Article 153.

The family home is deemed constituted on a house and lot from the time it is occupied as a
F. REMEDIES FOR BREACH OF OBLIGATIONS: family residence. From the time of its constitution and so long as any of its beneficiaries actually resides
therein, the family home continues to be such and is exempt from execution, forced sale or attachment
except as hereinafter provided and to the extent of the value allowed by law.
Article 1165. When what is to be delivered is a determinate thing, the creditor, in addition to the right
granted him by article 1170, may compel the debtor to make the delivery. Article 155. The family home shall be exempt from execution, forced sale or attachment except:
If the thing is indeterminate or generic, he may ask that the obligation be complied with at the expense of (1) For nonpayment of taxes;
the debtor. (2) For debts incurred prior to the constitution of the family home;
If the obligor delays, or has promised to deliver the same thing to two or more persons who do not have (3) For debts secured by mortgages on the premises before or after such
the same interest, he shall be responsible for any fortuitous event until he has effected the delivery. constitution; and
(4) For debts due to laborers, mechanics, architects, builders, materialmen and
Article 1166. The obligation to give a determinate thing includes that of delivering all its accessions and others who have rendered service or furnished material for the construction
accessories, even though they may not have been mentioned. of the building.
Article 1167. If a person obliged to do something fails to do it, the same shall be executed at his cost.
This same rule shall be observed if he does it in contravention of the tenor of the obligation. Furthermore, Rules of Court- RULE 39, SEC. 13:
it may be decreed that what has been poorly done be undone. Section 13. Property exempt from execution.
Except as otherwise expressly provided by law, the following property, and no other, shall be exempt from
Article 1168. When the obligation consists in not doing, and the obligor does what has been forbidden execution:
him, it shall also be undone at his expense.
FOCAUPLBELASE
Article 1170. Those who in the performance of their OBLIGATIONS are guilty of fraud, negligence, or
delay, and those who in any manner contravene the tenor thereof, are liable for damages.  The judgment obligor's Family home as provided by law, or the homestead in which he resides, and
land necessarily used in connection therewith;
Article 1177. The creditors, after having pursued the property in possession of the debtor to satisfy their  Ordinary tools and implements personally used by him in his trade, employment, or livelihood;
claims, may exercise all the rights and bring all the actions of the latter for the same purpose, save those  Three horses, or three cows, or three Carabaos, or other beasts of burden, such as the judgment
which are inherent in his person; they may also impugn the acts which the debtor may have done to obligor may select necessarily used by him in his ordinary occupation;
defraud them.  His necessary clothing and Articles for ordinary personal use, excluding jewelry;
 Household furniture and Utensils necessary for housekeeping, and used for that purpose by the
Article 1178. Subject to the laws, all rights acquired in virtue of an obligation are transmissible, if there judgment obligor and his family, such as the judgment obligor may select, of a value not exceeding
has been no stipulation to the contrary. one hundred thousand pesos;
 Provisions for individual or family use sufficient for four months;
Article 1191. The power to rescind OBLIGATIONS is implied in reciprocal ones, in case one of the  The professional Libraries and equipment of judges, lawyers, physicians, pharmacists, dentists,
obligors should not comply with what is incumbent upon him. engineers, surveyors, clergymen, teachers, and other professionals, not exceeding three hundred
The injured party may choose between the fulfillment and the rescission of the obligation, with the thousand pesos in value;
payment of damages in either case. He may also seek rescission, even after he has chosen fulfillment, if  One fishing Boat and accessories not exceeding the total value of one hundred thousand pesos
the latter should become impossible. owned by a fisherman and by the lawful use of which he earns his livelihood;
The court shall decree the rescission claimed, unless there be just cause authorizing the fixing of a period.  So much of the salaries, wages, or Earnings of the judgment obligor for his personal services within
This is understood to be without prejudice to the rights of third persons who have acquired the thing, in the four months preceding the levy as are necessary for the support of his family;
accordance with articles 1385 and 1388 and the Mortgage Law.  Lettered gravestones;
 Monies, benefits, privileges, or Annuities accruing or in any manner growing out of any life
Article 1192. In case both parties have committed a breach of the obligation, the liability of the first insurance;
infractor shall be equitably tempered by the court. If it cannot be determined which of the parties first  The right to receive legal Support, or money or property obtained as such support, or any pension
violated the contract, the same shall be deemed extinguished, and each shall bear his own damages. or gratuity from the Government;
 Properties specially Exempted by law.
Article 2236. The debtor is liable with all his property, present and future, for the fulfillment of his
OBLIGATIONS, subject to the exemptions provided by law. (Concurrence and Preference of Credits)
But no article or species of property mentioned in this section shall be exempt from execution issued upon
a judgment recovered for its price or upon a judgment of foreclosure of a mortgage thereon.
Article 302. Neither the right to receive legal support nor any money or property obtained as such support
or any pension or gratuity from the government is subject to attachment or execution. (Support)
Tolentino:
Article 1708. The laborer's wages shall not be subject to execution or attachment, except for debts Remedy under Article 1165  REMEDIES OF CREDITOR: For failure of debtor to comply,
incurred for food, shelter, clothing and medical attendance. (Contract Labor) 1. SPECIFIC PERFORMANCE, to obtain compliance of the prestations, whether
determinate or generic; this action implies a contractual relation;
FAMILY CODE: 2. TO RESCIND OR RESOLVE THE OBLIGATION
3. AN ACTION FOR DAMAGES exclusively or in addition to 1 and 2.
Amen | Compiled Notes
 1. Right to subsistence, support he receives are exempt
 Constitutional prohibition vs. imprisonment for debt applies, except in subsidiary 2. Public rights;
imprisonment when civil liability arising from crime is not paid; or in contempt; 3. Rights pertaining to honor
 Exception to exception on the General rule under Fortuitous Event: Debtor in default may 4. Right to use remaining powers available to him, e.g. SPA of agency or deposit;
still prove that he is not liable for fortuitous event because even if he had not performed, the loss administrator; to accept a contract
would still have occurred in the same manner. 5. Non-patrimonial rights – establish status, legitimate or illegitimate child; annulment
of marriage, legal separation, those arising from Persons and Family Relations;
Remedy under Article 1167  Performance of OBLIGATION by another at creditor’s choice 6. Personal rights arising from patrimonial source, e.g. to revoke a donation due to
and at debtor’s cost – court may not by discretion merely award damages to creditor when the ingratitude, to demand exclusion of an unworthy heir;
OBLIGATION may be done in spite of debtor’s refusal to do so;
Accion pauliana (Articles 1380-89) -- This is the right of creditors to set aside fraudulent transfers
But, law may not compel or force debtor to comply with OBLIGATION, if to do so, would which the debtor made so much of it as is necessary to pay the debts.
amount to involuntary servitude, and since worthy is the rule that if there is debt, then there is no  pertains to acts which debtor may have done in fraud of creditor E.g. alienation of property,
imprisonment. If OBLIGATION can only be done by debtor, then the only remedy is to ask for renunciation of inheritance or right of usufruct, assignment of credit, remission of debts.
damages.
(1) EXTRAJUDICIAL REMEDIES:
Remedy under Article 1168 OBLIGATION NOT TO DO was done  may compel debtor to
UNDO what he has done; but if impossible to undo so, the remedy is to ask for damages. (a) EXPRESSLY GRANTED BY LAW

Remedy under Article 1170  RECOVERABLE DAMAGES = when the OBLIGATION is to do (b) STIPULATED BY THE PARTIES
something other than the payment of money;
(a) EXPRESSLY GRANTED BY LAW, extrajudicial remedies
If OBLIGATION is payment of money, Article 2209 is the rule in relation to damages  when
debtors incurs in delay, there is payment of interest if without stipulation to the contrary, as agreed (In OBLIGATIONS of the Partners)
upon, or if no agreement, the legal interest will do. Article 1786. Every partner is a debtor of the partnership for whatever he may have promised to
contribute thereto.
Remedy under Article 1177  RIGHTS OF CREDITORS: He shall also be bound for warranty in case of eviction with regard to specific and determinate things
1. To levy by attachment and execution upon all the property of debtor except if exempt which he may have contributed to the partnership, in the same cases and in the same manner as the vendor
by law; is bound with respect to the vendee. He shall also be liable for the fruits thereof from the time they should
2. To exercise all the rights and actions of the debtor, except those inherently personal to have been delivered, without the need of any demand.
him; accion subrogatoria; prior court approval is not required. Article 1788. A partner who has undertaken to contribute a sum of money and fails to do so becomes a
This should concur with the following: requisites: debtor for the interest and damages from the time he should have complied with his obligation.
a. Creditor has interest in the right or action not only because of his credit but The same rule applies to any amount he may have taken from the partnership coffers, and his liability shall
that of the insolvency of debtor; begin from the time he converted the amount to his own use.
b. Malicious or negligent inaction of debtor at level which endanger the claim of
Creditor; (In Delivery of the Thing Sold)
c. Debtor’s right against 3rd person must be patrimonial, or susceptible of being Article 1526. Subject to the provisions of this Title, notwithstanding that the ownership in the goods may
transformed to patrimonial value. have passed to the buyer, the unpaid seller of goods, as such, has:
3. Ask for rescission of contracts made by debtor in fraud of Creditor’s rights. (1) A lien on the goods or right to retain them for the price while he is in possession of them;
(2) In case of the insolvency of the buyer, a right of stopping the goods in transitu after he has
parted with the possession of them;
Balane: (3) A right of resale as limited by this Title;
Q: Against what can the obligee demand performance? (4) A right to rescind the sale as likewise limited by this Title.
A: Against non-exempt properties of the debtor. -- The debtor is liable with all his property, present Where the ownership in the goods has not passed to the buyer, the unpaid seller has, in addition to his
and future, for the fulfillment of his OBLIGATIONS, subject to the exemptions provided by other remedies a right of withholding delivery similar to and coextensive with his rights of lien and
law. (Article 2236) stoppage in transitu where the ownership has passed to the buyer.

If number one is not enough, the creditor goes to any claims which the debtor may have against third (2) JUDICIAL REMEDIES:
persons. This is called accion subrogatoria, wherein the creditor is subrogated in the rights of
the debtor. (a) PRINCIPAL REMEDY  Article 1191 or Article 1170
Personal rights of the debtor:
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(b) SUBSIDIARY REM  Articles 1380 /1177 Accion Pauliana: Actions to set aside contracts in fraud of Creditors (Article 1381 par. 3)
(c) ANCILLARY REM  Rules of Court
Requisites for Accion Pauliana:
(a) PRINCIPAL REMEDY  1191 / 1170 1. Plaintiff: Asking for rescission has a credit prior to alienation, though demandable later;
2. Debtor has made a subsequent contract conveying a patrimonial benefit to 3rd person;
Article 1191. The power to rescind OBLIGATIONS is implied in reciprocal ones, in case one of the 3. Creditor-Plaintiff has no other legal remedy to satisfy his claim;
obligors should not comply with what is incumbent upon him. 4. Act being impugned is fraudulent;
The injured party may choose between the fulfillment and the rescission of the obligation, with the 5. The 3rd person who received property, if by onerous title, is accomplice in the fraud.
payment of damages in either case. He may also seek rescission, even after he has chosen fulfillment, if
the latter should become impossible.
The court shall decree the rescission claimed, unless there be just cause authorizing the fixing of a period. Rescission is a subsidiary action, which presupposes that the Creditor has exhausted the
This is understood to be without prejudice to the rights of third persons who have acquired the thing, in properties of the debtor. And that fraudulent conveyance must be shown.
accordance with articles 1385 and 1388 and the Mortgage Law.
Test: WON conveyance by debtor a bona fide transmission.
Notes:
Badges/ Signs of Fraud:
Two remedies are alternative and not cumulative, subject to the exception in par. 2 where he may
1. consideration of conveyance is inadequate
also seek rescission even after he has chosen fulfillment if the latter should become impossible
2. transfer made by Debtor after suit has begun and while pending action against him
3. a sale upon credit by insolvent Debtor
Article 1170. Those who in the performance of their obligation are guilty of fraud, negligence or delay, and those
4. evidence of large indebtedness or complete insolvency
who in any manner contravene the tenor thereof, are liable for damages.
5. transfer of all or nearly all of property of Debtor who is insolvent or greatly embarrassed
financially
(b) SUBSIDIARY REM  Articles 1380 /1177 6. transfer is made between father and son
Article 1380. Contracts validly agreed upon may be rescinded in the cases established by law. 7. failure of vendee to take exclusive possession of property
(Rescissible Contracts)
8. If alienation is gratuitous, good faith of transferee does NOT protect him over the owner;
Article 1177. The creditors, after having pursued the property in possession of the debtor to satisfy their otherwise that amounts to Unjust enrichment
claims, may exercise all the rights and bring all the actions of the latter for the same purpose, save those 9. If alienation is by onerous title, transferee must be a party to the fraud, to have rescission
which are inherent in his person; they may also impugn the acts which the debtor may have done to
defraud them. As a rule, Rescission benefits only Creditor who obtained Rescission. And the extent of revocation is
only to the amount of prejudice suffered by Creditor. As to the excess, the alienation is maintained.
Note:
Rescission in reciprocal OBLIGATION in Article 1191 is not identical to Rescission of contracts in Actions for Rescission may be brought by:
Article 1380 and the succeeding provisions thereto. (1) the person injured by the rescission of the contract;
(2) heirs of this person, and
Requisites of Rescission of a contract under Article 1380: (3) their Creditors by virtue of right granted under Article 1177.
A rescissible contract provided for under Article 1381 and 1382;
No other legal means to obtain reparation for damages (Article 1383); Notes:
The person demanding rescission must be able to return whatever he may be obliged to restore if  Right of transferee to retain property depends upon the nature of the transfer and upon
rescission be granted (Article 1385); the complicity of the former in the fraud.
The objects of contract must not have passed legally to the possession of a of 3rd person in good faith  When contract can’t be rescinded because 3rd person who is in good faith, the party who
(Article 1385); caused the loss is liable for the damages.
Actions for rescission must be brought within 4 years (Article 1389).  Badges of fraud, and Article 1387: Presumptions. May be rebutted by satisfactory and
convincing evidence.
 Rescindable contracts are valid until voided and can’t be attacked collaterally as in a land  Article 1388: Creditor with action only against subsequent transferees only when an action
registration proceeding. Direct proceeding is therefore necessary. lies against the 1st transferee. If 1st Transferee is in Good Faith, there is no liability. But if
the 1st Transferee is in Bad Faith, the rescissible character of 2nd alienation depends upon
 Rescission only for legal cause, as those in Article 1381 and 1382. how 2nd Transferee acquired the thing.
―Lesion‖ under Article 1381 par. 1 and 2, for those to give rise to rescission, must be known or could
have been known at the time of making the contract, and not due to circumstances subsequent thereto Article 1191. The power to rescind obligations is implied in reciprocal ones, in case one of the obligors should not
or unknown to the parties. comply with what is incumbent upon him.

Amen | Compiled Notes

The injured party may choose between the fulfillment and the rescission of the obligation with the payment of On July 3, 1987, herein respondents filed before the Regional Trial Court (RTC) of Makati City, Branch 61 a Complaint 4 for
damages in either case. He may also seek rescission, even after he has chosen fulfillment, if the latter should rescission of the agreement and the return of control and management of the Rural Bank from petitioners to respondents, plus
become impossible. damages. RTC ruled in favor of the respondents. Hence, petitioners appeal. But CA affirmed the RTC decision.
Issues:
The creditor shall decree the rescission claimed, unless there be just cause authorizing the fixing of a period. (1) Whether or not the action for rescission had already prescribed.
This is understood to be without prejudice to the rights of third persons who have acquired the thing, in (2) Whether or not the action for rescission is proper.
accordance with Articles. 1385 and 1388 and the Mortgage Law. Held:
(1) NO. Article 1389. The action to claim rescission must be commenced within four years x x x.
This is an erroneous proposition. Article 1389 specifically refers to rescissible contracts as, clearly, this provision is under the
Article 1192. In case both parties have committed a breach of the obligation, the liability of the 1st infractor shall chapter entitled "Rescissible Contracts."
be equally tempered bye the creditors. If it cannot be determined which of the parties 1st violated the contract, the In a previous case, this Court has held that Article 1389: applies to rescissible contracts, as enumerated and defined in Articles
same shall be deemed extinguished, and each shall bear his own damages. 1380 and 1381. We must stress however, that the "rescission" in Article 1381 is not akin to the term "rescission" in Article
1191 and Article 1592. In Articles 1191 and 1592, the rescission is a principal action which seeks the resolution or
According to Tolentino: cancellation of the contract while in Article 1381, the action is a subsidiary one limited to cases of rescission for lesion as
Similarities between Rescission under Article 1191 and Article 1380 include the following: enumerated in said article.
(1) both presuppose contracts validly entered into and existing, and The prescriptive period applicable to rescission under Articles 1191 and 1592, is found in Article 1144, which provides that
the action upon a written contract should be brought within ten years from the time the right of action accrues.
(2) both require mutual restitution when declared proper. Article 1381 sets out what are rescissible contracts, to wit:
Article 1381. The following contracts are rescissible:
Differences: (1) Those which are entered into by guardians whenever the wards whom they represent suffer lesion by more
than one-fourth of the value of the things which are the object thereof;
(1) Rescission under Article 1191 may be demanded only by party to the contract, while under (2) Those agreed upon in representation of absentees, if the latter suffer the lesion stated in the preceding number;
Article 1380 by 3rd person prejudiced by the contract; (3) Those undertaken in fraud of creditors when the latter cannot in any other manner collect the claims due them;
(2) Rescission under Article 1191 may be denied when there is sufficient reason to justify extension (4) Those which refer to things under litigation if they have been entered into by the defendant without the
of time to perform, while under Article 1380 such reason does NOT affect right to ask for rescission; knowledge and approval of the litigants or of competent judicial authority;
(5) All other contracts specially declared by law to be subject to rescission.
(3) Non-performance is the only ground for rescission under Article 1191 while there are various The Memorandum of Agreement subject of this controversy does not fall under the above enumeration. Accordingly, the
reasons of equity as grounds under Article 1191 applies only to reciprocal obligations where one prescriptive period that should apply to this case is that provided for in Article 1144, to wit:
party has not performed, while under Article 1380, OBLIGATION may be unilateral or reciprocal Article 1144. The following actions must be brought within ten years from the time the right of action accrues:
(1) Upon a written contract;
and even when contract has been fulfilled. xxxx
Based on the records of this case, the action was commenced on July 3, 1987, while the Memorandum of Agreement was
Case: UNLAD Resources Dev. Co., UNLAD Rural Bank of Noveleta, Inc., UNLAD Commodities, Inc., entered into on December 29, 1981. Article 1144 specifically provides that the 10-year period is counted from "the time the
Helena Benitez and Conrado Benitez II vs. Renato Dragon, et al., July 28, 2008, J. Nachura. right of action accrues." The right of action accrues from the moment the breach of right or duty occurs. 13 Thus, the original
Facts: Herein respondents and petitioner entered into a Memorandum of Agreement wherein it is provided that Complaint was filed well within the prescriptive period.
respondents, as controlling stockholders of Rural Bank shall allow Unlad Resources to invest P4.8 Million in the
(2) YES.
Rural Bank in a form of additional equity. Likewise, Unlad Resources, upon signing, it was agreed that the former There is no question that petitioners herein failed to fulfill their obligation under the Memorandum of Agreement. Even they
shall subscribe to a minimum of 480,000 common or preferred non-voting share of stock and pay immediately admit the same, albeit laying the blame on respondents.
1,200,000 for said subscription, and that upon signing, said agreement shall transfer control and management over It is true that respondents increased the Rural Bank’s authorized capital stock to only P5 million, which was not enough to
Rural Bank to Unlad. According to respondents, immediately after signing, they complied with their obligation accommodate the P4.8 million worth of stocks that petitioners were to subscribe to and pay for. However, respondents’ failure
and transferred control of Rural Bank to Unlad, thereby renaming the Bank into Unlad Rural Bank of Noveleta. to fulfill their undertaking in the agreement would have given rise to the scenario contemplated by Article 1191 of the Civil
However, despite repeated demands, Unlad has failed and refused to comply with their obligations as agreed Code, which reads:
upon. On August 10, 1984, the Board of Directors of [petitioner] Unlad Resources passed Resolution No. 84-041 authorizing Article 1191. The power to rescind reciprocal obligations is implied in reciprocal ones, in case one of the obligors should
the President and the General Manager to lease a mango plantation situated in Naic, Cavite. Pursuant to this Resolution, the not comply with what is incumbent upon him.
The injured party may choose between the fulfillment and the rescission of the obligation, with the payment of damages in
Bank as [lessee] entered into a Contract of Lease with the [petitioner] Helena Z. Benitez as [lessor]. The management of the
either case. He may also seek rescission, even after he has chosen fulfillment, if the latter should become impossible.
mango plantation was undertaken by Unlad Commodities, Inc., a subsidiary of Unlad Resources[,] under a Management
Contract Agreement. The Management Contract provides that Unlad Commodities, Inc. would receive eighty percent (80%) of The court shall decree the rescission claimed, unless there be just cause authorizing the fixing of a period.
the net profits generated by the operation of the mango plantation while the Bank’s share is twenty percent (20%). It was This is understood to be without prejudice to the rights of third persons who have acquired the thing, in accordance with
further agreed that at the end of the lease period, the Rural Bank shall turn over to the lessor all permanent improvements Articles 1385 and 1388 and the Mortgage Law.
introduced by it on the plantation. Thus, petitioners should have exacted fulfillment from the respondents or asked for the rescission of the contract instead of
simply not performing their part of the Agreement. But in the course of things, it was the respondents who availed of the
On May 20, 1987, [petitioner] Unlad Rural Bank wrote [respondents] regarding [the] Central Bank’s approval to retire its
remedy under Article 1191, opting for the rescission of the Agreement in order to regain control of the Rural Bank.
[Development Bank of the Philippines] preferred shares in the amount of P219,000.00 and giving notice for subscription to
proportionate shares. The [respondents] objected on the grounds that there is already a sinking fund for the retirement of the Having determined that the rescission of the subject Memorandum of Agreement was in order, the trial court ordered petitioner
Unlad Resources to return to respondents the management and control of the Rural Bank and for the latter to return the sum
said DEBTORP-held preferred shares provided for annually and that it could deprive the Rural Bank of a cheap source of
fund. (sic) of P1,003,070.00 to petitioners.
[Respondents] alleged compliance with all of their obligations under the Memorandum of Agreement in that they have Mutual restitution is required in cases involving rescission under Article 1191. This means bringing the parties back to
their original status prior to the inception of the contract. Article 1385 of the Civil Code provides, thus:
transferred control and management over the Rural bank to the [petitioners] and are ready, willing and able to allow
ART. 1385. Rescission creates the obligation to return the things which were the object of the contract, together with their
[petitioners] to subscribe to a minimum of four hundred eighty thousand (P480,000.00) (sic) common or preferred non-voting
fruits, and the price with its interest; consequently, it can be carried out only when he who demands rescission can return
shares of stocks with a total par value of four million eight hundred thousand pesos (P4,800,000.00) in the Rural Bank.
whatever he may be obligated to restore.
However, [petitioners] have failed and refused to subscribe to the said shares of stock and to pay the initial amount of one
Neither shall rescission take place when the things which are the object of the contract are legally in the possession of third
million two hundred thousand pesos (P1,200,000.00) for said subscription.
persons who did not act in bad faith.
Amen | Compiled Notes
In this case, indemnity for damages may be demanded from the person causing the loss. Article 1192 of the Civil Code provides that in case both parties have committed a breach of their reciprocal
This Court has consistently ruled that this provision applies to rescission under Article 1191: obligations, the liability of the first infractor shall be equitably tempered by the courts. We rule that the
Since Article 1385 of the Civil Code expressly and clearly states that "rescission creates the obligation to return the things liability of Island Savings Bank for damages in not furnishing the entire loan is offset by the liability of
which were the object of the contract, together with their fruits, and the price with its interest," the Court finds no justification
to sustain petitioners’ position that said Article 1385 does not apply to rescission under Article 1191.
Sulpicio M. Tolentino for damages, in the form of penalties and surcharges, for not paying his overdue
Rescission has the effect of "unmaking a contract, or its undoing from the beginning, and not merely its P17,000.00 debt. The liability of Sulpicio M. Tolentino for interest on his PI 7,000.00 debt shall not be
termination."16 Hence, rescission creates the obligation to return the object of the contract. It can be carried out only when included in offsetting the liabilities of both parties. Since Sulpicio M. Tolentino derived some benefit for his
the one who demands rescission can return whatever he may be obliged to restore. To rescind is to declare a contract void use of the P17,000.00, it is just that he should account for the interest thereon.
at its inception and to put an end to it as though it never was. It is not merely to terminate it and release the parties from We hold, however, that the real estate mortgage of Sulpicio M. Tolentino cannot be entirely foreclosed to
further obligations to each other, but to abrogate it from the beginning and restore the parties to their relative positions as satisfy his P 17,000.00 debt.
if no contract has been made.
Accordingly, when a decree for rescission is handed down, it is the duty of the court to require both parties to surrender
that which they have respectively received and to place each other as far as practicable in his original situation. The Case: Universal Food Corporation vs. CA and Magdalo Francisco Sr. and Victoriano Francisco, (1970),
rescission has the effect of abrogating the contract in all parts. J. Castro.
Clearly, the petitioners failed to fulfill their end of the agreement, and thus, there was just cause for rescission. With FACTS: Magdalo V. Francisco, Sr. PATENTEE or owner and author of the formula for MAFRAN SAUCE,
the contract thus rescinded, the parties must be restored to the status quo ante, that is, before they entered into the manufactured and distributed by UFC, filed with the CFI-Manila, an action for rescission of a contract entitled
Memorandum of Agreement. "Bill of Assignment." The plaintiffs prayed the court to adjudge the defendant as without any right to the use
of the Mafran trademark and formula, and order the latter to restore to them the said right of user; to order
Case: Central Bank of the Philippines and Acting Director Antonio Castro, Jr. of the Department of UFC to pay Magdalo his unpaid salary from December 1, 1960, as well as damages in the sum of P40,000, and
Commercial and Savings Bank (In his capacity as statutory receiver of Island Savings Bank) vs. CA and to pay the costs of suit.
Sulpicio Tolentino, October 3, 1985, C.J. Makasiar. Petitioner UFC contends that the CA erred in granting above prayers of plaintiff, holding that right to specific
Facts: Islands Savings Bank approved the loan application of Tolentino for P80,000. To secure the loan, Tolentino performance is not conjunctive with the right to rescind a reciprocal contract; that a plaintiff cannot ask for
executed a real estate mortgage on his 100-hectare land. Only P17,000 was released by the Bank, for which both remedies; that the appellate court awarded the respondents both remedies as it held that the respondents
Tolentino executed a promissory note payable within 3 years. The balance was not released. In 1965, the are entitled to rescind the Bill of Assignment and also that the respondent patentee is entitled to his salary
Monetary Board of the Central Bank issued Resolution No. 1049 prohibiting the Bank from doing business in the aforesaid; that this is a gross error of law.
Philippines. The Bank filed an application for extrajudicial foreclosure of the real estate mortgage of Tolentino for Certain provisions of the Bill of Assignment would seem to support the petitioner's position that the
non-payment of the promissory note for P17,000. In turn, Tolentino filed an action for injunction, specific respondent patentee ceded and transferred to the petitioner the formula for Mafran sauce.
performance or rescission, alleging that the Bank failed to fulfill its obligation to lend the balance of P63,000. However, a perceptive analysis of the entire instrument and the language employed therein would lead one to
Issues: the conclusion that what was actually ceded and transferred was only the use of the Mafran sauce formula.
Whether or not Tolentino can compel specific performance. This was the precise intention of the parties: (1) 2% ROYALTY; provisions to preserve utmost secrecy and
Held: monopoly of the formula by the patentee; etc.
NO. When Island Savings Bank and Sulpicio M. Tolentino entered into an P80,000.00 loan agreement on ISSUE: WON the rescission of the Bill of Assignment by the CA is proper.
April 28, 1965, they undertook reciprocal obligations. In reciprocal obligations, the obligation or promise of In this connection, we quote for ready reference the following articles of the new Civil Code governing
each party is the consideration for that of the other (Penaco vs. Ruaya, 110 SCRA 46 [1981]; Vda. de Quirino rescission of contracts:
vs, Pelarca 29 SCRA 1 [1969]); and when one party has performed or is ready and willing to perform his part ARTICLE 1191. The power to rescind OBLIGATIONS is implied in reciprocal ones, in case one of
of the contract, the other party who has not performed or is not ready and willing to perform incurs in delay the obligors should not comply with what is incumbent upon him.
(Art. 1169 of the Civil Code). The promise of Sulpicio M. Tolentino to pay was the consideration for the The injured party may choose between the fulfillment and the rescission of the obligation, with the
obligation of Island Savings Bank to furnish the P80,000.00 loan. When Sulpicio M. Tolentino executed a real payment of damages in either case. He may also seek rescission even after he has chosen
estate mortgage on April 28, 1965, he signified his willingness to pay the P80,000.00 loan. From such date, fulfillment, if the latter should become impossible.
the obligation of Island Savings Bank to furnish the P80,000.00 loan accrued. Thus, the Bank's delay in The court shall decree the rescission claimed, unless there be just cause authorizing the fixing of a
furnishing the entire loan started on April 28, 1965, and lasted for a period of 3 years or when the Monetary period.
Board of the Central Bank issued Resolution No. 967 on June 14, 1968, which prohibited Island Savings Bank This is understood to be without prejudice to the rights of third persons who have acquired the
from doing further business. Such prohibition made it legally impossible for Island Savings Bank to furnish the thing, in accordance with articles 1385 and 1388 of the Mortgage Law.
P63,000.00 balance of the P80,000.00 loan. The power of the Monetary Board to take over insolvent banks for ARTICLE 1383. The action for rescission is subsidiary; it cannot be instituted except when the
the protection of the public is recognized by Section 29 of R.A. No. 265, which took effect on June 15, 1948, party suffering damage has no other legal means to obtain reparation for the same.
the validity of which is not in question. ARTICLE 1384. Rescission shall be only to the extent necessary to cover the damages caused.
The Board Resolution No. 1049 issued on August 13,1965 cannot interrupt the default of Island Savings Bank HELD: YES. The power to rescind OBLIGATIONS is implied in reciprocal ones, in case one of the obligors
in complying with its obligation of releasing the P63,000.00 balance because said resolution merely prohibited should not comply with what is incumbent upon him.
the Bank from making new loans and investments, and nowhere did it prohibit island Savings Bank from The injured party may choose between fulfillment and rescission of the obligation, with payment of damages
releasing the balance of loan agreements previously contracted. Besides, the mere pecuniary inability to fulfill in either case.
an engagement does not discharge the obligation of the contract, nor does it constitute any defense to a decree In this case before us, there is no controversy that the provisions of the Bill of Assignment are reciprocal in
of specific performance (Gutierrez Repide vs. Afzelius and Afzelius, 39 Phil. 190 [1918]). And, the mere fact nature. The petitioner corporation violated the Bill of Assignment, specifically paragraph 5-(a) and (b), by
of insolvency of a debtor is never an excuse for the non-fulfillment of an obligation but 'instead it is taken as a terminating the services of the respondent patentee Magdalo V. Francisco, Sr., without lawful and justifiable
breach of the contract by him (vol. 17A, 1974 ed., CJS p. 650) cause.
Since both parties were in default in the performance of their respective reciprocal obligations, that is, The general rule is that rescission of a contract will not be permitted for a slight or casual breach, but
Island Savings Bank failed to comply with its obligation to furnish the entire loan and Sulpicio M. only for such substantial and fundamental breach as would defeat the very object of the parties in
Tolentino failed to comply with his obligation to pay his P17,000.00 debt within 3 years as stipulated, they making the agreement. The question of whether a breach of a contract is substantial depends upon the
are both liable for damages. attendant circumstances. The petitioner contends that rescission of the Bill of Assignment should be denied,
Amen | Compiled Notes
because under article 1383, rescission is a subsidiary remedy which cannot be instituted except when the Thus, vendor notified the vendee that, in view of his inability to comply with the terms of their contract, said
party suffering damage has no other legal means to obtain reparation for the same. agreement had been cancelled as of that date, thereby relieving him of any further obligation thereunder,
However, in this case the dismissal of the respondent patentee Magdalo V. Francisco, Sr. as the permanent and that all amounts paid by him had been forfeited in favor of the vendor, who assumes the absolute right
chief chemist of the corporation is a fundamental and substantial breach of the Bill of Assignment. He was over the lots in question. To this communication, the vendee did not reply, and it appears likewise that the
dismissed without any fault or negligence on his pArticle Thus, apart from the legal principle that the option vendor thereafter did not require him to make any further disbursements on account of the purchase price.
to demand performance or ask for rescission of a contract belongs to the injured party, the fact remains Myrick, respondent herein, commenced the present action in CFI-Albay, against MEI for the sum of P2,596.08
that the respondents-appellees had no alternative but to file the present action for rescission and damages. It is with legal interest thereon from the filing of the complaint until its payment, and for costs of the suit. Lower
to be emphasized that the respondent patentee would not have agreed to the other terms of the Bill of court granted, CA affirmed with modification that legal interest should be computed from the date of the
Assignment were it not for the basic commitment of the petitioner corporation to appoint him as its Second cancellation of the contract. Thus this petition.
Vice-President and Chief Chemist on a permanent basis; that in the manufacture of Mafran sauce and other ISSUE: WON petitioner’s contention is correct, that a bilateral contract may be resolved or cancelled only by
food products he would have "absolute control and supervision over the laboratory assistants and personnel the prior mutual agreement of the parties, which is approved by the judgment of the proper court; and that the
and in the purchase and safeguarding of said products;" and that only by all these measures could the letter of MEI was not assented to by the respondent, and therefore, cannot be deemed to have produced a
respondent patentee preserve effectively the secrecy of the formula, prevent its proliferation, enjoy its cancellation, even if it ever was intended.
monopoly, and, in the process afford and secure for himself a lifetime job and steady income. The salient HELD: Where the terms of writing are clear, positive and unambiguous, the intention of the parties should be
provisions of the Bill of Assignment, namely, the transfer to the corporation of only the use of the formula; the gleaned from the language therein employed, which is conclusive in the absence of mistake. The letter said
appointment of the respondent patentee as Second Vice-President and chief chemist on a permanent status; the ―cancelled‖ and it was unequivocal.
obligation of the said respondent patentee to continue research on the patent to improve the quality of the The fact that the contracting parties herein did not provide for resolution is now of no moment, for the reason
products of the corporation; the need of absolute control and supervision over the laboratory assistants and that the OBLIGATIONS arising from the contract of sale being reciprocal, such OBLIGATIONS are
personnel and in the purchase and safekeeping of the chemicals and other mixtures used in the preparation of governed by article 1124 of the Civil Code which declares that the power to resolve, in the event that one of
said product  all these provisions of the Bill of Assignment are so interdependent that violation of one would the obligors should not perform his part, is implied.
result in virtual nullification of the rest. Upon the other hand, where, as in this case, the petitioner cancelled the contract, advised the respondent that he
has been relieved of his OBLIGATIONS thereunder, and lead said respondent to believe it so and act upon
In the Separate Opinion: REYES, J.B.L., J., concurring: such belief, the petitioner may not be allowed, in the language of section 333 of the Code of Civil
I concur with the opinion penned by Mr. Justice Fred Ruiz Castro, but I would like to add that the argument of Procedure (now section 68 (a) of Rule 123 of the New Rules of Court), in any litigation the course of
petitioner, that the rescission demanded by the respondent-appellee, Magdalo Francisco, should be litigation or in dealings in nais, be permitted to repudiate his representations, or occupy inconsistent
denied because under Article 1383, NCC rescission can not be demanded except when the party suffering positions, or, in the letter of the Scotch law, to "approbate and reprobate."
damage has no other legal means to obtain reparation, is predicated on a failure to distinguish between a The contract of sale, contract SJ-639, contains no provision authorizing the vendor, in the event of failure of
rescission for breach of contract under Article 1191 of the Civil Code and a rescission by reason of lesion or the vendee to continue in the payment of the stipulated monthly installments, to retain the amounts paid to him
economic prejudice, under Article 1381, et seq. on account of the purchase price. The claim, therefore, of the petitioner that it has the right to forfeit said sums
(Rescission for breach of contract under Article 1191)  The rescission on account of breach of in its favor is untenable. Under article 1124 of the Civil Code, however, he may choose between demanding
stipulations is not predicated on injury to economic interests of the party plaintiff but on the breach of faith by the fulfillment of the contract or its resolution. These remedies are alternative and not cumulative, and the
the defendant, that violates the reciprocity between the parties. It is not a subsidiary action, and Article 1191 petitioner in this case, having to cancel the contract, cannot avail himself of the other remedy of exacting
may be scanned without disclosing anywhere that the action for rescission thereunder is subordinated to performance. (Osorio & Tirona vs. Bennet & Provincial Board of Cavite, 41 Phil., 301; Yap Unki vs. Chua
anything other than the culpable breach of his OBLIGATIONS by the defendant. This rescission is in Jamco, 14 Phil., 602.) As a consequence of the resolution, the parties should be restored, as far as practicable,
principal action retaliatory in character, it being unjust that a party be held bound to fulfill his promises to their original situation (Po Pauco vs. Siguenza, supra) which can be approximated only by ordering, as we
when the other violates his. As expressed in the old Latin aphorism: "Non servanti fidem, non est fides do now, the return of the things which were the object of the contract, with their fruits and of the price, with its
servanda." Hence, the reparation of damages for the breach is purely secondary. interest (article 1295, Civil Code), computed from the date of the institution of the action. (Verceluz vs. Edaño,
(Rescission by reason of lesion or economic prejudice, under Article 1381, et seq.)  On the contrary, in 46 Phil. 801.)
the rescission by reason of lesion or economic prejudice, the cause of action is subordinated to the existence of
that prejudice, because it is the raison d'etre as well as the measure of the right to rescind. Hence, where the Case: University of the Philippines vs. Walfrido Delos Angeles (Judge of CFI in Quezon City), September 29,
defendant makes good the damages caused, the action cannot be maintained or continued, as expressly 1970, JBL Reyes.
provided in Articles 1383 and 1384. But the operation of these two articles is limited to the cases of rescission Facts: In the provinces of Laguna and Quezon, Land Grants were segregated from the public domain and
for lesion enumerated in Article 1381 of the Civil Code of the Philippines, and does not, apply to cases under given as an endowment to UP, to be operated and developed for the purpose of raising additional income for
Article 1191. its support, pursuant to Act 3608.
It is probable that the petitioner's confusion arose from the defective technique of the new Code that terms both In 1960, UP and ALUMCO (Associated Lumber Manufacturing Co.) entered into a logging agreement under
instances as rescission without distinctions between them; unlike the previous Spanish Civil Code of 1889, that which the latter was granted exclusive authority, for a period starting from the date of the agreement to 31
differentiated "resolution" for breach of stipulations from "rescission" by reason of lesion or damage. But the December 1965, extendible for a further period of five (5) years by mutual agreement, to cut, collect and
terminological vagueness does not justify confusing one case with the other, considering the patent difference remove timber from the Land Grant, in consideration of payment to UP of royalties, forest fees, etc.;
in causes and results of either action. ALUMCO cut and removed timber therefrom but, as of 8 December 1964, it had incurred an unpaid account of
P219,362.94, which, despite repeated demands, it had failed to pay. After it had received notice that UP
Case : Magdalena Estate, Inc. Vs. Louis Myrick, March 14, 1941, J. Laurel. would rescind or terminate the logging agreement, ALUMCO executed an instrument, entitled
FACTS: Magdalena Estate, Inc. sold to Louis J. Myrick parcel of lots in San Juan Subdivision, San Juan Rizal, "Acknowledgment of Debt and Proposed Manner of Payments," dated 9 December 1964, which was
with contract of sale providing for the price which shall be payable in 120 equal monthly installments of each approved by the President of UP, and which stipulated the following:
on the 2nd day of each month from the date of execution of the agreement. Simultaneously, the vendee 3. In the event that the payments called for in Nos. 1 and 2 of this paragraph are not sufficient to
executed and delivered to the vendor a Promissory Note for the whole purchase price. Myrick made several liquidate the foregoing indebtedness of the DEBTOR in favor of the CREDITOR, the balance
installment payments the last being Oct. 1930, but was in default as to May payment.
Amen | Compiled Notes
 outstanding after the said payments have been applied shall be paid by the DEBTOR in full no later necessary, as without it, the extrajudicial resolution will remain contestable and subject to judicial
than June 30, 1965; invalidation, unless attack thereon should become barred by acquiescence, estoppel or prescription.
5. In the event that the DEBTOR fails to comply with any of its promises or undertakings in this
document, the DEBTOR agrees without reservation that the CREDITOR shall have the right and Case: Jose Zulueta vs. Hon. Mariano and Lamberto Avellana, January 30, 1982, J. Melencio-Herrera.
the power to consider the Logging Agreement dated December 2, 1960 as rescinded without FACTS: Petitioner Jose C. Zulueta is the registered owner of a residential house and lot situated within the
the necessity of any judicial suit, and the CREDITOR shall be entitled as a matter of right to Antonio Subdivision, Pasig, Rizal. On November 6, 1964, petitioner Zulueta and private respondent Lamberto
Fifty Thousand Pesos (P50,000.00) by way of and for liquidated damages; Avellana, a movie director, entered into a "Contract to Sell" the aforementioned property for P75,000.00
ALUMCO continued its logging operations, but again incurred an unpaid account, for the period from 9 payable in twenty years with respondent buyer assuming to pay a down payment of P5,000.00 and a monthly
December 1964 to 15 July 1965, in the amount of P61,133.74, in addition to the indebtedness that it had installment of P630.00 payable in advance before the 5th day of the corresponding month, starting with
previously acknowledged. December, 1964 – WITH FURTHER SPECIFIC STIPULATIONS IN CASE OF BREACH OF SUCH
Thus, UP informed ALUMCO that it had, as of that date, considered as rescinded and of no further legal effect contract.
the logging agreement that they had entered in 1960; and UP filed a complaint against ALUMCO at CFI-Rizal, Avellana occupied the property but title remained with petitioner Zulueta. Upon the allegation that respondent
for the collection or payment of sums of money with prayer for injunction. But before preliminary injunction had failed to comply with the monthly amortizations stipulated in the contract, despite demands to pay and to
may be issued, UP had taken steps to have another concessionaire to take over the logging operation, by vacate the premises, and that thereby the contract was converted into one of lease, petitioner, commenced
advertising an invitation to bid; that bidding was conducted, and the concession was awarded to Sta. Clara an ejectment suit against respondent before the MTC-Pasig. Respondent controverted by contending that the
Lumber Company, Inc.; the logging contract was signed on 16 February 1966. ALUMCO had filed several Municipal Court had no jurisdiction over the nature of the action as it involved the interpretation and/or
motions to discharge the writs of attachment and preliminary injunction but were denied by the court. Thus, rescission of the contract; and made some affirmative defenses and counterclaim. Lower court found in favor
ALUMCO filed a petition to enjoin petitioner University from conducting the bidding and for preliminary of plaintiff, and asked defendant to vacate and pay back rentals, etc. CA reversed and ruled against the Justice
injunction. Respondent judge issued the first of the questioned orders, enjoining UP from awarding of the Municipal Court finding the case as one of interpretation and rescission of contract because the contract
logging rights over the concession to any other party. to sell was converted to contract of lease. MR denied.
UP received the TRO after it had concluded its contract with Sta. Clara, and said company had started logging ISSUE: WON the original contract to sell was rescinded due to the automatic rescission clause in the contract,
operations. On motion, ALUMCO and one Jose Rico, the court, declared petitioner UP in contempt of court thus the case was unlawful detainer cognizable by the MTC or one of judicial rescission of contract cognizable
and Sta. Clara Lumber to refrain from exercising logging rights or conducting logging operations in the by then CFI.
concession. HELD: Thus, the basic issue is not possession but one of rescission or annulment of a contract, which is
UP’s MR was denied. beyond the jurisdiction of the Municipal Court to hear and determine.
ISSUE: Whether petitioner U.P. can treat its contract with ALUMCO rescinded, and may disregard the same A violation by a party of any of the stipulations of a contract on agreement to sell real property
before any judicial pronouncement to that effect. would entitle the other party to resolved or rescind it. An allegation of such violation in a detainer
HELD: YES. In the first place, UP and ALUMCO had expressly stipulated that, upon default by the debtor suit may be proved by competent evidence. And if proved a justice of the peace court might make a
ALUMCO, the creditor (UP) has "the right and the power to consider, the Logging Agreement as rescinded finding to that effect, but it certainly cannot declare and hold that the contract is resolved or
without the necessity of any judicial suit." As to such special stipulation, and in connection with Article 1191 rescinded. It is beyond its power so to do. And as the illegality of the possession of realty by a party
of the Civil Code, this Court stated in Froilan vs. Pan Oriental Shipping Co., et al., L-11897, 31 October 1964, to a contract to sell is premised upon the resolution of the contract, it follows that an allegation and
12 SCRA 276: proof of such violation, a condition precedent to such resolution or rescission, to render unlawful
there is nothing in the law that prohibits the parties from entering into agreement that violation of the possession of the land or building erected thereon by the party who has violated the contract,
the terms of the contract would cause cancellation thereof, even without court intervention. In other cannot be taken cognizance of by a justice of the peace court xxx
words, it is not always necessary for the injured party to resort to court for rescission of the True, the contract between the parties provided for extrajudicial rescission. This has legal effect, however,
contract. where the other party does not oppose it. Where it is objected to, a judicial determination of the issue is still
Of course, it must be understood that the act of party in treating a contract as cancelled or resolved on account necessary.
of infractions by the other contracting party must be made known to the other and is always provisional, A stipulation entitling one party to take possession of the land and building if the other party
being ever subject to scrutiny and review by the proper court. If the other party denies that rescission is violates the contract does not ex proprio vigore confer upon the former the right to take possession
justified, it is free to resort to judicial action in its own behalf, and bring the matter to court. Then, thereof if objected to without judicial intervention and' determination.
should the court, after due hearing, decide that the resolution of the contract was not warranted, the But while respondent Judge correctly ruled that the Municipal Court had no jurisdiction over the case and
responsible party will be sentenced to damages; in the contrary case, the resolution will be affirmed, and correctly dismissed the appeal, he erred in assuming original jurisdiction, in the face of the objection
the consequent indemnity awarded to the party prejudiced. interposed by petitioner. Section 11, Rule 40, leaves no room for doubt on this point:
In other words, the party who deems the contract violated may consider it resolved or rescinded, and act Section 11. Lack of jurisdiction. A case tried by an inferior court without jurisdiction over the
accordingly, without previous court action, but it proceeds at its own risk. For it is only the final judgment subject matter shall be dismiss on appeal by the Court of First Instance. But instead of dismissing
of the corresponding court that will conclusively and finally settle whether the action taken was or was not the case, the Court of First Instance may try the case on the merits, if the parties therein file their
correct in law. But the law definitely does not require that the contracting party who believes itself injured pleadings and go to trial without any objection to such jurisdiction.
must first file suit and wait for a judgment before taking extrajudicial steps to protect its interest. Otherwise, There was no other recourse left for respondent Judge, therefore, except to dismiss the appeal.
the party injured by the other's breach will have to passively sit and watch its damages accumulate during If an inferior court tries a case without jurisdiction over the subject-matter on appeal, the only
the pendency of the suit until the final judgment of rescission is rendered when the law itself requires that authority of the CFI is to declare the inferior court to have acted without jurisdiction and dismiss
he should exercise due diligence to minimize its own damages (Civil Code, Article 2203). the case, unless the parties agree to the exercise by the CFI of its original jurisdiction to try the case
We see no conflict between this ruling and the previous jurisprudence of this Court invoked by respondent on the merits.
declaring that judicial action is necessary for the resolution of a reciprocal obligation, since in every case The foregoing premises considered, petitioner's prayer for a Writ of Execution of the judgment of the
where the extrajudicial resolution is contested only the final award of the court of competent jurisdiction can Municipal Court of Pasig must perforce to be denied.
conclusively settle whether the resolution was proper or not. It is in this sense that judicial action will be

