his pecuniary liability.
Novation results in two stipulations—one to extinguish an existing
obligation, the other to substitute a new one in its place. Fundamental it is
that novation effects a substitution or modification of an obligation by
another or an extinguishment of one obligation by the creation of another.
In the case at hand, we fail to see what new or modified obligation arose
out of the payment by judgement debtor of the reduced amount of P4,000
to the creditor. Additionally, to sustain novation necessitates that the same
be so declared in unequivocal terms clearly and unmistakably shown by the
express agreement of the parties or by acts of equivalent import—or that
there is complete and substantial incompatibility between the two
obligations.
MIGUEL’S ANSWER: There is no implied novation, what is present is a
partial remission of P2,000. The amount of P4,000 is still due and
demandable. An implied novation is said to have occurred only if there is
no declaration that the old obligation is extinguished by the new one but
the old and new obligations are incompatible and cannot co-exist. In this
case, the obligations are not incompatible, there is still a debt due
although the amount was reduced.
Bar Question (1993)
Extinguishment; Loss; Impossible Service
In 1971, Able Construction, Inc. entered into a contract with Tropical Home
Developers, Inc. whereby the former would build for the latter the houses
within its subdivision. The cost of each house, labor and materials included,
was P100,000.00. Four hundred units were to be constructed within five
years. In 1973, Able found that it could no longer continue with the job due
to the increase in the price of oil and its derivatives and the concomitant
worldwide spiraling of prices of all commodities, including basic raw
materials required for the construction of the houses. The cost of
development had risen to unanticipated levels and to such a degree that
the conditions and factors which formed the original basis of the contract
had been totally changed. Able brought suit against Tropical Homes praying
that the Court relieve it of its obligation. Is Able Construction entitled to the
relief sought?
SUGGESTED ANSWER: Yes, the Able Construction. Inc. is entitled to the
relief sought under Article 1267, Civil Code. The law provides: "When the
service has become so difficult as to be manifestly beyond the
contemplation of the parties, the obligor may also be released therefrom,
in whole or in part."
MIGUEL’S ANSWER: Yes, the court may grant the relief sought by Able
Construction Inc. The Civil Code provides that the court may release the
obligor from his responsibility when the service has become so difficult that
it has gone beyond the expectations of the parties. However, the intention
of the parties must still prevail, it is only when the courts deem that the
difficulty goes beyond the intention and expectation of the parties that
courts may intervene.

Bar Question (1994)

Extinguishment; Loss
Dino sued Ben for damages because the latter had failed to deliver the
antique Marcedes Benz car Dino had purchased from Ben, which was—by
agreement—due for delivery on December 31, 1993. Ben, in his answer to
Dino's complaint, said Dino's claim has no basis for the suit, because as the
car was being driven to be delivered to Dino on January 1, 1994, a reckless
truck driver had rammed into the Mercedes Benz. The trial court dismissed
Dino's complaint, saying Ben's obligation had indeed, been extinguished by
force majeure. Is the trial court correct?
SUGGESTED ANSWER: a) No. Article 1262, New Civil Code provides, "An
obligation which consists in the delivery of a determinate thing shall be
extinguished if it should be lost or destroyed without the fault of the debtor,
and before he has incurred in delay. b) The judgment of the trial court is
incorrect. Loss of the thing due by fortuitous events or force majeure is a
valid defense for a debtor only when the debtor has not incurred delay.
Extinguishment of liability for fortuitous event requires that the debtor has
not yet incurred any delay. In the present case, the debtor was in delay
when the car was destroyed on January 1, 1993 since it was due for delivery
on December 31, 1993. (Art. 1262 Civil Code) c) It depends whether or not
Ben the seller, was already in default at the time of the accident because a
demand for him to deliver on due date was not complied with by him. That
fact not having been given in the problem, the trial court erred in dismissing
Dino's complaint. Reason: There is default making him responsible for
fortuitous events including the assumption of risk or loss.
If on the other hand Ben was not in default as no demand has been sent to
him prior to the accident, then we must distinguish whether the price has
been paid or not. If it has been paid, the suit for damages should prosper
but only to enable the buyer to recover the price paid. It should be noted
that Ben, the seller, must bear the loss on the principle of res perit domino.
He cannot be held answerable for damages as the loss of the car was not
imputable to his fault or fraud. In any case, he can recover the value of the
car from the party whose negligence caused the accident. If no price has
been paid at all, the trial court acted correctly in dismissing the complaint.
MIGUEL’S ANSWER: The trial court is wrong. The defense of loss of the
thing due to a fortuitous event can only be used if the obligor is not yet in
delay. In this case the car was due to be delivered on December 31, 1993,
Ben was already in delay when he lost the car due to the accident, he
cannot therefore use the defense loss due to fortuitous event.

Bar Question (1994)

Extinguishment; Novation
In 1978, Bobby borrowed P1,000,000 from Chito payable in two years. The
loan, which was evidenced by a promissory note, was secured by a
mortgage on real property. No action was filed by Chito to collect the loan
or to foreclose the mortgage. But in 1991, Bobby, without receiving any
amount from Chito, executed another promissory note which was worded
exactly as the 1978 promissory note, except for the date thereof, which
was the date of its execution. 1) Can Chito demand payment on the 1991
promissory note in 1994? 2) Can Chito foreclose the real estate mortgage
if Bobby fails to make good his obligation under the 1991 promissory note?
SUGGESTED ANSWER: 1) Yes, Chito can demand payment on the 1991
promissory note in 1994. Although the 1978 promissory note for P1 million
payable two years later or in 1980 became a natural obligation after the
lapse of ten (10) years, such natural obligation can be a valid consideration
of a novated promissory note dated in 1991 and payable two years later,
or in 1993. All the elements of an implied real novation are present: a) an
old valid obligation; b) a new valid obligation; c) capacity of the parties; d)
animus novandi or intention to novate; and e) The old and the new
obligation should be incompatible with each other on all material points
(Article 1292). The two promissory notes cannot stand together, hence, the
period of prescription of ten (10) years has not yet lapsed.
2) No. The mortgage being an accessory contract prescribed with the loan.
The novation of the loan, however, did not expressly include the mortgage,
hence, the mortgage is extinguished under Article 1296 of the NCC. The
contract has been extinguished by the novation or extinction of the principal
obligation insofar as third parties are concerned.
MIGUEL’S ANSWER: 1) Yes, Chino can demand payment on the 1991
promissory note. The 1978 promissory note can be considered as the
consideration for the new 1991 promissory note thereby renewing the
period of prescription starting from the issuance of the new promissory
note.
2) No, the mortgage was extinguished when the first promissory note to
which it was attached prescribed. Mortgage being merely an accessory
contract, is extinguished once the contract to which it was attached is
extinguished.

Bar Question (2000)

Extinguishment; Condonation
Arturo borrowed P500,000.00 from his father. After he had paid
P300,000.00, his father died. When the administrator of his father's estate
requested payment of the balance of P200,000.00. Arturo replied that the
same had been condoned by his father as evidenced by a notation at the
back of his check payment for the P300,000.00 reading: "In full payment
of the loan". Will this be a valid defense in an action for collection?
SUGGESTED ANSWER: It depends. If the notation "in full payment of the
loan" was written by Arturo's father, there was an implied condonation of
the balance that discharges the obligation. In such case, the notation is an
act of the father from which condonation may be inferred. The condonation
being implied, it need not comply with the formalities of a donation to be
effective. The defense of full payment will, therefore, be valid.
When, however, the notation was written by Arturo himself. It merely
proves his intention in making that payment but in no way does it bind his
father (Yam v. CA, G.R No. 104726. 11 February 1999). In such case, the
notation was not the act of his father from which condonation may be
inferred. There being no condonation at all the defense of full payment will
not be valid.
MIGUEL’S ANSWER: It is a valid defense if the condonation was done by
the father. If the notation at the back of the check was written by the father
then it may be deemed an implied condonation of the remaining balance of
the loan.

Bar Question (2001)

Extinguishment; Extraordinary Inflation or Deflation
On July 1, 1998, Brian leased an office space in a building for a period of
five years at a rental rate of P1,000.00 a month. The contract of lease
contained the proviso that "in case of inflation or devaluation of the
Philippine peso, the monthly rental will automatically be increased or
decreased depending on the devaluation or inflation of the peso to the
dollar." Starting March 1, 2001, the lessor increased the rental to P2,000 a
month, on the ground of inflation proven by the fact that the exchange rate
of the Philippine peso to the dollar had increased from P25.00=$1.00 to
P50.00=$1.00. Brian refused to pay the increased rate and an action for
unlawful detainer was filed against him. Will the action prosper? Why?
SUGGESTED ANSWER: The unlawful detainer action will not prosper.
Extraordinary inflation or deflation is defined as the sharp decrease in the
purchasing power of the peso. It does not necessarily refer to the exchange
rate of the peso to the dollar. Whether or not there exists an extraordinary
inflation or deflation is for the courts to decide. There being no showing
that the purchasing power of the peso had been reduced tremendously,
there could be no inflation that would justify the increase in the amount of
rental to be paid. Hence, Brian could refuse to pay the increased rate.
MIGUEL’S ANSWER: The action will not prosper. For the defense of inflation
or deflation to be valid, there must be an official pronouncement or
declaration

Bar Question (2001)

Extinguishment; Assignment of Rights
The sugar cane planters of Batangas entered into a long-term milling
contract with the Central Azucarera de Don Pedro Inc. Ten years later, the
Central assigned its rights to the said milling contract to a Taiwanese group
which would take over the operations of the sugar mill. The planters filed
an action to annul the said assignment on the ground that the Taiwanese
group was not registered with the Board of Investments. Will the action
prosper or not? Explain briefly.
SUGGESTED ANSWER: The action will prosper not on the ground invoked
but on the ground that the farmers have not given their consent to the
assignment. The milling contract imposes reciprocal obligations on the
parties. The sugar central has the obligation to mill the sugar cane of the
farmers while the latter have the obligation to deliver their sugar cane to
the sugar central. As to the obligation to mill the sugar cane, the sugar
central is a debtor of the farmers. In assigning its rights under the contract,
the sugar central will also transfer to the Taiwanese its obligation to mill
the sugar cane of the farmers. This will amount to a novation of the contract
by substituting the debtor with a third party. Under Article 1293 of the Civil
Code, such substitution cannot take effect without the consent of the
creditor. The formers, who are creditors as far as the obligation to mill their
sugar cane is concerned, may annul such assignment for not having their
consent thereto.
MIGUEL’S ANSWER: The action will prosper. The assignment should be
annulled. The assignment of the rights by Central Azucarera to the
Taiwanese group amounts to a novation of the contract with the
substitution of the debtor. For there to be a valid substitution, consent of
the creditor must be obtained. In this case, the consent of the farmers was
not obtained by the Central Azucarera before assigning the rights to the
Taiwanese group. The assignment is therefore invalid.