Amen | Compiled Notes

Case: Palay, Inc. and Albert Onstott vs, Jacobo Clave (Presidential Executive Assistant National Housing their aggregate payment already amounted to P4,533.38. On numerous occasions, the defendants-appellants
Authority) and Nazario Dumpit, Sept. 21, 1983, J. Melencio-Herrera. accepted and received delayed installment payments from the plaintiffs-appellees. On December 7, 1966,
FACTS: Petitioner Palay, Inc., through its President, Albert Onstott executed in favor of private respondent, the defendants-appellants wrote the plaintiffs-appellees a letter requesting the remittance of past due accounts.
Nazario Dumpit, a Contract to Sell a parcel of Land of the Crestview Heights Subd. in Antipolo, Rizal, owned On January 28, 1967, the defendants-appellants cancelled the said contract because the plaintiffs-
by said corporation. The sale price was P23,300.00 with 9% interest p.a., payable with a down-payment of appellees failed to meet subsequent payments. The plaintiffs' letter with their plea for reconsideration of the
P4,660.00 and monthly installments of P246.42 until fully paid. Contract provided for automatic said cancellation was denied by the defendants-appellants.
extrajudicial rescission upon default in payment of any monthly installment after the lapse of 90 days from The plaintiffs-appellees filed with CFI-Rizal to compel the defendants-appellants to execute in their favor the
the expiration of the grace period of one month, without need of notice and with forfeiture of all installments final deed of sale alleging inter alia that after computing all subsequent payments for the land in question, they
paid. Respondent Dumpit paid the downpayment and several installments amounting to P13,722.50. The last found out that they have already paid the total amount of P4,533.38 including interests, realty taxes and
payment was made on December 5, 1967 for installments up to September 1967. Almost six (6) years later, incidental expenses for the registration and transfer of the land.
private respondent wrote petitioner offering to update all his overdue accounts with interest, and seeking its The defendants-appellants alleged in their answer that the complaint states no cause of action and that the
written consent to the assignment of his rights to a certain Lourdes Dizon. Replying petitioners informed plaintiffs-appellees violated paragraph six (6) of the contract to sell when they failed and refused to pay
respondent that his Contract to Sell had long been rescinded and the lot had already been resold. and/or offer to pay the monthly installments corresponding to the month of August, 1966 for more than
Questioning the validity of the rescission of the contract, respondent filed a letter complaint with the National five (5) months, thereby constraining the defendants-appellants to cancel the said contract.
Housing Authority (NHA) for reconveyance with an altenative prayer for refund. NHA, finding the rescission The lower court rendered judgment in favor of the plaintiffs-appellees. MR denied.
void in the absence of either judicial or notarial demand, ordered Palay, Inc. and Alberto Onstott, jointly and ISSUE: WON the contract to sell has been automatically and validly cancelled by the defendants-appellants.
severally, to refund immediately to Dumpit the amount of P13,722.50 with 12% interest from the filing of the HELD: NO. The right to rescind the contract for non-performance of one of its stipulations, therefore, is not
complaint. Petitioners' MR was denied. Appeal to the OP was also denied. absolute. In Universal Food Corp. v. Court of Appeals (33 SCRA 1) the Court stated that;
ISSUE: Whether the rescission of the contract is proper. The general rule is that rescission of a contract will not be permitted for a slight or casual breach,
HELD: NO. Well settled is the rule, as held in previous jurisprudence, that judicial action for the rescission but only for such substantial and fundamental breach as would defeat the very object of the parties
of a contract is not necessary where the contract provides that it may be revoked and cancelled for in making the agreement. (Song Fo and Co. v. Hawaiian-Philippine Co., 47 Phil. 821, 827) The
violation of any of its terms and conditions. question of whether a breach of a contract is substantial depends upon the attendant circumstances.
However, even in the cited cases, there was at least a written notice sent to the defaulter informing him of the The breach of the contract adverted to by the defendants-appellants is so slight and casual when we
rescission. As stressed in University of the Philippines vs. Walfrido de los Angeles the act of a party in consider that apart from the initial downpayment of P392.00 the plaintiffs-appellees had already paid the
treating a contract as cancelled should be made known to the other. monthly installments for a period of almost nine (9) years. In other words, in only a short time, the entire
In this case, private respondent has denied that rescission is justified and has resorted to judicial action. It is obligation would have been paid.
now for the Court to determine whether resolution of the contract by petitioners was warranted. Article 1234  If the obligation has been substantially performed in good faith, the obligor may recover as
We hold that resolution by petitioners of the contract was ineffective and inoperative against private though there had been a strict and complete fulfillment, less damages suffered by the obligee.
respondent for lack of notice of resolution, as held in the U.P. vs. Angeles case, supra We agree with the observation of the lower court to the effect that:
Petitioner relies on Torralba vs. De los Angeles 8 where it was held that "there was no contract to rescind in Although the primary object of selling subdivided lots is business, yet, it cannot be denied that this
court because from the moment the petitioner defaulted in the timely payment of the installments, the contract subdivision is likewise purposely done to afford those landless, low income group people of
between the parties was deemed ipso facto rescinded." However, it should be noted that even in that case realizing their dream of a little parcel of land which they can really call their own.
notice in writing was made to the vendee of the cancellation and annulment of the contract although the The contract to sell entered into by the parties has some characteristics of a contract of adhesion. The
contract entitled the seller to immediate repossessing of the land upon default by the buyer. defendants-appellants drafted and prepared the contract. The plaintiffs-appellees, eager to acquire a lot upon
The indispensability of notice of cancellation to the buyer was to be later underscored in Republic Act No. which they could build a home, affixed their signatures and assented to the terms and conditions of the
6551 entitled "An Act to Provide Protection to Buyers of Real Estate on Installment Payments." which took contract. They had no opportunity to question nor change any of the terms of the agreement. It was offered to
effect on September 14, 1972, when it specifically provided: them on a "take it or leave it" basis.
Sec. 3(b) ... the actual cancellation of the contract shall take place after thirty days from The contract to sell, being a contract of adhesion, must be construed against the party causing it. We agree with
receipt by the buyer of the notice of cancellation or the demand for rescission of the the observation of the plaintiffs-appellees to the effect that "the terms of a contract must be interpreted against
contract by a notarial act and upon full payment of the cash surrender value to the buyer. the party who drafted the same, especially where such interpretation will help effect justice to buyers who,
(Emphasis supplied). after having invested a big amount of money, are now sought to be deprived of the same through the prayed
The contention that private respondent had waived his right to be notified under paragraph 6 of the contract is application of a contract clever in its phraseology, condemnable in its lopsidedness and injurious in its effect
neither meritorious because it was a contract of adhesion, a standard form of petitioner corporation, and private which, in essence, and in its entirety is most unfair to the buyers."
respondent had no freedom to stipulate. A waiver must be certain and unequivocal, and intelligently made;
such waiver follows only where liberty of choice has been fully accorded. 9 Moreover, it is a matter of public Case: Solomon Boysaw and Alfredo Yulo, Jr. vs. Interphil Promotions, Inc., Lope Sarreal and Manuel
policy to protect buyers of real estate on installment payments against onerous and oppressive conditions. Nieto, March 20, 1987, J. Fernan.
Waiver of notice is one such onerous and oppressive condition to buyers of real estate on installment FACTS: Solomon Boysaw and his then Manager, Willie Ketchum, signed with Interphil Promotions, Inc.
payments. represented by Lope Sarreal, Sr., a contract to engage Gabriel "Flash" Elorde in a boxing contest for the
junior lightweight championship of the world. It was stipulated that the bout would be held at the Rizal
Case: Buenaventura Angeles, et al. Vs. Ursula Torres Calasanz, et al., March 18, 1985, J. Gutierrez, Jr. Memorial Stadium in Manila on September 30, 1961 or not later than thirty [30] days thereafter should a
FACTS: Ursula Torres Calasanz and Tomas Calasanz and plaintiffs-appellees Buenaventura Angeles and postponement be mutually agreed upon, and that Boysaw would not, prior to the date of the boxing contest,
Teofila Juani entered into a contract to sell a piece of land located in Cainta, Rizal for the amount of P3,920.00 engage in any other such contest without the written consent of Interphil Promotions, Inc.
plus 7% interest per annum. Ketchum on his own behalf assigned to J. Amado Araneta the managerial rights over Solomon Boysaw,
The plaintiffs-appellees made a downpayment of P392.00 upon the execution of the contract. They promised presumably in preparation for his engagement with Elorde. Then, Araneta assigned to Alfredo J. Yulo, Jr. the
to pay the balance in monthly installments of P 41.20 until fully paid, the installments being due and payable managerial rights over Boysaw. The next day, Boysaw wrote Lope Sarreal, Sr. informing him of his arrival
on the 19th day of each month. The plaintiffs-appellees paid the monthly installments until July 1966, when and presence in the Philippines.
Amen | Compiled Notes
Yulo, Jr. wrote to Sarreal informing him of his acquisition of the managerial rights over Boysaw and demand was again given several times, until a Notice of rescission was given to Carmen Diokno after she
indicating his and Boysaw's readiness to comply with the boxing contract of May 1, 1961. On the same date, informed the Corp. that she wanted an audience with the Pres. because she had a prospective buyer of
on behalf of Interphil, Sarreal wrote a letter to the Games and Amusement Board [GAB] expressing concern the property.
over reports that there had been a switch of managers in the case of Boysaw, of which he had not been Thus, private respondents filed Complaint for Specific Performance with Damages to compel petitioner to
formally notified, and requesting that Boysaw be called to an inquiry to clarify the situation. execute a deed of sale in their favor, and to deliver to them the title of the lot in question. Petitioner filed an
The GAB called a series of conferences and changed the schedule the Elorde-Boysaw fight. The USA National Answer with counterclaim for damages in the form of attorney's fees, claiming that Contract to Sell has
Boxing Association which has supervisory control of all world title fights approved the date set by the GAB. been automatically rescinded or cancelled by virtue of private respondents' failure to pay the
Yulo, Jr. refused to accept the change in the fight date. installments due in the contract under the automatic rescission clause. After trial, the lower court rendered
The fight never materialized. Thus, Boysaw and Yulo, Jr. sued Interphil, Sarreal, and Nieto in CFI-Rizal a decision in private respondents' favor, holding that petitioner could not rescind the contract to sell, because:
for damages. (a) petitioner waived the automatic rescission clause by accepting payment on September 1967, and by sending
ISSUE: Whether or not Boysaw can compel the fulfillment of the contract. letters advising private respondents of the balances due, thus, looking forward to receiving payments thereon;
HELD: NO. The power to rescind OBLIGATIONS is implied, in reciprocal ones, in case one of the (b) in any event, until May 18, 1977 (when petitioner made arrangements for the acquisition of additional 870
obligors should not comply with what is incumbent upon him. [Part 1, Article 1191, Civil Code]. square meters) petitioner could not have delivered the entire area contracted for, so, neither could private
There is no doubt that the contract in question gave rise to reciprocal OBLIGATIONS. "Reciprocal respondents be liable in default, citing Article 1189, NCC. CA affirmed.
OBLIGATIONS are those which arise from the same cause, and in which each party is a debtor and a ISSUE: WON the Contract to Sell was rescinded or cancelled, under the automatic rescission clause contained
creditor of the other, such that the obligation of one is dependent upon the obligation of the other. They therein.
are to be performed simultaneously, so that the performance of one is conditioned upon the HELD: NO. We find the petition meritless. While it is true that a contractual provision allowing
simultaneous fulfillment of the other" [Tolentino] "automatic rescission" (without prior need of judicial rescission, resolution or cancellation) is VALID,
The power to rescind is given to the injured party. "Where the plaintiff is the party who did not the remedy of one who feels aggrieved being to go to Court for the cancellation of the rescission itself, in
perform the undertaking which he was bound by the terms of the agreement to perform for he is not entitled to case the rescission is found unjustified under the circumstances, still in the instant case there is a clear
insist upon the performance of the contract by the defendant, or recover damages by reason of his own WAIVER of the stipulated right of "automatic rescission," as evidenced by the many extensions granted
breach” [Seva vs. Alfredo Berwin 48 Phil. 581]. private respondents by the petitioner. In all these extensions, the petitioner never called attention to the proviso
Another violation of the contract in question was the assignment and transfer, first to J. Amado on "automatic rescission."
Araneta, and subsequently, to appellant Yulo, Jr., of the managerial rights over Boysaw without the knowledge
or consent of Interphil. The assignments, from Ketchum to Araneta, and from Araneta to Yulo, were in fact Illustrations:
novations of the original contract which, to be valid, should have been consented to by Interphil.
1. In a problem which involves remedies, the question in that problem would be what? The Premise of
Novation which consists in substituting a new debtor in the place of the original one, may be
a case has already been filed and a remedy has already been prayed for. The GENERAL
made even without the knowledge or against the will of the latter, but not without the consent
QUESTION would be: WILL THE ACTION PROSPER? If that is the question, what do you
of the creditor. [Article 1293]
CONSIDER FIRST? In remedies what is the steps for the action to prosper:
Creditor not bound to deal with unilaterally substituted debtor - Under the law when a contract is unlawfully
a. Whether or not the plaintiff is the aggrieved party? The remedies are only provided
novated by an applicable and unilateral substitution of the obligor by another, the aggrieved creditor is not
to the injured property. When someone files a case, it doesn’t mean that he is the
bound to deal with the substitute.
aggrieved party, it’s just that he was the one who filed the case to make it appear that he
The consent of the creditor to the change of debtors, whether in expromision or delegacion is an,
is the injured party.
indispensable requirement . . . Substitution of one debtor for another may delay or prevent the fulfillment of
b. To know the nature of the obligation.
the obligation by reason of the inability or insolvency of the new debtor, hence, the creditor should agree to
i. intention of the parties
accept the substitution in order that it may be binding on him.
ii. to know the manner of the breach in relation to the prayer
Thus, in a contract where x is the creditor and y is the debtor, if y enters into a contract with z,
Ex. Specific performance will not be proper in what obligation? In obligations to do it will
under which he transfers to z all his rights under the first contract, together with the OBLIGATIONS
not be a proper remedy.
thereunder, but such transfer is not consented to or approved by x, there is no novation. X can still bring his
c. Whether or not the remedy applied for is the appropriate remedy
action against y for performance of their contract or damages in case of breach. [Tolentino]
2. Can you give me an example of a remedy which is a principal remedy and that can also be extra-
From the evidence, it is clear that the appellees, instead of availing themselves of the options
judicially demanded and also is expressly demanded by law? Warranty against eviction in Sales.
given to them by law of rescission or refusal to recognize the substitute obligor Yulo, really wanted to
Rescissible contracts may also involve reciprocal obligations. E.g. SALE – may it not involve
postpone the fight date owing to an injury that Elorde sustained in a recent bout. That the appellees had the
reciprocal obligations? Yes, but a sale may also be rescissible as a contract.
justification to renegotiate the original contract, particularly the fight date is undeniable from the facts
3. Kinds of rescission:
aforestated. Under the circumstances, the appellees' desire to postpone the fight date could neither be
a. Article 1380 – RESCISSION of Contracts – SUBSIDIARY REMEDY = can only be
unlawful nor unreasonable.
invoked if that is the ONLY remedy. There should first be exhaustion other remedies to
We uphold the appellees' contention that since all the rights on the matter rested with the appellees,
be able to invoke Rescission.
and appellants' claims, if any, to the enforcement of the contract hung entirely upon the former's pleasure and
b. Article 1191 – (Rescission) RESOLUTION of Obligations – PRINCIPAL REMEDY
sufferance, the GAB did not act arbitrarily in acceding to the appellee's request to reset the fight date to
= can be invoked anytime even when other remedies are available.
November 4, 1961. It must be noted that appellant Yulo had earlier agreed to abide by the GAB ruling.
4. Can 2 Principal Remedies be sought for at the same time? YES. Give me an example where an
injured party can invoke 2 principal remedies at the same time. Example: When you filed a suit,
Case: Pilipinas Bank vs. IAC and Jose Diokno and Carmen Diokno, June 30, 1987, J. Paras.
civil action and another suit for damages.
FACTS: Hacienda Benito, Inc. (petitioner's predecessor-in-interest) as vendor, and private respondents, Jose
5. The remedy under 1191, is it extrajudicial remedy? YES. Basis: UP vs. DE LOS ANGELES
W. Diokno and Carmen I. Diokno, as vendees executed a Contract to Sell over a parcel of land in Victoria
CASE. QUESTION: In an extrajudicial rescission, when would the rescissory act take effect? From
Valley Subdivision in Antipolo, Rizal, subject to terms and conditions as stipulated. At vendees’ failure to
the time when the party claims rescission as remedy? Agree? NO! It is at the time the other party
pay, vendor sent several demands for the former to settle arrearages, requests for extensions were give, further
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 was given NOTICE or NOTICE WAS ISSUED to the other party. Why would it be from the If one of the parties in Reciprocal Obligation had already invoked the fulfilment as the remedy,
time? It is the time the other party was informed. BASIS: Due Process. So that he can also take may he thereafter invoke the remedy of rescission?
appropriate action. If he thinks the rescissory act is wrong, he can go to court to question such act.  Yes, if the obligation became impossible rescission could be a remedy.
6. X filed an action for rescission against Y. Y filed a motion to dismiss on the ground that the action What must have been the reason that the obligation has become impossible? Does it mean that
has already prescribed because the action was filed 4 years after the date of the contract of the every time fulfilment is impossible, and then rescission would be a remedy? A and B, A already
parties. Rule on the case. Answer: It will depend on the nature of the action. There are 2 kinds of invoked fulfilment, but every time this remedy of fulfilment becomes impossible then this remedy
rescission, so you should first determine the cause of action if it is under 1191 or 1381. of rescission can be resorted to? Is it Yes?
7. CASE: UFC CASE – what was the nature of the action? Action for rescission. Why would the  No. Despite the wording of the law, there is a premise.
plaintiff Magdalo file an action if he can just extra-judicially rescind? Why not just like what UP What must be the cause? Why the performance becomes impossible?
did, just gave a notice to the other party? Because he wanted to claim the unpaid wages, the unpaid  It must be on the cause not imputable to A. This is only half accurate. If it is not
salary. What if he did not want to recover that? In other words, in general, why would an action for imputable to A then what if it was due to a fortuitous event? The answer must be:
rescission be necessary? Because as stated in the case, even if the rescission is not ordered to the Rather due to the fault of B. Whether it is FE or fault of A do you think he would
court, there’s blade hanging in the neck of the person. IN OTHER WORDS, it is not necessary but have the remedy of rescission? No. because he could not claim that he is the injured
it may be advisable because at any time the other party may file an action to question the validity of party at least in a fortuitous event as a rule. That’s why the premise of the law to the
the rescissory act. This is so because if the rescissory act is a valid act then it should still be injured, the impossibility must be due to the fault of the other party.
sustained by the court. When would it be necessary? Are there good reasons why someone would A injured party, invoked rescission, it was a valid rescission, and under the law the premise is that
not file a case? Because a party cannot be left to take matters into their own hands OR because he this is a valid rescission, thereafter may he be allowed to invoke fulfilment as a remedy?
wants to recover something form the other party and cannot compel the other party. UFC CASE  NO. Why not?
AGAIN: This is also an action for rescission. What were the defences raised by the UFC?  He can no longer demand for fulfilment because with rescission, obligation has already
a. Plaintiff did not exhaust the remedies been extinguished as rescission is a mode of extinguishment, since the obligation has
SC: This defense is the result of the confusion as to the two kinds of rescission between 1191 already been extinguished therefore no more obligation to be fulfilled.
and 1381. This defense is of the premise that the contract entered into is a rescissible contract. 12. This was discuss in the MAGDALENA ESTATE CASE: Magdalena rescinded. Despite the fact
And in that kind of contract the remedy of rescission is a subsidiary remedy and therefore the that Magdalena rescinded, she still wanted or she still asked for the payment. When Myrick was
other party must exhaust all other legal remedies before he can invoke rescission as a remedy. only asking for was to get back what he paid for. Was Magdalena correct in forfeiting the accounts
But in this case, clearly it was not filed under Article 1383, the cause of action here is paid? NO, because there was no forfeiture clause in the contract. Had there been a forfeiture
because there was a breach. clause, which would have been a valid forfeiture. Again the effect of rescission is Mutual
- A and B entered into a sale of molasses, the parties stipulated to the date of payment. Restitution. That’s why Magdalena should return the money. She was ordered to return the money.
Buyer failed to pay on the due date and asked that he’ll be given an extension of 20 13. A obliged himself to give to B a refrigerator with motor #12345 which was in his sala, he also
days and that he’ll pay on the 20th day but 20 days after the due date A, creditor said obliged himself to give to B a 49‖ Sony Bravia, but he also obliged himself to repair the Mercedes
that he already rescinded the contract. Was the rescission valid? Was the rescission Benz of B. He did not do any of this. Can the court compel A to perform his obligations? If not,
proper? In other words, one of the requirements for rescission to be proper under what is the remedy available to B, if any?
1191 is? NO, it was not proper because breach must be substantial or fundamental. If a. Refrigerator – Specific performance
it is just a casual or slight breach, the other party has the remedy of Payment for b. TV – substitute performance – somebody else would perform at the expense of the
Damages. Always remember that NOT every breach gives the injured party a reason debtor
to rescind. c. Obligation to give a Generic Thing – Debtor may be asked to comply with the
b. Breach is not SUBSTANTIAL or FUNDAMENTAL obligation at the expense of the debtor or to have the thing delivered to him at the
c. More fundamental issue: Whether or not under the Bill of Assignment, Plaintiff expense of the debtor.
Magdalo has the obligation to transfer ownership. d. Car – also substitute performance; other person would fulfil the obligation
d. Main issue in this case: W/N rescission was proper? 14. Do you agree that in all performance to do, substitute performance is the remedy if the debtor
- The defense of UFC that Plaintiff Magdalo did not comply with his obligation to refuses to perform the obligation? No, if the performance is purely or strictly personal in nature.
transfer ownership over the formula of the sauce to UFC got to do with the issue as to Only the debtor can perform such obligation because in the constitution of the obligation the skills
w/n the rescission was proper? It has something to do with the breach. of the debtor are considered. He alone can perform.
 Rescission cannot be a remedy if the plaintiff had not complied with his obligation or at 15. I forgot to mention: Even if A is the aggrieved party, and an action was filed against B, the case
least not in the position to comply with the obligation, the premise behind this is that may not prosper because it may not be the proper remedy, but any other reason why this case may
he is not the injured party. He who is not the injured party, then there is no not prosper aside from prescription, any other? Even if the remedy invoked is the proper remedy.
remedy under the law. Why? Neither, because he is not the injured party nor because the remedy invoked was wrong but?
8. Remember that the EFFECT OF RESCISSION: MUTUAL RESCISSION. Because B is not the one who cause the damage to A.
9. UP CASE: How come or why was the extra-judicial rescission was sufficient? Because UP doesn’t 16. If A the debtor, can B validly cause the levy of all the properties of A? Not all. Because there are
want to recover anything from the concessioner at that point and also to be free from the agreement properties that are exempted. Under the FC, Art 155, the Family Home is exempted from levy. So it
with the concessioner. To be able to award to the other party. Rescind first to be free from any other is correct to say that family home may not be levied upon? No, there are exceptions that family
acts to be sought for. home are exempt from levy and execution. If the debtor has 3 carabaos, and these carabaos would
10. Both parties are in delay. What is the effect? In contemplation of the law, it is as if there is NO be exempt from execution, correct? No because it was not stated that the debtor is not a farmer or is
DELAY. Therefore there is no cause of action against the other party. essential to his occupation.
11. In Article 1191, how many remedies are mentioned in that article? Only two: 17. Future properties of the debtor may be levied upon by his creditors? YES. “FUTURE
a. Fulfilment of obligation w/damages PROPERTY” – properties he may acquire after the execution sale or levy subject to the exceptions
b. Rescission of obligation w/ damages mentioned. However, if the debtor’s properties were not sufficient to cover the debts of 10M, which
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 were worth only of 3M, there is a deficiency of 7M. If you are the counsel of the debtor, then the 5. Mutual Desistance or mutuo disenso (Saura v. DEBTORP)
debtor wanted to start anew, what advice would you give? FILE FOR INSOLVENCY 6. In some cases, Unilateral Withdrawal, e.g., in partnership, any partner can withdraw any
PROCEEDING. Does this extinguished obligation? NO because after he may acquire properties time from the partnership.
thus these newly acquired property may be levied by his creditors. What would really extinguish his
7. In some cases, change of civil status, e.g., if marriage is annulled, it extinguishes
obligation? Court discharges him of his obligation, which is allowed by law which would result to
the extinguishment of his obligation. obligations like the obligation to give support, among others.
18. Aside from rescission in 1383, is there any other subsidiary remedy expressly recognized by Civil 8. Unforeseen Events  (rebus sic stantibus) (Article 1267.)
Code of the Philippines? YES. Accion Pauliana – But this is covered under 1383. But this is 9. Want of Interest  GR: No, but there are certain cases:
covered under contracts. An action to set aside or to impugn in fraud of creditors. ACCION  If it is equitable to deem the OBLIGATION extinguished due to want of interest of
SUBROGATORIA – can only be invoked by the injured party if there are no other remedies. How creditor in the fulfillment of such OBLIGATION.
many persons are involved? 10. Abandonment of the thing  as in Article 662, party wall; or abandonment of a vessel
a. 3 persons: under Code of Comm.
i. 1. Creditor,
ii. 2. Debtor and
11. Insolvency of debtor judicially declared and discharged.
iii. 3. Debtor of the Debtor.
19. The action is AGAINST the DEBTOR of the DEBTOR by the creditor. The law would give the Illustration: Carale owns a restaurant. He hires Molina as a chef. In the contract of employment,
creditor a right of action against the debtor of the debtor in accion subrogatoria and in every right there was a stipulation that if Molina resigns from Carale's restaurant, he cannot seek employment
of a debtor as against his debtor can be the subject of accion subrogatoria? NO, the law said: Rights from another restaurant for a period of five years. Subsequently, Molina resigns from Carale's
inherent in the person or purely personal rights. What rights can be a subject matter of a restaurant and wants to apply to Mildo's House of Chicken. In this case, Molina cannot work with
subrogatory action? Gen Rule: Property Rights. Exception: Personal in nature. Mildo's because of the stipulation in the contract he signed with Carale. Suppose, however, Carale,
20. Debtor is the agent to the third person, who is the third person as to the debtor? The PRINCIPAL. closes down his restaurant and engages in a totally different business, a construction business, for
21. If the creditor files a subrogatory action against this principal, will the action prosper? It may
prosper. When? What may be the nature of the action filed by the creditor? Maybe the principal
example, Molina can apply for work at Mildo's even before the lapse of the five year prohibitive
owes him a sum of money by way of a commission. This is obviously not an inherent right in the period. In this case, Molina can make out a case of extinguishment of obligation on the ground
person. of want of interest. The obvious purpose of the stipulation is to prevent unfair competition.