Bar Question (2002)

Extinguishment; Compensation
Stockton is a stockholder of Core Corp. He desires to sell his shares in Core
Corp. In view of a court suit that Core Corp. has filed against him for
damages in the amount of P 10 million, plus attorney’s fees of P 1 million,
as a result of statements published by Stockton which are allegedly
defamatory because it was calculated to injure and damage the
corporation’s reputation and goodwill. The articles of incorporation of Core
Corp. provide for a right of first refusal in favor of the corporation.
Accordingly, Stockton gave written notice to the corporation of his offer to
sell his shares of P 10 million. The response of Core corp. was an acceptance
of the offer in the exercise of its rights of first refusal, offering for the
purpose payment in form of compensation or set-off against the amount of
damages it is claiming against him, exclusive of the claim for attorney’s
fees. Stockton rejected the offer of the corporation, arguing that
compensation between the value of the shares and the amount of damages
demanded by the corporation cannot legally take effect. Is Stockton
correct? Give reason for your answer.
SUGGESTED ANSWER: Stockton is correct. There is no right of
compensation between his price of P10 million and Core Corp.’s
unliquidated claim for damages. In order that compensation may be proper,
the two debts must be liquidated and demandable. The case for the P
10million damages being still pending in court, the corporation has as yet
no claim which is due and demandable against Stockton.
MIGUEL’S ANSWER: Stockton is correct. In order for there to be a valid
compensation, one of the requisites that Art. 1279 of the Civil Code
provides is that the debts be liquidated and demandable. In this case, since
the claim for damages is still pending in court, the amount has not been
liquidated yet therefore one of the requisites for a valid compensation is
lacking.
Bar Question (2008)
Compensation
Eduardo was granted a loan by XYZ Bank for the purpose of improving a
building which XYZ leased from him. Eduardo, executed the promissory
note in favor of the bank with his friend Recardo as co-signatory. In the PN,
they both acknowledged that they are “individually and collectively” liable
and waived the need for prior demand. To secure the PN, Recardo executed
a real estate mortgage on his own property. When Eduardo defaulted on
the PN, XYZ stopped payment of rentals on the building on the ground that
legal compensation had set in since there was still a balance due on the PN
after applying the rentals. XYZ foreclosed the real estate mortgage over
Recardo’s property. Recardo opposed the foreclosure on the ground that he
is only a co-signatory; that no demand was made upon him for payment,
and assuming he is liable, his liability should not go beyond half the balance
of the loan. Further, Recardo said that when the bank invoked
compensation between the rentals and the amount of the loan, it amounted
to a new contract or novation and had the effect of extinguishing the
security since he did not give his consent (as owner of the property under
the real estate mortgage) thereto.
(a) Can XYZ Bank validly assert legal compensation?
(b) Can Recardo’s property be foreclosed to pay the full balance of the
loan?
(c) Does Recardo have basis under the Civil Code for claiming that the
original contract was novated?
SUGGESTED ANSWER: (a) XYZ may validly assert the partial compensation
of both debts, but it should be facultative compensation because not all of
the 5 requisites of legal compensation are present. The payment of the
rentals by XYZ Bank is not yet due, but the principal obligation of loan
where both Eduardo and Recardo are bound solidarily and therefore any of
them is principally bound to pay the entire loan, is due and demandable
without need of demand. XYZ Bank may declare its obligation to pay rentals
as already due and demand payment from any of the two debtors.
(b) No, because there was no prior demand on Ricardo, depriving him of
the right to reasonably block the foreclosure by payment. The waiver of
prior demand in the PN is against public policy and violates the right to due
process. Without demand, there is no default and the foreclosure is null
and void. Since the mortgage, insofar as Ricardo is concerned is not
violated, a requirement under Act 3135 for a valid foreclosure of real estate
mortgage is absent.
In the case of DBP vs Licuanan, it was held that: “the issue of whether
demand was made before the foreclosure was effected is essential. If
demand was made and duly received by the respondents and the latter still
did not pay, then they were already in default and foreclosure was proper.
However, if demand was not made, then the loans had not yet become due
and demandable. This meant that respondents had not defaulted in their
payment and the foreclosure was premature”.
(c) None of the three kinds of novation is applicable. There is no objective
novation, whether express or implied, because there is no change in the
object or principal conditions of the obligation. There is no substitution of
debtors, either. Compensation is considered as abbreviated or simplified
payment and since Recardo bound himself solidarily with Eduardo, any
facultative compensation which occurs does not result in partial legal
subrogation. Neither Eduardo nor Recardo is a third person interested in
the obligation under Art. 1302 of the Civil Code
MIGUEL’S ANSWER: (a) XYZ may assert compensation. The requisites for
a valid application of compensation are present in this case. XYZ and
Eduardo are creditors of one another, Eduardo as to the promissory note
that is due and XYZ as to the rentals which are also due, both debts are
demandable and both consists in debts of a sum of money that is liquidated
and demandable. All of the requisites for compensation are present and this
XYZ may validly apply compensation in the fulfillment of the debt of
Eduardo to them.
(b) Recardo’s property may be foreclosed upon proper showing that
demand was made upon him and he failed to pay, without which foreclosure
cannot be effected.
(c) None. There is no novation in this case as there was no change in object,
condition, or debtor.
Bar Question (2014)
Novation
J.C. Construction (J.C.) bought steel bars from Matibay Steel Industries
(MSI) which is owned by Buddy Batungbacal. J.C. failed to pay the
purchased materials worth P500,000 on due date. J.C. persuaded its client
Amoroso with whom it had receivables to pay its obligation to MSI. Amoroso
agreed and paid MSI the amount of P50,000. After two (2) other payments,
Amoroso stopped making further payments. Buddy filed a complaint for
collection of the balance of the obligation and damages against J.C. J.C.
denied any liability claiming that its obligation was extinguished by reason
of novation which took place when MSI accepted partial payments from
Amoroso on its behalf. Was the obligation of J.C. Construction to MSI
extinguished by novation? Why?
SUGGESTED ANSWER: No, the obligation of J.C. Construction to MSI was
not extinguished by novation. Under Article 1292 of the Civil Code, in order
that an obligation may be extinguished by another which substitute the
same, it is imperative that it be so declared in unequivocal terms, or that
the old and the new obligation be on every point incompatible with each
other. Novation by substitution of debtor requires the consent of the
creditor as provided in Article 1923 of the Civil Code. This requirement is
not present as in this case. In Magdalena Estates Inc. v Rodriguez it was
ruled that the mere fact that the creditor received payment from a third
person does not constitute novation and does not extinguish the obligation
of the original debtor. Since there was no novation, the obligation of the
original debtor is not extinguished. Thus the obligation of J.C. Construction
to MSI subsists.
MIGUEL’S ANSWER: The obligation of JC Construction to MSI was not
extinguished. For there to be novation by substitution of the debtor, the
consent of the creditor must be taken. The mere fact that MSI received
payment from Amoroso does not necessarily imply that there was
substitution.
Bar Question (2000)
Loss of the thing due; Force Majeure
Kristina brought her diamond ring to a jewelry shop for cleaning. The
jewelry shop undertook to return the ring by February 1, 1999." When the
said date arrived, the jewelry shop informed Kristina that the Job was not
yet finished. They asked her to return five days later. On February 6, 1999,
Kristina went to the shop to claim the ring, but she was informed that the
same was stolen by a thief who entered the shop the night before. Kristina
filed an action for damages against the jewelry shop which put up the
defense of force majeure. Will the action prosper or not?
SUGGESTED ANSWER: The action will prosper. Since the defendant was
already in default not having delivered the ring when delivery was
demanded by plaintiff at due date, the defendant is liable for the loss of the
thing and even when the loss was due to force majeure.
MIGUEL’S ANSWER: The action will prosper. The defense of force majeure
or fortuitous event can be used when there is an unforeseen event that
prevents the obligor from performing his obligation. However, the Civil
Code provides that for it to be a valid defense, the obligor must not be in
default. In this case, since the obligor was already in default, he cannot
invoke the defense of fortuitous event.
Extinguishment; Compensation/Set-Off; Banks (1998)
Question:

2. X, who has a savings deposit with Y Bank in the sum of P1,000,000.00, incurs a loan
obligation with the said Bank in the sum of P800,000.00 which has become due. When x tries
to withdraw his deposit, Y Bank allows only P200,000.00 to be withdrawn, less service
charges, claiming that compensation has extinguished its obligation under the savings account
to the concurrent amount of X’s debt. X contends that compensation is improper when one of
the debts, as here, arises from a contract of deposit. Assuming that the promissory note signed
by X to evidence the loan does not provide for compensation between said loan and his savings
deposit, who is correct? (3%)
UP Suggested Answer:
Y bank is correct. An. 1287, Civil Code, does not apply. All the requisites of Art. 1279,
Civil Code are present. In the case of Gullas vs. PNB [62 Phil. 519), the Supreme Court held:
"The Civil Code contains provisions regarding compensation (set off) and deposit. These
portions of Philippine law provide that compensation shall take place when two persons are
reciprocally creditor and debtor of each other. In this connection, it has been held that the
relation existing between a depositor and a bank is that of creditor and debtor, x x x As a general
rule, a bank has a right of set off of the deposits in its hands for the payment of any indebtedness
to it on the part of a depositor." Hence, compensation took place between the mutual obligations
of X and Y bank.

XII
Extinguishment; Payment ( Q12 - 1995)
Question:
In 1983 PHILCREDIT extended loans to Rivett-Strom Machineries, Inc. (RIVETTT-
STROM), consisting of US$10 Million for the cost of machineries imported and directly paid
by PHTLCREDIT, and 5 Million in cash payable in installments over a period of ten (10) years
on the basis of the value thereof computed at the rate of exchange of the U.S. dollar vis-à-vis
the Philippine peso at the time of payment.
RIVETT-STROM made payments on both loans which if based on the rate of exchange
in 1983 would have fully settled the loans.
PHILCREDIT contends that the payments on both loans should be based on the rate of
exchange existing at the time of payment, which rate of exchange has been consistently
increasing, and for which reason there would still be a considerable balance on each loan. Is
the contention of PHILCREDIT correct? Discuss fully.
UP Suggested Answer:
As regards the loan consisting of dollars, the contention of PHILCREDIT is correct. It
has to be paid in Philippine currency computed on the basis of the exchange rate at the TIME
OF PAYMENT of each installment, as held in Kalalo v. Luz, 34 SCRA 337. As regards the P5
Million loan in Philippine pesos, PHILCREDIT is wrong. The payment thereof cannot be
measured by the peso-dollar exchange rate. That will be violative of the Uniform Currency Act
(RA, 529] which prohibits the payment of an obligation which, although to be paid in
Philippine currency, is measured by a foreign currency. (Palanca v. CA, 238 SCRA 593).
Extinguishment; Compensation (2009)