G. MODES OF EXTINGUISHMENT OF OBLIGATIONS SAURA IMPORT and EXPORT BANK VS. DEBTORP [44 S 445]
FACTS: Plaintiff Saura, Inc. applied to the Rehabilitation Finance Corporation (RFC), before its conversion
into DEBTORP, for an industrial loan of P500,000.00, to be used as follows: P250,000.00 for the construction
Article 1231. Obligations are extinguished BY: of a factory building (for the manufacture of jute sacks); P240,900.00 to pay the balance of the purchase price
(1) Payment or Performance; of the jute mill machinery and equipment; and P9,100.00 as additional working capital. The jute mill
(2) Loss of the thing due; machinery had already been purchased by Saura on the strength of a LOC by PBTC. RFC approved the loan
secured by a first mortgage on the factory building to be constructed, the land site thereof, and the machinery
(3) Condonation or Remission of the debt; and equipment to be installed, and the loan to be released at the discretion of RFC, subject to availability of
(4) Confusion or Merger of the rights of creditor and debtor; funds, andas the construction of the factory buildings progresses, to be certified to by an appraiser of RFC.
(5) Compensation; China Engineers, Ltd. had again agreed to act as co-signer for the loan. When the RFC Board later decided to
decrease the loan from 500K to 300K, China Eng signified to withdraw as co-maker. Thus, when Saura
(6) Novation.
requested for the release of the 500K loan, RFC signified that the Loan Agreement has been cancelled.
Other causes of extinguishment of obligations, such as annulment, rescission, fulfillment of a resolutory condition, Saura, Inc. does not deny that the factory he was building in Davao was for the manufacture of bags from local
and prescription are governed elsewhere in this Code. raw materials, a Kenaf mill plant, to manufacture copra and corn bags, runners, floor mattings, carpets,
draperies; out of 100% local raw materials. When negotiations came to a standstill. Saura, Inc. did not pursue
the matter further. Instead, it requested RFC to cancel the mortgage which RFC did. It appears that the
Balane:
cancellation was requested to make way for the registration of a mortgage contract, executed over the same
Article 1231 gives us ten modes of extinguishing an obligation. One of the modes mentioned is property in favor of PBTC, under which contract Saura, Inc. had up to December 31 of the same year within
rescission. But it does not tell us whether this is rescission under Article 1191 (resolution) or which to pay its obligation on the trust receipt heretofore mentioned. It appears further that for failure to pay
rescission under the said obligation PBTC sued Saura.
Article 1380, et. seq. If it means both, then we have eleven modes of extinguishing an obligation NINE YEARS LATER, Saura commenced the present suit for damages, alleging failure of RFC /DEBTORP
under Article 1231. (Similar to Tolentino’s) to comply with its obligation to release the proceeds of the loan applied for and approved, thereby preventing
 This enumeration is not exclusive. the plaintiff from completing or paying contractual commitments it had entered into, in connection with its jute
Other modes of extinguishing an obligation are the following: mill project. The trial court rendered judgment for the plaintiff.
ISSUE: WON the OBLIGATION of RFC to Saura in the perfected loan contract subsists.
1. Death  particularly where the obligation is purely personal, e.g., death of one partner
HELD: When RFC turned down the request of Saura, the negotiations which had been going on for the
dissolves the partnership/agency; implementation of the loan agreement reached an impasse. Saura, Inc. obviously was in no position to comply
2. Renunciation by the creditor with RFC's conditions. So instead of doing so and insisting that the loan be released as agreed upon, Saura,
3. Compromise Inc. asked that the mortgage be cancelled, which was done by RFC. The action thus taken by both parties was
4. Arrival of Resolutory Term / fulfillment of resolutory condition in the nature of mutual desistance - what Manresa terms as "mutuo disenso" - which is a mode of
Amen | Compiled Notes
extinguishing obligations. It is a concept that derives from the principle that since mutual agreement can Novation, in its broad concept, may either be extinctive or modificatory. It is extinctive when an old obligation
create a contract, mutual disagreement by the parties can cause its extinguishment. is terminated by the creation of a new obligation that takes the place of the former; it is merely modificatory
when the old obligation subsists to the extent it remains compatible with the amendatory agreement. An
Extinguishment of OBLIGATIONS by mutual desistance  Where after approval of his loan, the borrower, extinctive novation results either by changing the object or principal conditions (objective or real), or by
instead of insisting for its release, asked that the mortgage given as security be cancelled and the creditor acceded substituting the person of the debtor or subrogating a third person in the rights of the creditor (subjective or
thereto, the action taken by both parties was in the nature of mutual desistance - what Manresa terms "mutuo personal). Under this mode, novation would have dual functions ─ one to extinguish an existing obligation, the
disenso" - which is a mode of extinguishing obligations. It is a concept that derives from the principle that since other to substitute a new one in its place ─ requiring a conflux of four essential requisites: (1) a previous valid
mutual agreement can create a contract, mutual disagreement by the parties can cause its extinguishment. obligation; (2) an agreement of all parties concerned to a new contract; (3) the extinguishment of the old
obligation; and (4) the birth of a valid new obligation. x x x
In order that an obligation may be extinguished by another which substitutes the same, it is imperative that it
Case: Land Bank of the Philippines vs. Alfredo Ong, Nov. 24, 2010, J. Velasco Jr. be so declared in unequivocal terms, or that the old and the new obligations be on every point incompatible
Facts: On March 18, 1996, spouses Johnson and Evangeline Sy secured a loan from Land Bank Legazpi City with each other. The test of incompatibility is whether or not the two obligations can stand together, each one
in the amount of PhP 16 million. The loan was secured by three (3) residential lots, five (5) cargo trucks, and a having its independent existence. x x x (Emphasis supplied.)
warehouse. Under the loan agreement, PhP 6 million of the loan would be short-term and would mature on Furthermore, Art. 1293 of the Civil Code states:
February 28, 1997, while the balance of PhP 10 million would be payable in seven (7) years. The Notice of Novation which consists in substituting a new debtor in the place of the original one, may be made even
Loan Approval dated February 22, 1996 contained an acceleration clause wherein any default in payment of without the knowledge or against the will of the latter, but not without the consent of the creditor. Payment by
amortizations or other charges would accelerate the maturity of the loan. the new debtor gives him rights mentioned in articles 1236 and 1237.
Subsequently, however, the Spouses Sy found they could no longer pay their loan. On December 9, 1996, they We do not agree, then, with the CA in holding that there was a novation in the contract between the parties.
sold three (3) of their mortgaged parcels of land for PhP 150,000 to Angelina Gloria Ong, Evangeline’s Not all the elements of novation were present. Novation must be expressly consented to. Moreover, the
mother, under a Deed of Sale with Assumption of Mortgage. Evangeline’s father, petitioner Alfredo Ong, later conflicting intention and acts of the parties underscore the absence of any express disclosure or circumstances
went to Land Bank to inform it about the sale and assumption of mortgage. Atty. Edna Hingco, the Legazpi with which to deduce a clear and unequivocal intent by the parties to novate the old agreement. 15 Land Bank is
City Land Bank Branch Head, told Alfredo and his counsel Atty. Ireneo de Lumen that there was nothing thus correct when it argues that there was no novation in the following:
wrong with the agreement with the Spouses Sy but provided them with requirements for the assumption of [W]hether or not Alfredo Ong has an interest in the obligation and payment was made with the knowledge or
mortgage. They were also told that Alfredo should pay part of the principal which was computed at PhP consent of Spouses Sy, he may still pay the obligation for the reason that even before he paid the amount of
750,000 and to update due or accrued interests on the promissory notes so that Atty. Hingco could easily P750,000.00 on January 31, 1997, the substitution of debtors was already perfected by and between Spouses
approve the assumption of mortgage. Two weeks later, Alfredo issued a check for PhP 750,000 and personally Sy and Spouses Ong as evidenced by a Deed of Sale with Assumption of Mortgage executed by them on
gave it to Atty. Hingco. A receipt was issued for his payment. He also submitted the other documents required December 9, 1996. And since the substitution of debtors was made without the consent of Land Bank – a
by Land Bank, such as financial statements for 1994 and 1995. Atty. Hingco then informed Alfredo that the requirement which is indispensable in order to effect a novation of the obligation, it is therefore not bound to
certificate of title of the Spouses Sy would be transferred in his name but this never materialized. No notice of recognize the substitution of debtors. Land Bank did not intervene in the contract between Spouses Sy and
transfer was sent to him. Spouses Ong and did not expressly give its consent to this substitution.
Alfredo later found out that his application for assumption of mortgage was not approved by Land Bank.
Issue: A. Payment or Performance
(1) Whether or not Article 1236 applies to the case at bar.
(2) Whether or not there is novation in the contract. PERTINENT PROVISIONS/ reading matters:
Held:
(1) Land Bank contends that Art. 1236 of the Civil Code backs their claim that Alfredo should have sought Article 1232. Payment means not only the delivery of money but also the performance, in any other manner, of an
recourse against the Spouses Sy instead of Land Bank. Art. 1236 provides: obligation.
The creditor is not bound to accept payment or performance by a third person who has no interest in the
fulfillment of the obligation, unless there is a stipulation to the contrary. Article 1233. A debt shall not be understood to have been paid unless the thing or service in which the obligation
Whoever pays for another may demand from the debtor what he has paid, except that if he paid without the consists has been completely delivered or rendered, as the case may be.
knowledge or against the will of the debtor, he can recover only insofar as the payment has been beneficial to
the debtor.1avvphi1
We agree with Land Bank on this point as to the first part of paragraph 1 of Art. 1236. Land Bank was not Article 1234. If the obligation has been substantially performed in good faith, the obligor may recover as though
bound to accept Alfredo’s payment, since as far as the former was concerned, he did not have an interest in the there had been a strict and complete fulfillment, less damages suffered by the obligee.
payment of the loan of the Spouses Sy. However, in the context of the second part of said paragraph, Alfredo
was not making payment to fulfill the obligation of the Spouses Sy. Alfredo made a conditional payment so
that the properties subject of the Deed of Sale with Assumption of Mortgage would be titled in his name. It is Article 1235. When the obligee accepts the performance, knowing its incompleteness or irregularity, and without
clear from the records that Land Bank required Alfredo to make payment before his assumption of mortgage expressing any protest or objection, the obligation is deemed fully complied with.
would be approved. He was informed that the certificate of title would be transferred accordingly. He, thus,
made payment not as a debtor but as a prospective mortgagor. Article 1236. The creditor is not bound to accept payment or performance by a third person who has no interest in
(2) Land Bank also faults the CA for finding that novation applies to the instant case. It reasons that a the fulfillment of the obligation, unless there is a stipulation to the contrary.
substitution of debtors was made without its consent; thus, it was not bound to recognize the substitution under
the rules on novation. Whoever pays for another may demand from the debtor what he has paid, except that if he paid without the
On the matter of novation, Spouses Benjamin and Agrifina Lim v. M.B. Finance Corporation 14 provides the knowledge or against the will of the debtor, he can recover only insofar as the payment has been beneficial to the
following discussion: debtor.

Amen | Compiled Notes

Article 1237. Whoever pays on behalf of the debtor without the knowledge or against the will of the latter, cannot Article 1249. The payment of debts in money shall be made in the currency stipulated, and if it is not possible to
compel the creditor to subrogate him in his rights, such as those arising from a mortgage, guaranty, or penalty. deliver such currency, then in the currency which is legal tender in the Philippines.
The delivery of promissory notes payable to order, or bills of exchange or other mercantile documents shall
Article 1238. Payment made by a third person who does not intend to be reimbursed by the debtor is deemed to produce the effect of payment only when they have been cashed, or when through the fault of the creditor they
be a donation, which requires the debtor's consent. But the payment is in any case valid as to the creditor who has have been impaired.
accepted it. In the meantime, the action derived from the original obligation shall be held in abeyance.

Article 1239. In obligations to give, payment made by one who does not have the free disposal of the thing due Article 1250. In case an extraordinary inflation or deflation of the currency stipulated should supervene, the value
and capacity to alienate it shall not be valid, without prejudice to the provisions of article 1427 under the Title on of the currency at the time of the establishment of the obligation shall be the basis of payment, unless there is an
"Natural Obligations." agreement to the contrary.

Article 1240. Payment shall be made to the person in whose favor the obligation has been constituted, or his Article 1251. Payment shall be made in the place designated in the obligation.
successor in interest, or any person authorized to receive it. There being no express stipulation and if the undertaking is to deliver a determinate thing, the payment shall be
made wherever the thing might be at the moment the obligation was constituted.
Article 1241. Payment to a person who is incapacitated to administer his property shall be valid if he has kept the In any other case the place of payment shall be the domicile of the debtor.
thing delivered, or insofar as the payment has been beneficial to him. If the debtor changes his domicile in bad faith or after he has incurred in delay, the additional expenses shall be
Payment made to a third person shall also be valid insofar as it has redounded to the benefit of the creditor. Such borne by him.
benefit to the creditor need not be proved in the following cases: These provisions are without prejudice to venue under the Rules of Court.
If after the payment, the third persons acquires the creditor's rights;
If the creditor ratifies the payment to the third person; Article 1302. It is presumed that there is legal subrogation:
If by the creditor's conduct, the debtor has been led to believe that the third person had authority to receive the 1) When a creditor pays another creditor who is preferred, even without the debtor's knowledge;
payment. 2) When a third person, not interested in the obligation, pays with the express or tacit approval of
the debtor;
Article 1242. Payment made in good faith to any person in possession of the credit shall release the debtor. 3) When, even without the knowledge of the debtor, a person interested in the fulfillment of the
obligation pays, without prejudice to the effects of confusion as to the latter's share
Article 1243. Payment made to the creditor by the debtor after the latter has been judicially ordered to retain the
debt shall not be valid. Republic Act No. 529, as amended by R.A. No. 4100, provides:

SECTION 1. Every provision contained in, or made with respect to, any domestic obligation to wit, any
Article 1244. The debtor of a thing cannot compel the creditor to receive a different one, although the latter may obligation contracted in the Philippines which provision purports to give the obligee the right to require
be of the same value as, or more valuable than that which is due. payment in gold or in a particular kind of coin or currency other than Philippine currency or in an amount
In obligations to do or not to do, an act or forbearance cannot be substituted by another act or forbearance against of money of the Philippines measured thereby, be as it is hereby declared against public policy, and null,
the obligee's will. void, and of no effect, and no such provision shall be contained in, or made with respect to, any obligation
hereafter incurred.
The above prohibition shall not apply to
Article 1246. When the obligation consists in the delivery of an indeterminate or generic thing, whose quality and
circumstances have not been stated, the creditor cannot demand a thing of superior quality. Neither can the debtor (a) transactions where the funds involved are the proceeds of loans or investments made directly or
deliver a thing of inferior quality. The purpose of the obligation and other circumstances shall be taken into indirectly, through bona fide intermediaries or agents, by foreign governments, their agencies and
consideration. instrumentalities, and international financial banking institutions so long as the funds are
identifiable, as having emanated from the sources enumerated above;
Article 1247. Unless it is otherwise stipulated, the extrajudicial expenses required by the payment shall be for the (b) transactions affecting high-priority economic projects for agricultural, industrial and power
account of the debtor. With regard to judicial costs, the Rules of Court shall govern. development as may be determined by the National Economic Council which are financed by or
through foreign funds;
Article 1248. Unless there is an express stipulation to that effect, the creditor cannot be compelled partially to
receive the prestations in which the obligation consists. Neither may the debtor be required to make partial (c) forward exchange transactions entered into between banks or between banks and individuals or
payments. juridical persons;
However, when the debt is in part liquidated and in part unliquidated, the creditor may demand and the debtor may
(d) import-export and other international banking, financial investment and industrial transactions.
effect the payment of the former without waiting for the liquidation of the latter.
With the exception of the cases enumerated in items (a), (b), (c) and (d) in the foregoing provision, in
which cases the terms of the parties’ agreement shall apply, every other domestic obligation heretofore or
Amen | Compiled Notes
 hereafter incurred, whether or not any such provision as to payment is contained therein or made with  payment should be made by the debtor to the creditor at the right time and place.
respect thereto, shall be discharged upon payment in any coin or currency which at the time of payment is
legal tender for public and private debts. KINDS:
1. NORMAL  when Debtor voluntarily performs
Provided, That if the obligation was incurred prior to the enactment of this Act and required payment in a
particular kind of coin or currency other than Philippine currency, it shall be discharged in Philippine 2. ABNORMAL  when Debtor is forced by judicial proceeding
currency, measured at the prevailing rates of exchange at the time the obligation was incurred, except in
case of a loan made in a foreign currency stipulated to be payable in the same currency in which case the Balane:
rate of exchange prevailing at the time of the stipulated date of payment shall prevail. All coin and Payment or Performance is used interchangeably.
currency, including Central Bank notes, heretofore or hereafter issued and declared by the Government of But technically,
the Philippines shall be legal tender for all debts, public and private. Payment  in obligations to give,
Performance  in obligations to do.
Pertinent portion of Republic Act No. 8183 states:
Payment/ performance is the paradigmatic mode of extinguishment of an obligation.
SECTION 1. All monetary obligations shall be settled in the Philippine currency which is legal tender in  It is the only normal way of extinguishing an obligation.
the Philippines. However, the parties may agree that the obligation or transaction shall be settled in any
other currency at the time of payment. Article 1233. A debt shall not be understood to have been paid unless the thing or service in which the obligation
consists has been completely delivered or rendered, as the case may be.
SEC. 2. R.A. No. 529, as amended, entitled "An Act to Assure the Uniform Value of Philippine Coin Tolentino: This Article States two requisites for Payment:
and Currency" is hereby repealed. (Approved on June 11, 1996)
(1) Identity, of the prestation, and  the very thing or service due must be delivered or released;
 The repeal of R.A. No. 529 by R.A. No. 8183 has the effect of removing the prohibition on the (2) Its integrity  prestation must be fulfilled completely.
stipulation of currency other than Philippine currency, such that obligations or transactions
may now be paid in the currency agreed upon by the parties.
For BALANE: Article 1233 states these requisites of payment:
 Just like R.A. No. 529, however, the new law does not provide for the applicable rate of I. Re: The prestation
exchange for the conversion of foreign currency  incurred obligations in their peso equivalent. 1. Identity
2. Integrity
 It follows, therefore, that the jurisprudence established in R.A. No. 529 regarding the rate of 3. Indivisibility
conversion remains applicable. Thus, in Asia World Recruitment, Inc. v. National Labor Relations
Commission, the Court, applying R.A. No. 8183, sustained the ruling of the NLRC that obligations II. Re: The parties
in foreign currency may be discharged in Philippine currency based on the prevailing rate at 1. Payor/ obligor/ debtor
the time of payment.
2. Payee/ obligee/ creditor
CONCEPT OF PAYMENT III. Re: Time and place

Article 1232. Payment means not only the delivery of money but also the performance, in any other manner, of an Discussions:
obligation. I. With respect to prestation:
It is the fulfillment of the prestation due which extinguishes the OBLIGATION by the 1. Identity
realization of the purposes for which it was constituted.  If specific prestation, this requisite means that the very thing or service must be delivered.
It is a juridical act which is voluntary, licit and made with the intent to extinguish the (Article 1244.)
OBLIGATION;  If generic, the requisite requires the delivery of something of neither inferior nor superior
It is made not only by 1 who owes money but also by 1 bound to do something or to refrain quality (Article 1246). It must be something in the middle. In case of money, there are
from doing special rules:
 Thus, Payment is identical with Fulfillment.
Governing rule: RA 529 as amended by RA 4100
Requisites of Payment or Performance:  In case of money debts, you will have to pay in legal tender in the Philippines. This
[TOLENTINO] law supersedes Article 1249.
1. the person who pays  must have requisite capacity  If the parties stipulate that payment will be made in foreign currency, the
2. the person to whom payment is made obligation to pay is valid but the obligation to pay in foreign currency is void.
3. the thing to be paid  in accordance with the OBLIGATION Payment will be made in Phil. currency.
4. the manner, time and place of payment, etc.

Amen | Compiled Notes

LEGAL TENDER – means such currency which in a given jurisdiction can be used for payment of 3. In case of application of payments if several debts are equally onerous (Article 1254, par.
debts public and private, and which cannot be refused by Creditor. 2.)

In the Republic of the Philippines, the ff. are legal tender: (Sec. 54, RA 265) 3. Indivisibility  This means that the obligor must perform the prestation in one act and not in
1. RP silver peso and half peso for debts of any amount, RP subsidiary silver coins 20 ¢and 10 parts. (Article 1248)
¢ for up to P20 debts, and RP minor nickel and copper coins for up to P2.00 debts; There are several exceptions to this requirement:
2. RP Treasury certificates, new Victory series (EO 25, s. 1944, already withdrawn from 1. In case or express stipulation. (Article 1248.)
circulation) 2. In case of prestations which necessarily entail partial performance. (Article 1225, par. 2)
3. All notes and coins issued by CB. 3. If the debt is liquidated in part and unliquidated in part (Article 1248.)
4. In case of joint divisible obligations (Article 1208.)
Q: How do you convert? 5. In solidary obligations when the debtors are bound under different terms and conditions.
A: In case of an obligation which is not a loan in foreign currency, if incurred before RA 529, (Article 1211.)
conversion must be as of the time the obligation was incurred. If incurred after RA 529 became 6. In compensation when a balance is left. (Article 1290.)
effective, the conversion must be as of the time the obligation was incurred (Kalalo v. Luz) If the 7. If the work is to be delivered partially, the price or compensation for each part having been
loan is in foreign currency, the conversion is as of the time of payment. (RA 529) fixed. (Article 1720.)
8. In case of several guarantors who demand the right of division. (Article 2065.)
Payment in negotiable paper  This may be refused by the creditor. Payment in manager's check 9. In case of impossibility or extreme difficulty of single performance.
or certified check is not payment in legal tender. The ruling in Seneris has been reversed in the
case of Bishop of Malolos. The Malolos ruling is better. I found it hard to accept that manager's II. With respect to the parties
check or certified check is good as legal tender. There are always risks to which cashier's checks There are two parties involved:
are subject. What if after having issued a cashier's check, the drawee-bank closes, what happens 1. Payor/ obligor/ debtor
to your cashier's check? 2. Payee/ obligee/ creditor

 In any event, payment by check can be refused by the creditor. And even if payment by check is Requirements:
accepted by the creditor, the acceptance is only a provisional payment until the check is 1. Article 1226 - 1238. Who should the payor be:
(a) encashed or a. Without need of the creditor's consent
(b) when through the fault of the creditor they have been impaired. 1. The debtor himself
2. His heirs or assigns
The case of Namarco v. Federation, 49 SCRA 238, interprets the phrase "when through the fault 3. His agent
of the creditor, they have been impaired" as to apply only to a check used in payment if issued by 4. Anyone interested in the fulfillment of the obligation, e.g., a guarantor
a person other than the debtor. b. With the creditor's consent -- Anyone.
 This is a departure from the rule in the Old Civil Code which did not require consent on
Why? It is because if the check was issued by the debtor himself, all that the debtor have to do is to the part of the creditor.
issue another check. c. Effect of payment by a third person:
1. If the payment was with the debtor's consent, he becomes the agent of the debtor.
Revaluation in case of extraordinary inflation or deflation (Article 1250) The effect is subrogation (Articles 1236-1237)
(1) Exception: If the person paying intended it to be a donation. (Article 1238.)
 This rule has never been used. It was only during the Japanese occupation that there was a 2. If payment was without the debtor's consent, the third person may demand repayment
recognition of extraordinary inflation in this country. to the extent that the debtor has been benefited. (Article 1236, par. 2.)

Exceptions to the requirement of identity 2. Who may be the payee?

(i) Dacion en pago (Article 1245) 1. The obligee proper (Articles 1240, 1626.)
(ii) Novation 2. His successor or transferee (Article 1240.)
In both cases, there is a voluntary change in the object. 3. His agent (ibid.)
4. Any third person subject to the following qualifications:
2. Integrity  There must be delivery of the entire prestation due. (Article 1233) or completely a. Provided it redounded to the obligee's benefit and only to the extent of such
fulfilled; benefit. (Article 1241, par. 2.)
The exceptions to the requirement of integrity are: b. If it falls under Article 1241, par. 2 nos. 1, 2 and 3, benefit is deemed to be total.
1. In case of substantial performance in good faith (Article 1234.) This is an equity rule. 5. Anyone in possession of the credit. (Article 1242.)
2. In case of waiver of obligee/ creditor (Article 1235.)
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 In all these five (5) cases, it is required that the debt should not have been garnished. (Article HELD: NO. What applies here is Article 1234: If the obligation has been substantially performed in good faith,
1243) the obligor may recover as though there had been a strict and complete fulfillment, less damages suffered by
the obligee. In this connection, it should be noted that, apart from the initial installment of P396.12, paid upon
III. With respect to the time and place of payment: the execution of the contract, on September 7, 1954, the defendant religiously satisfied the monthly
installments accruing thereafter, for a period of almost eight (8) years, or up to January 5, 1962; that, although
1. When payment to be made: When due
the principal obligation under the contract was P3,691.20, the total payments made by the defendant up to
2. Place (Article 1251.) January 5, 1962, including stipulated interest, aggregated P4,134.08; that the defendant has offered to pay all
of the installments overdue including the stipulated interest, apart from reasonable attorney’s fees and the
Primary rule: As stipulated. costs; and that, accordingly, the trial court sentenced the defendant to pay all such installments, interest, fees
Secondary rule: Place where the thing was at the time the obligation was constituted if the and costs. Thus, plaintiff will thereby recover everything due thereto, pursuant to its contract with the
obligation is to deliver a determinate thing. defendant, including such damages as the former may have suffered in consequence of the latter’s default.
Tertiary rule: At the debtor's domicile. Under these circumstances, we feel that, in the interest of justice and equity, the decision appealed from may
be upheld upon the authority of Art. 1234 of the Civil Code.1
Balane:
** Payment and Performance are used interchangeably.
LEGARDA HERMANOS and JOSE LEGARDA VS. FELIPE SALDAÑA [55 SCRA 324] The Court's
 But technically, payment is used in obligations to give whereas performance is used in obligations doctrine in J.M. Tuason vs. Javier is fully applicable to the present case, RE Substantial performance of contract
to do. Payment/ performance is the paradigmatic mode of extinguishment of an obligation. It is the OBLIGATION in GF, Article 1234.
only normal way of extinguishing an obligation. FACTS: Contract to Sell between Plaintiff vendee, Felipe Saldaña and Defendant vendor, Legarda Hermanos, a
subdivision-owner, on 2 written contracts, payable for 10 yrs, 120 equal monthly installments with 10% interest
Article 1234. If the obligation has been substantially performed in good faith, the obligor may recover as though p.a., from May 1948. Respondent Saldaña faithfully paid for 8-yrs about 95-mos. installments out of 120; he
there had been a strict and complete fulfillment, less damages suffered by the obligee. stopped paying from filing of this case with CFI-Manila in 1961; after his 1st 5 years of paying, respondent called
Substantial Performance: attention of vendors that he wanted to build a house on his lot but they have to start improvements on the
1. an attempt in GF to perform, without any willful or intentional departure from it; subdivision, e.g. roads. Instead, he was informed of cancellation of contract for failure to pay as stipulated, the
2. deviation from performance of OBLIGATION must be slight, and omission or defect must 120 installments and his payments were to be treated as rents.
The Lower Court dismissed respondent’s complaint, upheld the cancellation of the contract. Appellate court
be so technical and unimportant, and must not pervade the whole, must not be so material reversed, and ordered the conveyance of one of the 2 lots to defendants. At the latter’s choice. It was found that
to the achievement of the very purpose of the parties; the lots could not be delivered because they were still submerged in water and there were no roads in the
3. party claiming substantial performance must show attempt in good faith. subdivision. (for equity and justice)
ISSUE: WON cancellation of contract here was proper?
CASES on Payment: HELD: NO. The Court's doctrine in the analogous case of J.M. Tuason & Co. Inc. vs. Javier is fully applicable
to the present case, with the respondent at bar being granted lesser benefits, since no rescission of contract was
therein permitted. There, where the therein buyer-appellee identically situated as herein respondent buyer had
J.M. TUASON V. LEGAYA JAVIER [31 SCRA 829] - In the interest of justice and equity, court may grant likewise defaulted in completing the payments after having religiously paid the stipulated monthly installments
the vendee a new term where he substantially performed in good faith according to Article 1234, regardless of for almost eight years and notwithstanding that the seller-appellant had duly notified the buyer of the rescission
Article 1592 of the same Code. of the contract to sell, the Court upheld the lower court's judgment denying judicial confirmation of the
rescission and instead granting the buyer an additional grace period of sixty days from notice of judgment to
FACTS: Contract to Sell between Plaintiff JM Tuazon and defendant Ligaya Javier on a parcel of land in Sta. pay all the installment payments in arrears together with the stipulated 10% interest per annum from the date
Mesa Heights Subd. on installment with down and interest of 10% p.a. Defendant took possession of property of default, apart from reasonable attorney's fees and costs, which payments, the Court observed, would have
after payment of 1st installment on execution of contract in Sept. 1954 and paid monthlu installments until Jan. the plaintiff-seller "recover everything due thereto, pursuant to its contract with the defendant, including such
1962. After subsequent months, default by defendant of monthly installments. Plaintiff informed her that contract damages as the former may have suffered in consequence of the latter's default."
has been rescinded. But defendant refused to vacate. Thus, plaintiff filed case with CFI-Rizal for judicial In affirming, the Court held that "Regardless, however, of the propriety of applying said Art. 1592 thereto, we
rescission of contract and payment of arrears. find that plaintiff herein has not been denied substantial justice, for, according to Art. 1234 of said Code: 'If
Based on Article 1592, CFI found in favor of defendant but made the latter pay arrears within 60 days, plus the obligation has been substantially performed in good faith, the obligor may recover as though there had
interests, attorney’s fees, and that title should be transferred after such payment with costs at the expense of been a strict and complete fulfillment, less damages suffered by the obligee,'" and "that in the interest
defendant. of justice and equity, the decision appealed from may be upheld upon the authority of Article 1234 of the Civil
Article 1592. In the sale of immovable property, even though it may have been stipulated that upon Code."
failure to pay the price at the time agreed upon the rescission of the contract shall of right take place,
the vendee may pay, even after the expiration of the period, as long as no demand for rescission of the
contract has been made upon him either judicially or by a notarial act. After the demand, the court may
not grant him a new term. GUILLERMO AZCONA VS. JOSE JAMANDRE (Administrator of the Intestate Estate of Cirilo Jamandre)
Thus, plaintiff appealed for erroneous application of Article 1592 because this is a contract to sell and not of [151 SCRA 317]
contract of sale. FACTS: GUILLERMO AZCONA leased 80 Ha. out of his 150 Ha pro-indiviso share in hacienda Sta. Fe in
ISSUE: WON CFI erred in NOT declaring herewith contract rescinded. Escalante, Negros Occidental to CIRILO JAMANDRE, decedent represented by Administrator to his Estate; that
the Yearly rental agreed: P7,200 for 3-agricultural years from 1960, extendible to 1965 at lessee’s option. 1st
Amen | Compiled Notes
annual rental due on Mar. 1960; but respondent did not pay for failure of petitioner to deliver possession of the
property to him until he paid in Oct. 1960 of P7000; that in April 1961, petitioner notified respondent that contract Payment made to one having apparent authority to receive the money will, as a rule, be treated
is deemed cancelled for failure to comply with the conditions therein; that the respondent filed complaint, as though actual authority had been given for its receipt.
defendant filed counterclaim; both were dismissed by Trial Court for pari de licto.
ISSUE: WON the payment of P7000, lacking of 200 from the agreed annual rental of 7200, amounts to delay and
ground for rescission. Likewise, if payment is made to one who by law is authorized to act for the creditor, it will work a
HELD: NO. The receipt showed full payment as per contract; no mention of the short of 200; which means that discharge. The receipt of money due on a judgment by an officer authorized by law to accept it will,
rental was reduced, perhaps because of the reduction of the 80 Ha. by 16 Ha. used by Petitioner as grazing land. therefore satisfy the debt.
But the rest of the contract subsists.
xxx If the petitioner is fussy enough to invoke it now, it stands to reason that he would have fussed it too in the xxx The theory is where a payment is made to a person authorized and recognized by
receipt he willingly signed after accepting, without reservation and apparently without protest only P7,000. the creditor, the payment to such a person so authorized is deemed payment to the
Article 1235 is applicable. creditor. xxx
Petitioner says that he could not demand payment of the balance of P200 on 10/26/60, date of receipt because the
rental for the crop year 1961-1962 was due on or before 1/30/61. But this would not have prevented him from
reserving in the receipt his right to collect the balance when it fell due. Moreover, there is evidence in the record Unless authorized by law or by consent of the obligee, a public officer has no authority to accept
that when the due date arrived, he made any demand, written or verbal, for the payment of that amount. anything other than money in payment of an obligation under a judgment being executed.
In the absence of an agreement, either express or implied, payment means the discharge of a debt or
obligation in money and unless the parties so agree, a debtor has no rights, except at his own peril, to
Article 1235. When the obligee accepts the performance, knowing its incompleteness or irregularity, and without
expressing any protest or objection, the obligation is deemed fully complied with. substitute something in lieu of cash as medium of payment of his debt. Consequently, unless
authorized by law or by consent of the obligee, a public officer has no authority to accept anything
1. To whom payment should be made other than money in payment of an obligation under a judgment being executed. Strictly speaking,
the acceptance by the sheriff of the petitioner's checks, in the case at bar, does not, per se, operate as a
Article 1240. Payment shall be made to the person in whose favor the obligation has been constituted, or his discharge of the judgment debt. [PAL V. CA (181 S 557)]
successor in interest, or any person authorized to receive it.
Tolentino:
ARAÑAS V. TUTAAN [127 SCRA 828] Authority to receive: LEGAL or CONVENTIONAL
(1) Legal: conferred by law, such as authority of guardian to include creditor (Cr), or the
Payment by judgment debtor to the wrong party does not extinguish judgment debt. administrator of estate
(2) Conventional: authority from Creditor himself, as when agent is appointed to collect from
FACTS: CFI-Rizal, Quezon declared petitioner-plaintiff spouses Arañas as owner of 400 shares of stocks in
Debtor.
Universal Textile Mills, Inc. UTEX, which the Corp-defendant issued to co-defendant Gene Manuel and BR
Castaneda, including stock dividends which accrued to said shares. This court a quo rendered decision in August  Payment to wrong party does NOT extinguish obligation to Creditor, if there is no
1971. UTEX made a motion for clarification and such was answered in 1972 clearly directing UTEX to pay fault or negligence which can be imputed to the latter, even when Debtor acted in utmost
spouses petitioners as rightful owners of all accruing dividends from their stocks from after the judgment by the Good Faith and by mistake as to the person of his Creditor, or through error induced by
court, and for the transfer of the disputed shares of stocks to the names of petitioner-spouses. In lieu of the appeal fraud of 3rd Person, EXCEPT AS PROVIDED IN ARTICLE 1241.
filed by Manuel and Castaneda, UTEX failed to transfer the names of the shares and pay the dividends to  Deposit by Debtor in bank, in the name of and to the credit of Cr, without latter’s
petitioners. Thus, spouses-petitioner asked for a writ of execution from court a quo for payment of cash dividends authority does NOT constitute payment; but when the Creditor cannot be found in the
from1972-1979 with interest and to effect the transfer of the shares to them. Lower court granted such order but
place of payment, such deposit may be a valid excuse for not holding the Debtor in default
absolved UTEX of payment of cash dividends which they have already paid to Manuel and Castaneda on the
ground of equity.
ISSUE: WON UTEX should be made to pay spouses Arañas the cash dividends from 1972-1979 with interests, General Rule: Consignation in court of thing or amount due, when properly made will
after it has already paid the same to Manuel and Castañeda, despite knowledge of the court’s decision otherwise. extinguish the obligation.
HELD: The burden of recovering the supposed payments of the cash dividends made by UTEX to the wrong
parties Castaneda and Manuel squarely falls upon itself by its own action and cannot be passed by it to petitioners Article 1241. Payment to a person who is incapacitated to administer his property shall be valid if he has kept the
as innocent parties. thing delivered, or insofar as the payment has been beneficial to him.
Payment made to a third person shall also be valid insofar as it has redounded to the benefit of the creditor. Such
*** It is elementary that payment made by a judgment debtor to a wrong party cannot extinguish the benefit to the creditor need not be proved in the following cases:
judgment obligation of such debtor to its creditor. xxx 1. If after the payment, the third persons acquire the creditor's rights;
2. If the creditor ratifies the payment to the third person;
3. If by the creditor's conduct, the debtor has been led to believe that the third person had authority to
A payment in order to be effective to discharge an obligation must be made to the proper parties.-- receive the payment.
In general, a payment, in order to be effective to discharge an obligation, must be made to the proper
person. Thus, payment must be made to the obligee himself or to an agent having authority, express Baviera: Number three is Estoppel in Pais.
or implied, to receive the particular payment. Tolentino:
Amen | Compiled Notes
 1. When Creditor is incapacitated, payment must be made to his legal representative or deliver  Debtor can therefor be made to pay again to the party who secured the attachment or
the thing to court for consignation ff. Article 1256. garnishment, but he can recover the same to the extent of what he has paid to his Creditor.
2. Payment to Incapacitated Creditor shall be valid only insofar as it accrued to his benefit.
Absence of benefit, Debtor may be made to pay again by Creditor when he attains capacity, or Article 1244. The debtor of a thing cannot compel the creditor to receive a different one, although the latter may
his legal representative during the incapacity. be of the same value as, or more valuable than that which is due.
3. Same principles are applicable to payment made to 3rd Person, but person who paid has right In obligations to do or not to do, an act or forbearance cannot be substituted by another act or forbearance against
to recover from 3rd Person. the obligee's will.
4. In ff. Cases, payment to 3rd Person releases Debtor: Tolentino:
(a) when without notice to assngment of credit, he pays to original Creditor [Article 1626] and Defects of the thing delivered may be waived by the Creditor, if he expressly so declares, or if, with
(b) when in Good Faith he pays to one in possession of credit [Article 1242] knowledge thereof, he accepts the thing without protest or disposes of it or consumes it
5. If mistake of Debtor due to fault of Creditor, then Creditor cannot demand anew.
Article 1245. Dation in payment, whereby property is alienated to the creditor in satisfaction of a debt in money,
Article 1242. Payment made in good faith to any person in possession of the credit shall release the debtor. shall be governed by the law of sales.
(Assignment of Credits and Other Incorporeal Rights) Article 1246. When the obligation consists in the delivery of an indeterminate or generic thing, whose quality and
Article 1626. The debtor who, before having knowledge of the assignment, pays his creditor shall be released circumstances have not been stated, the creditor cannot demand a thing of superior quality. Neither can the debtor
from the obligation. deliver a thing of inferior quality. The purpose of the obligation and other circumstances shall be taken into
consideration.
2. Who shall make payment?
Article 1236. The creditor is not bound to accept payment or performance by a third person who has no interest in Tolentino:
the fulfillment of the obligation, unless there is a stipulation to the contrary.  Creditor or Debtor may waive the benefit of this Article;
Whoever pays for another may demand from the debtor what he has paid, except that if he paid without the  Creditor may require a thing of inferior quality and Debtor may deliver a thing of superior
knowledge or against the will of the debtor, he can recover only insofar as the payment has been beneficial to the quality, unless the price to be pd in the latter case is dependent upon the quality.
debtor. Article 1247. Unless it is otherwise stipulated, the extrajudicial expenses required by the payment shall be for the
account of the debtor. With regard to judicial costs, the Rules of Court shall govern.
Article 1237. Whoever pays on behalf of the debtor without the knowledge or against the will of the latter, cannot
compel the creditor to subrogate him in his rights, such as those arising from a mortgage, guaranty, or penalty. Article 1248. Unless there is an express stipulation to that effect, the creditor cannot be compelled partially to
receive the prestations in which the obligation consists. Neither may the debtor be required to make partial
Article 1238. Payment made by a third person who does not intend to be reimbursed by the debtor is deemed to payments.
be a donation, which requires the debtor's consent. But the payment is in any case valid as to the creditor who has
accepted it. However, when the debt is in part liquidated and in part unliquidated, the creditor may demand and the debtor may
effect the payment of the former without waiting for the liquidation of the latter.
Article 2173. When a third person, without the knowledge of the debtor, pays the debt, the rights of the former are
governed by articles 1236 and 1237. (Other Quasi-Contracts)
Article 1239. In obligations to give, payment made by one who does not have the free disposal of the thing due BALANE CASE:
and capacity to alienate it shall not be valid, without prejudice to the provisions of article 1427 under the Title on
"Natural Obligations." Article 1249. The payment of debts in money shall be made in the currency stipulated, and if it is not possible to
Article 1427. When a minor between eighteen and twenty-one years of age, who has entered into a contract deliver such currency, then in the currency which is legal tender in the Philippines.
without the consent of the parent or guardian, voluntarily pays a sum of money or delivers a fungible thing in The delivery of promissory notes payable to order, or bills of exchange or other mercantile documents shall
fulfillment of the obligation, there shall be no right to recover the same from the obligee who has spent or produce the effect of payment only when they have been cashed, or when through the fault of the creditor they
consumed it in good faith. have been impaired.
 NOTE: Age of majority is now 18. In the meantime, the action derived from the original obligation shall be held in abeyance.
Tolentino:
 Where the person paying has no capacity to make the payment, the Creditor cannot be NORBERTO TIBAJIA JR. VS. CA AND EDEN TAN (1993)
compelled to accept it. Consignation will not be proper. Facts: In a suit for collection of a sum of money, Eden Tan obtained judgment against Petitioners, spouses
 In case Creditor accepts, the payment will not be valid, except in the case provided in Norberto Tibajia, Jr. and Carmen Tibajia. The decision having become final, Eden Tan filed motion for
execution and the garnished funds which by then were on deposit with the cashier of the RTC-Pasig were
Article 1427.
levied upon.
Tibajia spouses delivered to Deputy Sheriff Eduardo Bolima the total money judgment in Cashier's Check
Article 1243. Payment made to the creditor by the debtor after the latter has been judicially ordered to retain the P262,750.00, and in Cash 135,733.70 = Total P398,483.70. Tan, refused to accept such payment and instead
debt shall not be valid. insisted that the garnished funds deposited with RTC-Pasig be withdrawn to satisfy the judgment obligation.
Tolentino: Defendant spouses (petitioners) filed a motion to lift the writ of execution on the ground that the judgment debt
 Payment to Creditor after the credit has been attached or garnished is void as to the party had already been paid. Trial court denied on the ground that payment in cashier's check is not payment in
who obtained the attachment or garnishment, to the extent of the amount of judgment legal tender and that payment was made by a third party other than the defendant. MR was denied. CA
in his favor;
Amen | Compiled Notes
affirmed, holding that payment by cashier's check is not payment in legal tender as required by RA No. 529. suffered, as alleged in the second, third and fourth causes of action. Appellant also set up affirmative and
MR denied again. special defenses, alleging that appellee had no cause of action, that appellee was in estoppel because of certain
ISSUE: Whether or not payment by means of check (even by cashier's check) is considered payment in legal acts, representations, admissions and/or silence, which led appellant to believe certain facts to exist and to act
tender as required by the Civil Code, Republic Act No. 529, and the Central Bank Act. upon said facts, that appellee's claim regarding the Menzi project was premature because appellant had not yet
HELD: NO. been paid for said project, and that appellee's services were not complete or were performed in violation of the
The provisions of law applicable to the case at bar are the following: agreement and/or otherwise unsatisfactory. Appellant also set up a counterclaim for actual and moral damages
for such amount as the court may deem fair to assess, and for attorney's fees.
a. Article 1249 of the Civil Code which provides: Trial Court authorized the case to be heard before a Commissioner. The Commissioner rendered a report
Article 1249. The payment of debts in money shall be made in the currency stipulated, and if it is not possible which, in resume, states that the amount due to appellee was US$28K as his fee in the IRRI Project, and
to deliver such currency, then in the currency which is legal tender in the Philippines. P51,539.91 for the other projects, less the sum of P69,475.46 which was already paid by the appellant. The
The delivery of promissory notes payable to order, or bills of exchange or other mercantile documents shall Commissioner also recommended the payment to appellee of the sum of P5,000.00 as attorney's fees. Both
produce the effect of payment only when they have been cashed, or when through the fault of the creditor they had no objection to the findings of fact of the Commissioner contained in the Report.
have been impaired. ISSUE: WON the recommendation in the Report that the payment of the amount due to the plaintiff in dollars
In the meantime, the action derived from the original obligation shall be held in abeyance; was legally permissible, and if not, at what rate of exchange it should be paid in pesos.
HELD: Under the agreement, Exhibit A, appellee was entitled to 20% of $140,000.00, or the amount of
b. Section 1 of Republic Act No. 529, as amended, which provides: $28,000.00. Appellee, however, cannot oblige the appellant to pay him in dollars, even if appellant himself
Sec.1. Every provision contained in, or made with respect to, any obligation which purports to give the obligee had received his fee for the IRRI project in dollars. This payment in dollars is prohibited by Republic Act
the right to require payment in gold or in any particular kind of coin or currency other than Philippine currency 529 which was enacted on June 16, 1950. Said act provides as follows:
or in an amount of money of the Philippines measured thereby, shall be as it is hereby declared against public SECTION 1. Every provision contained in, or made with respect to, any obligation which provision purports
policy null and void, and of no effect, and no such provision shall be contained in, or made with respect to, any to give the obligee the right to require payment in gold or in a particular kind of coin or currency other than
obligation thereafter incurred. Every obligation heretofore and hereafter incurred, whether or not any such Philippine currency or in an amount of money of the Philippines measured thereby, be as it is hereby declared
provision as to payment is contained therein or made with respect thereto, shall be discharged upon payment in against public policy, and null, void and of no effect, and no such provision shall be contained in, or made with
any coin or currency which at the time of payment is legal tender for public and private debts. respect to, any obligation hereafter incurred. Every obligation heretofore or here after incurred, whether or
not any such provision as to payment is contained therein or made with respect thereto, shall be discharged
c. Section 63 of Republic Act No. 265, as amended (Central Bank Act) which provides: upon payment in any coin or currency which at the time of payment is legal tender for public and private
Sec. 63. Legal character. Checks representing deposit money do not have legal tender power and their debts: Provided, That, ( a) if the obligation was incurred prior to the enactment of this Act and required
acceptance in the payment of debts, both public and private, is at the option of the creditor: Provided, however, payment in a particular kind of coin or currency other than Philippine currency, it shall be discharged in
that a check which has been cleared and credited to the account of the creditor shall be equivalent to a delivery Philippine currency measured at the prevailing rate of exchange at the time the obligation was incurred, (b)
to the creditor of cash in an amount equal to the amount credited to his account. except in case of a loan made in a foreign currency stipulated to be payable in the same currency in which case
From the aforequoted provisions of law, it is clear that this petition must fail. the rate of exchange prevailing at the time of the stipulated date of payment shall prevail. All coin and
A check, whether a manager's check or ordinary check, is not legal tender, and an offer of a currency, including Central Bank notes, heretofore or hereafter issued and declared by the Government of the
check in payment of a debt is not a valid tender of payment and may be refused receipt by the Philippines shall be legal tender for all debts, public and private.
obligee or creditor. Under the above-quoted provision of Republic Act 529, if the obligation was incurred prior to the
enactment of the Act and require payment in a particular kind of coin or currency other than the
OCTAVIO KALALO VS. ALFREDO LUZ (1970) [34 SCRA 337] Philippine currency the same shall be discharged in Philippine currency measured at the prevailing rate
Under RA 529, if the obligation was incurred prior to the enactment in a particular kind of coin or currency of exchange at the time the obligation was incurred.
other than the Phil. currency the same shall be discharged in Phil. currency measured at the prevailing rate of As we have adverted to, Republic Act 529 was enacted on June 16, 1950. In the case now before us the
exchange at the time the obligation was incurred. RA 529 does not provide for the rate of exchange for the obligation of appellant to pay appellee the 20% of $140,000.00, or the sum of $28,000.00, accrued on August
payment of the obligation incurred after the enactment of said Act. The logical conclusion is that the rate of 25, 1961, or after the enactment of Republic Act 529. It follows that the provision of Republic Act 529 which
exchange should be that prevailing at the time of payment for such contracts. requires payment at the prevailing rate of exchange when the obligation was incurred cannot be applied.
Republic Act 529 does not provide for the rate of exchange for the payment of obligation incurred after the
FACTS: Octavio KALALO, a licensed civil engineer doing business under the firm name of O. A. Kalalo and enactment of said Act. The logical conclusion, therefore, is that the rate of exchange should be that
Associates, entered into an agreement with Alfredo LUZ, a licensed architect, doing business under firm name prevailing at the time of payment.
of A. J. Luz and Associates, whereby the former was to render engineering design services to the latter for This view finds support in the ruling of this Court in the case of Engel vs. Velasco and Co. where this Court
fees, as stipulated in the agreement. The services included design computation and sketches, contract drawing held that even if the obligation assumed by the defendant was to pay the plaintiff a sum of money expressed in
and technical specifications of all engineering phases of the project designed by O. A. Kalalo and Associates American currency, the indemnity to be allowed should be expressed in Philippine currency at the rate of
bill of quantities and cost estimate, and consultation and advice during construction relative to the work. The exchange at the time of judgment rather than at the rate of exchange prevailing on the date of defendant's
fees agreed upon were percentages of the architect's fee. breach. This is also the ruling of American court as follows:
Kalalo in his complaint against Luz alleged that for services rendered in connection with the different projects
there was due him fees in US$, excluding interests, of which some were paid, thus leaving unpaid the balance The value in domestic money of a payment made in foreign money is fixed with respect to the
plus prayer for consequential and moral damages, as well as moral damages, attorney's fees and expenses of rate of exchange at the time of payment.
litigation; and actual damages. NELIA PONCE AND VICENTE PONCE VS. CA AND JESUSA AFABLE [90 SCRA 533] It is to be
Luz admitted that appellee rendered engineering services, as alleged, but averred that some were not in noted that while an agreement to pay in dollars is declared as null and void and of no effect, what the law
accordance with the agreement and such claims were not justified by the services actually rendered, and that specifically prohibits is payment in currency other than legal tender. It does not defeat a creditor's claim for
the aggregate amount actually due was only P80,336.29, of which P69,475.21 had already been paid, thus payment, as it specifically provides that "every other domestic obligation xxx whether or not any such provision
leaving a balance of only P10,861.08. Luz denied liability for any damage claimed by appellee to have as to payment is contained therein or made with respect thereto, shall be discharged upon payment in any coin
Amen | Compiled Notes
or currency which at the time of payment is legal tender for public and private use." A contrary rule would Government of the Philippines shall be legal tender for all debts, public and private. (As amended by
allow a person to profit or enrich himself inequitably at another's expense. RA 4100, Section 1, approved June 19, 1964)