No.XV. Sarah had a deposit in a savings account with Filipino Universal Bank in the amount of five
million pesos (P5,000,000.00). To buy a new car, she obtained a loan from the same bank in the
amount of P1,200,000.00, payable in twelve monthly installments. Sarah issued in favor of the bank
post-dated checks, each in the amount of P100,000.00, to cover the twelve monthly installment
payments. On the third, fourth and fifth months, the corresponding checks bounced.

The bank then declared the whole obligation due, and proceeded to deduct the amount of one
million pesos (P1,000,000.00) from Sarah’s deposit after notice to her that this is a form of
compensation allowed by law. Is the bank correct? Explain. (4%)

SUGGESTED ANSWER: No, the bank is not correct. While the Bank is correct about the applicability
of compensation, it was not correct as to the amount compensated.
A bank deposit is a contract of loan, where the depositor is the creditor and the bank the debtor.
Since Sarah is also the debtor of the bank with respect to the loan, both are mutually principal
debtors and creditors of each other. Both obligation are due, demandable and liquidated but only up
to the extent of P300,000.00 (covering the unpaid third, fourth and fifth monthly installments). The
entire one million was not yet due because the loan has no acceleration clause in case of default.
And since there is no retention or controversy commenced by third person and communicated in
due time to the debtor, then all the requisites of legal compensation are present but only up to the
amount of P300,000.00. The bank, therefore, may deduct P300,000.00 from Sarah’s bank deposit by
way of compensation.

Extinguishment; Payment of Check (2013)

No.VI. Lito obtained a loan of P1,000,000 from Ferdie, payable within one year. To secure payment,
Lito executed a chattel mortgage on a Toyota Avanza and a real estate mortgage on a 200-square
meter piece of property.

(B) Lito's failure to pay led to the extrajudicial foreclosure of the mortgaged real property. Within a
year from foreclosure, Lito tendered a manager's check to Ferdie to redeem the property. Ferdie
refused to accept payment on the ground that he wanted payment in cash: the check does not
qualify as legal tender and does not include the interest payment. Is Ferdie's refusal justified? (4%)

SUGGESTED ANSWER:

A check, whether a manager’s check or an ordinary check is not legal tender, and an offer of a check
in payment of a debt is not a valid tender of payment and may be refused receipt by the oblige or
creditors (Philippine Airlines v. CA and Amelia Tan, G.R. No. L-49188, 1990). Mere delivery of checks
does not discharge the obligation under a judgment. A check shall produce the effect of payment
only when they have been cashed or where through the fault of the creditor they have been
impaired (Art 1249, Civil Code).

However, it is not necessary that the right of redemption be exercised by delivery of legal tender. A
check may be used for the exercise of right of redemption, the same being a right and not an
obligation. The tender of a check is sufficient to compel redemption but is not in itself a payment
that relieves the redemptioner from his liability to pay the redemption price (Biana v. Gimenez, G.R.
No. 132768, Sept 9, 2005, citing Fortunado v. CA).

Redemption within the period allowed by law is not a matter of intent but a question of payment or
valid tender of full redemption prices within the said period. Whether redemption is being made
under Art. 3135 or under the General Banking Law, the mortgagor or his assignee is required to
tender payment to make said redemption valid (Heirs of Quisumbing v. PNB and SLDC, G.R. No.
178242, Jan 20, 2009).

Moreover, Ferdie’s refusal was justified on the ground that the amount tendered does not include
interest. In order to effect the redemption of the foreclosed property, the payment to the purchaser
must include the following sums: (a) the bid price; (b) the interest on the bid price, computed at one
per centum (1%) per month; and (c) the assessments and taxes, if any, paid by the purchaser with
the same rate of interest (Sec 28, 1997 Rules of Civil Procedure). Unless there is an express
stipulation to that effect, the creditor cannot be compelled to receive partial payment of the
prestation (Art. 1248, Civil Code).
Extinguishment; Payment of Check; Legal Tender (2008)

No. XVII. Felipe borrowed $100 from Gustavo in 1998, when the Phil P - US$ exchange rate was P56 -
US$1. On March 1, 2008, Felipe tendered to Gustavo a cashier's check in the amount of P4,135 in
payment of his US$ 100 debt, based on the Phil P - US$ exchange rat at that time. Gustavo accepted
the check, but forgot to deposit it until Sept. 12, 2008. His bank refused to accepted the check
because it had become stale. Gustavo now wants Felipe to pay him in cash the amount of P5,600.
Claiming that the previous payment was not in legal tender, and that there has been extraordinary
deflation since 1998, and therefore, Felipe should pay him the value of the debt at the time it was
incurred. Felipe refused to pay him again, claiming that Gustavo is estopped from raising the issue of
legal tender, having accepted the check in March, and that it was Gustavo's negligence in not
depositing the check immediately that caused the check to become stale.

(A). Can Gustavo now raised the issue that the cashier's check is not legal tender? (2%)

SUGGESTED ANSWER:

No. Gustavo previously accepted a check as payment. It was his fault why the check became stale.
He is now estopped from raising the issue that a cashier's check is not legal tender.

(B). Can Felipe validly refuse to pay Gustavo again? (2%)

SUGGESTED ANSWER:

Yes, Felipe can refuse to pay Gustavo, who allowed the check to become stale. Although a check is
not legal tender (Belisario v. Natividad. 60 Phil 156), there are instances when a check produces the
effects of payment, for example: (a) when the creditor is in estoppel or he had previously promised
he would accept a check (Paras, Civil Code Annotated, Vol IV, 2000 ed., p. 394); (b) when the check
has lost its value because of the fault of the creditor (Art. 1249, 2nd par.),as when he was
unreasonably delayed in presenting the check for payment (PNB v. Seeto, G.R. No, L-4388, 13 August
1952).

(C). Can Felipe compel Gustavo to receive US$100 instead? (1%)

SUGGESTED ANSWER:

Felipe cannot compel Gustavo to receive US$100 because under RA 529, payment of loans should be
at Philippine currency at the rate of exchange prevailing at the time of the stipulated date of
payment. Felipe could only compel Gustavo to receive US$ 100 if they stipulated that obligation be
paid in foreign currency (R.A. 4100).

Extinguishment; Total Destruction; Leased Property (1993)

Question:
A is the owner of a lot on which he constructed a building in the total cost of
P10,000,000.00. Of that amount B contributed P5,000,000.00 provided that the building as a
whole would be leased to him (B) for a period of ten years from January 1. 1985 to December
31, 1995 at a rental of P100,000.00 a year. To such condition, A agreed. On December 20,
1990, the building was totally burned. Soon thereafter, A's workers cleared the debris and
started construction of a new building. B then served notice upon A that he would occupy the
building being constructed upon completion, for the unexpired portion of the lease term,
explaining that he had spent partly for the construction of the building that was burned. A
rejected B's demand. Did A has a right in rejecting B's demand?
UP Suggested Answer:
Yes. A was correct in rejecting the demand of B. As a result of the total destruction of
the building by fortuitous event, the lease was extinguished. (Art. 1655, Civil Code.)

Payment by Cession or Dation

IV. In June 1988, X obtained a loan from A and executed with Y as solidary co-maker a promissory
note in favor of A for the sum of P200.000.00. The loan was payable at P20,000.00 with interest
monthly within the first week of each month beginning July 1988 until maturity in April 1989 To
secure the payment of the loan, X put up as security a chattel mortgage on his car, a Toyota Corolla
sedan. Because of failure of X and Y to pay the principal amount of the loan, the car was
extrajudicially foreclosed. A acquired the car at A’s highest bid of PI20.000.00 during the auction
sale.

After several fruitless letters of demand against X and Y, A sued Y alone for the discovery of
P80.000.00 constituting the deficiency.

Y resisted the suit raising the following defenses: a) That Y should not be liable at all because X was
not sued together with Y. b) That the obligation has been paid completely by A’s acquisition of the
car through “dacion en pago" or payment by cession. c) That Y should not be held liable for the
deficiency of P80.000.00 because he was not a co-mortgagor in the chattel mortgage of the car,
which contract was executed by X alone as owner and mortgagor. d) That assuming that Y is liable,
he should only pay the proportionate sum of P40.000.00.

Decide each defense with reasons. (1992 Bar Question)

SUGGESTED ANSWER:

(a) This first defense of Y is untenable. Y is still liable as solidary debtor. The creditor may proceed
against any one of the solidary debtors. The demand against one does not preclude further demand
against the others so long as the debt is not fully paid.

(b) The second defense of Y is untenable. Y is still liable. The chattel mortgage is only given as a
security and not as payment for the debt in case of failure to pay. Y as a solidary co-maker is not
relieved of further liability on the promissory note as a result of the foreclosure of the chattel
mortgage.

(c) The third defense of Y is untenable. Y is a surety of X and the extrajudicial demand against the
principal debtor is not inconsistent with a judicial demand against the surety. A suretyship may co-
exist with a mortgage.

(d) The fourth defense of Y is untenable. Y is liable for the entire prestation since Y incurred a
solidary obligation with X.

(Arts. 1207. 1216, 1252 and 2047 Civil Code; Bicol Savings and Loan Associates vs. Guinhawa 188
SCRA 642)
X, a dressmaker, accepted clothing materials from Karla to make two dresses for her day. On the X
was supposed to deliver Karla's dresses, X called up Karla to say that she had an urgent matter to
attend to and will deliver them the next day. That night, however, a robber broke into her shop and
took everything including Karla's two dresses. X claims she is not liable to deliver Karla's dresses or to
pay for the clothing materials considering she herself was a victim of the robbery which was a
fortuitous event and over which she had no control. Do you agree? Why? (2015 BAR)

Answer:

NO, I do not agree with the contention of X. The law provides that except when it is otherwise
declared by stipulation or when the law provides or the nature of the obligation requires the
assumption of risk, no person shall be liable for those events which could not be foreseen or which
though foreseen were inevitable (Art. 1174). In the case presented, X cannot invoke fortuitous event
as a defense because she had already incurred in delay at the time of the occurrence of the loss (Art.
1165).