FACTS: On June 3, 1969, private respondent Jesusa B. Afable, together with Felisa L. Mendoza and Ma. NEW PACIFIC TIMBER AND SUPPLY COMPANY VS. HON. SENERIS AND EX-OFFICIO SHERIFF
Aurora C. Diño executed a promissory note in favor of petitioner Nelia G. Ponce in the sum of P814,868.42, HAKIM ABDULWAHID [101 SCRA 686]
Philippine Currency, payable, without interest, on or before July 31, 1969. It was further provided therein FACTS: Upon a compromise judgment against petitioner, and for the latter’s failure to comply, CFI-Zambo
that should the indebtedness be not paid at maturity, it shall draw interest at 12% per annum, without demand; issued a writ of execution. Sheriff levied on personal properties or petitioner. And set such for auction sale. Prior
that should it be necessary to bring suit to enforce payment of the note, the debtors shall pay a sum equivalent to which date of auction, petitioner deposited with Clerk of Court, ex-officio sheriff, the payment of the judgment
to 10% of the total amount due for attorney's fees; and, in the event of failure to pay the indebtedness plus OBLIGATION consisting of cash and checks. Private respondent, Ricardo TONG refused to accept and requested
interest in accordance with its terms, the debtors shall execute a first mortgage in favor of the creditor over the auction to proceed. Tong was the highest bidder in the auction, for total amount short of the judgment debt.
their properties or of the Carmen Planas Memorial, Inc. ISSUE: Whether the Sheriff can validly refuse acceptance of the P50,000 Cashier’s check and P13,130 in cash as
For failure to comply with the OBLIGATION, a Complaint was filed by PONCE at CFI-Manila for the payment of the judgment obligation.
recovery of the principal sum of P814,868.42, plus interest and damages. HELD: YES. It is to be emphasized that the check deposited by the petitioner in the amount of P50,000 is not an
Trial Court rendered judgment ordering respondent Afable and her co-debtors, Felisa L. Mendoza and Ma. ordinary check but a Cashier's check of the Equitable Banking Corp., a bank of good standing and reputation. It
Aurora C. Diño , to pay petitioners, jointly and severally, the sum of P814,868.42, plus 12% interest per was even a certified crossed check. It is well known and accepted practice in the business sector that a Cashier's
annum from July 31, 1969 until full payment, and a sum equivalent to 10% of the total amount due as check is deemed as cash.
attorney's fees and costs. Moreover, since the said check has been certified by the drawee bank, by the certification, the funds represented
From said Decision, by respondent Afable appealed to the Court of Appeals. She argued that the contract by the check are transferred from the credit of the maker to that of the payee or holder, and for all intents and
under consideration involved the payment of US dollars and was, therefore, illegal; and that under the in purposes, the latter becomes the depositor of the drawee bank, with rights and duties of one in such situation.
pari delicto rule, since both parties are guilty of violating the law, neither one can recover. It is to be noted that Where a check is certified by the bank on which it is drawn, the certification is equivalent to acceptance.
said defense was not raised in her Answer. CA affirmed Trial Court. MR denied. CA’s holding: the agreement Said certification "implies that the check is drawn upon sufficient funds in the hands of the drawee, that they
is null and void and of no effect under Republic Act No. 529. Under the doctrine of pari delicto, no recovery have been set apart fort its satisfaction, and that they shall be so applied whenever the check is presented
can be made in favor of the plaintiffs for being themselves guilty of violating the law. for payment. It is an understanding that the check is good then, and shall continue to be good, and this agreement
ISSUE: WON the subject matter is illegal and against public policy, thus, doctrine of pari delicto applies. is as binding on the bank as its notes in circulation, a certificate of deposit payable to the order of the depositor, or
HELD: WE DISAGREE. It is to be noted that while an agreement to pay in dollars is declared as null and any other obligation it can assume. The object of certifying a check, as regards both parties, is to enable the holder
void and of no effect, what the law specifically prohibits is payment in currency other than legal tender. It to use it as money." When the holder procures the check to be certified, "the check operates as an assignment of a
does not defeat a creditor's claim for payment, as it specifically provides that "every other domestic obligation part of the funds to the creditors." Hence, the exception to the rule enunciated under Sec. 63 of the CB Act shall
... whether or not any such provision as to payment is contained therein or made with respect thereto, shall be apply in this case:
discharged upon payment in any coin or currency which at the time of payment is legal tender for public and
private debts." A contrary rule would allow a person to profit or enrich himself inequitably at another's Sec. 63. Legal Character – Checks representing deposit do not have legal tender power and their
expense. acceptance in payment of debts, both public and private, is at the option of the Creditor Provided,
Section 1 of Republic Act No. 529, which was enacted on June 16, 1950: however that a check which has been cleared and credited to the account of the creditor shall be
Section1. Every provision contained in, or made with respect to, any domestic obligation to wit, any obligation equivalent to a delivery to the creditor in cash in an amount equal to the amount credited to his
contracted in the Philippines which provision purports to give the obligee the right to require payment in account.
gold or in a particular kind of coin or currency other than Philippine currency or in an amount of money of
the Philippines measured thereby, be as it is hereby declared against public policy, and null and void and of
no effect and no such provision shall be contained in, or made with respect to, any obligation hereafter ROMAN CATHOLIC BISHOP OF MALOLOS, INC. VS. IAC AND ROBES-FRANCISCO REALTY
incurred. The above prohibition shall not apply to (a) transactions were the funds involved are the proceeds of AND DEV. CORP. [191 SCRA 411]
loans or investments made directly or indirectly, through bona fide intermediaries or agents, by foreign FACTS: Petitioner is vendor of parcels of land in Bulacan to vendee Robes-Francisco Realty Corp. with down
governments, their agencies and instrumentalities, and international financial and banking institutions so long payment of 20K+ and balance of 100K payable within 4yrs with 12% int. p.a. from execution of contract on July
as the funds are Identifiable, as having emanated from the sources enumerated above; (b) transactions affecting 7, 1975, with forfeiture clause in case vendee fails to pay in 4yrs.
high priority economic projects for agricultural industrial and power development as may be determined by the On July 17, 1975, vendee wrote a letter requesting for extension and allowance to pay in installment within 6mos
National Economic Council which are financed by or through foreign funds; (c) forward exchange transactions with interests. Petitioner denied, granted only 5 days grace period. Request for 30-days grace on the 4th day was
entered into between banks or between banks and individuals or juridical persons; (d) import-export and other also denied by petitioner. Private respondent later purports tender of payment (in check) on 5th day was refused by
international banking financial investment and industrial transactions. With the exception of the cases petitioner. Trial Court favored petitioner. IAC reversed after finding that respondent had sufficient funds at the
enumerated in items (a) (b), (c) and (d) in the foregoing provision, in, which cases the terms of the parties' time of tender of check payment to petitioner. On the 5th day of the grace period, and concluded that there was
agreement shall apply, every other domestic obligation heretofore or hereafter incurred whether or not any valid tender of payment.
such provision as to payment is contained therein or made with- respect thereto, shall be discharged upon ISSUE: WON offer of certified personal check is valid tender of payment of OBLIGATION under a contract
payment in any coin or currency which at the time of payment is legal tender for public and private debts: which stipulates that consideration of sale is in Phil. Currency?
Provided, That if the obligation was incurred prior to the enactment of this Act and required payment HELD: Finding of sufficient available funds by CA does not constitute proof of tender of payment. (non sequitur)
in a particular kind of coin or currency other than Philippine currency, it shall be discharge in Tender of Payment involves a positive and unconditional act by the obligor of offering legal tender currency as
Philippine currency measured at the prevailing rates of exchange at the time the obligation was payment to oblige for the OBLIGATION and demanding that the latter accept the same.
incurred, except in case of a loan made in foreign currency stipulated to be payable in the currency in Since a negotiable instrument is only a substitute for money and not money, the delivery of such an instrument
which case the rate of exchange prevailing at the time of the stipulated date of payment shall prevail All does not, by itself, operate as payment. A check, whether a manager's check or ordinary check, is not legal
coin and currency, including Central Bank notes, heretofore and hereafter issued and d by the 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 obligee or creditor.
Amen | Compiled Notes
 Plaintiff's complaint was dismissed on the grounds relied upon by the defendants therein. SC reversed, and the
Tolentino: case was remanded to the court of origin for the determination of the compensation to be paid the plaintiff-
appellant as owner of the land, including attorney's fees, also directed the determination of just compensation
 Legal tender: such currency which in a given jurisdiction can be used for the payments of on the basis of the price or value thereof at the time of the taking.
debts, public and private, and which cannot be refused by the Creditor. ISSUE: WON Article 1250 applicable in determining JUST compensation payable to Amigable from the
 Since payment must be in money that is legal tender, payment in check even when good taking in 1924.
may be validly refused by Creditor HELD: NO. Article 1250 applies only to cases where a contract or agreement is involved. It does not apply
 Payment by Check: WON Manager’s check or ordinary is NOT a valid tender of payment where the obligation to pay arises from law, independent of contracts. The taking of private property by the
government in the exercise of its power of eminent domain does not give rise to a contractual obligation.
Article 1250. In case an extraordinary inflation or deflation of the currency stipulated should supervene, the value
of the currency at the time of the establishment of the obligation shall be the basis of payment, unless there is an SIMEON DEL ROSARIO VS. SHELL COMPANY OF THE PHIL. LTD. [164 SCRA 556]
agreement to the contrary. FACTS: Del Rosario leased to Shell his land in Ligao, Albay at 250/mo. With stipulation on currency adjustment
according to inflation. An EO (EO 195) was promulgated by Pres Diosdado Macapagal prompting Del Rosario to
Baviera: This article applies to contracts only. EXTRAORDINARY means unusual or beyond the demand for increase in rental from Shell which the latter refused to pay. Thus Del Rosario filed with CFI-Manila
common fluctuation, not foreseen. which was dismissed.
Tolentino: Does NOT apply where obligation to pay arises from law, independent of contracts, like ISSUE: WON the effect of EO 195 is official devaluation of peso as contemplated in the Lease Contract
the taking of private property by the goverment in the exercise of its power of eminent domain HELD: In the case at bar, while no express reference has been made to metallic content, there nonetheless is a
reduction in par value or in the purchasing power of Phil. currency. Even assuming there has been no official
FILIPINO PIPE AND FOUNDRY CORP. (FPFC) VS. NAWASA [161 SCRA 32] devaluation as the term is technically understood, the fact is that there has been a diminution or lessening in the
Facts: In 1961 NAWASA entered contract with FPFC for the supply of cast iron pressure pipes for the purchasing power of the peso, thus there has been "depreciation" (opposite of "appreciation.") Moreover, when
construction of the Waterworks in Msbate and Samar. NWS paid in installments. Leaving a balance of unpaid laymen unskilled in the semantics of economics use the terms "devaluation" or "depreciation" they certainly mean
interests. Thus, FPFC filed a collection case against NWS in CFI-Manila. them in their ordinary signification--decrease in value. Hence, as contemplated by the parties herein in their lease
In 1967, CFI ordered NAWASA to pay FPFC the balance unpaid balance NWS negotiable bonds, redeemable in agreement, the term "devaluation" may be regarded as synonymous with "depreciation," for certainly both refer to
10 yrs with 6%p.a. interest. NWS failed to pay, neither delivered bonds. In 1971, FPFC filed another complaint a decrease in the value of the currency. The rentals should therefore, by their agreement, be proportionately
seeking an adjustment of the unpaid balance due to change in value of judgment in peso in 1967 to 1971. Trial increased.
Court dismissed the complaint holding that the inflation was a worldwide occurrence and that there was no proof
of extraordinary inflation in the sense contemplated by Article 1250. Article 1251. Payment shall be made in the place designated in the obligation.
Issue: WON there was extraordinary inflation to apply Art 1250. There being no express stipulation and if the undertaking is to deliver a determinate thing, the payment shall be
Held: None. Extraordinary inflation exists when there is a decrease or increase in the purchasing power of the made wherever the thing might be at the moment the obligation was constituted.
Phil currency which is unusual or beyond the common fluctuation value of the said currency, and such decrease or In any other case the place of payment shall be the domicile of the debtor.
increase could not have been reasonably foreseen or was manifestly beyond the contemplation of the parties at the If the debtor changes his domicile in bad faith or after he has incurred in delay, the additional expenses shall be
time of the establishment of the obligation. The decline of the purchasing power of the currency cannot be borne by him.
considered extraordinary. It was due to oil embargo crisis the effect of which was worldwide. These provisions are without prejudice to venue under the Rules of Court.

PEDRO VELASCO VS. MERALCO [42 SCRA 556] Four Special Kinds of Payments:
FACTS: Velasco’s Motion for Reconsideration; SC decision incorrectly reduced amount of damages due him 1. Dacion en pago (Article 1245.)
based only on his BIR assessed income and not considered his undeclared source of income which he did not
2. Application of payments (Subsection 1.)
disclose. He now urges that damages awarded him was inadequate considering the present high cost of living,
applying Art 1250. 3. Payment by cession (Subsection 2.)
ISSUE: Whether or not Article 1250 of the New Civil Code is applicable. 4. Consignation (Subsection 3.)
HELD: From the employment of the words "extraordinary inflation or deflation of the currency stipulated" in
Article 1250, it can be seen that the same envisages contractual obligations where a specific currency is selected Article 1245. Dation in payment, whereby property is alienated to the creditor in satisfaction of a debt in money,
by the parties as the medium of payment; hence it is inapplicable to obligations arising from tort and not from shall be governed by the law of sales.
contract. Besides, there is no showing that the factual assumption of said article has come into existence. [Tolentino]
Dation in payment is the delivery and transmission of ownership of a thing by the Debtor to the
COMMISSIONER OF PUBLIC HIGHWAYS V. BURGOS [96 S 831] - Creditor as an accepted equivalent of performance of OBLIGATION;
FACTS: Victoria Amigable is the owner of parcel of land in Cebu which the Government took for road-right-  It may be a thing or a real right (i.e. usufruct), or of a credit against a 3rd Person;
of-way purpose in 1924. The land had since become streets known as Mango Avenue and Gorordo Avenue. In
Example: Assignment by an heir-Debtor of his interests in the succession to the Creditor, made after
1959, Amigable filed in CFI-Cebu a complaint, to recover ownership and possession of the land, and for
damages in the sum of P50,000.00 for the alleged illegal occupation of the land by the Government, moral
the death of decedent, extinguishes the OBLIGATION.
damages in the sum of P25,000.00, and attorney's fees in the sum of P5,000.00, plus costs of suit.
In its answer, the Republic alleged, among others, that the land was either donated or sold by its owners to the Effect on OBLIGATION  extinguished to the extent of the value of thing delivered
Province of Cebu to enhance its value, and that in any case, the right of the owner, if any, to recover the value  Debtor does not have to be insolvent, agreement only between the parties makes dation
of said property was already barred by estoppel and the statute of limitations, defendants also invoking the possible.
non-suability of the Government.
Amen | Compiled Notes
When personal property is delivered it is PLEDGE, not dation, unless parties clearly stipulate, Dacion en pago, according to Manresa, is the transmission of the ownership of a thing by the debtor
but in doubt, the presumption is pledge, with lesser transmission of rights. to the creditor as an accepted equivalent of the performance of an obligation.
Warranties of Debtor  Dation is an onerous transmission or contract of alienation, provision in  In dacion en pago, as a special mode of payment, the debtor offers another thing to the
Sales Re warranty against eviction and against hidden defects of the thing applies, Debtor is vendor, creditor who accepts it as equivalent of payment of an outstanding debt.
Creditor is vendee;
 If Creditor is evicted, original OBLIGATION is not revived, but Creditor is entitled to Dacion en pago in the nature of sale. The undertaking really partakes in one sense of the nature of
recover from breach of warranty in Article 1555. sale, that is, the creditor is really buying the thing or property of the debtor, payment for which is to
[Balane] be charged against the debtor's debt.
 Dacion en pago, in Roman law, called "datio in solutum", in French, "dation en  As such, the essential elements of a contract of sale, namely, consent, object certain, and
paiement," in Spanish, "dacion en pago.") cause or consideration must be present.
 Dation in payment is possible only if there is a debt in money. Instead of money, a
thing is delivered in satisfaction of the debt in money. (Dation en pago is explained in Dacion en pago in its modern concept. In its modern concept, what actually takes place in dacion en
the case of Filinvest v. Phil Acetylene). pago is an objective novation of the obligation where the thing offered as an accepted equivalent of
There are two ways at looking at dacion en pago: the performance of an obligation is considered as the object of the contract of sale, while the debt is
1. Classical way  where dacion en pago is treated as a sale. considered as the purchase price. In any case, common consent is an essential prerequisite, be it
2. Modern concept  which treats dacion en pago as a novation. sale or novation, to have the effect of totally extinguishing the debt or obligation.

Castan has another view  Both are wrong. CITIZENS SURETY AND INSURANCE COMPANY VS. CA AND PASCUAL PEREZ [162 SCRA 738]
* A dacion en pago is not a sale because there is no intention to enter into a contract of sale. RATIO: There is no dation in payment when there is no obligation to be extinguished.
* It is not also a novation because in novation, the old obligation is extinguished and a new FACTS: Petitioner issued 2 surety bonds to Pascual Perez to guarantee his compliance in a Contract of Sale of
obligation takes its place. Goods he entered with Singer Sawing Machine Co. Perez in turn executed a deed of assignment of its stock of
lumber to petitioner. And a 2nd indemnity agreement to guaranty reimbursement of whatever liability it will be
** But here, the old obligation is extinguished. What takes its place? Nothing. So what is it? It
made to pay in the future on Perez’s liabilities. Perez failed to comply. Singer made petitioner pay Perez’s
is a special form of payment which resembles a sale. OBLIGATION. Pascual failed to reimburse petitioner. Thus petitioner filed a claim against the estate of Nicasia
Sarmiento which was being administered by Perez. Perez averred that his liability to the surety has been
There are two more things to remember in the cases of Filinvest v. Phil. Acetylene, supra. and extinguished by the deed of assignment of the lumber. Trial Court held Perez and the estate of Sarmiento
Lopez v. CA, 114 SCRA 671: solidarily liable to Citizens Surety. CA reversed and dismissed Citizens’ claim against the estate of Sarmiento.
 Dacion en pago can take place only if both parties consent. ISSUE: WON CA erred in concluding that there was dation in payment by the execution of the Deed of
Q: To what extent is the obligation extinguished? Assigment?
HELD: The transaction could not be dation in payment. xxx When the deed of assignment was executed on
Answer: Up to the value of the thing given (the thing must be appraised) unless the parties agree on
12/4/59, the obligation of the assignor to refund the assignee had not yet arisen. In other words, there was no
a total extinguishment. (Lopez. v. CA, supra.) obligation yet on the part of the petitioner, Citizens' to pay Singer Sewing Machine Co. There was nothing to be
extinguished on that date, hence, there could not have been a dation in payment.

FILINVEST CREDIT CORP. V. PHIL. ACETYLENE [111 SCRA 421] 2ND SPECIAL KIND OF PAYMENT: Application of Payment
FACTS: Phil. Acetylene Co. purchased from Alexander LIM with Deed of Sale, a Chevrolet 1969 model with
downpayment, and balance payable for 34 mos. With 12% int. p.a. reflected in a PN, with Chattel ortgage as
security in Lim’s favor. Lim assigned to Filinvest Finance Corp. his interests in the PN and Chattel Mortgage. [Balane]
After defaulting in 9 installments, Filinvest sent demand letter to PAC, to pay or return the vehicle. PAC returned Application of payment (Imputacion in Spanish) is the designation of a debt which is being paid by
the car but Filinvest cannot sell the car due to unpaid taxes thereon incurred by PAC. Fil offered to deliver back the debtor who has several obligations of the same kind in favor of the creditor to whom the payment
the car to PAC, the latter refused. Fil thus filed a complaint for collection of money withdamages in CFI- is made.
Manila. PAC averred that Fil has no cause of action against PAC because when the car was returned after the
demand letter, the OBLIGATION was extinguished. Rules where the amount sent by the debtor to the creditor is less than all that is due:
ISSUE: WON the return of mortgaged vehicle to appellee by voluntary surrender by appellant totally No.1: Apply in accordance with the agreement.
extinguished the OBLIGATION, as in dacion en pago?
No.2: Debtor may apply the amount (an obvious limitation because of the principles of
HELD: NO. We find appellant's contention devoid of persuasive force. The mere return of the mortgaged motor
vehicle by the mortgagor, the herein appellant, to the mortgagee, the herein appellee, does not constitute dation indivisibility and integrity) where there would be partial payment.
in payment in the absence, express or implied of the true intention of the parties. The demand for return merely No.3: Creditor can make the application.
showed appellee’s interest to secure the value of the vehicle and prevent loss, damage, destruction or fraudulent No.4: Apply to the most onerous debt. (Article 1252, par. 1.)
transfer to 3rd person, as shown in the doc, ―Vol. Surrender with SPA To Sell‖ which never said that such return Q; What are the rules to determine which is the most onerous debt?
is in full satisfaction of the mortgaged debt. The conveyance was as to rights only, ownership never left the A: (Article 1252)
mortgagor, as such burdens on the property should still be shouldered by him.
Amen | Compiled Notes
 1. If one is interest paying and the other is not, the debt which is interest paying is more A: Generally, NO, only to the extent of the net proceeds. The extinguishment of the obligation is pro
onerous. tanto.
2. If one is a secured debt and the other is not, the secured debt is more onerous  Execution in Legal cession where the extinguishment of the obligation is total. Legal
3. If both are interest free, one is older than the first, the newer one is more onerous because cession is governed by the Insolvency Law.
prescription will take longer with respect to the newer debt.
Article 1255. The debtor may cede or assign his property to his creditors in payment of his debts. This cession,
5th Rule: Proportional application if the debts are equally onerous. unless there is stipulation to the contrary, shall only release the debtor from responsibility for the net proceeds of
the thing assigned. The agreements which, on the effect of the cession, are made between the debtor and his
Article 1252. He who has various debts of the same kind in favor of one and the same creditor, may declare at the creditors shall be governed by special laws.
time of making the payment, to which of them the same must be applied. Unless the parties so stipulate, or when
the application of payment is made by the party for whose benefit the term has been constituted, application shall 4th SPECIAL FORM OF PAYMENT:
not be made as to debts which are not yet due. Tender of Payment and Consignation
If the debtor accepts from the creditor a receipt in which an application of the payment is made, the former cannot
complain of the same, unless there is a cause for invalidating the contract. Article 1256. If the creditor to whom tender of payment has been made refuses without just cause to accept it, the
[Tolentino] debtor shall be released from responsibility by the consignation of the thing or sum due.
 Necessary that OBLIGATION must all be due. Consignation alone shall produce the same effect in the following cases:
When the creditor is absent or unknown, or does not appear at the place of payment;
 Only in case of mutual agreement, or upon consent of the party in whose favor the term When he is incapacitated to receive the payment at the time it is due;
was establish, that payments may be applied to OBLIGATION which have not yet When, without just cause, he refuses to give a receipt;
matured. When two or more persons claim the same right to collect;
When the title of the obligation has been lost.
Article 1253. If the debt produces interest, payment of the principal shall not be deemed to have been made until
the interests have been covered. [Balane]
Article 1254. When the payment cannot be applied in accordance with the preceding rules, or if application can “Subsection 3.-- Tender of Payment and Consignation”
not be inferred from other circumstances, the debt which is most onerous to the debtor, among those due, shall be The title of the subsection is wrong. It should have been Consignation only because that is the
deemed to have been satisfied. special mode of payment and not the tender of payment.
If the debts due are of the same nature and burden, the payment shall be applied to all of them proportionately.  It is a special mode of payment because payment is made not to the creditor but to the
court.
[Baviera]  Consignation is an option on the part of the debtor because consignation assumes that
The ff. are the rules for application of payments: the creditor was in mora accipiendi (when the creditor without just cause, refuses to accept
1 - The first choice belongs to the Debtor; payment.)
2 - If the Debtor did not choose, the Creditor may choose, which he will manifest in a receipt.
3 - If neither specified the application, payment shall be made to the most onerous debt. Consequence when the creditor without just cause, refuses to accept payment The debtor may
just delay payment. But something still hangs above his head. He is therefore, given the option to
3rd SPECIAL FORM OF Payment – by Cession consignation. Distinguish this from BGB (German Civil Code) which states that mora accipiendi
extinguishes the obligation.
[Balane]
 Property is turned over by the debtor to the creditor who acquires the right to sell it and [Tolentino]
 Tender of payment before consignation is required by the present Article but only in case
divide the net proceeds among themselves.
where the Creditor refuses to accept it without just cause.
Q: Why is payment by cession a special form of payment?
Effect on INTEREST: When tender is made in a form that Creditor could have immediately
A: Because there is no completeness of performance (re: integrity.)
realized payment (cash), followed by a prompt attempt of the Debtor to make consignation, the
In most cases, there will be a balance due.
accrual of interest will be suspended from the date of such tender.
But when tender is not accompanied by means of pmt, and the Debtor did not take any immediate
Q: Difference between dacion en pago and payment by cession:
step to consign, then interest is not suspended from the time of such tender.
In dacion en pago, there is a transfer of ownership from the debtor to the creditor.
In payment by cession, there is no transfer of ownership. The creditors simply acquire the right to sell
the properties of the debtor and apply the proceeds of the sale to the satisfaction of their credit. SOLEDAD SOCO VS. HON. MILITANTE AND REGINO FRANCISCO JR. [123 S 160] Requirements
of consignation
Q: Does payment by cession terminate all debts due?
Amen | Compiled Notes
FACTS: Disputed here is decision of lower court in an Unlawful Detainer case filed by lessor SOLEDAD SOCO Tender is the antecedent of consignation, that is, an act preparatory to the consignation, which is
against private respondent REGINO FRANCISCO JR. lessee of a building owned by Soco, whose payments of the principal, and from which are derived the immediate consequences which the debtor desires or
rentals were considered valid and effective, dismissed the Unlawful Detainer case and made lessor pay moral and seeks to obtain.
exemplary damages, attorney’s fees, holding there was substantial compliance in the with the requisites of  Tender of payment is extrajudicial, while consignation is necessarily judicial, and the priority of
consignation. Francisco and Soco entered into a Contract of Lease for a monthly rental of P 800.00 for a period the first is the attempt to make a private settlement before proceeding to the solemnities of
of 10 years renewable for another 10 years at the option of the lessee. Francisco subleased the bldg for a rental consignation. (8 Manresa 325).
of 3,000/month. Knowing this, Soco apparently stopped accepting rental payments of Francisco and later
demanded him to vacate the bldg. and filed for rescission/annulment of Lease Contract with CFI-Cebu. Article 1257. In order that the consignation of the thing due may release the obligor, it must first be announced to
ISSUE: WON the provisions in Arts. 1256-1261, NCC regarding the requisites of consignation must be complied the persons interested in the fulfillment of the obligation.
with fully and strictly, mandatorily and that did the lower court err in ruling substantial compliance thereto?
The consignation shall be ineffectual if it is not made strictly in consonance with the provisions which regulate
HELD: NO. We do not agree with the questioned decision. We hold that the essential requisites of a valid
payment.
consignation must be complied with fully and strictly in accordance with the law, Articles 1256 to 1261,
New Civil Code. That these Articles must be accorded a mandatory construction is clearly evident and plain Article 1258. Consignation shall be made by depositing the things due at the disposal of judicial authority, before
from the very language of the codal provisions themselves which require absolute compliance with the whom the tender of payment shall be proved, in a proper case, and the announcement of the consignation in other
essential requisites therein provided. Substantial compliance is not enough for that would render only a cases.
directory construction to the law. The use of the words "shall" and "must" which are imperative, operating to The consignation having been made, the interested parties shall also be notified thereof.
impose a duty which may be enforced, positively indicate that all the essential requisites of a valid
consignation must be complied with. The Civil Code Articles expressly and explicitly direct what must be [Tolentino]
essentially done in order that consignation shall be valid and effectual.  Notice: The requirement is fulfilled by the service of summons upon the Defendant
together with copy of complaint.
Consignation Defined:
 Consignation is the act of depositing the thing due with the court or judicial authorities Article 1259. The expenses of consignation, when properly made, shall be charged against the creditor.
whenever the creditor (1) cannot accept or (2) refuses to accept payment, and it generally [Tolentino] Proper when 
requires a prior tender of payment. 1. Creditor accepts consignation after deposit without protest though Debtor failed to
comply with requisites or;
Requisites of Valid Consignation: 2. Court declares consignation as validly made.
In order that consignation may be effective, the debtor must first comply with certain requirements prescribed
by law. The debtor must show Article 1260. Once the consignation has been duly made, the debtor may ask the judge to order the cancellation of
1. that there was a debt due; the obligation.
2. that the consignation of the obligation had been made because the creditor to Before the creditor has accepted the consignation, or before a judicial declaration that the consignation has been
whom tender of payment was made refused to accept it, or because he was absent properly made, the debtor may withdraw the thing or the sum deposited, allowing the obligation to remain in
or incapacitated, or because several persons claimed to be entitled to receive the force.
amount due (Article 1176,NCC); [Tolentino]
3. that previous notice of the consignation had been given to the person interested in Effects of Consignation:
the performance of the obligation (Article 1177,NCC); 1. Debtor is released in the same manner as if he had performed the obligation.
4. that the amount due was placed at the disposal of the court (Article 1178,NCC); 2. Accrual of INTEREST is suspended.
and 3. Deterioration or loss of thing or amount consigned without fault of Debtor must be borne
5. that after the consignation had been made the person interested was notified by Creditor.
thereof (Article 1178,NCC). 4. Any increment or increase in value of thing inures to the benefit of Creditor.
 Failure in any of these requirements is enough ground to render a consignation ineffective. (Jose SC:
Ponce de Leon vs. Santiago Syjuco, Inc., 90 Phil. 311).
 When money is deposited in court under the provisions of the law on consignation, it is in
 Without prior notice, a consignation is void as payment. (Limkako vs. Teodoro, 74 Phil 313)
 In order to be valid, the tender of payment must be made in lawful currency. While payment
custodia legis and therefore exempt from Attachment and execution (Manejero v. Lampa)
in check by the debtor may be acceptable as valid, if no prompt objection to said payment is made
(Desbarats vs. Vda. de Mortera, L-4915, May 25, 1956) Article 1261. If, the consignation having been made, the creditor should authorize the debtor to withdraw the
 The fact that in previous years payment in check was accepted does not place its creditor in same, he shall lose every preference which he may have over the thing. The co-debtors, guarantors and sureties
estoppel from requiring the debtor to pay his obligation in cash (Sy vs. Eufemio, L-10572, shall be released.
Sept. 30, 1958). [Baviera]
 Thus, the tender of a check to pay for an obligation is not a valid tender of payment thereof Q: When is there a need to tender payment?
(Desbarats vs. Vda. de Mortera, supra). A: (a) upon demand and (b) when debt is due
 Tender of payment must be distinguished from consignation
Q: There are 2 or more claims. What will Debtor do after consignation?
Amen | Compiled Notes
 A: File INTERPLEADER. HELD: NO. The right to redeem is a RIGHT NOT AN OBLIGATION, thus no consignation is required.
To preserve the right to redeem, consignation is not required. But to actually redeem, there must of course be
Q: Why tender first? payment or consignation (deposit) itself.
A: It is because there is no need to consign if Creditor accepts payment. We can only know this
through tender. (EXHAUSTION OF EXTRAJUDICIAL MEANS) (2nd MODE OF EXTINGUISHEMENT)
LOSS OF THE THING DUE OR IMPOSSIBILITY OF PERFORMANCE
Q: Before and after consignation, there is a need to notify the Creditor. Why is this?
A: So that the Creditor can get the money from the Clerk of court and avoid costs of litigation. Article 1262. 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.
Q: Debtor consigns. Hearing…Before the court could approve, the City Hall burned + money. When by law or stipulation, the obligor is liable even for fortuitous events, the loss of the thing does not
Should Debtor pay again? extinguish the obligation, and he shall be responsible for damages. The same rule applies when the nature of the
A: No. When money is consigned, it is no longer generic. It becomes specific. Creditor bears the loss obligation requires the assumption of risk.
because although it was due to a fortuitous event, there was delay on his part when he refused to
accept payment. Balane:
Article 1262 is the same as fortuitous event in Article 1174.
Q: In a Contract of Sale with pacto de retro. The vendor tendered payment within the 3-yr pd The effect is the same:
but vendee refused to accept. Action for specific performance by Vendor. According to Vendee,  The OBLIGATION is extinguished if the OBLIGATION is to deliver a determinate thing. If the
since money was not consigned, Vendor cannot claim right of repurchase. Tenable argument? OBLIGATION is to deliver a generic thing, the OBLIGATION is not extinguished.
A: No. As long as there was tender, no need to consign.
But in one case of a co-owner wanting to redeem at reasonable price (was exorbitant), the court held [General Rule] Genus nunquam perit ("Genus never perishes.")
that reasonable price is determined according to the circumstances. So if you want to redeem, But what is not covered by this rule is an OBLIGATION to deliver a limited generic – something in
consign the full amount in cout and ask it to fix the reasonable compensation. between specific and generic thing,

LAURO IMMACULATA VS. HON. NAVARRO AND HEIRS OF JUANITO VICTORIA [160 SCRA e.g., "For P3,000, I promise to deliver to you one of my watches." This OBLIGATION does not
211] We hereby grant said alternative cause of action or prayer. While the sale was originally executed in Dec. really fall under either Article 1262 or Article 1263. But this OBLIGATION really falls under Article
1969, it was only on Feb. 3, 1974 when, as prayed for by private respondent, and as ordered by the court a quo, a 1262. In this case, the OBLIGATION may be extinguished by the loss of all the thing through
deed of conveyance was formally executed. Since the offer to redeem was made on 3/24/75, this was clearly within
Fortuitous Event.
the 5-yr. period of legal redemption allowed by the Public Land Act.