X and Y are partners in a shop offering portrait painting. Y provided the capital and the marketing
while X was the portrait artist. They accepted the PS0,000.00 payment of Kyla to do her portrait but
X passed away without being able to do it. Can Kyla demand that Y deliver the portrait she had paid
for because she was dealing the with business establishment and not with the artist personally? Why
or why not?

Answer:

NO, Kyla cannot demand that Y deliver the portrait. The death of X has the effect of dissolving the
partnership (Art. 1830). Also, while the obligation was contracted by the partnership, it was X who
was supposed to create the portrait for Kyla. Since X died before creating the portrait, the obligation
can no longer be complied because of impossibility of performance (Art. 1266). In obligations to do,
the debtor shall be released when the prestation becomes legally or physically impossible without
the debtor’s fault.

AB Corp. entered into a contract with XY Corp. whereby the former agreed to construct the research
and laboratory facilities of the latter. Under the terms of the contract, AB Corp. agreed to complete
the facility in 18 months, at the total contract price of P10 million. XY Corp. paid 50% of the total
contract price, the balance to be paid upon completion of the work. The work started immediately,
but AB Corp. later experienced work slippage because of labor unrest in his company. AB Corp.’s
employees claimed that they are not being paid on time; hence, the work slowdown. As of the 17th
month, work was only 45% completed. AB Corp. asked for extension of time, claiming that its labor
problems is a case of fortuitous event, but this was denied by XY Corp. When it became certain that
the construction could not be finished on time, XY Corp. sent written notice canceling the contract,
and requiring AB Corp. to immediately vacate the premises.

xxx

b) Can XY Corp. unilaterally and immediately cancel the contract? (2%) (2008 Bar Question)

MAIN SUGGESTED ANSWER:

No. XY Corp cannot unilaterally and immediately cancel the contract because there is need for a
judicial action of rescission. The provisions of Art. 1191 of the Civil Code providing for rescission in
reciprocal obligations can only be invoked judicially (Escueta v. Pando, 76 Phil. 256 [1946]; Republic
v. Hospital de San Juan de Dios, 84 Phil. 820 [1949]).

ALTERNATIVE ANSWER:

Yes, XY Corp. may unilaterally cancel the obligation but this is subject to the risk that the
cancellation of the reciprocal obligation being challenged in court and if AB Corp. succeeds, then XY
Corp. will be declared in default and be liable for damages (U.P. v. de los Angeles, 35 SCRA 102
[1970]).

TX filed a suit for ejectment against BD for nonpayment of condominium rentals amount to
P150,000. During the pendency of the case, BD offered and TX accepted the full amount due as
rentals from BD, who then filed a motion to dismiss the ejectment suit on the ground that the action
is already extinguished.

Is BD’s contention correct? Why or why not? Reason. (5%) (2004 Bar Question)

SUGGESTED ANSWER:

BD’s contention is not correct. TX can still maintain the suit for ejectment. The acceptance by the
lessor of the payment by the lessee of the rentals in arrears even during the pendency of the
ejectment case does not constitute a waiver or abandonment of the ejectment case. (Spouses
Clutario v. CA, 216 SCRA 341 [1992]).

C. A treasury warrant payable to Rosenne and indorsed by Boni was cashed at the Philippine
National Bank. The warrant was subsequently dishonored by the Philippine Treasury. The Bank then
applied the deposit of Boni to the payment of the amount paid for the warrant. Is the action of the
Bank in accordance with law? Reasons. (1988 Bar Question)

SUGGESTED ANSWER:

Yes, the action of the Bank is in accordance with law. The facts stated in the above problem are
exactly the same as those in the case of Gullas vs. National Bank, 62 Phil. 519, where the Supreme
Court held that a bank has a right of set-off of the deposit in its hands for the payment of any
indebtedness to it on the part of the depositor. When-a person deposits his money at a bank,
whether such deposit is fixed, savings or current, a relationship of creditor and debtor is established
between the depositor and bank. It is, therefore, evident that all of the requisites for compensation
are present in this case.

Drew borrowed P500,000 from Pia, with Edwin acting as surety for the loan. The loan was also
secured by a real estate mortgage executed by Martin in favor of Pia. On the maturity date, Edwin
offered to pay Pia the P500,000 in cash. Pia asked Edwin if Drew knew about Edwin’s offer to pay
and Edwin replied that Drew did not know of it.

a) Can Edwin compel Pia to accept payment from him? Explain.

b) Assuming that Pia refuses to accept Edwin’s payment, what is the recourse of Edwin, if any?
Explain.
 c) Let us assume that Drew knew and had given his consent to the offer of payment by Edwin
and that Pia had accepted Edwin’s payment. When Edwin tried to seek reimbursement
from Drew, the latter was unable to pay because of insolvency. May Edwin foreclose upon
the mortgage executed by Martin? Explain.

(a) Yes, Edwin can compel Pia to accept payment from him. Under the Civil Code provisions on
obligations and contracts, a person interested in the fulfillment of the obligation can compel the
creditor to accept payment from him. Here Edwin who is a surety is a party interested in the
fulfillment of the obligation as he is liable together with the principal debtor in favor of the creditor.
Hence Edwin can compel Pia to accept payment from him.

(b) If Pia refuses to accept Edwin’s payment, Edwin’s recourse is to consign the amount due with the
court. Under the Civil Code provisions on obligations and contracts, the debtor may consign the
amount due where the creditor unjustifiably refuses the debtor’s tender of payment. Here, Pia’s
refusal to accept Edwin’s tender of payment was unjustified since Edwin as a surety is a person
interested in the fulfillment of the obligation who can compel the creditor Pia to accept payment
from him. Hence Edwin has the recourse of consignation if Pia refuses refuses to accept Edwin’s
payment.

(c) Yes, Edwin may foreclose upon the mortgage executed by Martin. Under the Civil Code provisions
on Obligations and Contracts, there is legal subrogation when a person interested in the fulfillment
of the obligation pays the creditor. In such a case, payor steps into the shoes of the creditor and
acquires the creditor’s accessory rights such as those arising from mortgage. Here Edwin who is
interested in the fulfillment of the obligation had paid Pia. Hence there was legal subrogation and
Edwin thus steps into the shoes of Pia and acquires the latter’s rights as mortgagee. Thus Edwin may
foreclose upon the mortgage.

ABC Construction Corporation and Northville Properties entered into a construction contract
whereby ABC agreed to construct a 10-storey condominium for Northville Properties for P50 million.
The contract stipulated that a pre-condition for the full payment of the price was the submission by
ABC of a performance bond and an “as-built” drawing or a drawing of the condominium as
constructed by ABC. Northville paid the initial billings amounting to P30 million but refused to pay
the balance of P20 million, although ABC had finished the construction of the condominium, on the
ground that ABC had failed to submit the performance bond and the “as-built” drawing as required
by the contract. During the trial ABC’s chief project engineer testified that they did not submit the
performance bond and “asbuilt” drawing because they though it was no longer necessary since the
condominium project had been completed in accordance with specifications. The president of
Northville on the other hand testified that ABC is not entitled to the balance since it failed to comply
with its contractual undertaking to submit the performance bond and “as-built” drawing which is a
condition for full payment. Is ABC entitled to the payment of the balance of P20 million? Explain

- Yes, ABC is entitled to the payment of the balance of P20 million. Under the Civil Code
provisions on Obligations and Contracts, if the obligation has been substantially performed
in good faith, the obligor may recover payment as though there had been a strict and
complete fulfillment. Here there was a substantial performance by ABC as it was able to
complete the construction of the condominium and its failure to submit the performance
bond and the “asbuilt” drawing was in good faith as it though the same were not necessary.
Hence ABC is entitled to the payment of P20 million.
Ric and Pol entered into an “Agreement of Purchase and Sale” over two parcels of land for a price of
P1 million. The terms of the agreement provided for a downpayment of P500,000 with the balance
payable in ten equal monthly installments and for Ric to deliver the deed of absolute sale and clean
title covering the 2 parcels to Pol upon the latter’s full payment of the purchase price. Pol made a
downpayment of P500,000 but made no further payments. Ric filed an action for rescission of the
Agreement which was granted by the trial court. The court ordered the setting aside of the Agreement,
ordered Pol to return the parcels of land to Ric, and ordered Ric to return the downpayment to Pol.
On appeal, Pol contended that the Agreement cannot be rescinded since he had paid Ric a
considerable sum and had therefore substantially complied with his obligation. Is Pol’s contention
correct? Explain.

Using a personal check, Julia bought a Toyota Altis car from United Car Sales Center (UCSC). The car
was delivered the same day. When the seller presented the check for payment the following day, the
check was dishonored by the drawee bank on the ground of insufficient funds. Unfortunately, Julia
was nowhere to be found. Meanwhile, UCSC discovered that the car had been sold and delivered by
Julia to Romeo, who knew nothing about the problem with Julia’scheck. UCSC then filed an action to
recover the car from Romeo, claiming that the sale to Julia was void. Can the suit prosper? Explain.

Josef owns a piece of land in Pampanga. The National Housing Authority (NHA) sought to expropriate
the property for its socialized housing project. The trial court fixed the just compensation for the
property at P50 million. The NHA immediately deposited the same at the authorized depository bank
and filed a motion for the issuance of a writ of possession with the trial court. Unfortunately, there
was delay in the resolution of the motion. Meanwhile, the amount deposited earned interest. When
Josef sought the release of the amount deposited, NHA argued that Josef should only be entitled to
P50 million. Who owns the interest earned? (3%) SUGGESTED ANSWER: The interest earned belongs
to Josef because bank interest partakes of the nature of civil fruits under Article 442 of the Civil Code
and shall belong to the owner of the principal thing. When the National Housing Authority deposited
the P50 Million as payment for the just compensation with an authorized depositary bank for the
purpose of obtaining a writ of possession, it is deemed to be a constructive delivery of the said amount
to Josef. Since Josef is entitled to the P50 Million and undisputably the owner of the said principal
amount, the interest yield, as accession, in a bank deposit should likewise pertain to the owner of the
money deposited. Being an attribute of ownership (jus fruendi), Josef’s right over the fruits, that is the
bank interests, must be respected. [Basis: Republic v. Holy Trinity Realty Development Corp., G.R. No.
172410, April 14, 2008]