FACTS: A previous complaint, for annulment of judgment and deed of sale with reconveyance of real Article 1263. In an obligation to deliver a generic thing, the loss or destruction of anything of the same kind does
property alleged that Juanito Victoria, with the cooperation of defendant Juanita Naval and others succeeded in not extinguish the obligation.
causing plaintiff Lauro Immaculata, petitioner herein, to execute a Deed of Absolute Sale in favor of Juanito Article 1264. The courts shall determine, whether, under the circumstances, the partial loss of the object of the
Victoria, by unduly taking advantage of the mental illness and/or weakness of petitioner and through deceit obligation is so important as to extinguish the obligation.
and fraudulent means, purportedly disposed of by way of absolute sale, a 5,000-sq.m.parcel of land with Article 1265. Whenever the thing is lost in the possession of the debtor, it shall be presumed that the loss was due
TCT, for P58K, which petitioner supposedly received, but in truth and in fact did not; Jurisdiction of the court to his fault, unless there is proof to the contrary, and without prejudice to the provisions of article 1165. This
over the person of the defendant was also questioned but such was upheld through valid service of summons to presumption does not apply in case of earthquake, flood, storm, or other natural calamity.
the guardian ad litem and also later through voluntary appearance in lieu of pleadings asking for exercise of
jus by the same court. Accordingly, respondent Court directed the respondent Sheriff to execute the deed of Article 1165. When what is to be delivered is a determinate thing, the creditor, in addition to the right granted him
conveyance prayed for by Juanito Victoria, by reason of which, without the knowledge and consent of by article 1170, may compel the debtor to make the delivery.
petitioner, a new TCT was issued in favor of Juanito Victoria; that the said TCT is null and void having been If the thing is indeterminate or generic, he may ask that the obligation be complied with at the expense of the
based on void proceedings; debtor.
If the obligor delays, or has promised to deliver the same thing to two or more persons who do not have the same
*** that, in the alternative, petitioner prays that he be allowed to repurchase the property within five (5) interest, he shall be responsible for any fortuitous event until he has effected the delivery.
years from the time judgment is rendered by the respondent court upholding the validity of the proceedings
Article 1170. Those who in the performance of their obligations are guilty of fraud, negligence, or delay, and
and the sale since the land in question was originally covered by a Free Patent title;
those who in any manner contravene the tenor thereof are liable for damages.
Respondent Court dismissed the complaint on the ground of res judicata. In this present MR, the petitioner Article 1266. The debtor in obligations to do shall also be released when the prestation becomes legally or
merely asks of this Court to consider a point inadvertently missed – the matter of LEGAL REDEMPTION, physically impossible without the fault of the obligor.
which has remained unresolved. The bar of res judicate is as to questions on the validity of the sale.
[Balane]
An offer to redeem was made clearly within the 5-yr-period allowed by law, Public Land Act. (Sec. 119, CA
No. 141) Objective and Subjective Impossibility:
ISSUE: WON offer to redeem was insincere in the absence of consignation of such amount in Court?
Amen | Compiled Notes
 In objective impossibility, the act cannot be done by anyone. The effect of objective impossibility Ordinarily, on a contract for a piece of work, an increase in prices will not relieve the contractor
is to extinguish the OBLIGATION. because such circumstances was already considered by the parties when they entered into the
 In subjective impossibility, the OBLIGATION becomes impossible only with respect to the contract.
obligor. BAR Q: What if the prices rose so high as to be beyond the contemplation of the parties due to the
oil crisis?
There are 3 views as to the effect of a subjective impossibility: Answer: Released.
1. One view holds that the OBLIGATION is not extinguished. The obligor should ask
another to do the OBLIGATION. Balane:
2. Another view holds that the OBLIGATION is extinguished. Rebus sic stantibus. Literally means "things as they stand."
3. A third view distinguishes one prestation which is very personal and one which are not
personal such that subjective impossibility is a cause for extinguishes a very personal It is short for clausula rebus sic stantibus ("agreement of things as they stand.")
OBLIGATION, but not an OBLIGATION which is not very personal. This is a principle of international law which holds that when 2 countries enter into a treaty, they
enter taking into account the circumstances at the time it was entered into and should the
PEOPLE VS. NATIVIDAD FRANKLIN, accused, ASIAN SURETY AND INSURANCE COMPANY [39 circumstances change as to make the fulfillment of the treaty very difficult, one may ask for a
SCRA 363] termination of the treaty. This principle of international law has spilled over into Civil law.
FACTS: Appellant, ASIAN SURETY and INSURANCE CO. INC. contends that the CFI-PAMPANGA erred in
forfeiting its bail bond for the provisional release of NATIVIDAD FRANKLIN, it contends that lower court
This doctrine is also called the doctrine of extreme difficulty and frustration of commercial
should have released it from all liability under the bail bond because its failure to produce and surrender the
accused was due to the negligence of the Phil. Government itself in issuing a passport to said accused, thereby object.
enabling her to leave the country. In support of this contention, the provisions of Article 1266 are invoked. It has four (4) requisites:
ISSUE: WON Surety should be held liable? 1. The event or change could not have been foreseen at the time of the execution of the
HELD: Article 1266, NCC does not apply to a surety upon a bail bond. contract;
Article 1266 does not apply to a surety upon a bail bond, as said Article speaks of a relation between a debtor and 2. The event or change makes the performance extremely difficult but not impossible;
creditor, which does not exist in the case of a surety upon a bail bond, on one hand, and the State, on the other. For 3. The event must not be due to an act of either party;
while sureties upon a bail bond (or recognizance) can discharge themselves from liability by surrendering their 4. The contract is for a future prestation. If the contract is of immediate fulfillment, the gross
principal, sureties on ordinary bonds or commercial contracts, as a general rule, can only be released by payment inequality of the reciprocal prestation may involve lesion or want of cause.
of the debt or performance of the act stipulated.
It is clear, therefore, that in the eyes of the law a surety becomes the legal custodian and jailer of the accused,
thereby assuming the obligation to keep the latter at all times under his surveillance, and to produce and In the case of Naga, the court did not consider the 4th element as an element.
surrender him to the court upon the latter's demand.  The attitude of the courts on this doctrine is very strict. This principle has always been
That the accused in this case was able to secure a Philippine passport which enabled her to go to the United strictly applied. To give it a liberal application is to undermine the binding force of an
States was, in fact, due to the surety company's fault because it was its duty to do everything and take all steps obligation. Every obligation is difficult. The performance must be extremely difficult in
necessary to prevent that departure. This could have been accomplished by seasonably informing the order for rebus sic stantibus to apply.
Department of Foreign Affairs and other agencies of the government of the fact that the accused for whose
provisional liberty it had posted a bail bond was facing a criminal charge in a particular court of the country.
Had the surety company done this, there can be no doubt that no Philippine passport would have been issued to LAGUNA TAYABAS BUS COMPANY AND BATANGAS TRANSPO COMPANY VS. FRANCISCO
MANABAT, assignee of Biñan Transpo Company, Insolvent [59 SCRA 650]
Natividad Franklin.
FACTS: LEASE contract was executed between BTC and LTB, with monthly rental of Php 2500 of Certificate of
NOTES: Public Convenience, provisionally approved by the Public Service Commission. Later, BTC was declared
 Liability of Sureties on a bail bond is conditioned upon appearance of accused from the insolvent and FRANCISCO MANABAT was appointed as assignee. Rentals were still paid, until strikes by
time set for arraignment or trial or any other time as fixed by court, the bondsman being Employees of BTC caused them some further losses. Thus they asked for permission of PSC to suspend operation
the jailer of the accused and absolutely responsible for his custody, with duty at all times to of the CPC also in lieu of low passenger traffic on these lines and high cost of operation. Manabat opposed the
keep him under surveillance. jurisdiction of PSC to suspend the lease contract being an impairment of OBLIGATION. PSC contended that it
had the power to suspend, as it did so, as a consequence of its power to issue the same CPC, and not as an
 Surety will be exonerated where the performance of condition of bail bond is rendered
interpretation of the provision of the Lease contract, which is a function of regular courts.
impossible by act of God (e.g. death of accused), of the obligee (arrested by government), ISSUE: WON petitioners may ask PSC for reduction of rentals in lieu of such suspension and declaration of
or the law (law punishing him is repealed) or also under Rule 114, sec. 16. insolvency of the corp. citing Article 1680.
HELD: Article 1680, it will be observed is a special provision for leases of rural lands. No other legal provision
Article 1267. When the service has become so difficult as to be manifestly beyond the contemplation of the makes it applicable to ordinary leases. xxx
parties, the obligor may also be released therefrom, in whole or in part. Even if the cited article were a general rule on lease, its provisions nevertheless do not extend to petitioners. One
of the requisites is that the cause of the loss of the fruits of the leased prop. must be an "extraordinary and
[Baviera] unforeseen fortuitous event." The circumstances of the case fail to satisfy such requisite. xxx [T]he alleged
causes for the suspension of operations on the lines leased, namely, the high prices of spare parts and gasoline and
the reduction of the dollar allocations (by the CB Monetary B), "already existed when the contract of lease was

Amen | Compiled Notes

executed." The cause of petitioners' inability to operate on the lines cannot, therefore, be ascribed to FE or (2) to just keep the thing in his possession, with the obligation to use due diligence, subject to the
circumstances beyond their control, but to their own voluntary desistance. general rules of OBLIGATION, but no longer to the special liability under Article 1268.
*** Performance is not excused by subsequent inability to perform, by unforeseen difficulties, by unusual
ARTICLE 1189, 1174, 1165, 1268, 1942, 1979, 2159:
or unexpected expenses, by danger, by inevitable accident, by the breaking of machinery, by strikes, by
sickness, by failure of a party to avail himself of the benefits to be had under the contract, by weather
conditions, by financial stringency, or by stagnation of business. Neither is performance excused by the fact Article 1189. When the conditions have been imposed with the intention of suspending the efficacy of an
that the contract turns out to be hard and improvident, unprofitable or impracticable, ill-advised or even obligation to give, the following rules shall be observed in case of the improvement, loss or deterioration of the
foolish, or less profitable, or unexpectedly burdensome. thing during the pendency of the condition.
If the thing is lost without the fault of the debtor, the obligation shall be extinguished;
If the thing is lost through the fault of the debtor, he shall be obliged to pay damages; it is understood that the thing
JESUS OCCENA VS. HON. JABSON AND TROPICAL HOMES INC. [73 SCRA 637] is lost when it perishes, or goes out of commerce, or disappears in such a way that its existence is unknown or it
FACTS: Tropical HOMES INC., filed complaint for modification of Terms and Condi of subdivision contract cannot be recovered;
with petitioner Occena, landowners of disputed lands in Davao, citing Article 1267, and the worldwide increases When the thing deteriorates without the fault of the debtor, the impairment is to be borne by the creditor;
in prices. If it deteriorates through the fault of the debtor, the creditor may choose between the rescission of the obligation
The NCC authorizes the release of an obligor when the service has become so difficult as to be manifestly and its fulfillment, with indemnity for damages in either case:
beyond the contemplation of the parties. If the thing is improved by its nature, or by time, the improvement shall inure to the benefit of the creditor;
ISSUE: WON the above Article gives the court the authority to consequently modify the contents of the contract. If it is improved at the expense of the debtor, he shall have no other right than that granted to the usufructuary.
HELD: Respondent's complaint seeks not release from the subdivision contract but that the court "render [Balane]
judgment modifying the terms and conditions of the contract... by fixing the proper shares that should pertain to
the herein parties out of the gross proceeds from the sales of subdivided lots of subject subdivision."
There are three requisites in order for Article 1189 to apply:
 Article 1267 does not grant the courts this authority to remake, modify, or revise the contract or to fix 1. There is loss, deterioration or improvement before the happening of the condition.
the division of shares between the parties as contractually stipulated with the force of law between the parties, so 2. There is an obligation to deliver a determinate thing (on the part of the debtor)
as to substitute its own terms for those covenanted by the parties themselves. 3. The condition happens.

Balane: In this case the interpretation of the court is too literal. According to the court, it can release Article 1174. Except in cases expressly specified by law, or when it otherwise declared by stipulation, or when
the nature of the obligation requires the assumption of risk, no person shall be responsible for those events which
a debtor from the obligation but it cannot make the obligation lighter. But if you look at Article
could not be foreseen, or which, though foreseen, were inevitable.
1267, partial release is permitted.
Article 1165. When what is to be delivered is a determinate thing, the creditor, in addition to the right granted him
NAGA TELEPHONE V. CA [230 S 351] - The term "service" should be understood as referring to the by article 1170, may compel the debtor to make the delivery.
"performance" of the obligation.-- Article 1267 speaks of "service" which has become so difficult. Taking into If the thing is indeterminate or generic, he may ask that the obligation be complied with at the expense of the
consideration the rationale behind this provision, the term "service" should be understood as referring to the debtor.
"performance" of the obligation. In the present case, the obligation of prvt. resp. consists in allowing petitioners to If the obligor delays, or has promised to deliver the same thing to two or more persons who do not have the same
use its posts in Naga City, which is the service contemplated in said article. Furthermore, a bare reading of this interest, he shall be responsible for any fortuitous event until he has effected the delivery.
article reveals that it is not a requirement thereunder that the contract be for future service with future unusual
change. According. to Tolentino, Article 1267 states in our law the doctrine of unforeseen events. This is said to Article 1268. When the debt of a thing certain and determinate proceeds from a criminal offense, the debtor shall
be based on the discredited theory of rebus sic stantibus in public international law; under this theory, the parties not be exempted from the payment of its price, whatever may be the cause for the loss, unless the thing having
stipulate in the light of certain prevailing conditions, and once these conditions cease to exist the contract also been offered by him to the person who should receive it, the latter refused without justification to accept it.
ceases to exist. Considering practical needs and the demands of equity and good faith, the disappearance of the
basis of a contract gives rise to a right to relief in favor of the party prejudiced. Article 1942. The bailee is liable for the loss of the thing, even if it should be through a fortuitous event:
If he devotes the thing to any purpose different from that for which it has been loaned;
Balane: The Court went too far in this case. It even went to the extent of stipulating for the parties If he keeps it longer than the period stipulated, or after the accomplishment of the use for which the commodatum
in the name of equity. has been constituted;
If the thing loaned has been delivered with appraisal of its value, unless there is a stipulation exempting the bailee
Article 1268. When the debt of a thing certain and determinate proceeds from a criminal offense, the debtor shall from responsibility in case of a fortuitous event;
not be exempted from the payment of its price, whatever may be the cause for the loss, unless the thing having If he lends or leases the thing to a third person, who is not a member of his household;
been offered by him to the person who should receive it, the latter refused without justification to accept it. If, being able to save either the thing borrowed or his own thing, he chooses to save the latter.
Article 1269. The obligation having been extinguished by the loss of the thing, the creditor shall have all the Article 1979. The depositary is liable for the loss of the thing through a fortuitous event:
rights of action which the debtor may have against third persons by reason of the loss. (1) If it is so stipulated;
(2) If he uses the thing without the depositor's permission;
[Tolentino] (3) If he delays its return;
When Debtor tenders payment and Creditor refuses to accept without just cause, Debtor has 2 (4) If he allows others to use it, even though he himself may have been authorized to use the same.
alternatives:
(1) to consign or
Amen | Compiled Notes
Q: What if a depositor was in the premises of the bank and was robbed of his money which he One and the other kind shall be subject to the rules which govern inofficious donations. Express condonation shall,
was about to deposit? furthermore, comply with the forms of donation.
A: Bank cannot be held liable for fortuitous event (robbery) especially in the case of a bank where
the money has not yet been actually deposited. FORMS of Condonation:
 Article 1979 provides for instances wherein depositary is still liable even in cases of
fortuitous event. a. By a Will

Q: What kind of diligence is required of a depositary? Article 935. The legacy of a credit against a third person or of the remission or release of a debt of the legatee
A: Ordinary Diligence. shall be effective only as regards that part of the credit or debt existing at the time of the death of the testator.
In the first case, the estate shall comply with the legacy by assigning to the legatee all rights of action it may have
against the debtor. In the second case, by giving the legatee an acquittance, should he request one.
*Safety Deposit Box: If the jewelry inside a Safety Deposit Box was stolen, rules on deposit will
In both cases, the legacy shall comprise all interests on the credit or debt which may be due the testator at the time
not apply because the contract governing the transaction is LEASE of safety deposit box. of his death.

In Negotiorum Gestio Article 936. The legacy referred to in the preceding article shall lapse if the testator, after having made it, should
Article 2147. The officious manager shall be liable for any fortuitous event: bring an action against the debtor for payment of his debt, even if such payment should not have been effected at
(1) If he undertakes risky operations which the owner was not accustomed to embark upon; the time of his death.
(2) If he has preferred his own interest to that of the owner; The legacy to the debtor of the thing pledged by him is understood to discharge only the right of pledge.
(3) If he fails to return the property or business after demand by the owner;
(4) If he assumed the management in bad faith. b. By Agreement
Payee in Solutio Indebiti Article 1270. Condonation or remission is essentially gratuitous, and requires the acceptance by the obligor. It
Article 2159. Whoever in bad faith accepts an undue payment, shall pay legal interest if a sum of money is may be made expressly or impliedly.
involved, or shall be liable for fruits received or which should have been received if the thing produces fruits. One and the other kind shall be subject to the rules which govern inofficious donations. Express condonation shall,
He shall furthermore be answerable for any loss or impairment of the thing from any cause, and for damages to the furthermore, comply with the forms of donation.
person who delivered the thing, until it is recovered.
Article 746. Acceptance must be made during the lifetime of the donor and of the donee.
rd
3 MODE OF EXTINGUISHMENT OF OBLIGATION: Article 752. The provision of article 750 notwithstanding, no person may give or receive, by way of donation,
CONDONATION OF REMISSION OF THE DEBT more than he may give or receive by will.
The donation shall be inofficious in all that it may exceed this limitation.
[Balane]
Article 750. The donation may comprehend all the present property of the donor, or part thereof, provided he
 Condonation or remission is an act of liberality by virtue of which, without receiving reserves, in full ownership or in usufruct, sufficient means for the support of himself, and of all relatives who, at
any equivalent, the creditor renounces enforcement of an obligation which is extinguished the time of the acceptance of the donation are by law entitled to be supported by the donor. Without such
in whole or in part. reservation, the donation shall be reduced on petition of any person affected.

This has four (4) requisites: Article 748. The donation of a movable may be made orally or in writing.
1. Debt that is existing. You can remit a debt even before it is due. An oral donation requires the simultaneous delivery of the thing or of the document representing the right donated.
2. Renunciation must be gratuitous. If renunciation is for a consideration, the mode of If the value of the personal property donated exceeds five thousand pesos, the donation and the acceptance shall be
extinguishment may be something else. It may be novation, compromise of dacion en made in writing. Otherwise, the donation shall be void.
pago. Article 749. In order that the donation of an immovable may be valid, it must be made in a public document,
3. Acceptance by the debtor. specifying therein the property donated and the value of the charges which the donee must satisfy.
4. Capacity of the parties. The acceptance may be made in the same deed of donation or in a separate public document, but it shall not take
effect unless it is done during the lifetime of the donor.
The form of donation must be observed. If the condonation involves movables, apply Article 748. If the acceptance is made in a separate instrument, the donor shall be notified thereof in an authentic form, and this
If it involves immovables, apply Article 749. step shall be noted in both instruments.

But note that the creditor may just refuse to collect (without observing any form.) In this case, the Presumption in Condonation:
OBLIGATION will be extinguished not by virtue of condonation but by waiver under Article 6.
Article 1271. The delivery of a private document, evidencing a credit, made voluntarily by the creditor to the
Article 1270. Condonation or remission is essentially gratuitous, and requires the acceptance by the obligor. It debtor, implies the renunciation of the action which the former had against the latter.
may be made expressly or impliedly.
Amen | Compiled Notes
If in order to nullify this waiver it should be claimed to be inofficious, the debtor and his heirs may uphold it by VELASCO V. MASA
providing that the delivery of the document was made in virtue of payment of the debt. Facts: Velasco filed a complaint for the recovery of a sum of money he gave to Masa as a loan, as contained in a
private document. V claims that while he was imprisoned during the Jap occupation, M coerced and tricked V’s
[Balane:] Articles 1271 and 1272 refer to a kind of implied renunciation when the creditor divests wife into surrendering the doc to M. V filed a criminal case before against M which was dismissed for lack of
jurisdiction. M contends that doc was voluntarily delivered to him through Osmena. TC dismissed the action.
himself of the proof credit. According to De Diego, this provision is absurd and immoral in that it
authorizes the debtor and his heirs to prove that they paid the debt, when the provision itself Issue: WON there was condonation.
assumes that there has been a remission, which is gratuitous. [Tolentino]
Held: Yes. No satisfactory proof as to allegation of coercion and trickery on V’s wife. It is an unquestionable fact
This is Limited to Private Document  Article 1271 has no application to public documents that the instrument proving the debt now claimed passed to the possession of the Debtor. For this reason, unless
because there is always a copy in the archives which can be used to prove the credit. the contrary is proven, it must be presumed that in accordance with the provisions of the law, that delivery was
voluntarily made. This fact implies a renunciation of the action which Cr had for the recovery of his credit. It
 Private document refers to the original in order for Article 1271 to apply. (Trans-Pacific. v. CA, should be noted that the doc is of a private nature, the only case subject to the provisions of Articles 1187 to 1189
OCC, so that a tacit renunciation of the debt may be presumed, in the absence of proof that the doc was delivered
supra.) for some other reason than the gratuitous waiver of the debt and the complete extinction of the obligation to pay.

TRANS-PACIFIC V. CA [234 SCRA 494]

HELD: It may not be amiss to add that Article 1271 raises a presumption, not of payment, but of the renunciation Effect of Partial Remission:
of the credit where more convincing evidence would be required than what normally would be called for to prove
payment. Article 1273. The renunciation of the principal debt shall extinguish the accessory obligations; but the waiver of
the latter shall leave the former in force.
The rationale for allowing the presumption of renunciation in the delivery of a private instrument is that, Article 2076. The obligation of the guarantor is extinguished at the same time as that of the debtor, and for the
unlike that of a public instrument, there could be just one copy of the evidence of credit. same causes as all other obligations.
Article 2080. The guarantors, even though they be solidary, are released from their obligation whenever by some
Where several originals are made out of a private document, the intendment of the law would thus be to refer to act of the creditor they cannot be subrogated to the rights, mortgages, and preferences of the latter.
the delivery only of the original rather than to the original duplicate of which the debtor would normally retain a
copy. It would thus be absurd if Article 1271 were to be applied differently. (Provisions Common to Pledge and Mortgage)
Article 2085. The following requisites are essential to the contracts of pledge and mortgage:
Article 1272. Whenever the private document in which the debt appears is found in the possession of the debtor, it (1) That they be constituted to secure the fulfillment of a principal obligation;
shall be presumed that the creditor delivered it voluntarily, unless the contrary is proved. xxx
Rule 131, Sec. 5 (b), (j), (k), Rules of Court, Disputable presumptions. The following presumptions are Article 1274. It is presumed that the accessory obligation of pledge has been remitted when the thing pledged,
satisfactory if uncontradicted, but may be contradicted and overcome by other evidence: after its delivery to the creditor, is found in the possession of the debtor, or of a third person who owns the thing.
xxx
(b) That an unlawful act was done with an unlawful intent; [Balane]
xxx The accesory obligation of pledge is extinguished because pledge is a possessory lien.
(j) That a person found in possession of a thing taken in the doing of a wrongful act is the taker and doer of the
whole act; otherwise, that things which a person possesses, or exercises acts of ownership over, are owned by him;  The presumption in this case is that the pledgee has surrendered the thing pledged to the
(k) That a person in possession of an order on himself for the payment of money, or the delivery of anything, has pledgor. This is not a conclusive presumption according to Article 2110, par. 2.
paid the money or delivered the thing accordingly;
xxx Article 2093. In addition to the requisites prescribed in article 2085, it is necessary, in order to constitute the
contract of pledge, that the thing pledged be placed in the possession of the creditor, or of a third person by
Under the 1985 Rules of Court, as amended: Rule 131, Sec. 3. Disputable presumptions.-- The following common agreement.
presumptions are satisfactory if uncontradicted, but may be contradicted and overcome by other evidence: Article 2105. The debtor cannot ask for the return of the thing pledged against the will of the creditor, unless and
xxx until he has paid the debt and its interest, with expenses in a proper case.
(c) That a person intends the ordinary consequences of his voluntary act;
xxx
(f) That money paid by one to another was due to the latter; 4TH MODE OF EXTINGUISHMENT:
(g) That a thing delivered by one to another belonged to the latter; Confusion or Merger of Rights
(h) That an obligation delivered up to the debtor has been paid;
(i) That prior rents or installments had been paid when a receipt for the later ones is produced; Article 1275. The obligation is extinguished from the time the characters of creditor and debtor are merged in the
(k) That a person in possession of an order on himself for the payment of they money, or the delivery of anything, same person.
has paid the money or delivered the thing accordingly;
xxx
[Balane]

Amen | Compiled Notes

  Confusion is the meeting in one person of the qualities of the creditor and debtor with The creditor who may have executed any of these acts, as well as he who collects the debt, shall be liable to the
respect to the same obligation. others for the share in the obligation corresponding to them.
Article 1219. The remission made by the creditor of the share which affects one of the solidary debtors does not
There are two (2) requisites: release the latter from his responsibility towards the co-debtors, in case the debt had been totally paid by anyone of
1. It must take place between the creditor and the principle debtor (Article 1276.) them before the remission was effected.
2. The very same obligation must be involved. Article 1216. The creditor may proceed against any of one of the solidary debtors or some or all of them
simultaneously. The demand made against one of them shall not be an obstacle to those which may subsequently
Rationale  You become your own creditor or you become your own debtor. So how can you sue be directed against the others, so long as the debt has not been fully collected.
yourself? Article 1217. Payment made by one of the solidary debtors extinguishes the obligation. If two or more solidary
debtors offer to pay, the creditor may choose which offer to accept.
What may cause a merger or confusion? He who made the payment may claim from his co-debtors only the share which corresponds to each, with the
(1) Succession, whether compulsory, testamentary or intestate; interest for the payment already made. If the payment is made before the debt is due, no interest for the
(2) Donation; intervening period may be demanded.
(3) Negotiation of a negotiable instrument. When one of the solidary debtors cannot, because of his insolvency, reimburse his share to the debtor paying the
 Because of its nature, confusion/ merger may overlap with other causes of extinguishment. obligation, such share shall be borne by all his co-debtors, in proportion to the debt of each.
For example, I owe Ms. Olores P100,000. She bequeath to me that credit. And then she died. In
this case, there is extinguishment both by merger. But in this case, merger could overlap with e. Indivisible Obligations
payment. Article 1209. If the division is impossible, the right of the creditors may be prejudiced only by their collective
acts, and the debt can be enforced only by proceeding against all the debtors. If one of the latter should be
Article 1276 (below) is perfectly in consonance with Article 1275. insolvent, the others shall not be liable for his share.
Article 1224. A joint indivisible gives rise to indemnity for damages from the time anyone of the debtors does no
a. Principal Parties comply with his undertaking. The debtors who may have been ready to fulfill their promises shall not contribute to
the indemnity beyond the corresponding portion of the price of the thing or of the value of the service in which the
obligation consists.
Article 1276. Merger which takes place in the person of the principal debtor or creditor benefits the guarantors.
Confusion which takes place in the person of any of the latter does not extinguish the obligation.
5TH MODE OF EXTINGUISHMENT:
[Tolentino] Compensation
 Extinguishment of the principal obligation through confusion releases the guarantors,
whose obligation is merely accessory. Article 1278. Compensation shall take place when two persons, in their own right, are creditors and debtors of
 When merger takes place in the person of the guarantor, obligation is NOT extinguished. each other.
[Balane]
b. Among guarantors  Compensation is a mode of extinguishing, to the concurrent amount, the obligations of
those persons who in their own right are reciprocally debtors and creditors of each other.
(Effects of Guaranty as Between Co-Guarantors) [Castan]
Article 2073. When there are two or more guarantors of the same debtor and for the same debt, the one among  Perhaps, next to payment, compensation is the most common mode of extinguishing an
them who has paid may demand of each of the others the share which is proportionally owing from him.
obligation.
If any of the guarantors should be insolvent, his share shall be borne by the others, including the payer, in the same
proportion. Distinguished from Confusion  In compensation, there are 2 parties and 2 debts, whereas in
The provisions of this article shall not be applicable, unless the payment has been made in virtue of a judicial confusion, there are 2 debts and only 1 party.
demand or unless the principal debtor is insolvent.
CASES:
c. Joint Obligations
Article 1277. Confusion does not extinguish a joint obligation except as regards the share corresponding to the Case: BPI vs. CA, Annabelle Salazar and Julio Templonuevo, January 25, 2007, J. Azcuna.
creditor or debtor in whom the two characters concur. Facts: A.A. Salazar Construction and Engineering Services, being substituted by Annabelle Salazar filed an action
for sum of money with damages against BPI for the recovery of the amount worth P267, 707.70 debited by BPI
from her account. BPI, however alleged that one Templonuevo, third-party defendant demanded from the former
d. Solidary Obligations payment of the amount worth 267, 692.50 representing the aggregate value of 3 checks allegedly payable to him
Article 1215. Novation, compensation, confusion or remission of the debt, made by any of the solidary creditors
which were deposited with BPI to herein respondent Salazar’s account without Templonuevo’s knowledge and
or with any of the solidary debtors, shall extinguish the obligation, without prejudice to the provisions of article corresponding endorsement. Heeding to this allegation, BPI froze the account purporting to Salazar.
1219.

Amen | Compiled Notes

The bank found Salazar not entitled to the account for lack of endorsement thereon by her which prompted it to attended by malice, bad faith or gross negligence. The award of reasonable attorney’s fees is proper where
debit the amount from the former’s account and the sum worth P267, 692.50 was paid to Templonuevo by means exemplary damages are awarded. It is proper where depositors are compelled to litigate to protect their interest.
of cashier’s check. The difference between the value represented bank charges in connection with the issuance of
a cashier’s check to Templonuevo. RTC however, ruled in favor of Salazar and was affirmed by the CA saying GAN TION vs. CA and ONG WAN SIENG [28 SCRA 235, 1969] – Award of attorney’s fees is proper subject
that there was no ineffective payment to Salazar which would call for the exercise of petitioner’s right to set off of legal compensation.
against the BPI bank deposits. Hence, BPI filed this petition contending thet the CA committed reversible error in FACTS: Ong Wan Sieng was a tenant in certain premises owned by Gan Tion. Gan filed an ejectment case
NOT applying the provisions of Articles 22, 1278 and 1290 of the Civil Code in favor of BPI regarding against Ong in 1961 for non-payment of rentals for 2 months total of P360. Ong denied and said that agreed rental
COMPENSATION arguing that the deduction of the subject amount from Salazar’s account, BPI was merely was not 180 but 160 which he offered but was refused by Gan. The trial court favored plaintiff-Gan. While the
rectifying the undue payment it made upon the checks and exercising its prerogative to alter or modify an Appellate court reversed and ordered plaintiff-Gan to pay Attoerney’s fees of P500. This became final.
erroneous credit entry in the regular course of its business. When Ong obtained writ of execcution, Gan Tion went to the appellate court and pleaded legal compensation
Issue: Whether or not compensation under the Civil Code is proper in this case. averring that Ong owed him more than P4K in rentals from Aug ’61 to Oct. ’63. The Appellate Court said that
Held: YES. The right of set-off was explained in Associated Bank v. Tan: A bank generally has a right of set- attorney’s fees may not be legally compensated because such constitute trust fund for benefit of lawyer. And the
off over the deposits therein for the payment of any withdrawals on the part of a depositor. The right of a requisites of Article 1278 not complied with.
collecting bank to debit a client's account for the value of a dishonored check that has previously been credited ISSUE: WON there was legal compensation between Gan Tion and Ong Wan Sieng.
has fairly been established by jurisprudence. To begin with, Article 1980 of the Civil Code provides that HELD: YES. The award of attorney’s fees is in favor of litigant not of his counsel, thus litigant is judgment
"[f]ixed, savings, and current deposits of money in banks and similar institutions shall be governed by the creditor who may enforce judgment by execution. Such is credit therefore which can be proper subject of legal
provisions concerning simple loan." compensation.
Hence, the relationship between banks and depositors has been held to be that of creditor and debtor. Thus,
legal compensation under Article 1278 of the Civil Code may take place "when all the requisites mentioned
in Article 1279 are present," as follows: PNB VS. GLORIA ONG ACERO, ET AL. [148 SCRA 166, 1987]- There is no compensation where the
(1) That each one of the obligors be bound principally, and that he be at the same time a parties are not creditors and debtors of each other.
principal creditor of the other; FACTS: Savings account of ISABELA Construction and Wood Development Corporation with the PNB of P2M
(2) That both debts consist in a sum of money, or if the things due are consumable, they be of the is subject of 2 conflicting claims – that of the Aceros, as judgment creditor of ISABELA and of PNB as creditor of
same kind, and also of the same quality if the latter has been stated; the depositor due to a loan or credit agreement by ISABELA with PNB the deposit being the collateral. IAC
(3) That the two debts be due; decided against PNB.
(4) That they be liquidated and demandable; ISSUE: WON by operation of Article 1278, PNB and ISABELA has become here debtors and creditors of each
(5) That over neither of them there be any retention or controversy, commenced by third persons other.
and communicated in due time to the debtor. HELD: NO. PNB's main thesis is that when it opened a savings account for ISABELA on March 9, 1979 in
While, however, it is conceded that petitioner had the right of set-off over the amount it paid to the amount of P 2M, it (PNB) became indebted to ISABELA in that amount. 11 So that when ISABELA itself
Templonuevo against the deposit of Salazar, the issue of whether it acted judiciously is an entirely subsequently came to be indebted to it on account of ISABELA's breach of the terms of the Credit Agreement
different matter. As businesses affected with public interest, and because of the nature of their functions, of October 13, 1977, and therefore ISABELA and PNB became at the same time creditors and debtors of each
banks are under obligation to treat the accounts of their depositors with meticulous care, always having in other, compensation automatically took place between them, in accordance with Article 1278 of the Civil
mind the fiduciary nature of their relationship. In this regard, petitioner was clearly remiss in its duty to private Code. The amounts due from each other were, in its view, applied by operation of law to satisfy and extinguish
respondent Salazar as its depositor. their respective credits. More specifically, the P2M owed by PNB to ISABELA was automatically applied in
To begin with, the irregularity appeared plainly on the face of the checks. Despite the obvious lack of payment and extinguishment of PNB's own credit against ISABELA. This having taken place, that amount of
indorsement thereon, petitioner permitted the encashment of these checks three times on three separate P2M could no longer be levied on by any other creditor of ISABELA, as the ACEROS attempted to do in the
occasions. This negates petitioner’s claim that it merely made a mistake in crediting the value of the checks to case at bar, in order to satisfy their judgment against ISABELA.
Salazar’s account and instead bolsters the conclusion of the CA that petitioner recognized Salazar’s claim of Article 1278 of the Civil Code does indeed provide that "Compensation shall take when two persons, in their
ownership of checks and acted deliberately in paying the same, contrary to ordinary banking policy and own right, are creditors and debtors of each other." Also true is that compensation may transpire by
practice. It must be emphasized that the law imposes a duty of diligence on the collecting bank to scrutinize operation of law, as when all the requisites therefor, set out in Article 1279, are present. Nonetheless, these
checks deposited with it, for the purpose of determining their genuineness and regularity. The collecting bank, legal provisions can not apply to PNB's advantage under the circumstances of the case at bar.
being primarily engaged in banking, holds itself out to the public as the expert on this field, and the law thus The insuperable obstacle to the success of PNB's cause is the factual finding of the IAC that it has not proven by
holds it to a high standard of conduct. The taking and collection of a check without the proper indorsement competent evidence that it is a creditor of ISABELA. The only evidence presented by PNB towards this end
amount to a conversion of the check by the bank. consists of 2 documents marked in its behalf. But as the IAC has cogently observed, these documents do not
More importantly, however, solely upon the prompting of Templonuevo, and with full knowledge of the prove any indebtedness of ISABELA to PNB. All they do prove is that a letter of credit might have been opened
brewing dispute between Salazar and Templonuevo, petitioner debited the account held in the name of the sole for ISABELA by PNB, but not that the credit was ever availed of [by ISABELA's foreign correspondent (MAN)],
proprietorship of Salazar without even serving due notice upon her. This ran contrary to petitioner’s assurances or that the goods thereby covered were in fact shipped, and received by ISABELA.
to private respondent Salazar that the account would remain untouched, pending the resolution of the
controversy between her and Templonuevo. ENGRACIO FRANCIA VS. IAC, HO FERNANDEZ[162 SCRA 753]- [T]here can be no off-setting of
For the above reasons, the Court finds no reason to disturb the award of damages granted by the CA against taxes against the claims that the taxpayer may have against the government.
petitioner. This whole incident would have been avoided had petitioner adhered to the standard of diligence FACTS: ENGRACIO FRANCIA is the registered owner of a lot and 2-storey house in Pasay City, a portion
expected of one engaged in the banking business. A depositor has the right to recover reasonable moral of which lot was subject of expropriation by the Republic of the Philippines, with just compensation computed
damages even if the bank’s negligence may not have been attended with malice and bad faith, if the former at its assessed value. From 1963 to 1977, Francia has not paid real property taxes on the property. Thus, such
suffered mental anguish, serious anxiety, embarrassment and humiliation.31 Moral damages are not meant to was sold on public auction by the City Treasurer of Pasay City pursuant to Sec. 73 PD 464 Real Property Tax
enrich a complainant at the expense of defendant. It is only intended to alleviate the moral suffering she has Code to satisfy his delinquency. Ho Fernandez was the highest bidder. In 1979 Francia received notice that Ho
undergone. The award of exemplary damages is justified, on the other hand, when the acts of the bank are wants the TCT transferred to him after a Final Bill of Sale was issued to him. Francia filed a complaint to
Amen | Compiled Notes
annul the auction sale stating that Francia contends that his tax delinquency of P2,400.00 has been (5) That over neither of them there by any retention or controversy, commenced by third persons and
extinguished by legal compensation. He claims that the government owed him P4,116.00 when a portion of his communicated in due time to the debtor.
land was expropriated on October 15, 1977. Hence, his tax obligation had been set-off by operation of law as
[Balane]
of October 15, 1977. He was in Iligan at that time, but such was dismissed and court ordered Register of Deed to
effect the transfer of title, and for him to pay Ho attorney’s fees. IAC affirmed. Requisites under Article 1279:
ISSUE: WON Francia’s tax delinquency of P2,400 has been set-off by the government’s indebtedness to him 1. Mutual Debtors and Creditors  The parties must be mutually debtors and creditors (1)
of P4,116 after a portion of his lot was expropriated. in their own right, and (2) as principals. There can be no compensation if 1 party occupies
HELD: NO. There is no legal basis for the contention. By legal compensation, obligations of persons, who in only a representative capacity. Likewise, there can be no compensation if in one
their own right are reciprocally debtors and creditors of each other, are extinguished (Art. 1278, Civil Code). obligation, a party is a principal obligor and in another obligation, he is a guarantor.
The circumstances of the case do not satisfy the requirements provided by Article 1279, to wit: 2. Fungible Things Due  The word consumable is wrong. Under Article 418, consumable
(1) that each one of the obligors be bound principally and that he be at the same time a principal creditor of things are those which cannot be used in a manner appropriate to their nature without their
the other; being consumed. In a reciprocal obligation to deliver horses, the things due are not
xxx xxx xxx
(3) that the two debts be due.
consumable; yet there can be compensation. (Tolentino) The proper terminology is
xxx xxx xxx "fungible" which refers to things of the same kind which in payment can be substituted for
This principal contention of the petitioner has no merit. We have consistently ruled that there can be no off- another.
setting of taxes against the claims that the taxpayer may have against the government. A person cannot refuse 3. Maturity of Debts  Both debts must be due to permit compensation.
to pay a tax on the ground that the government owes him an amount equal to or greater than the tax being 4. Demandable and Liquidated Debts  Tolentino: Demandable means that the debts are
collected. The collection of a tax cannot await the results of a lawsuit against the government. enforceable in court, there being no apparent defenses inherent in them. The obligations
In the case of Republic v. Mambulao Lumber Co. (4 SCRA 622), this Court ruled that Internal Revenue Taxes must be civil obligations, excluding those that are purely natural. xxx Before a judicial
can not be the subject of set-off or compensation. We stated that: decree of rescission or annulment, a rescissible or voidable debt is valid and demandable;
A claim for taxes is not such a debt, demand, contract or judgment as is allowed to be set-off under the
statutes of set-off, which are construed uniformly, in the light of public policy, to exclude the remedy in an
hence, it can be compensated.
action or any indebtedness of the state or municipality to one who is liable to the state or municipality for
taxes. Neither are they a proper subject of recoupment since they do not arise out of the contract or A debt is liquidated when its existence and amount are determined. xxx And a debt is
transaction sued on. ... (80 C.J.S., 7374). "The general rule based on grounds of public policy is well-settled considered liquidated, not only when it is expressed already in definite figures which do not require
that no set-off admissible against demands for taxes levied for general or local governmental purposes. The verification, but also when the determination of the exact amount depends only on a simple
reason on which the general rule is based, is that taxes are not in the nature of contracts between the party arithmetical operation. xxx
and party but grow out of duty to, and are the positive acts of the government to the making and enforcing
of which, the personal consent of individual taxpayers is not required. ..."
 The debt must not have been garnished. (additional requirement)
We stated that a taxpayer cannot refuse to pay his tax when called upon by the collector because he has a claim
against the governmental body not included in the tax levy.
This rule was reiterated in the case of Corders v. Gonda (18 SCRA 331) where we stated that: "... internal Compensation is not prohibited by any provision of law like Articles 1287, 1288 and 1794.
revenue taxes can not be the subject of compensation: Reason: government and taxpayer are not mutually
creditors and debtors of each other' under Article 1278 of the Civil Code and a "claim for taxes is not such Article 1287. Compensation shall not be proper when one of the debts arises from a depositum or from the obliga-
a debt, demand, contract or judgment as is allowed to be set-off." tions of a depositary or of a bailee in commodatum.
Neither can compensation be set up against a creditor who has a claim for support due by gratuitous title, without
prejudice to the provisions of paragraph 2 of article 301.
Article 1286. Compensation takes place by operation of law, even though the debts may be payable at different Article 1288. Neither shall there be compensation if one of the debts consists in civil liability arising from a penal
places, but there shall be an indemnity for expenses of exchange or transportation to the place of payment. offense.
Article 1794. Every partner is responsible to the partnership for damages suffered by it through his fault, and he
A. Different Kinds of Compensation: cannot compensate them with the profits and benefits which he may have earned for the partnership by his
industry. However, the courts may equitably lessen this responsibility if through the partner's extraordinary efforts
Legal Compensation (Articles 1279, 1290) which takes place automatically by operation of law once in other activities of the partnership, unusual profits have been realized.
all the requisites are present.
CASES:
Article 1279. In order that compensation may be proper, it is necessary: REPUBLIC V. DE LOS ANGELES [98 SCRA 103]- Compensation of debts arising even without proof of
(1) That each one of the obligors be bound principally, and that he be at the same time a principal creditor of the liquidation of claim is allowable where the claim is undisputed.
other; FACTS: Spouses FARIN got a loan from MARCELO STEEL CORP of P600k and did a Real Estate Mortgage
(2) That both debts consist in a sum of money, or if the things due are consumable, they be of the same kind, and of their lot in Quezon City as security in favor of MARCELO STEEL. A year later MARCELO STEEL asked
also of the same quality if the latter has been stated; sheriff assistant in extrajudicial foreclosure of the real estate mortgage of such lot. Spouses Farin filed for
injunction and succeeded. Thus, MARCELO STEEL invoked par. 5 in the mortgage contract and asked the court
(3) That the two debts be due; instead to compel the lessees of ―Dona Petra Bldg‖ situated on the mortgaged lot, including the Rice and Corn
(4) That they be liquidated and demandable; Admin (RCA), to direct their rental payments to MARCELO STEEL. Such an order was issued by the court.
Amen | Compiled Notes
RCA filed an Motion for Reconsideration praying to be excluded from such order because Spouses Farin has a transactions were duly paid for and transferred. But the later payments were pocketed by Sycip with checks paid
standing OBLIGATION with RCA which should be set-off with their rental OBLIGATIONS, thus rents of RCA by him having been dishonored for insufficiency of funds. Estafa case was filed against Sycip which the latter was
has been previously assigned by Spouses Farin to Vidal Tan. Spouses Farin also filed Motion for Reconsideration convicted ordering him to pay Lapuz P8,000. But Sycip contended that there is compensation because Lapuz owes
asking the court to exclude lessees of the bldg from such order as they are not parties to the case. The trial court him more than P5,000.
denied both MR and granted motion of Spouses Farin for RCA to release rentals incurred for repair of the bldg. ISSUE: WON CA erred in not applying Article 1278-79 despite evidence showing Lapuz’ indebtedness to pet.
Trial Court ratiocinated that RCA never presented any proof of Farin’s indebtedness which it wants to offset with Sycip.
its rentals. HELD: NO. Petitioner contends that respondent CA erred in not applying the provisions on compensation or
ISSUE: WON Respondent Judge erred in denying claim of RCA that compensation of debts has taken place setting-off debts under Article 1278 and 1279, despite evidence showing that Jose Lapuz still owed him an amount
because records showed no proof of plaintiffs’ indebtedness to RCA. of more than P5,000 and in not dismissing the appeal considering that the latter is not legally the aggrieved party.
HELD: YES. Proof of the liquidation of a claim, in order that there be compensation of debts, is proper if This contention is untenable. Compensation cannot take place in this case since the evidence shows that Jose
such claim is disputed. But, if the claim is undisputed, as in the case at bar, the statement is sufficient and Lapuz is only an agent of Albert Smith and/ or Dr. Dwight Dill. Compensation takes place only when two
no other proof may be required. xxx In the instant case, RCA’s claim of Petra’s obligation to RCA was raised persons in their own right are creditors and debtors of each other, and that each one of the obligors is bound
by RCA in its motion dated Dec. 23, 1967. The silence of Petra, although the declaration is such as naturally one principally and is at the same time a principal creditor of the other. Moreover, xxx Lapuz did not consent to the
to call for action or comment if not true, could be taken as an admission of the existence and validity of such a off-setting of his obligation with petitioner's obligation to pay for the 500 shares.
claim. Since RCA’s claim is undisputed, proof of its liquidation is not necessary.

COMPANIA MARITIMA vs. CA and PAN ORIENTAL SHIPPING CO. [135 SCRA 593]- Compensation
LORETO SOLINAP VS. HON. DEL ROSARIO AND SPOUSES JUANITO AND HARDEVI LUTERO cannot take place where one of the debts is not liquidated as when there is a running interest still to be paid
AND THE PROVINCIAL SHERRIF OF ILOILO [123 SCRA 640]- Compensation cannot take place where thereon.
one's claim against the other is still the subject of court litigation. It is a requirement, for compensation to take FACTS: FERNANDO FROILAN purchased from SHIPPING ADMINISTRATION a boat for 200K, and paid
place, that the amount involved be certain and liquidated. downpayment of 50K, while he constituted a mortgage on the vessel for the unpaid balance. However, Froilan
FACTS: SPOUSES TIBURCIO LUTERO and ASUNCION MAGALONA, owners of Hacienda Tambal, leased defaulted in payment of the balance and interests as well as insurance premiums on the vessel which was paid for
such to LORETO SOLINAP for 10 years with rental of P50K/year, further agreed that half of annual rental would by the SHIPPING ADMINISTRATION (SA).
be paid by Solinap to PNB as amortization on indebtedness of Spouses Lutero. When Tiburcio died, testate estate Thus, SA took immediate possession of the vessel as well as its cargoes, with claim that the vessel is not
proceedings was instituted at CFI-Iloilo which authorized the administrator of estate, Judge Nicolas Lutero, the repossessed but its ownership is retransferred to the SA/government.
grandson of decedent, to take from the heirs its obligation with PNB with right of subrogation. After compliance, PAN ORIENTAL offered to charter the same vessel with monthly rental of 3K, which the government agreed
the heirs who paid subjugated to the PNBs claim against lessee Solinap for payment of rentals. Solinap instituted a with further stipulation that charterer will pay cost of labor, dry-docking and repairs, including spare parts needed.
separate action against Spouses Lutero, the administrator, who allegedly owed Solinap P71K with Real Estate Froilan protested to the charter agreement.
Mortgage as security. In this case, Spouses Lutero setup a counterclaim of P125K in unpaid rentals of petitioner Before formal bareboat charter was to be approved by General Manager of SA, a Cabinet resolution was issued
on Hacienda Tambal. An order thereafter in the estate proceedings ordered Solinap to reimburse to Spouses revoking the cancellation of the contract of Sale to Froilan, restored him to all his rights, on condition he will pay
Lutero P25,000 plus interest. Solinap raises the defense of compensation. at least 10K to settle partially his outstanding accounts, to reimburse Pan Oriental of its expenses incurred, and file
ISSUE: WON the trial court erred in not holding that legal compensation has taken place in these cases by a bond to cover the rest of his undertaking with the government. After posting his bond, court ordered to restore
operation of Article 1278. Froilan’s possession of the vessel. Pan Oriental resisted. COMPANIA MARITIMA as purchaser of the vessel
HELD: NO. Petitioner contends that respondent judge gravely abused her discretion in not declaring the mutual from Froilan was allowed to be intervenor.
obligations of the parties extinguished to the extent of their respective amounts. He relies on Article 1278 to the ISSUE: WON the Court erred in holding that Froilan, Compania and Government should pay Pan Oriental
effect that compensation shall take place when 2 persons, in their own right, are creditors and debtors of each reimbursements of its legitimate expenses with legal interest from the time of disbursement, instead of from the
other. The argument fails to consider Article 1279 which provides that compensation can take place only if date of dispossession, failing to consider legal compensation between RP and Pan Oriental.
both obligations are liquidated. In the case at bar, the petitioner's claim against the respondent Luteros is still HELD: NO. More, the legal interest payable from 2/3/51 on the sum of P40,797.54, representing useful
pending determination by the court. While it is not for us to pass upon the merits of the plaintiff's cause of action expenses incurred by PAN-ORIENTAL, is also still unliquidated since interest does not stop accruing
in that case, it appears that the claim asserted therein is disputed by the Luteros on both factual and legal grounds. "until the expenses are fully paid." Thus, we find without basis REPUBLIC'S allegation that PAN-
More, the counterclaim interposed by them, if ultimately found to be meritorious, can defeat petitioner's demand. ORIENTAL'S claim in the amount of P40,797.54 was extinguished by compensation since the rentals payable
Upon this premise, his claim in that case cannot be categorized as liquidated credit which may properly be set-off by PAN-ORIENTAL amount to P59,500 while the expenses reach only P40,797.54. Deducting the latter
against his obligation. Compensation cannot take place where one's claim against the other is still the subject of amount from the former, REPUBLIC claims that P18,702.46 would still be owing by PAN-ORIENTAL to
court litigation. It is a requirement, for compensation to take place, that the amount involved be certain and REPUBLIC. That argument loses sight of the fact that to the sum of P40,797.54 will still have to be added the
liquidated. legal rate of interest "from Feb. 3, 1951 until fully paid."

FRANCISCO SYCIP VS. CA AND PEOPLE OF THE PHILIPPINES [134 SCRA 317]- Compensation INTERNATIONAL CORPORATE BANK INC. (ICB) VS. IAC, NATIVIDAD FAJARDO, SILVINO
cannot take place where, with respect to the money involved in the estafa case, the complainant was merely PASTRANA as Deputy and Special Sheriff [163 S 296]- Requisite of legal compensation under Article 1279.
acting as agent of another. In set-off the two persons must in their own right be creditor and debtor of each The requirement that debts must be liquidated and demandable has not yet been met since the validity of the
other extrajudicial foreclosure and petitioner’s claim for deficiency is still in question. Here, the case is still pending
FACTS: JOSE LAPUZ received from ALBERT SMITH 2,000 shares of stock of REPUBLIC FLOUR MILLS in for the annulment of sheriff’s sale on extrajudicial foreclosure of respondent property from which there is an
the name of Dwight Dill who left for Honolulu. Jose was suppose to sell his shares at market value from which he alleged deficiency.
would get commission. According to Jose, Francisco Sycip approached him and volunteered to sell the shares. A FACTS: NATIVIDAD PAJARDO secured from Investment Underwiriting and ATRIUM Capital, predecessors
Special Power of Attorney was granted by Dill to Lapuz, for the latter to transact with Sycip. Series of their of ICB, a loan of P50M, which she secured with Real Estate Mortgage of her properties in Quiapo and Bulacan
Amen | Compiled Notes
with total market value of 110M. However, only 20M of the loan was approved for release which same amount
went to pay her standing OBLIGATIONS with the same bank, thus she did not receive the same amount. She also MINDANAO PORTLAND CEMENT CORPORATION (MPCC) VS. CA, PACWELD STEEL
made a money-market placement with ATRIUM of more than P1M at 17% interest for 32 days. At maturity, CORPORATION AND ATTY. CASIANO LAQUIHON [120 SCRA 930]- Automatic compensation requires
proceeds of such was not released to her but instead allegedly applied to her mortgaged indebtedness which she present extinguishment of two debts arising from final and executory judgments due to compensation by
failed to pay. Her properties were auctioned and Atrium being the sole bidder, acquired them only at 20M in all. operation of law.
At the end she is still indebted in the amount of P6.81M. FACTS: Atty. Laquihon, in behalf of 3rd party defendant Pacweld Steel Corp. filed a Motion to direct payment of
She thus filed a complaint with the trial court for annulment of the sheriff’s sale of her mortgaged properties the attorney’s fees to counsel invoking the fact that MPCC was adjudged to pay Pacweld 10K in attorney’s fees.
debt not yet being due and demandable, the release of the balance of her loan of P30M, and recovery of the MPCC opposed this motion stating that such amount is compensated with an equal amount it is entitled from
proceeds of her money-market investments. Pacweld after the latter is also adjudged by same CFI-Manila in another case to pay to MPCC. The Court issued
The IAC ordered ICB to pay plaintiff Fajardo the proceeds of her money-market investments. CA affirmed. On the motion of Atty. Laquihon and denied the MR of MPCC.
execution, ICB’s 20 motor vehicles were levied upon, and upon motion by plaintiff, its branches were ordered to ISSUE: WON Trial Court erred in not holding the 2 judgment debts of the 2 corporations against each other
pay. mutually compensated.
Petitioner contends that after foreclosing the mortgage, there is still due from private respondent as deficiency the HELD: YES. It is clear from the record that both corporations, petitioner Mindanao Portland Cement Corp.
amount of P6.81 million against which it has the right to apply or set off private respondent's money market claim (appellant) and respondent Pacweld Steel Corp. (appellee), were creditors and debtors of each other, their debts to
of P1,062,063.83. each other consisting in final and executory judgments of the CFI in 2 separate cases, ordering the payment to
ISSUE: WON there was legal compensation in this case, that after petitioner foreclosed the mortgage, upon the each other of the sum of P10K by way of attorney's fees. The 2 obligations, therefore, respectively offset each
deficiency amount, it still has the right to setoff plaintiff’s money-market investments proceeds. other, compensation having taken effect by operation of law and extinguished both debts to the concurrent amount
HELD: NO. The argument is without merit. Compensation shall take place when two persons, in their own right of P10T, pursuant to the provisions of Article 1278, 1279 and 1290, since all the requisites provided in Article
are creditors and debtors of each other. When all the requisites mentioned in Article 1279 are present, 1279 for automatic compensation even though the creditors and debtors are not aware of the compensation
compensation takes effect by operation of law, even without the consent or knowledge of the debtors. (Article were duly present.
1290.) Automatic compensation, requisites of, present  Extinguishment of two debts arising from final and
Article 1279 requires among others, that in order that legal compensation shall take place, 'the two debts be executory judgments due to compensation by operation of law.
due' and 'they be liquidated and demandable.' Compensation is not proper where the claim of the person
asserting the set-off against the other is neither clear nor liquidated; compensation cannot extend to unliquidated,
disputed claim arising from breach of contract. Facultative Compensation which takes place when compensation is claimable by only one of the
There can be no doubt that petitioner is indebted to private respondent in the amount of P1,062,063.83 parties but not of the other, e.g., Articles 1287, 1288.
representing the proceeds of her money market investment. This is admitted. But whether private respondent is
indebted to petitioner in the amount of P6.81 million representing the deficiency balance after the foreclosure of Article 1287. Compensation shall not be proper when one of the debts arises from a depositum or from the obliga-
the mortgage executed to secure the loan extended to her, is vigorously disputed. This circumstance prevents tions of a depositary or of a bailee in commodatum.
legal compensation from taking place. Neither can compensation be set up against a creditor who has a claim for support due by gratuitous title, without
prejudice to the provisions of paragraph 2 of article 301.
Article 1280. Notwithstanding the provisions of the preceding article, the guarantor may set up compensation as Article 301. The right to receive support cannot be renounced; nor can it be transmitted to a third person. Neither
regards what the creditor may owe the principal debtor.
can it be compensated with what the recipient owes the obligor.
Article 1283. If one of the parties to a suit over an obligation has a claim for damages against the other, the former
However, support in arrears may be compensated and renounced, and the right to demand the same may be
may set it off by proving his right to said damages and the amount thereof. transmitted by onerous or gratuitous title.

Effect of Legal Compensation: [Baviera]

Note that Article 301 of the NCC is not found in Family Code.
Article 1289. If a person should have against him several debts which are susceptible of compensation, the rules Future support cannot be compensated.
on the application of payments shall apply to the order of the compensation.
Article 1290. When all the requisites mentioned in article 1279 are present, compensation takes effect by Thus, a father who paid damages for son’s quasi-delict cannot claim compensation by not giving
operation of law, and extinguishes both debts to the concurrent amount, even though the creditors and debtors are support to his son. However under Article 301, support IN ARREARS may be compensated and
not aware of the compensation.
renounced and the right to demand the same may be transmitted by onerous or gratuitous title.
Article 1279. In order that compensation may be proper, it is necessary:
(1) That each one of the obligors be bound principally, and that he be at the same time a principal creditor of the [Balane]
other;  The depositary cannot set up compensation with respect to the things deposited to him.
(2) That both debts consist in a sum of money, or if the things due are consumable, they be of the same kind, and  But the depositor can set up the compensation.
also of the same quality if the latter has been stated;
(3) That the two debts be due; Article 1288. Neither shall there be compensation if one of the debts consists in civil liability arising from a penal
(4) That they be liquidated and demandable; offense.
(5) That over neither of them there by any retention or controversy, commenced by third persons and [Baviera]
communicated in due time to the debtor.
Amen | Compiled Notes
The obligation of the depositary to return a specific thing cannot be compensated or substituted by Assignment with the debtor's knowledge but without his consent  The debtor can set up
delivery of a thing of the same kind. compensation with a credit already existing at the time of the assignment.
Assignment without the debtor's knowledge  Debtor can set up as compensation any credit
Q: If there is an obligation of the depositary to the depositor for damages (already liquidated existing at the time he acquired knowledge even if it arose after the actual assignment.
and demandable) in case of negligence and if the depositor owes the depositary a sum of
money, can there be set-off? Article 1284. When one or both debts are rescissible or voidable, they may be compensated against each other
A: No, since it arose out of a deposit. Not allowed by law. But it could be a way of creditor to collect before they are judicially rescinded or avoided.
a bad debt. 6TH MODE OF EXTINGUISHMENT:
Novation
Article 1794. Every partner is responsible to the partnership for damaged suffered by it through his fault, and he
cannot compensate them with the profits and benefits which he may have earned for the partnership by his
industry. However, the courts may equitably lessen this responsibility if through the partner’s extraordinary efforts Article 1291. Obligations may be modified by:
in other activities of the partnership, unusual profits have been realized. (1) Changing their object or principal conditions;
Contractual/ Conventional compensation which takes place when parties agree to set-off even if the (2) Substituting the person of the debtor;
requisites of legal compensation are not present, e.g., Article 1282. (Baviera OL: F. Comp 1. Kinds a. (3) Subrogating a third person in the rights of the creditor.
Voluntary) [TOLENTINO]
Novation is the extinguishment of an obligation by the substitution or change of the obligation by a
Article 1282. The parties may agree upon the compensation of debts which are not yet due.
subsequent one which extinguishes or modifies the first, either by changing the object of principal
[Tolentino] conditions, or by substituting the person of the debtor, or by subrogating a third person in the rights
1. Voluntary Compensation is not limited to obligations which are not yet due. The parties of the creditor. (Manresa)
may compensate by agreement any obligations, in which the objective requisites provided
for legal compensation are not present. xx  Novation is the most unusual mode of extinguishing an obligation.
2. Judicial Compensation when decreed by the court in a case where there is a counterclaim,  It is the only mode whereby an obligation is extinguished and a new obligation is created to take
such as that provided in Article 1283. (Baviera OL: F. Comp 1. Kinds b. Judicial) its place.
The other modes of extinguishing an obligation are absolute in the sense that the extinguishment of
Article 1283. If one of the parties to a suit over an obligation has a claim for damages against the other, the former the obligation is total (with the exception of compromise.)
may set it off by proving his right to said damages and the amount thereof.
Novation, on the other hand, is a relative mode of extinguishing an obligation.
[Baviera] What is the idea behind legal compensation?
It is to facilitate collection of money or for expediency. Classification of Novation:
1. Subjective (Personal) or novation by a change of subject
Effect of Assignment of Credit: 2. Active subjective or a change of creditor; also known as subrogation.
3. Passive subjective or a change of debtor
Article 1285. The debtor who has consented to the assignment of rights made by a creditor in favor of a third 4. Objective (Real) or novation by change in the object or in the principal conditions.
person, cannot set up against the assignee the compensation which would pertain to him against the assignor,
 Novation by a change in the principal conditions is the most problematic kind of
unless the assignor was notified by the debtor at the time he gave his consent, that he reserved his right to the
compensation. novation because you have to determine whether or not the change in the
conditions is principal or merely incidental.
If the creditor communicated the cession to him but the debtor did not consent thereto, the latter may set up the
compensation of debts previous to the cession, but not of subsequent ones.  For example, a change from straight terms to installment terms and a change
from non-interest bearing obligation to an interest bearing one are changes in
If the assignment is made without the knowledge of the debtor, he may set up the compensation of all credits prior
to the same and also later ones until he had knowledge of the assignment.
the principal conditions.
5. Mixed novation which is a combination of both subjective and objective novation.
[Balane]
There are 3 situations covered in this Article: Requisites of Novation:
1. Assignment with the debtor's consent; 1. There must be a previous valid obligation;
2. Assignment with the debtor's knowledge but without his consent; and 2. Agreement of the parties to create the new obligation;
3. Assignment without the debtor's knowledge (and obviously without his consent.) 3. Extinguishment of the old obligation. (I would consider this an effect, rather than a
requisite of novation-- Balane);
4. Validity of the new obligation. (Tiu Siuco v. Habana, 45 P 707.)
Rules: 5. There must be CONSENT of all the parties to the substitution, resulting in the extinction of
Assignment with the debtor's consent  Debtor cannot set up compensation at all unless the the old obligation and the creation of a valid one.
right is reserved.
Amen | Compiled Notes
 JAL denied the material allegations of the complaint. It argued, among others, that its failure to allow
Article 1292. In order that an obligation may be extinguished by another which substitute the same, it is respondent to fly on his scheduled departure was due to "a need for his travel documents to be authenticated by
imperative that it be so declared in unequivocal terms, or that the old and the new obligations be on every point the United States Embassy"25 because no one from JAL's airport staff had encountered a parole visa before. 26 It
incompatible with each other. posited that the authentication required additional time; that respondent was advised to take the flight the
following day, July 30, 1992. JAL alleged that respondent agreed to be rebooked on July 30, 1992. RTC ruled
[TOLENTINO] in favor of Simangan. Stating that,
 Novation is NEVER presumed. The RTC explained:
In summarily and insolently ordering the plaintiff to disembark while the latter was already settled
It must be established that  in his assigned seat, the defendant violated the contract of carriage; that when the plaintiff was
1. the old and the new contracts are incompatible in all points, ordered out of the plane under the pretext that the genuineness of his travel documents would be
2. or that the will to novate appear by express agreement of the parties verified it had caused him embarrassment and besmirched reputation; and that when the plaintiff
3. or in acts of equivalent import. was finally not allowed to take the flight, he suffered more wounded feelings and social humiliation
for which the plaintiff was asking to be awarded moral and exemplary damages as well as
attorney's fees.
IMPLIED NOVATION  There is no specific form required for an implied novation. All that is The reason given by the defendant that what prompted them to investigate the genuineness of the
required is INCOMPATIBILITY between the original and the subsequent contracts. travel documents of the plaintiff was that the plaintiff was not then carrying a regular visa but just a
 A mere extension of the term of payment does not result in novation, for the period affects letter does not appear satisfactory. The defendant is engaged in transporting passengers by plane
only the performance, not the creation of the obligation from country to country and is therefore conversant with the travel documents. The defendant
should not be allowed to pretend, to the prejudice of the plaintiff not to know that the travel
CASES: documents of the plaintiff are valid documents to allow him entry in the United States.
The foregoing act of the defendant in ordering the plaintiff to deplane while already settled in his assigned seat
clearly demonstrated that the defendant breached its contract of carriage with the plaintiff as passenger in bad
Case: Japan Airlines vs. Jesus Simangan, April 22, 2008, J. R.T. Reyes.
faith and as such the plaintiff is entitled to moral and exemplary damages as well as to an award of attorney's
Facts: In 1991, respondent Jesus Simangan decided to donate a kidney to his ailing cousin, Loreto Simangan,
fees. CA affirmed with modification stating thus, While the protection of passengers must take precedence
in UCLA School of Medicine in Los Angeles, California, U.S.A. Upon request of UCLA, respondent
over convenience, the implementation of security measures must be attended by basic courtesies.
undertook a series of laboratory tests at the National Kidney Institute in Quezon City to verify whether his
In fact, breach of the contract of carriage creates against the carrier a presumption of liability, by a
blood and tissue type are compatible with Loreto's.6 Fortunately, said tests proved that respondent's blood and
simple proof of injury, relieving the injured passenger of the duty to establish the fault of the carrier
tissue type were well-matched with Loreto's.7
or of his employees; and placing on the carrier the burden to prove that it was due to an unforeseen
Respondent needed to go to the United States to complete his preliminary work-up and donation surgery.
event or toforce majeure.
Hence, to facilitate respondent's travel to the United States, UCLA wrote a letter to the American Consulate in
That appellee possessed bogus travel documents and that he might stay illegally in Japan are
Manila to arrange for his visa. In due time, respondent was issued an emergency U.S. visa by the American
allegations without substantiation. Also, appellant's attempt to rebook appellee the following day
Embassy in Manila.8
was too late and did not relieve it from liability. The damage had been done. Besides, its belated
Having obtained an emergency U.S. visa, respondent purchased a round trip plane ticket from petitioner JAL
theory of novation, i.e., that appellant's original obligation to carry appellee to Narita and Los
for US$1,485.00 and was issued the corresponding boarding pass.9 He was scheduled to a particular flight
Angeles on July 29, 1992 was extinguished by novation when appellant and appellant agreed that
bound for Los Angeles, California, U.S.A. via Narita, Japan.10
appellee will instead take appellant's flight to Narita on the following day, July 30, 1992, deserves
On July 29, 1992, the date of his flight, respondent went to Ninoy Aquino International Airport in the company
little attention. It is inappropriate at bar. Questions not taken up during the trial cannot be raised for
of several relatives and friends.11 He was allowed to check-in at JAL's counter.12 His plane ticket, boarding
the first time on appeal.40 (Underscoring ours and citations were omitted)
pass, travel authority and personal articles were subjected to rigid immigration and security routines. 13 After
Citing Ortigas, Jr. v. Lufthansa German Airlines,41 the CA declared that "(i)n contracts of common carriage,
passing through said immigration and security procedures, respondent was allowed by JAL to enter its
inattention and lack of care on the part of the carrier resulting in the failure of the passenger to be
airplane.14
accommodated in the class contracted for amounts to bad faith or fraud which entitles the passengers to the
While inside the airplane, JAL's airline crew suspected respondent of carrying a falsified travel document and
award of moral damages in accordance with Article 2220 of the Civil Code."42
imputed that he would only use the trip to the United States as a pretext to stay and work in Japan. 15 The
Nevertheless, the CA modified the damages awarded by the RTC.
stewardess asked respondent to show his travel documents. Shortly after, the stewardess along with a Japanese
Issue: Whether or not JAL is correct when it used as a defense NOVATION in not being liable for breach of
and a Filipino haughtily ordered him to stand up and leave the plane. 16 Respondent protested, explaining that
contract of carriage.
he was issued a U.S. visa. Just to allow him to board the plane, he pleaded with JAL to closely monitor his
Held: NO. That respondent purchased a round trip plane ticket from JAL and was issued the corresponding
movements when the aircraft stops over in Narita.17 His pleas were ignored. He was then constrained to go out
boarding pass is uncontroverted.49 His plane ticket, boarding pass, travel authority and personal articles were
of the plane.18In a nutshell, respondent was bumped off the flight.
subjected to rigid immigration and security procedure.50 After passing through said immigration and security
Respondent went to JAL's ground office and waited there for three hours. Meanwhile, the plane took off and
procedure, he was allowed by JAL to enter its airplane to fly to Los Angeles, California, U.S.A. via Narita,
he was left behind.19 Afterwards, he was informed that his travel documents were, indeed, in
Japan.51 Concisely, there was a contract of carriage between JAL and respondent.
order.20 Respondent was refunded the cost of his plane ticket less the sum of US$500.00 which was deducted
Nevertheless, JAL made respondent get off the plane on his scheduled departure on July 29, 1992. He was not
by JAL.21 Subsequently, respondent's U.S. visa was cancelled.22
allowed by JAL to fly. JAL thus failed to comply with its obligation under the contract of carriage.
Displeased by the turn of events, respondent filed an action for damages against JAL with the Regional Trial
JAL justifies its action by arguing that there was "a need to verify the authenticity of respondent's travel
Court (RTC) in Valenzuela City, docketed as Civil Case No. 4195-V-93. He claimed he was not able to donate
document."52 It alleged that no one from its airport staff had encountered a parole visa before. 53 It further
his kidney to Loreto; and that he suffered terrible embarrassment and mental anguish. 23 He prayed that he be
contended that respondent agreed to fly the next day so that it could first verify his travel document, hence,
awarded P3 million as moral damages, P1.5 million as exemplary damages and P500,000.00 as attorney's
there was novation.54 It maintained that it was not guilty of breach of contract of carriage as respondent was
fees.24
not able to travel to the United States due to his own voluntary desistance. 55
Amen | Compiled Notes
We cannot agree. JAL did not allow respondent to fly. It informed respondent that there was a need to first WHEREFORE, Premises Considered, judgment is rendered DISMISSING as against Anamer D. Salazar the
check the authenticity of his travel documents with the U.S. Embassy. 56 As admitted by JAL, "the flight could civil aspect of the above-entitled case.
not wait for Mr. Simangan because it was ready to depart."57 The RTC found that the Prudential Bank check drawn by Timario for the amount of P214,000.00 was payable
Since JAL definitely declared that the flight could not wait for respondent, it gave respondent no choice but to to the order of respondent, and such check was a negotiable order instrument; that petitioner was not the payee
be left behind. The latter was unceremoniously bumped off despite his protestations and valid travel appearing in the check, but respondent who had not endorsed the check, much less delivered it to petitioner. It
documents and notwithstanding his contract of carriage with JAL. Damage had already been done when then found that petitioner’s liability should be limited to the allegation in the amended information that "she
respondent was offered to fly the next day on July 30, 1992. Said offer did not cure JAL's default. endorsed and negotiated said check," and since she had never been the holder of the check, petitioner's signing
Considering that respondent was forced to get out of the plane and left behind against his will, he could not of her name on the face of the dorsal side of the check did not produce the technical effect of an indorsement
have freely consented to be rebooked the next day. In short, he did not agree to the alleged novation. Since arising from negotiation. The RTC ruled that after the Prudential Bank check was dishonored, it was replaced
novation implies a waiver of the right the creditor had before the novation, such waiver must be express.58 It by a Solid Bank check which, however, was also subsequently dishonored; that since the Solid Bank check
cannot be supposed, without clear proof, that respondent had willingly done away with his right to fly on July was a crossed check, which meant that such check was only for deposit in payee’s account, a condition that
29, 1992. rendered such check non-negotiable, the substitution of a non-negotiable Solid Bank check for a negotiable
Moreover, the reason behind the bumping off incident, as found by the RTC and CA, was that JAL personnel Prudential Bank check was an essential change which had the effect of discharging from the obligation
imputed that respondent would only use the trip to the United States as a pretext to stay and work in Japan. 59 whoever may be the endorser of the negotiable check. The RTC concluded that the absence of negotiability
Apart from the fact that respondent's plane ticket, boarding pass, travel authority and personal articles already rendered nugatory the obligation arising from the technical act of indorsing a check and, thus, had the effect of
passed the rigid immigration and security routines,60 JAL, as a common carrier, ought to know the kind of novation; and that the ultimate effect of such substitution was to extinguish the obligation arising from the
valid travel documents respondent carried. As provided in Article 1755 of the New Civil Code: "A common issuance of the Prudential Bank check.
carrier is bound to carry the passengers safely as far as human care and foresight can provide, using the utmost CA found that petitioner indorsed the Prudential Bank check, which was later replaced by a Solid Bank check
diligence of very cautious persons, with a due regard for all the circumstances."61 Thus, We find untenable issued by Timario, also indorsed by petitioner as payment for the 300 cavans of rice bought from respondent.
JAL's defense of "verification of respondent's documents" in its breach of contract of carriage. Petitioner contends that the issuance of the Solid Bank check and the acceptance thereof by the respondent, in
It bears repeating that the power to admit or not an alien into the country is a sovereign act which cannot be replacement of the dishonored Prudential Bank check, amounted to novation that discharged the latter check;
interfered with even by JAL.62 that respondent's acceptance of the Solid Bank check, notwithstanding its eventual dishonor by the drawee
In an action for breach of contract of carriage, all that is required of plaintiff is to prove the existence of such bank, had the effect of erasing whatever criminal responsibility, under Article 315 of the Revised Penal Code,
contract and its non-performance by the carrier through the latter's failure to carry the passenger safely to his the drawer or indorser of the Prudential Bank check would have incurred in the issuance thereof in the amount
destination.63 Respondent has complied with these twin requisites. of P214,000.00; and that a check is a contract which is susceptible to a novation just like any other contract.
WHEREFORE, the petition is DENIED. The appealed Decision of the Court of Appeals is AFFIRMED Respondent filed its Comment, echoing the findings of the CA.
WITH MODIFICATION. As modified, petitioner Japan Airlines is ordered to pay respondent Jesus Issue: Whether or not there is novation in the case at bar.
Simangan the following: (1) P500,000.00 as moral damages; (2) P100,000.00 as exemplary damages; and Held: NO. We find no merit in this petition.
(3) P200,000.00 as attorney's fees. Section 119 of the Negotiable Instrument Law provides, thus:
The total amount adjudged shall earn legal interest at the rate of 6% per annum from the date of judgment of SECTION 119. Instrument; how discharged. – A negotiable instrument is discharged:
the Regional Trial Court on September 21, 2000 until the finality of this Decision. From the time this Decision (a) By payment in due course by or on behalf of the principal debtor;
becomes final and executory, the unpaid amount, if any, shall earn legal interest at the rate of 12% per annum (b) By payment in due course by the party accommodated, where the instrument is made or
until its satisfaction. accepted for his accommodation;
(c) By the intentional cancellation thereof by the holder;
Case: Anamer Salazar vs. J.Y. Brothers Marketing Corp., October 20, 2012, J. Peralta. (d) By any other act which will discharge a simple contract for the payment of money;
Facts: J.Y. Brothers Marketing (J.Y. Bros., for short) is a corporation engaged in the business of selling sugar, (e) When the principal debtor becomes the holder of the instrument at or after maturity in his own
rice and other commodities. On October 15, 1996, Anamer Salazar, a freelance sales agent, was approached by right. (Emphasis ours)
Isagani Calleja and Jess Kallos, if she knew a supplier of rice. Answering in the positive, Salazar accompanied And, under Article 1231 of the Civil Code, obligations are extinguished:
the two to J.Y. Bros. As a consequence, Salazar with Calleja and Kallos procured from J. Y. Bros. 300 cavans xxxx
of rice worthP214,000.00. As payment, Salazar negotiated and indorsed to J.Y. Bros. Prudential Bank Check (6) By novation.
No. 067481 dated October 15, 1996 issued by Nena Jaucian Timario in the amount of P214,000.00 with the Petitioner's claim that respondent's acceptance of the Solid Bank check which replaced the dishonored
assurance that the check is good as cash. On that assurance, J.Y. Bros. parted with 300 cavans of rice to Prudential bank check resulted to novation which discharged the latter check is unmeritorious.
Salazar. However, upon presentment, the check was dishonored due to "closed account." In Foundation Specialists, Inc. v. Betonval Ready Concrete, Inc. and Stronghold Insurance Co., Inc.,12 we
Informed of the dishonor of the check, Calleja, Kallos and Salazar delivered to J.Y. Bros. a replacement cross stated the concept of novation, thus:
Solid Bank Check No. PA365704 dated October 29, 1996 again issued by Nena Jaucian Timario in the amount x x x Novation is done by the substitution or change of the obligation by a subsequent one which extinguishes
ofP214,000.00 but which, just the same, bounced due to insufficient funds. When despite the demand letter the first, either by changing the object or principal conditions, or by substituting the person of the debtor, or by
dated February 27, 1997, Salazar failed to settle the amount due J.Y. Bros., the latter charged Salazar and subrogating a third person in the rights of the creditor. Novation may:
Timario with the crime of estafa before the Regional Trial Court of Legaspi City, docketed as Criminal Case [E]ither be extinctive or modificatory, much being dependent on the nature of the change and the intention of
No. 7474. the parties. Extinctive novation is never presumed; there must be an express intention to novate; in cases where
After the prosecution rested its case and with prior leave of court, Salazar submitted a demurrer to evidence. it is implied, the acts of the parties must clearly demonstrate their intent to dissolve the old obligation as the
On November 19, 2001, the court a quo rendered an Order, the dispositive portion of which reads: moving consideration for the emergence of the new one. Implied novation necessitates that the incompatibility
WHEREFORE, premises considered, the accused Anamer D. Salazar is hereby ACQUITTED of the crime between the old and new obligation be total on every point such that the old obligation is completely
charged but is hereby held liable for the value of the 300 bags of rice. Accused Anamer D. Salazar is therefore superceded by the new one. The test of incompatibility is whether they can stand together, each one having an
ordered to pay J.Y. Brothers Marketing Corporation the sum of P214,000.00. The Regional Trial Court (RTC) independent existence; if they cannot and are irreconcilable, the subsequent obligation would also extinguish
of Legaspi City, Branch 5, then proceeded with the trial on the civil aspect of the criminal case. the first.
On April 1, 2004, the RTC rendered its Decision,4 the dispositive portion of which reads:
Amen | Compiled Notes
An extinctive novation would thus have the twin effects of, first, extinguishing an existing obligation On October 3, 1978, the Central Bank approved Ponciano Lagman’s loan application for P220,000.00. As with
and, second, creating a new one in its stead. This kind of novation presupposes a confluence of four essential the two other IBRD loans, the amount was credited to Metrobank’s demand deposit account, which amount
requisites: (1) a previous valid obligation, (2) an agreement of all parties concerned to a new contract, (3) the Metrobank later credited in favor of RBG’s special savings account. Of the P220,000.00, RBG only
extinguishment of the old obligation, and (4) the birth of a valid new obligation. Novation is merely withdrew P75,375.00.
modificatory where the change brought about by any subsequent agreement is merely incidental to the main On November 3, 1978, more than a month after RBG had made the above withdrawals from its account with
obligation (e.g., a change in interest rates or an extension of time to pay; in this instance, the new agreement Metrobank, the Central Bank issued debit advices, reversing all the approved IBRD loans. 6 The Central Bank
will not have the effect of extinguishing the first but would merely supplement it or supplant some but not all implemented the reversal by debiting from Metrobank’s demand deposit account the amount corresponding to
of its provisions.) all three IBRD loans.
The obligation to pay a sum of money is not novated by an instrument that expressly recognizes the old, Upon receipt of the November 3, 1978 debit advices, Metrobank, in turn, debited the following amounts from
changes only the terms of payment, adds other obligations not incompatible with the old ones or the new RBG’s special savings account: P189,052.00, P115,000.00, and P8,000.41. Metrobank, however, claimed that
contract merely supplements the old one.13 these amounts were insufficient to cover all the credit advices that were reversed by the Central Bank. It
In Nyco Sales Corporation v. BA Finance Corporation,14 we found untenable petitioner Nyco's claim that demanded payment from RBG which could make partial payments. As of October 17, 1979, Metrobank
novation took place when the dishonored BPI check it endorsed to BA Finance Corporation was subsequently claimed that RBG had an outstanding balance of P334,220.00. To collect this amount, it filed a complaint for
replaced by a Security Bank check,15 and said: collection of sum of money against RBG before the RTC, docketed as Civil Case No. 6028. 7
There are only two ways which indicate the presence of novation and thereby produce the effect of In its July 7, 1994 decision,8 the RTC ruled for Metrobank, finding that legal subrogation had ensued:
extinguishing an obligation by another which substitutes the same. First, novation must be explicitly stated and [Metrobank] had allowed releases of the amounts in the credit advices it credited in favor of [RBG’s special
declared in unequivocal terms as novation is never presumed. Secondly, the old and the new obligations must savings account] which credit advices and deposits were under its supervision. Being faulted in these acts or
be incompatible on every point.1avvphi1 The test of incompatibility is whether or not the two obligations can omissions, the Central Bank [sic] debited these amounts against [Metrobank’s] demand [deposit] reserve;
stand together, each one having its independent existence. If they cannot, they are incompatible and the latter thus[, Metrobank’s] demand deposit reserves diminished correspondingly, [Metrobank as of this time,] suffers
obligation novates the first. In the instant case, there was no express agreement that BA Finance's acceptance prejudice in which case legal subrogation has ensued.9
of the SBTC check will discharge Nyco from liability. Neither is there incompatibility because both checks It thus ordered RBG to pay Metrobank the sum of P334,200.00, plus interest at 14% per annum until the
were given precisely to terminate a single obligation arising from Nyco's sale of credit to BA Finance. As amount is fully paid.
novation speaks of two distinct obligations, such is inapplicable to this case.16 On appeal, the CA noted that this was not a case of legal subrogation under Article 1302 of the Civil Code.
In this case, respondent’s acceptance of the Solid Bank check, which replaced the dishonored Prudential Bank Issue: Whether or not legal subrogation under Article 1302 applies.
check, did not result to novation as there was no express agreement to establish that petitioner was already Held: YES. Our disagreement with the appellate court is in its conclusion that no legal subrogation took place;
discharged from his liability to pay respondent the amount of P214,000.00 as payment for the 300 bags of rice. the present case, in fact, exemplifies the circumstance contemplated under paragraph 2, of Article 1302 of the
As we said, novation is never presumed, there must be an express intention to novate. In fact, when the Solid Civil Code which provides:
Bank check was delivered to respondent, the same was also indorsed by petitioner which shows petitioner’s Art. 1302. It is presumed that there is legal subrogation:
recognition of the existing obligation to respondent to pay P214,000.00 subject of the replaced Prudential Bank (1) When a creditor pays another creditor who is preferred, even without the debtor’s knowledge;
check. (2) When a third person, not interested in the obligation, pays with the express or tacit approval of
Moreover, respondent’s acceptance of the Solid Bank check did not result to any incompatibility, since the two the debtor;
checks − Prudential and Solid Bank checks − were precisely for the purpose of paying the amount (3) When, even without the knowledge of the debtor, a person interested in the fulfillment of the
of P214,000.00,i.e., the credit obtained from the purchase of the 300 bags of rice from respondent. Indeed, obligation pays, without prejudice to the effects of confusion as to the latter’s share. [Emphasis
there was no substantial change in the object or principal condition of the obligation of petitioner as the supplied.]
indorser of the check to pay the amount of P214,000.00. It would appear that respondent accepted the Solid As discussed, Metrobank was a third party to the Central Bank-RBG agreement, had no interest except as a
Bank check to give petitioner the chance to pay her obligation. conduit, and was not legally answerable for the IBRD loans. Despite this, it was Metrobank’s demand deposit
account, instead of RBG’s, which the Central Bank proceeded against, on the assumption perhaps that this was
Case: Metropolitan Bank and Trust Company vs. Rural bank of Gerona, Inc. (RBG), July 5, 2012, J. Brion. the most convenient means of recovering the cancelled loans. That Metrobank’s payment was involuntarily
Facts: RBG is a rural banking corporation organized under Philippine laws and located in Gerona, Tarlac. In made does not change the reality that it was Metrobank which effectively answered for RBG’s obligations.
the 1970s, the Central Bank and the RBG entered into an agreement providing that RBG shall facilitate the Was there express or tacit approval by RBG of the payment enforced against Metrobank? After Metrobank
loan applications of farmers-borrowers under the Central Bank-International Bank for Reconstruction and received the Central Bank’s debit advices in November 1978, it (Metrobank) accordingly debited the amounts
Development’s (IBRD’s) 4th Rural Credit Project. The agreement required RBG to open a separate bank it could from RBG’s special savings account without any objection from RBG.14 RBG’s President and
account where the IBRD loan proceeds shall be deposited. The RBG accordingly opened a special savings Manager, Dr. Aquiles Abellar, even wrote Metrobank, on August 14, 1979, with proposals regarding possible
account with Metrobank’s Tarlac Branch. As the depository bank of RBG, Metrobank was designated to means of settling the amounts debited by Central Bank from Metrobank’s demand deposit account.15 These
receive the credit advice released by the Central Bank representing the proceeds of the IBRD loan of the instances are all indicative of RBG’s approval of Metrobank’s payment of the IBRD loans. That RBG’s tacit
farmers-borrowers; Metrobank, in turn, credited the proceeds to RBG’s special savings account for the latter’s approval came after payment had been made does not completely negate the legal subrogation that had taken
release to the farmers-borrowers. place.
On September 27, 1978, the Central Bank released a credit advice in Metrobank’s favor and accordingly Article 1303 of the Civil Code states that subrogation transfers to the person subrogated the credit with all the
credited Metrobank’s demand deposit account in the amount of P178,652.00, for the account of RBG. The rights thereto appertaining, either against the debtor or against third persons. As the entity against which the
amount, which was credited to RBG’s special savings account represented the approved loan application of collection was enforced, Metrobank was subrogated to the rights of Central Bank and has a cause of action to
farmer-borrower Dominador de Jesus. RBG withdrew the P178,652.00 from its account. recover from RBG the amounts it paid to the Central Bank, plus 14% per annum interest.
On the same date, the Central Bank approved the loan application of another farmer-borrower, Basilio Under this situation, impleading the Central Bank as a party is completely unnecessary. We note that the CA
Panopio, for P189,052.00, and credited the amount to Metrobank’s demand deposit account. Metrobank, in erroneously believed that the Central Bank’s presence is necessary "in order x x x to shed light on the matter of
turn, credited RBG’s special savings account. Metrobank claims that the RBG also withdrew the entire reversals made by it concerning the loan applications of the end users and to have a complete determination or
credited amount from its account. settlement of the claim."16 In so far as Metrobank is concerned, however, the Central Bank’s presence and the
reasons for its reversals of the IBRD loans are immaterial after subrogation has taken place; Metrobank’s
Amen | Compiled Notes
interest is simply to collect the amounts it paid the Central Bank. Whatever cause of action RBG may have On November 26, 1968, the petitioner moved for reconsideration of the appellate court's decision, which
against the Central Bank for the unexplained reversals and any undue deductions is for RBG to ventilate as a motion the Court of Appeals denied in its resolution of December 7, 1968. Hence, the present petition
third-party claim; if it has not done so at this point, then the matter should be dealt with in a separate case that for certiorari to review the decision of the Court of Appeals, seeking reversal of the appellate court's decision
should not in any way further delay the disposition of the present case that had been pending before the courts and affirmance of the order of the lower court.
since 1980. ISSUE: WON the mortgage debt novated the judgment debt.
While we would like to fully and finally resolve this case, certain factual matters prevent us from doing so. HELD: Where the new obligation merely reiterates or ratifies the old OBLIGATION, although the former
Metrobank contends in its petition that it credited RBG’s special savings account with three amounts effects but minor alterations or slight modifications with respect to the cause or object or conditions of the
corresponding to the three credit advices issued by the Central Bank: the P178,652.00 for Dominador de Jesus; latter, such changes do not effectuate any substantial incompatibility between the 2 OBLIGATIONS. Only
the P189,052.00 for Basilio Panopio; and the P220,000.00 for Ponciano Lagman. Metrobank claims that all of those essential and principal changes introduced by the new OBLIGATION producing an alteration or
the three credit advices were subsequently reversed by the Central Bank, evidenced by three debit advices. The modification of the essence of the old OBLIGATION result in implied novation. In the case at bar, the mere
records, however, contained only the credit and debit advices for the amounts set aside for de Jesus and reduction of the amount due in no sense constitutes a sufficient indicium of incompatibility, especially in the
Lagman;17 nothing in the findings of fact by the RTC and the CA referred to the amount set aside for Panopio. light of (a) the explanation by the petitioner that the reduced indebtedness was the result of the partial
Thus, what were sufficiently proven as credited and later on debited from Metrobank’s demand deposit payments made by the respondent before the execution of the chattel mortgage agreement, and (b) the latter's
account were only the amounts of P178,652.00 and P189,052.00. With these amounts combined, RBG’s admissions bearing thereon. Hence, the SC held that there is NO incompatibility between the mortgage
liability would amount to P398,652.00 – the same amount RBG acknowledged as due to Metrobank in its obligation and the judgment liability of Gabriel sufficient to justify a conclusion of implied novation.
August 14, 1979 letter.18 Significantly, Metrobank likewise quoted this amount in its July 11, 1979 19 and July
26, 197920 demand letters to RBG and its Statement of Account dated December 23, 1982. 21 Resolution of the controversy posed by the petition at bar hinges entirely on a determination of whether or not
RBG asserts that it made partial payments amounting to P145,197.40,22 but neither the RTC nor the CA made the subsequent agreement of the parties as embodied in the deed of chattel mortgage impliedly novated the
a conclusive finding as to the accuracy of this claim. Although Metrobank admitted that RBG indeed made judgment obligation in civil case 27116. The Court of Appeals, in arriving at the conclusion that implied
partial payments, it never mentioned the actual amount paid; neither did it state that the P145,197.40 was part novation has taken place, took into account the four circumstances heretofore already adverted to as indicative
of theP312,052.41 that, it admitted, it debited from RBG’s special savings account. of the incompatibility between the judgment debt and the principal obligation under the deed of chattel
Deducting P312,052.41 (representing the amounts debited from RBG’s special savings account, as admitted by mortgage.
Metrobank) from P398,652.00 amount due to Metrobank from RBG, the difference would only be P86,599.59. 1. Anent the first circumstance, the petitioner argues that this does not constitute a circumstance in implying
We are, therefore, at a loss on how Metrobank computed the amount of P334,220.00 it claims as the balance of novation of the judgment debt, stating that in the interim — from the time of the rendition of the judgment in
RBG’s loan. As this Court is not a trier of facts, we deem it proper to remand this factual issue to the RTC for civil case 27116 to the time of the execution of the deed of chattel mortgage — the respondent made partial
determination and computation of the actual amount RBG owes to Metrobank, plus the corresponding interest payments, necessarily resulting in the lesser sum stated in the deed of chattel mortgage. He adds that on record
and penalties. appears the admission by both parties of the partial payments made before the execution of the deed of chattel
mortgage. The erroneous conclusion arrived at by the Court of Appeals, the petitioner argues, creates the
EUSEBIO MILLAR VS. COURT OF APPEALS, ANTONIO GABRIEL- The law requires no specific form wrong impression that the execution of the deed of chattel mortgage provided the consideration or the reason
for an effective novation by implication. The test is whether the two obligations can stand together. If they for the reduced judgment indebtedness.
cannot, incompatibility arises, and the second obligation novates the first. Slight modifications on cause, object Where the new obligation merely reiterates or ratifies the old obligation, although the former effects but minor
or condition of the old obligation do not affect substantial incompatibility. alterations or slight modifications with respect to the cause or object or conditions of he latter, such changes do
FACTS: Millar obtained a favorable judgment against Gabriel. A writ of execution was issued, on the basis of not effectuate any substantial incompatibility between the two obligations Only those essential and principal
which Gabriel’s Willy’s Ford Jeep was seized. Subsequently, Gabriel pleaded with Millar to release the jeep changes introduced by the new obligation producing an alteration or modification of the essence of the old
under an agreement whereby Ganriel would mortgage the jeep in favor of Millar to secure the payment of the obligation result in implied novation. In the case at bar, the mere reduction of the amount due in no sense
judgment debt. The chattel mortgage reduced the amount to be paid by Gabriel. However, Gabriel failed to constitutes a sufficient indictum of incompatibility, especially in the light of (a) the explanation by the
comply with the said agreement. Millar obtained another writ of execution but was opposed by Gabriel arguing petitioner that the reduced indebtedness was the result of the partial payments made by the respondent before
that the judgment debt has already been extinguished by NOVATION. The lower court ruled that novation had the execution of the chattel mortgage agreement and (b) the latter's admissions bearing thereon.
taken place, and that the parties had executed the chattel mortgage only "to secure or get better security for the At best, the deed of chattel mortgage simply specified exactly how much the respondent still owed the
judgment. petitioner by virtue of the judgment in civil case 27116. The parties apparently in their desire to avoid any
The respondent duly appealed the aforesaid order to the Court of Appeals, which set aside the order of future confusion as to the amounts already paid and as to the sum still due, decoded to state with specificity in
execution in a decision rendered on October 17, 1968, holding that the subsequent agreement of the parties the deed of chattel mortgage only the balance of the judgment debt properly collectible from the respondent.
impliedly novated the judgment obligation in civil case 27116. All told, therefore, the first circumstance fails to satisfy the test of substantial and complete incompatibility
The appellate court stated that the following circumstances sufficiently demonstrate the incompatibility between the judgment debt an the pecuniary liability of the respondent under the chattel mortgage agreement.
between the judgment debt and the obligation embodied in the deed of chattel mortgage, warranting a 2. The petitioner also alleges that the third circumstance, considered by the Court of Appeals as indicative of
conclusion of implied novation: incompatibility, is directly contrary to the admissions of the respondent and is without any factual basis. The
1. Whereas the judgment orders the respondent to pay the petitioner the sum of P1,746.98 with interest at 12% appellate court pointed out that while the judgment made no mention of payment of damages, the deed of
per annum from the filing of the complaint, plus the amount of P400 and the costs of suit, the deed of chattel chattel mortgage stipulated the payment of liquidated damages in the amount of P300 in case of default on the
mortgage limits the principal obligation of the respondent to P1,700; part of the respondent.
2. Whereas the judgment mentions no specific mode of payment of the amount due to the petitioner, the deed However, the petitioner contends that the respondent himself in his brief filed with the Court of Appeals
of chattel mortgage stipulates payment of the sum of P1,700 in two equal installments; admitted his obligation, under the deed of chattel mortgage, to pay the amount of P300 by way of attorney's
3. Whereas the judgment makes no mention of damages, the deed of chattel mortgage obligates the respondent fees and not as liquidated damages. Similarly, the judgment makes mention of the payment of the sum of P400
to pay liquidated damages in the amount of P300 in case of default on his part; and as attorney's fees and omits any reference to liquidated damages.
4. Whereas the judgment debt was unsecured, the chattel mortgage, which may be foreclosed extrajudicially in The discrepancy between the amount of P400 and tile sum of P300 fixed as attorney's fees in the judgment and
case of default, secured the obligation. the deed of chattel mortgage, respectively, is explained by the petitioner, thus: the partial payments made by

Amen | Compiled Notes

the respondent before the execution of the chattel mortgage agreement were applied in satisfaction of part of acknowledged and stipulated in the 14th whereas clause of MWSS' Resolution. However, MWSS' failure to
the judgment debt and of part of the attorney's fee fixed in the judgment, thereby reducing both amounts. pay within the stipulated period removed the very cause and reason for the agreement, rendering some
At all events, in the absence of clear and convincing proof showing that the parties, in stipulating the payment ineffective. Petitioners, therefore, were remitted to their original rights under the judgment award.
of P300 as attorney's fees in the deed of chattel mortgage, intended the same as an obligation for the payment As to whether or not petitioners are now in estoppel to question the subsequent agreement, suffice it to state
of liquidated damages in case of default on the part of the respondent, we find it difficult to agree with the that petitioners never acknowledged full payment; on the contrary, petitioners refused MWSS' request for a
conclusion reached by the Court of Appeals. conforme or quitclaim. (p. 125, Rollo)
3. As to the second and fourth circumstances relied upon by the Court of Appeals in holding that the montage Accordingly, the award is still subject to execution by mere motion, which may be availed of as a matter
obligation superseded, through implied novation, the judgment debt, the petitioner points out that the appellate of right any time within (5) years from entry of final judgment in accordance with Section 5, Rule 39 of
court considered said circumstances in a way not in accordance with law or accepted jurisprudence. The the Rules of Court.
appellate court stated that while the judgment specified no mode for the payment of the judgment debt, the
deed of chattel mortgage provided for the payment of the amount fixed therein in two equal installments. JOSEPH COCHINGYAN JR. AND JOSE VILLANUEVA VS. R AND B SURETY AND INSURANCE
On this point, we see no substantial incompatibility between the mortgage obligation and the judgment liability COMPANY [151 SCRA 339]
of the respondent sufficient to justify a conclusion of implied novation. The stipulation for the payment of the Novation defined. There can be no implied novation because the parties to the new obligation expressly
obligation under the terms of the deed of chattel mortgage serves only to provide an express and specific recognized the continuous existence and validity of the old one.
method for its extinguishment — payment in two equal installments. The chattel mortgage simply gave the FACTS: Pacific Agricultural Suppliers, Inc. PAGRICO (P) submitted a surety bond issued by R and B surety in
respondent a method and more time to enable him to fully satisfy the judgment indebtedness. 1 The chattel favor of PNB. Under the bond, PNB had the right to proceed directly against R and B without going after P. In
mortgage agreement in no manner introduced any substantial modification or alteration of the judgment. turn, 2 indemnity agreements were entered into with R and B by CCM (Catholic Church Mart) and Joseph
Instead of extinguishing the obligation of the respondent arising from the judgment, the deed of chattel Cochingyan in his capacity as CCM President and in his personal capacity; and by P, Jose Villanueva as P’s
mortgage expressly ratified and confirmed the existence of the same, amplifying only the mode and period for manager and in his personal capacity, Liu Tua Beth, as PACOCO President, and in his personal capacity. 2 years
compliance by the respondent. after the execution of these documents, a TRUST AGREEMENT was entered into between Jose and Susana
The Court of Appeals also considered the terms of the deed of chattel mortgage incompatible with the Cochingyan, Tomas Besa, a PNB officer, as trustee; and PNB was the beneficiary. The trust agreement expressly
judgment because the chattel mortgage secured the obligation under the deed, whereas the obligation under the provides that it shall not, in any manner release R and B from their respective liabilities under the bond. When P
judgment was unsecured. The petitioner argues that the deed of chattel agreement clearly shows that the parties failed to pay, PNB demanded payment from R and B. R and B in turn demanded reimbursement from Joseph
agreed upon the chattel mortgage solely to secure, not the payment of the reduced amount as fixed in the Cochingyan and Jose V. who refused to pay on the ground that the trust agreement had extinguished their
aforesaid deed, but the payment of the judgment obligation and other incidental expenses in civil case 27116. obligation under the Indemnity Agreements.
The unmistakable terms of the deed of chattel mortgage reveal that the parties constituted the chattel mortgage ISSUE: Whether there is NOVATION.
purposely to secure the satisfaction of the then existing liability of the respondent arising from the judgment HELD: Novation is the extinguishment of an obligation by the substitution or change of the obligation by a
against him in civil case 27116. As a security for the payment of the judgment obligation, the chattel mortgage subsequent one which terminates it, either by changing its object or principal conditions, or by substituting
agreement effectuated no substantial alteration in the liability of the respondent. a new debtor in place of the old one, or by subrogating a third person to the rights of the creditor.
The defense of implied novation requires clear and convincing proof of complete incompatibility between the Novation through a change of the object or principal conditions of an existing obligation is referred to as objective
two obligations. 2 The law requires no specific form for an effective novation by implication. The test is (or real) novation.
whether the two obligations can stand together. If they cannot, incompatibility arises, and the second Novation by the change of either the person of the debtor or of the creditor is described as subjective (or personal)
obligation novates the first. If they can stand together, no incompatibility results and novation does not take novation.
place. Novation may also be both objective and subjective (mixed) at the same time. In both objective and subjective
We do not see any substantial incompatibility between the two obligations as to warrant a finding of an novation, a dual purpose is achieved  an obligation is extinguished and a new one is created in lieu thereof.
implied novation. Nor do we find satisfactory proof showing that the parties, by explicit terms, intended the Novation is never presumed. If objective novation is to take place, it is imperative that the new obligation
full discharge of the respondent's liability under the judgment by the obligation assumed under the terms of the expressly declare that the old obligation is thereby extinguished, or that the new obligation be on every point
deed of chattel mortgage so as to justify a finding of express novation. incompatible with the old one. Novation is never presumed; it must be established either by the discharge of the
old debt by the express terms of the new agreement, or by the acts of the parties whose intention to dissolve the
old obligation as a consideration of the emergence of the new one must be clearly discernible.
INTEGRATED CONSTRUCTION SERVICES, INC. AND ENGINEERING CONSTRUCTION INC. VS. If old debtor is not released, no novation occurs and the third person who assumed the obligation becomes a
RELOVA AND METROPOLITAN WATERWORKS AND SEWERAGE SYSTEM, [146 SCRA 360] co-debtor or surety or a co-surety.  Again, if subjective novation by a change in the person of the debtor is to
Novation; While the tenor of the subsequent letter-agreement in a sense novates the judgment award there occur, it is not enough that the juridical relation between the parties to the original contract is extended to a third
being a shortening of the period within which to pay, the failure of the party to comply with the suspensive person. It is essential that the old debtor be released from the obligation, and the third person or new debtor take
and conditional nature of d agreement, remitted the parties to their original rights under the judgment the place in the new relation. If the old debtor is not released, no novation occurs and the third person who has
award. assumed the obligation of the debtor becomes merely a co-debtor or surety or a co-surety.
FACTS: Petitioners sued the MWSS, formerly NAWASA, at CFI-Manila for breach of contract. The Arbitration Novation is not implied when the parties to the new obligation expressly negated the lapsing of the old
Board rendered decision-award which became final and executory, and ordered MWSS to pay petitioners. obligation.  Neither can the petitioners anchor their defense on implied novation. Absent an unequivocal
Petitioners subsequently agreed to give MWSS some discounts due to early payment of the award provided that declaration of extinguishment of a pre-existing obligation, a showing of complete incompatibility between the old
MWSS would pay the judgment. However, MWSS only paid on December of 1972 instead of the agreed October and the new obligation (and nothing else) would sustain a finding of novation by implication. But where, as in
1972 payment. Hence, petitioners moved for Execution of judgment against MWSS. The trial court however this case, the parties to the new obligation expressly recognize the continuing existence and validity of the old one,
denied the motion averring that the letter-agreement (Re: discounts) NOVATED the award. where, in other words, the parties expressly negated the lapsing of the old obligation, there can be no novation.
ISSUE: Whether novation applies. The issue of implied n ovation is not reached at all.
HELD: While the tenor of the subsequent letter-agreement in a sense novates the judgment award there being In the case at bar, the Trust Agreement does not expressly terminate the obligation of R and B Surety
a shortening of the period within which to pay (Kabangkalan Sugar Co. vs. Pacheco, 55 Phil. 555), the under the Surety Bond. On the contrary, the Trust Agreement expressly provides for the continuing
suspensive and conditional nature of the said agreement (making the novation conditional) is expressly
Amen | Compiled Notes
subsistence of that obligation by stipulating that it “shall not in any manner release” R and B Surety from BUSINESS AS UNITED VETERANS SECURITY AGENCY AND FOREIGN BOATS WATCHMENT
its obligation under the Surety Bond. What the Trust did was merely to bring in another person to assume [125 SCRA 849]
the same obligation. The precise legal effect is the increase of the number of persons liable to the obligee Novation is never presumed but must be explicitly stated; No novation in the absence of explicit novation or
and NOT the extinguishment of the liability of the first debtor. PNB never intended to release and never incompatibility on every point between the old and the new agreements of the parties.
did release R and B. Thus, R and B, which was NOT a party to the Trust Agreement could not have been FACTS: DANIEL E. ROXAS, doing business under the name and style of United Veterans Security Agency
intended to release any of its own indemnitors simply because one of those indemnitors, the Trustor under and Foreign Boats Watchmen, sued the NATIONAL POWER CORPORATION (NPC) and two of its officers
the Trust Agreement became also directly liable to PNB. in Iligan City. The purpose of the suit was to compel the NPC to restore the contract of Roxas for security
services which the former had terminated. The parties drafted a Compromise Agreement which the Trial Court
FUA CAM LU VS. YAP FAUCO AND YAP SINGCO [74 PHIL. 287] approved. The agreement consisted of NPC paying plaintiff sum of money, plaintiff will pay or return
NOVATION BY SUBSEQUENT AGREEMENT materials lost and found by his agency, the contract for security services with NPC will remain, and they both
FACTS: Fua Cam Lu, judgment-Creditor of Yap Fauco and Yap Singco, agreed subsequently to the execution of waive other claims and counter-claims with each other.
a mortgage in his favor by the Yaps of a camarin being built on the same lot plus reduction of debt to 1,200 NPC subsequently contracted another security agency. Thus, plaintiff asked court a quo for writ of execution
payable in 4 installments; that in case of default they would pay balance plus the discounted amount and 10% which was granted. NPC appealed claiming that the judgment was novated thus extinguished, and nothing
attorney’s fees. Consequently, no public auction was held. However, on March 31, 1934, the provincial sheriff, more to execute.
without publication sold land at public auction. Fauco and Singco refused to recognize Fua’s title arguing that the ISSUE: WON novation of judgment by subsequent agreement of parties extinguished the OBLIGATION of NPC
judgment in Civil Case no. 42125 was NOVATED. to sustain the security contract with plaintiff.
ISSUE: Whether Fauco and Singco’s liabiliy the Civil Case No. 42125 has been extinguished. HELD: NO. It is elementary that novation is never presumed; it must be explicitly stated or there must be
HELD: YES. The Yaps’ liability under the judgment has been extinguished by the new agreement. Although the manifest incompatibility between the old and the new obligations in every aspect. Thus the Civil Code
mortgage did not expressly cancel the old obligation, this was impliedly novated by reason of incompatibility provides: Article 1292. In order that an obligation may be extinguished by another which substitutes the same,
resulting from the fact that, whereas the judgment was for P1,538.04 payable at one time, did not provide for it is imperative that it be so declared in unequivocal terms, or that the old and the new obligations be on every
attorney's fees, and was not secured, the new obligation is for P1200 payable in installments, stipulates for point incompatible with each other. In the case at bar, there is nothing in the May 14, 1982 agreement which
attorney's fees and is secured by a mortgage. The later agreement did not merely extend the time to pay the supports the petitioner's contention. There is neither explicit novation nor incompatibility on every point
judgment, because it was therein recited that appellants promised to pay P1,200 to appellee as a settlement of the between the "old" and the "new" agreements…said contract was executed precisely to implement the
said judgment. Said judgment cannot be said to have been settled, unless it was extinguished. compromise agreement for which reason there was no novation.
** Foreclosure of such new mortgage under the judgment in the old OBLIGATION was VOID.
SPOUSES BALILA VS. IAC, DEL CASTILLO [155 SCRA 262]
CARLOS SANDICO, SR. AND TEOPISTO TIMBOL VS. HON. PIGUING AND DESIDERIO PARAS Subsequent mutual agreements and actions of petitioners and private respondents allowing the former
[42 SCRA 322] extension of time to pay their obligations and in installments novated and amended the period of payment
FACTS: Spouses Sandico and Timbol as administrator of the Estate of late Sixta Paras obtained judgment in their decreed by the trial court in its judgment by compromise.
favor against Desiderio Paras for the recognition of easement rights of the former and payment of damages; the FACTS: Amicable settlement of this dispute was arrived at and made basis of decision of Trial Court.
judgment debt was later on agreed by them to be reduced from P6,000 to P4,000 and was subsequently paid by Defendants admitted "having sold under a pacto de retro sale the parcels of land described in the complaint in
Paras. the amount of P84,000.00" and that they "hereby promise to pay the said amount within the period of four (4)
When the spouses demanded for performance of the part of the judgment about the recognition of the easement months but not later than May 15,1981. Subsequently, private respondent Guadalupe Vda. de del Castillo,
rights of the petitioner, they demanded that defendant rebuild and reconstruct the irrigation canal in its original represented by her son Waldo del Castillo as for attorney-in-fact, accepted payments from petitioners and
dimensions. When defendant refused, the spouses asked the court a quo in a motion for execution to compel them gave petitioners several extensions of time to pay their remaining OBLIGATIONS. Plaintiffs filed for the
or hold them in contempt. An alias writ of execution was issued which was later, on appeal was ordered quashed consolidation of titles which the defendants opposed because they already made payments.
by the CA because the parties ―novated by subsequent agreement‖ the judgment in question, thus there is nothing ISSUE: WON decision of trial court in its judgment by compromise was novated and amended by the
more to be executed. subsequent mutual agreements and actions of petitioners and private respondents
ISSUE: WON CA erred in quashing the alias writ of execution due to its interpretation hat the subsequent HELD: YES. The fact therefore remains that the amount of P84,000 payable on or before May 15, 1981 decreed
agreement extinguished the defendant’s OBLIGATION on the judgment of court a quo. by the trial court in its judgment by compromise was novated and amended by the subsequent mutual
HELD: NO. CA was not in grave abuse of discretion. agreements and actions of petitioners and private respondent Spouses. Petitioners paid the afore-stated
Novation results in 2 stipulations  (1) to extinguish an existing obligation, and (2) to substitute a new one in its amount on an installment basis and they were given by private respondents no less than 8 extensions of time to
place. Fundamental it is that novation effects a substitution or modification of an obligation by another or an pay their obligation. These transactions took place during the pendency of the motion for reconsideration of the
extinguishment of one obligation by the creation of another. In the case at hand, we fail to see what new or order of the trial court dated 4/26/83, during the pendency of the petition for certiorari before the IAC and after the
modified obligation arose out of the payment by the respondent of the reduced amount of P4,000 and substituted filing of the petition before Us. This answers the claim of the respondent Spouses on the failure of the petitioners
the monetary liability for P6,000 of the said respondent under the appellate court's judgment. to present evidences or proofs of payment in the lower court and the appellate court.
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 2 obligations. PEOPLE'S BANK AND TRUST COMPANY VS. SYVEL'S INCORPORATED, ANTONIO SYYAP AND
Record showed that defendant attempted to rebuild the irrigation canal but not in the original dimensions, which ANGEL SYYAP [164 SCRA 247]
was not disputed by both parties. Such partial reconsideration does not constitute substantial compliance. Thus SC When does novation take place; Novation is never presumed. Absence of existence of explicit novation nor
remanded the case to Trial Court for ocular on the job done and if defendant refuses to complete to ask another to incompatibility between the old and the new agreements. Novation was not intended in the case at bar as the
do the work at the expense of defendant. Real estate mortgage was taken as additional security for the performance of the contract. If objective novation
is to take place, it is essential that the new obligation expressly declare that the old obligation is to be
NATIONAL POWER CORPORATION VS. JUDGE DAYRIT AND DANIEL ROXAS, DOING extinguished or that the new obligation be on every point incompatible with the old one. xxx
Amen | Compiled Notes
FACTS: Action for foreclosure of chattel mortgage executed in favor of the plaintiff by the defendant Syvel's PNB VS. MALLARI
Inc. on its stocks of goods, personal properties and other materials owned by it and located at its stores or
warehouses. This chattel mortgage was duly registered in Register of Deed of Manila and Pasay City, in FACTS: Def borrowed from PNB and this loan was secured by a chattel mortgage on his standing crop. Mallari
connection with a credit commercial line in the amount of P900K granted to Syvel’s; defendants Antonio and defaulted so the sacks of rice deposited in a warehouse were attached. Guanzon, defendant’s Er, offered to pay the
Angel V. Syyap guaranteed absolutely and unconditionally and without the benefit of excussion the full and obli of the latter. This was accepted by PNB so the attachment was later lifted. Guanzon defaulted in his payment
prompt payment of any indebtedness to be incurred on account of the said credit line. so PNB sued the def on the same obligation. The LC dismissed the comp on the ground that there was novation
The failure of Syvels’ to pay in accord with terms and conditions of the Commercial Credit Agreement, bank brought about by the alteration of the principal conditions of the original obli and the substitution of a news
started to foreclose extrajudicially the chattel mortgage but was not pushed through after Syvel’s attempted to debtor.
settle. As no payment was made, this case was filed in Court. During its pendency, Syyap proposed to have the
case settled amicably and to that end a conference was held in which Mr. Antonio de las Alas, Jr., VP of the HELD: The acceptance of PNB of the offer of G to pay under the terms specified by him constituted not only a
Bank, plaintiff, defendant Antonio V. Syyap and Atty. Mendoza were present. Mr. Syyap requested that the substitution of the debtor but an alteration or modification of the terms and conditions of the original K.
plaintiff dismiss this case because he did not want to have the goodwill of Syvel's Incorporated impaired, and
offered to execute a Real Estate Mortgage on his property in Bacoor. Mr. De las Alas consented, and so the
Real Estate Mortgage. Syvel’s did not agree to People’s motion to dismiss which included the dismissal of
their counterclaim and filed instead their own motion to dismiss on the ground that by the execution of said
Effect of insolvency of new debtor--
real estate mortgage, the obligation secured by the chattel mortgage was NOVATED and therefore, appellee’s
cause of action thereon was extinguished. Article 1294. If the substitution is without the knowledge or against the will of the debtor, the debtor’s insolvency
ISSUE: WON on the ground that by the execution of said real estate mortgage, the obligation secured by the or non-fulfillment of the obligation shall not give rise to any liability on the part of the original debtor.
chattel mortgage subject of this case was novated, and therefore, appellee's cause of action thereon was Article 1295. The insolvency of the new debtor, who has been proposed by the original debtor and accepted by
extinguished. the creditor, shall not revive the action of the latter against the original obligor, except when said insolvency was
HELD: NO. Novation takes place when the object or principal condition of an obligation is changed or already existing and of public knowledge, or known to the debtor, when he delegated his debt.
altered. It is elementary that novation is never presumed; it must be explicitly stated or there must be
manifest incompatibility between the old and the new obligations in every aspect. In the case at bar, there is
nothing in the REM which supports appellants' submission. The contract on its face does not show the existence 2. Change of Principal Condition or Object
of an explicit novation nor incompatibility on every point between the old and the new agreements as the second
contract evidently indicates that the same was executed as new additional security to the CM previously entered 3. Subrogation/Subjective Novation
into by the parties. Records show that in the real estate mortgage, appellants agreed that the chattel mortgage
"shall remain in full force and shall not be impaired by this (real estate) mortgage." It is clear, therefore, that a. In case of active subjective novation
a novation was not intended. The real estate mortgage was evidently taken as additional security for the
performance of the contract Article 1300. Subrogation of a third person in the rights of the creditor is either legal or conventional. The former
is not presumed, except in cases expressly mentioned in this Code; the latter must be clearly established in or order
b. FORMS OF NOVATION: that it may take effect.

Article 1281. Compensation may be total or partial. When the two debts are of the same amount, there is a total Legal (Article 1302)  In all cases of Article 1302, subrogation takes place by operation of law.
compensation. (Classmates, I think there was a typo error in Ma’am Bubbles’ outline. I think this should have
been Article 1291, reproduced below)
Article 1302. It is presumed that there is legal subrogation:
(1) When a creditor pays another creditor who is preferred, even without the debtor's knowledge;
1. Substitution of debtor-- (2) When a third person, not interested in the obligation, pays with the express or tacit approval of the debtor;
(3) When, even without the knowledge of the debtor, a person interested in the fulfillment of the obligation pays,
Article 1236. The creditor is not bound to accept payment or performance by a third person who has no interest in
without prejudice to the effects of confusion as to the latter's share;
the fulfillment of the obligation, unless there is a stipulation to the contrary.
Whoever pays for another may demand from the debtor what he has paid, except that if he paid
without the knowledge or against the will of the debtor, he can recover only insofar as the payment has been Conventional/ Contractual (Article 1301)  Consent of the 3 parties (old creditor, debtor and new
beneficial to the debtor. creditor) are required.
Article 1237. Whoever pays on behalf of the debtor without the knowledge or against the will of the latter, cannot
compel the creditor to subrogate him in his rights, such as those arising from a mortgage, guaranty, or penalty. Article 1301. Conventional subrogation of a third person requires the consent of the original parties and of the
third person.
Article 1835 second paragraph
A partner is discharged from any existing liability upon dissolution of the partnership by an agreement to that
effect between himself, the partnership creditor and the person or partnership continuing the business; and such Q: Is it possible for a creditor to transfer his credit without consent of the debtor?
agreement may be inferred from the course of dealing between the creditor having knowledge of the dissolution
and the person or partnership continuing the business. A: Yes. But this is not novation but an assignment of rights under Article 1624.

 Assignment is also a novation but much simpler. But is not subrogation.

Amen | Compiled Notes
 Article 1236. The creditor is not bound to accept payment or performance by a third person who has no interest in
KINDS OF NOVATION: the fulfillment of the obligation, unless there is a stipulation to the contrary.
Whoever pays for another may demand from the debtor what he has paid, except that if he paid without the
a. Legal knowledge or against the will of the debtor, he can recover only insofar as the payment has been beneficial to the
debtor.
Article 1302. It is presumed that there is legal subrogation: Article 1237. Whoever pays on behalf of the debtor without the knowledge or against the will of the latter, cannot
(1) When a creditor pays another creditor who is preferred, even without the debtor's knowledge; compel the creditor to subrogate him in his rights, such as those arising from a mortgage, guaranty or penalty.
(2) When a third person, not interested in the obligation, pays with the express or tacit approval of the debtor;
RODRIGUEZ VS. REYES [37 SCRA 195]
(3) When, even without the knowledge of the debtor, a person interested in the fulfillment of the obligation pays, FACTS: On November 13, 1962, Alberto Benipayo was sued by his siblings for the partition of the properties
without prejudice to the effects of confusion as to the latter's share; held by them in common as heirs of the late spouses, Donato Benipayo. The parties agreed to have the properties
Article 1177. The creditors, after having pursued the property in possession of the debtor to satisfy their claims, sold at public auction. The list of properties includes properties which were mortgaged to the Development Bank
may exercise all the rights and bring all the actions of the latter for the same purpose, save those which are of the Philippines (DBP). After the sale of said properties, Jose Dualan (one of the winning bidders) asked the
inherent in his person; they may also impugn the acts which the debtor may have done to defraud them. Court to order the payment of the mortgaged debt to DBP from the proceeds of the auction sale. The siblings
(Conventional Redemption) argued that upon purchase of the mortgaged property, Dualan replaced the debtors in the principal obligation.
ISSUE: Whether there is novation.
Article 1610. The creditors of the vendor cannot make use of the right of redemption against the vendee, until
HELD: NO. By buying the property covered by TCT No. 48979 with notice that it was mortgaged, respondent
after they have exhausted the property of the vendor.
Dualan only undertook either to pay or else allow the land's being sold if the mortgage creditor could not or did
Article 1729. Those who put their labor upon or furnish materials for a piece of work undertaken by the not obtain payment from the principal debtor when the debt matured. Nothing else. Certainly, the buyer did not
contractor have an action against the owner up to the amount owing from the latter to the contractor at the time the obligated himself to replace the debtor in the principal obligation, and he could not do so in law without the
claim is made. However, the following shall not prejudice the laborers, employees and furnishers of materials: creditor's consent. (Article 1293) The obligation to discharge the mortgage indebtedness therefore, remained on
(1) Payments made by the owner to the contractor before they are due; the shoulders of the original debtors and their heirs, petitioners herein, since the record is devoid of any evidence
of contrary intent. xxx
(2) Renunciation by the contractor of any amount due him from the owner.
This article is subject to the provisions of special laws: Article 1835. xxx
(Assignment of Credits and Other Incorporeal Rights) A partnership is discharged from any existing liability upon dissolution of the partnership by an agreement to that
Article 1629. In case the assignor in good faith should have made himself responsible for the solvency of the effect between himself, the partnership creditor and the person or partnership continuing the business; and such
debtor, and the contracting parties should not have agreed upon the duration of the liability, it shall last for one agreement may be inferred from the course of dealing between the creditor having knowledge of the dissolution
year only, from the time of the assignment if the period had already expired. and the person or partnership continuing the business.
If the credit should be payable within a term or period which has not yet expired, the liability shall cease one year
after the maturity. [Balane]
Article 2207. If the plaintiff's property has been insured, and he has received indemnity from the insurance Passive Subjective Novation-- Articles 1293 and 1295
company for the injury or loss arising out of the wrong or breach of contract complained of, the insurance  Article 1293 talks of expromission (not upon the old debtor's initiative. It could be upon
company shall be subrogated to the rights of the insured against the wrongdoer or the person who has violated the
the initiative of the creditor or of the new debtor.)
contract. If the amount paid by the insurance company does not fully cover the injury or loss, the aggrieved party
shall be entitled to recover the deficiency from the person causing the loss or injury.  Article 1295 talks of delegacion (change at the old debtor's initiative.)
 In expromission, the change in the person of the debtor is not upon the initiative of the old
debtor, whether or not he gave his consent. As soon as a new debtor and creditor agree,
2. Effect:
Article 1304. A creditor, to whom partial payment has been made, may exercise his right for the remainder, and
novation takes place.
he shall be preferred to the person who has been subrogated in his place in virtue of the partial payment of the  In both cases, the intent of the parties must be to release the old debtor.
same credit.
Article 1303. Subrogation transfers to the person subrogated the credit with all the rights thereto appertaining, What is the difference in effect between expromission and delegacion?
either against the debtor or against third persons, be they guarantors or possessors of mortgages, subject to  In expromission, the release of the old debtor is absolute (even if it turns out that the new
stipulation in a conventional subrogation. debtor is insolvent.)
 In delegacion, the release of the old debtor is not absolute. He may be held liable (1) if
b. Passive Subjective Novation the new debtor was already insolvent at the time of the delegacion; and (2) such
(Substitution of the debtor) insolvency was either known to the old debtor or of public knowledge.

Article 1293. Novation which consists in substituting a new debtor in the place of the original one, may be made Cases of expromission are quite rare.
even without the knowledge or against the will of the latter, but not without the consent of the creditor. Payment
by the new debtor gives him the rights mentioned in articles 1236 and 1237. Effect of Novation

Amen | Compiled Notes

Article 1296. When the principal obligation is extinguished in consequence of a novation, accessory obligations ii. Application of payment – Yes there is transfer of ownership. If money is
may subsist only insofar as they may benefit third persons who did not give their consent. delivered by the debtor to the creditor ownership passes to the creditor. The only
[Balane] question here in this form of payment is to which debt the payment will apply?
Effect of novation as to accessory obligations Accessory obligations may subsist only insofar as This is the issue in this kind of payment, but as to ownership it passes
they may benefit third persons who did not give their consent, e.g., stipulation pour atrui immediately to the creditor.
iii. Cession - Ownership does not pass because the creditor upon delivery because
the creditors just accept the things or those things to be sold and the proceeds
General rule: In a novation, the accesory obligation is extinguished.
thereof to be applied to the indebtedness.
Exception: In an active subjective novation, the guarantors, pledgors, mortgagors are not released. iv. Consignation – Upon the delivery of the thing to the court ownership does not
automatically pass to the creditors because the consignation may be void, if it is
Look at Article 1303, accessory obligations are not extinguished. So there is a conflict. void, then ownership does not pass to the creditor. However, if the creditor will
accept thereafter, may be months or years thereafter, or maybe the court
How do you resolve? According to commentators, Article 1303 is an exception to Article 1296. declares the consignation valid, then the ownership passes, however, by law the
effect of acceptance or the declaration by the court that the consignation is
Article 1297. If the new obligation is void, the original one shall subsist, unless the parties intended that the valid retroacts to the time of the delivery of the court as if the creditor is
former relation should be extinguished in any event. already the owner of the thing at the time of the delivery.
Article 1298. The novation is void if the original obligation was void, except when annulment may be claimed
only by the debtor, or when ratification validates acts which are voidable. c. Extent of Extinguishment: May there be total extinguishment of the debt?
Article 1299. If the original obligation was subject to a suspensive or resolutory condition, the new obligation i. Application of payment – No, there can never be total extinguishment, precisely
shall be under the same condition, unless it is otherwise stipulated. because there is a need to determine to which debt the payment is to be applied.
Because the amount paid is not sufficient to cover all the debts, because you will
no longer have a problem is the amount is sufficient to cover all the debts you
Illustrations: just have to invoke the rules on application on payments. Necessarily there is no
1. Special forms of payment: total extinguishment of the debts under the rules on application of payment.
a. Dation ii. Cession – the extinguishment will only be to the extent of the net profits of the
b. Application – Before the courts do not consider application as special form of payment. sale, unless the parties agree that the abandonment will result to the
c. Tender of payment and consignation – Tender of payment is not a form of payment extinguishment of the entire debt. So here, the net proceeds is the basis of the
consignation is a special form of payment. extent of the extinguishment of the debt.
d. Cession iii. Consignation – Because this is a special form of payment it follows the rule in
payment, thus as a rule “partial performance is non performance” therefore if the
2. Distinguish one from the other or the rest: debtor delivers only a portion of his debt, then the consignation is null and void.
a. Consent: is consent of both parties required in this special form of payment? There is no The exception will only be if the creditor would agree to the delivery of partial
question that as to debtors consent is obviously there because he is the one offering to pay, amount, then to that extent there will be partial extinguishment.
so if he is the one offering to pay then there must be consent, but as to creditor? iv. Dation in payment – There are authors who will take the position that if there is
i. Dation in payment – the creditor has to accept the delivery of a thing instead of Dation in payment then the obligation is totally extinguished unless it is clear in
the other prestation for the satisfaction of the debt, if there is no consent on the the intention of the parties that it will result only to partial extinguishment. But is
part of the creditor, there can be no dation in payment. CASE: Filinvest v. Phil. this the better rule? For example if A is the debtor of B in the amount of 1M and
Acetelyn A delivered to B a car stating that it is to be applied to the amount that B owes A,
ii. Application of payment – As a rule the consent of the creditor is not required, it the value of the car is 150K, if the creditor accepted the car, does that mean that
is only under certain circumstances that the consent of the creditor will be the entire obligation is extinguished? This rule does not seem to be equitable,
present. the BETTER RULE: As a rule the extinguishment is only to the extent of the value
iii. Payment by cession – Definitely the consent of the creditor is required, if the of the thing delivered unless it is clear from the agreement of the parties that
creditor would not agree that the debtor would abandon the properties for the the delivery of a thing, no matter the value, is equivalent to the amount of the
creditors to sell, there can be no payment by cession. obligation.
iv. Consignation – The consent of the creditor is not required even if the creditor
refuses to accept the thing delivered by the debtor to the court by way of 3. Specific Rules:
consignation, the court may declare the consignation to be valid. a. Dation in payment – Again in Dation a thing is delivered and ownership thereof is delivered
by the debtor to the creditor in satisfaction of his debt. Dation apparently will only apply to
b. As to the effect of the delivery of the thing from the debtor to the creditor or from the the delivery of the thing THIS IS NOT TRUE. The SC has ruled that even rights can be the
debtor to the court is there transfer of ownership? subject of Dation for example: if hereditary right is already vested to the debtor, the
i. Dation in payment – yes there is transfer of ownership, because that thing is debtor can deliver his rights to his creditor for the satisfaction of his debt. Also, in one
being delivered and the ownership thereof is being transferred in satisfaction of case, a credit owing to the debtor may be delivered by him to his creditor for the
his debt. satisfaction of his debt. But just like the other modes of payment, in order that there be
Amen | Compiled Notes
 Dation there has to be an obligation to be extinguished (CASE: Citizen’s Surety v. CA: Perez payment, he cannot designate payment to which the payment should be applied. In the first
was claiming that with the execution of deed of assignment that practically extinguishes his place why would he designate it to the 50K? The 50K may be interest bearing. THEREFORE,
obligation under the indemnity agreement by way of Dation, the scenario here was: a THE RIGHT OF THE DEBTOR TO DESIGNATE TO WHICH PAYMENT SHALL APPLY IS NOT
contract of sale was entered into, payable by installment, the buyer is Pascual enterprises, to ABSOULTE, ONE OF THE EXCEPTIONS IS AS TO PARTIAL PAYMENT. SECOND LIMITATION, A
secure the fulfillment of his obligation, a surety bond was executed in favor of the seller, not delivered the 30K, he designated it for the payment of the 30K debt, however, the 30K debt
citizen’s surety executed an indemnity agreement just in case it will be held liable under the is interest bearing, can he compel the creditor to apply the payment to the principal first,
bond, Pascual Perez and his wife being the party thereto, Citizen’s also had Perez execute a then he will just pay the interest later? NO BY EXPRESS PROVISION OF THE LAW, PAYMENT
deed of assignment over certain stocks. The surety obviously was held liable under the bond, SHOULD ALWAYS BE APPLIED TO INTEREST FIRST, IF THERE ARE EXCESS THEN THAT WILL
the surety went after Perez under the indemnity agreement. Perez claimed that the BE THE AMOUNT APPLIED TO THE PRINCIPAL. THIRD LIMITATION: A designated the 30K for
execution of deed of assignment was a form of Dation, but the facts showed that at the the payment of the 30K debt, but the 30K debt is not yet due. THE LAW REQUIRES THAT THE
time the deed of assignment was executed there was no obligation under the indemnity DEBT IS ALREADY DUE IN ORDER THAT THE DEBTOR WOULD HAVE THE RIGHT TO
agreement nor under the surety bond. Why? Because the contract were all dated earlier DESGINATE SUCH PAYMENT TO THE DEBT. What is the meaning of due here? The period
than the time he was made liable, therefore there was no obligation yet. So what is really must be fixed for the benefit of the creditor or for both of them. If it is not yet due, but the
the nature of deed of assignment? It was a form of security arrangement. Other facts period is fixed solely for the benefit of the debtor it does not matter the debtor can
relied upon by the SC in ruling that the deed of assignment was not Dation in payment was designate such debt because the period is for his benefit. But also he cannot vary an
that after the deed of assignment was executed, Perez also executed a real estate agreement which they had as to which debt the payment to be applied.
mortgage, so why would he execute a real estate mortgage if his obligation was already PROBLEM: What if A entrusted X to apply the 30K to 30K debt, but the debt is secured
extinguished by Dation. Also, in deed of assignment, there were partial payments made, if by a mortgage, as instructed X applied the payment, he issued a receipt stating that the 30K
there was Dation then he would not have made the payments.) is applied to the 30K debt, however, days thereafter, A asked X to apply the amount to
What is the law governing Dation? Others would say that this is governed by the law another debt, the 50K, though the creditor cannot be compelled to accept, he may accept if
of sales. If you will read 1245, it would appear that Dation is governed by law of sales, but he wants to. So, if X agrees, and he applied the payment of the 50K debt instead of the
reading it more closely; the law on sales will only apply if the obligation is in money. For 30K, thereafter A was not able to pay X as to the 30K debt, can X foreclose the mortgage?
instance, A owes B 20K, instead of paying cash, A offered his cell phone to B in satisfaction of NOT ANYMORE! A already paid the 30K, although it was revived (when he chose that the
the obligation, there is here Dation and this will be governed by the law on sales as provided payment be applied to 50K instead) the mortgage was not revived (mortgage is not
for in 1245. Tolentino criticized this provision, considering that the trend worldwide is to revived without the consent of the mortgagor).
consider this as a form of novation because practically there is a change in the object, from SECOND RULE: What if the debtor did not designate the debt to which the payment
money to a thing. REMEMBER! 1245 will not apply if the pre-existing obligation is not in shall apply? The debt designated by the creditor. He would have the right to designate to
money. For example: A is obliged to deliver to B a horse, so instead of delivering a horse he which debt the payment shall apply. However, is the debtor’s consent required in the
delivered a car to B. 1245 will not apply here because the pre-existing obligation is not in designation made by the creditor? Yes! By express provision of the law, if in the receipt the
money, but it is to deliver a horse. So in this case Novation shall apply because there was a debtor sees that the payment was applied to a particular debt, and the debtor does not
changed in the object of the obligation, from horse to car. Again, going back to Tolentino’s agree to such application, he may refuse to accept the application.
criticism, he said that regardless of pre-existing obligation whether money or thing, still the THIRD RULE: Neither the debtor nor the creditor made the designation. Scenario: the
law that will apply is the law of novation. Atty. Uribe: I find wisdom in 1245 because, instead debtor made payment; the creditor accepted and issued a receipt without designating the
of paying in cash, (refer to the cell phone example) the debtor paid by giving his phone to particular debt, so to which debt the payment shall apply? IT WILL DEPEND ON WHETHER
the creditor, but is this not almost similar to the scenario where the debtor paid in cash and THE DEBT OF THE SAME NATURE AND BURDEN OR WHETHER THE DEBT IS MOST ONEROUS
the creditor used the cash to buy the cell phone? And therefore the law on sales will govern. OF THEM ALL. If all the debts are of the same nature and burden, the law requires
I think 1245 will do. proportional application. As regards to the most onerous debt, apply the payment to the
most onerous obligation. TAKE NOTE! That you should only go into these rules if the law
b. Application of payment – the only question relevant in this rule is “to which debt will the would not guide you as to which debt the payment should be applied, there are guides like
payment be applied?” the premise of this question is a debtor has two or more debts to one partial payment, interest bearing, and the circumstances which may show the intention of
creditor but may the rules on application of payments be invoked if the debtor has two or the parties, if these guides are not present, then that is the time you go into the rules
more creditors? Yes. As long as as to one creditor he has two or more debts. The law does considering the nature and burden of the debts. IN DETERMINING WHICH DEBT IS THE
not require that the debtor should only have one creditor. For example: A’s creditors are MOST ONEROUS: is there a particular rule? None. The SC held that there is no hard and fast
XYZ, for the rules to be invoked, he must have two debts to one creditor. Let us say A owes X rule! This is because each debt has its own features, for example, there are debts which
100K, 50K, and 20K, now if A delivers to X 30K, the question here is to which debt will the consist of bigger amount the other smaller amount but interest bearing, the other one
payment apply? 1. AS A RULE: The debt designated by the debtor, so under the law, the secured. For example one debt is secured by real estate mortgage and another debt is
debtor has the right to designate to which debt the payment will apply. So here, A can secured by pledge, what is more burdensome? The debt secured by a real estate mortgage.
designate the 30K to apply to 100K or to 50K or to 20K or 30K. But having said that, if A However, real estate mortgage may be constituted by one real estate, so consider if the real
instructed the creditor to apply the 30K to 50K, can the creditor be compelled to apply the estate mortgage constitutes a small lot and the pledge constitutes ships, which is more
payment to the 50K debt? AS A RULE THE ANSWER IS NO because this is a special form of onerous? Obviously the debt secured by pledge constituting ships. TAKE NOTE THAT ALL
payment, the rules of payment shall apply, the creditor cannot be compelled to accept partial FACTORS ARE CONSIDERED IN DETERMINING WHICH IS MORE ONEROUS. If for instance in
payment, nor the debtor be compelled to perform partial payment. Therefore, unless there is one debt the debtor is merely the guarantor and other debt he is the principal, apparently
a stipulation giving the debtor a right to designate to a debt that will constitute partial the debt in which he is the principal debtor is more onerous, but the common reason given
Amen | Compiled Notes
 by few authors is because in this debt where he is a guarantor, his liability is only subsidiary, NONE! Once a debtor failed to comply with his obligations and xxx is insolvent. There is no
in fact inchoate, he may or may not be held liable because the principal debtor should first be such thing as partial insolvent. The statement of Professor Sta. Maria is a better statement
held in default then his properties dissolved before the guarantor may be held liable, BUT “this mode of extinguishing obligation would normally be resorted to by debtors who are in a
THIS IS A WRONG REASON WHY? If the rules on applications of payment are to be invoked, financially difficult position.”
it presupposes as to the two debts he is already liable, his liability is not merely inchoate, d. Tender of payment and consignation – Fist, let us go to the claim of Prof. Jurado, as a rule
and even if it is only subsidiary, he is already liable, in other words in this scenario for the tender of payment is necessary for consignation to be valid, correct? Reading 1256, there
rules to be applied, the principal debtor should have defaulted and his properties exhausted are how many grounds or causes for consignation wherein the law expressly provides that
that is why the guarantor is liable, if he is not yet liable there is no reason to apply the rules tender of payment is not required. In 1256 there are about 5 grounds, where the law
on application of payment because there is only one debt, which is the debt to which he is provides that in those grounds tender of payment is not required, obvious because in those
the principal debtor. But even considering that in the contract of guaranty the guarantor is grounds the creditor is not present. So in those causes, there is no tender of payment but
already liable, which is more onerous, Atty. Uribe: the debt more onerous is the debt to the consignation is valid. What are the grounds or causes for consignation where tender of
which the debtor is a principal, because in guaranty the guarantor may be able to recover payment is necessary under the law? Where the creditor refuses to accept without just
what he paid to the creditor from the debtor, in the debt to which he is a principal, he cause. Therefore going back to the statement tender of payment is required for
cannot recover anything by way of reimbursement. One author would claim: bigger amount consignation to be valid, it seems wrong. AS A RULE TENDER OF PAYMENT IS NOT
is more onerous than smaller amount. Is there any basis for this claim? Atty. Uribe: I beg to REQUIRED, THE ONLY EXCEPTION TO THAT RULE IS WHEN THE GROUND FOR
disagree to this claim, first, if the debt is one peso or two pesos or even one thousand pesos CONSIGNATION IS THAT THE CREDITOR REFUSES TO ACCEPT WITHOUT JUST CAUSE.
bigger in amount, does that really matter in this country? But if you go by the rules, if you On the other hand, Jurado is very much correct in his statement that “tender of
follow this claim, then what will happen to the rule that there are debts of the same nature payment by its very nature is extrajudicial” as you have read in the case of Soco v.
and burden because if the debts would have 1 peso difference, then that debt is already Milintante, tender of payment is made during the pendency of the action, that consignation
more onerous, since the law provides that proportional application to debts, presupposes is void. Tender of payment should be made prior to consignation not during the pendency of
that the debts are of different amounts. OBVIOUSLY THIS IS WRONG. Example this is 1M the action. SO IT IS BY ITS VERY NATURE EXTRAJUDICIAL IN CHARACTER.
the other debt is 10K, you think 1M is more onerous, not necessarily, let’s say the debt is Now, if the ground for consignation requires tender of payment and the debtor sent
only 10K but it is interest bearing, what should I pay first? Of course the 10K interest bearing. probably three letters to the creditor informing the creditor that “I am willing to pay my
Who cares about the 1M, after 2 years it is still 1M! Again the amount is irrelevant. Another, debt xxx” is this a valid tender of payment? NO! In order for tender of payment to be a
OLDER DEBT IS MORE ONEROUS. There is no basis to this claim. In fact, older debts may be valid tender of payment, you have to actually offer the amount to the creditor; IT IS THE ACT
less onerous why? Because it is about to prescribe. OF OFFERING THE AMOUNT WHICH CONSTITUTES A VALID TENDER OF PAYMENT.
In to the requisites of a valid consignation:
c. Cession or assignment – Here the debtor would abandon or assign all his properties to the i. There must be a debt to be extinguished – a sum of money is delivered not to
creditor which properties will have to be sold by the creditor the net proceeds shall be applied extinguish a debt but to exercise a right, like the right of redemption, if the other
to the credit. FIRST ISSUE: All the properties of the debtor shall be delivered? No there are party refuses to accept the money, then the person who has the right is not
properties which are exempt from execution. But can the debtor deliver to the creditor required to deliver to the court the amount by way of consignation because he is
properties which are exempt from execution? Yes! Because that is a right which the debtor not intending to extinguish an obligation. Example: A had the right to redeem, he
can waive, though he cannot be compelled he may abandon those properties to the creditor. offered to redeem, the other party refused to accept, when the action was filed
However, there are certain properties which cannot be the subject of the claim of the the defendant claimed that the action should be dismissed because the
creditor even with the consent of the debtor LIKE THE FAMILY HOME, of course there are redemptioner was not sincere in redeeming the property because if the
beneficiaries of the family home who can object to the sale thereof. redemptioner was sincere, when I refused to accept the money he should have
What if the debtor is willing to abandon all his properties and the creditors would deliver the money to the court by way of consignation. The SC: the claim is
refuse, what is the remedy of the debtor? Authors would say that the best remedy of the erroneous, because the redemptioner is exercising a right, and in the exercise
debtor is to file an action for insolvency. In a way insolvency proceeding has its advantages, thereof there was refusal without just cause, there is no need for consignation.
however, here in the Philippines businessmen are really not keen on filing an insolvency But if the intention is to extinguish an obligation and the money was refused,
proceedings. that is when the debtor has to go to the court and deliver the money by way of
What if the creditors did agree for this kind of payment but they failed to agree as to consignation.
how they will partition/distribution the proceeds? Atty. Uribe agrees that the rules on ii. The consignation must be based on a ground provided by law – Is the
concurrence and preference of credits because in these rules there are preferred debts and enumeration under 1256 an exclusive enumeration? Atty. Uribe agrees with the
those debts which are not preferred they shall be paid proportionately. position that the enumeration does not have to be exclusive because as long as it
Alleged requirement of few authors that in this form of payment, the debtor is would be more burdensome to the debtor if he will not be allowed to deliver the
insolvent. In other words, there can be no cession if the debtor is not insolvent. Atty. Uribe thing or the money to the court, consignation should be allowed. Some of the
CANNOT AGREE TO THIS REQUIREMENT because if you read 1265 there is no requirement grounds are:
that the debtor must be insolvent for payment of cession to take place. Another important a. When without just cause the creditor refuses to issue a receipt – is
reason is the fact that this is by agreement of parties, there can only be payment of cession the issuance of the receipt the operative fact which extinguishes the
because the creditor agreed, as long as the debtor is willing to abandon the properties and obligation? NO! in our jurisdiction PAYMENT IS THE MODE OF
the creditors agree and the proceeds shall be applied to the debt, there is cession. Other EXTINGUISHMENT, THE RECEIPT IS MERELY AN EVIDENCE. But if the
authors claim that the debtor should be partially insolvent, is there any basis to this? creditor refuses to issue a receipt or does not want to issue a receipt,
Amen | Compiled Notes
 it is better that the debtor does not give the payment to him, because COURT THAT THE CONSIGNATION IS VALID, THE OBLIGATION IS EXTINGUISHED, AND
he can easily deny that the debtor did not pay. Actually, in other THEREFORE, WHEN THE AMOUNT WAS WITHDREW BY THE DEBTOR THE OBLIGAITON WAS
jurisdiction, it is the issuance of the receipt that extinguishes the REVIVED, UPON REVIVAL THE DEBTOR FAILED TO PAY, THE CREDITOR CAN NO LONGER
obligation, this rule seems to have an advantage because it would FORECLOSE THE MORTGAGE, WITH THE EXTINGUISHMENT OF PRINCIPAL OBLIGAITON
minimize the litigation involving issues as to payment. THE ACCESSORY CONTRACTS ARE ALSO EXTINGUISHED.
b. When two or more persons claim the same right to collect – A good Liability to pay interest: Let us assume that the obligation became due on 1. Jan. 1,
example is an obligation to deliver a carabao, in this obligations three 2002, 2. tender of payment was made Jan. 1, 2003 which is the due date, and 3.
creditors are claiming from the debtor, because three persons are consignation was made January 2, 2006 three years after the tender. 4. Thereafter the
claiming to the carabao that will give the person a right to deliver the court’s decision was released January 2, 2008, QUESTION: can the debtor be held liable
carabao to the court by way of consignation? Not necessarily. The SC from period 3 to period 4? If the court declared the consignation to be VOID there is no
held that the debtor should determine for himself the person who has question that the debtor is liable to pay interests, on the premise that there was demand
the right over the thing or the money. and that demand was necessary for the debtor to incur in delay. However, what if the
iii. Notices required for consignation to be valid: AT LEAST TWO: Why? Because if court declared the consignation to be valid? Is he liable for interest? Is he liable from
the obligation pertain to an obligation to pay on a monthly basis, like rental, the period 2 to 4? Obviously he is liable because he made the tender of payment only period
SC as rule in the case of SOCO, THERE MUST BE AT LEAST TWO NOTICES FOR number two, but from the time of consignation to the time the declaration of decision of
EACH AMOUNT WHICH BECAME DUE (so every month that the payment is not the court is he liable for interest? NO! because the effect of the declaration retroact to the
accepted sent notice prior the consignation). But if there is only one debt, there time of the delivery of the amount to the court as if the obligation was extinguished at the
should be two notices required, is it required that both notices should come from time the consignation was made, therefore there will be no obligation to pay the interest.
the debtor? NO! But the first notice should come from the debtor prior the The problem is in period of tender of payment to the consignation, can he be made liable
consignation and the second notice may come into the form of summons. Is for payment of interest? Juridically speaking, there is basis to the SC ruling that the debtor
notice really an essential requisite for the validity? TOLENTINO DOES NOT is still liable because the effect of consignation will only be from the time the thing is
AGREE WITH THIS VIEW, he thinks that even without such notice the consignation delivered to the court, so until the obligation is extinguished the debtor should still be held
may still be considered as valid. But it can be the basis of holding the debtor liable for interest. However, in the recent cases of the SC, it was held that from the time
liable, this rule is better but THIS IS NOT THE RULE LAID DOWN BY THE SUPREME tender of payment was made the debtor is no longer required to pay interest, here, the
COURT. SECOND: if the payment is monthly and the creditor already refused to law requires that if the creditor refuses acceptance, the debtor should immediately go to
accept the payment in the first month the defendant will question the necessity court, otherwise the debtor will have no reason to go to the court because he no longer
of second notices, since the creditor already knows that the debtor will again has liability for interest. However, in the recent ruling of the SC, it held that BY REASON
deliver to the court the payment by way of consignation RATIONALE: THIS IS TO OF JUSTICE AND EQUITY, why? Because here as the consignation is valid it means that the
GIVE THE CREDITOR THE OPPORTUNITY TO CHANGE HIS MIND. Which is very creditor refused to accept without just cause, if the creditor accepted it would there be
true, the bigger the amount the more difficult to refuse. liability on the part of the debtor to pay interest? None! So, under the principle of justice
There are only two questions in consignation: After the delivery of the money or and equity the debtor should no longer be held liable to pay interest from the time
the thing with the court, what if thereafter the money was withdrawn from the court, tender of payment was made up to the time of consignation even if the consignation was
thereafter the debtor failed to pay the creditor, can the creditor still go after those who made years after. ATTY. URIBE: This is quite inconsistent with consignation, there is a much
are subsidiarily liable for the debt (like the mortgagor)? PREMISE HERE IS: A is indebted better basis than justice and equity, if you remember our discussion in period, in periods
to B, A delivered a sum of money to the court by way of consignation however, A two to three the debtor is liable for interest, but when the creditor refused to accept
withdrew the money, the debt is secured by a mortgage, thereafter A failed to pay the without just cause, is it not that he is also in delay which is known as mora xxx so if both
creditor, can the creditor foreclose the mortgage? It depend on the manner how A was parties are already in delay, following the ruling of the SC in Agcaoili v. GSIS, in
able to withdraw the money from the court. IF A WITHDREW THE MONEY AS A MATTER contemplation of law, no one is in delay and if no one is in delay could there be liability
OF RIGHT (when even the court cannot refuse the withdrawal, and this can happen if the to pay interest? None. Without invoking justice and equity, this decision seems to be
creditor has not yet accepted and the court has not yet declared the consignation to be more correct.
valid, in this scenario, the debtor can still withdraw the money as a matter of right at
anytime), THUS, NO DEBT HAS BEEN EXTINGUISHED, BECAUSE IN CONSIGNATION THE 4. LOSS OF A THING DUE – Can this mode of extinguishment be invoked in all kinds of
DEBT WILL ONLY BE EXTINGUISHED EITHER BECAUSE THE CREDITOR HAS ALREADY obligations meaning obligations to do? It does not seem like it because it says loss of the thing. If you
ACCEPTED OR THE COURT HAS ALREADY DECLARED THAT THE CONSIGNATION IS VALID, will read the provisions under this mode, loss of the thing due, there are provisions pertaining to
ABSENCE OF THE TWO NO OBLIGATION IS EXTINGUISHED, THEREFORE NO OBLIGATION IS obligation to do, thus, authors would consider a better name for this mode, instead of loss of the thing
REVIVED, THEREFORE IF THE DEBTOR WITHDREW UNDER THIS SCENARIO AND FAILED TO due a better name would be Impossibility of Performance. In impossibility of performance it would
PAY, THE CREDITOR MAY STILL FORECLOSE THE MORTGAGE, BECAUSE THE OBLIGATION already include even obligations to give or to deliver, in case of obligations to give it will be impossible
WAS NEVER EXTINGUISHED. HOWEVER, IF THE WITHDRAWAL IS NOT AS A MATTER OF to perform because the thing to be delivered is lost.
RIGHT, THEREFORE HE WAS ONLY ABLE TO WITHDRAW WITH THE CONSENT OF THE
CREDITOR (this may happen either when the withdrawal was made after the acceptance a. May this mode apply to obligations to deliver generic thing? YES. If you remember the
or the withdrawal was made after the declaration by the court that the consignation was doctrine genus non quam peruit this applies to a scenario where the loss or destruction of
valid.) IN THIS CASE, THE CREDITOR CONSENTED TO THE WITHDRAWAL. WHAT HAPPENS anything of the same kind does not extinguish the obligation. EXAMPLE: there is an
TO THE OBLIGATION, UPON THE ACCEPTANCE BY THE CREDITOR OR DECLARATION BY THE obligation to deliver a brand new 2009 Toyota camry, just because the brand new Toyota
Amen | Compiled Notes
 camry was lost does not mean that the obligation is extinguished under this doctrine. We have already discussed that even if the loss was caused during fortuitous
GOING BACK TO THE ORIGINAL QUESTION: May an obligation to deliver a generic thing be event that will not necessarily exempt the debtor from liability. That may be the general rule
extinguished because the obligation became impossible to perform? YES! As the law would under 1174 but there are EXCEPTIONS APPLICABLE TO OBLIGAITONS TO DELIVER A
define loss it is a scenario where the thing goes out of commerce, so if the thing went out of DETERMINATE THING: stipulation of the party that the debtor will be liable whatever may
commerce there is nothing to deliver. Another scenario, is when it became legally impossible be the cause of the loss, or may be the law provides for liability even if the loss was caused
to perform, impossibility of performance may either be physical impossibility or legal by a fortuitous event.
impossibility. Pesigan v. Angeles Delivery of carabao from one province to another, along Occenia v. Jobson when the performance has become so difficult as to be
the way the carabaos were confiscated because a law became effective during the pendency manifestly beyond the contemplation of the parties, the obligor may also be released in
of the obligation, therefore the obligation was considered legally impossible to perform. whole or in part. THE LAW GRANTS THE COURT THE POWER TO RELEASE THE DEBTOR IN
TAKE NOTE THAT when the law became effective, there must already be an obligation WHOLE OR IN PART BUT IT DID NOT VEST THE COURT THE POWER TO CHANGE THE TERMS
which will become impossible to perform because if the law became effective before the AND CONDITIONS AGREED UPON BY THE PARTIES. Requirements:
obligation was instituted in the first place the obligation is void and there is nothing to be i. The performance of the obligation has become so difficult. This should not be
extinguished. confused with impossible; if the obligation has become impossible to perform
then 1267 will not apply in fact as a rule the obligation will be considered
b. Obligations to deliver a determinate thing: if the thing to be delivered was lost or destroyed, extinguished.
is the obligation extinguished? If you will read 1262 literally, it will depend on the cause of ii. The difficulty to perform must be due to a fortuitous event or beyond the
the loss. If the cause of the loss was due to the fault of the debtor then the obligation is not contemplation of the parties.
extinguished 1263 provides that if the thing is lost or destroyed without the fault of the Effect of partial loss. A scenario could be an obligation to deliver a cell
debtor, the obligation is extinguished, therefore, if the loss is caused by the debtor the phone with housing, what if the cell phone was lost but the housing is still available, is the
obligations is not extinguished. However, Prof. Tolentino opines even if the loss is due to obligation totally extinguished, can the debtor still be compelled to deliver the housing? The
the fault of the debtor, what will be delivered? None, so here, there is physical answer depends on the intention of the parties as to really what was the principal
impossibility, and therefore the obligation should be deemed to be extinguished without motivation in entering the transaction. But is it possible that the housing is more valuable
prejudice to his liability to pay damages because the loss is due to his fault. Nonetheless if than the cell phone? Yes it is possible for instance it has diamonds. So if the delivery of the
you want stick with the opinion of Tolentino you can always cite 1262 as the basis but this housing was the intention, apparently the buyer cannot be compelled to accept the cell
does not seem to be correct. BUT ULTIMATELY IN CASES DECIDED BY THE SUPREME phone.
COURT: As to the thing to be delivered is lost or destroyed, what is the issue that is always
mentioned in the case, is it “won the obligation was extinguished?” No, the ISSUE IS 5. Condonation or Remission of the debt or a.k.a donation of credit – As to the kinds of
WHEHTER THE DEBTOR CAN BE HELD FOR DAMAGES in other words it does not matter condonation:
whether the obligation was extinguished or not, what matters is is the debtor liable for the a. Extent of extinguishment whether total or partial: Condonation may be partial. PARTIAL:
damages caused by the loss of the thing. If the loss was due to his fault he is liable for the principal amount may not even be reduced and the creditor will only condone the
damages, otherwise he cannot be held liable for damages. In fact Sta. Maria also take this interest or the principal amount nor the interest will not be condoned but the accessory
position, Sta. Maria will not state whether the obligation is extinguished or not, the issue obligations will be condoned and therefore it will result to partial condonation.
that will be posted is that whether or not the obligation to deliver a thing is converted to b. Whether Condonation is express or implied: if the condonation is EXPRESS you should
an obligation to pay a sum of money. However, if this is your position, you actually take the consider the rules as to formalities of donation. BAR QUESTION: The son is indebted to his
position that there was extinguishment. If you remember in prescription, prescription is a father 500K, the son paid 300K through a check, thereafter the father died, the executor
mode of extinguishing an obligation because it converts the civil obligation to natural demanded for the payment of the balance 200K, the son claimed that the 200K was
obligation, there is a change in the obligation therefore there is extinguishment, in the same condoned by his father as can be seen from the writing at the back of the check stating that
manner if the obligation to deliver is converted to a monetary obligation then there is an the check is for the full payment of the debt, was there extinguishment by condonation?
extinguishment of an obligation. U.P. LAW CENTER: the effect of the writing on the check will depend on who wrote the
Who has the burden of proving as to the cause of the loss? The creditor or same, if the son is the one who wrote the writing the obligation was not totally extinguished,
the one claiming that it was the debtor’s fault who caused the loss. Reasonable, because this if the father was the one who wrote was there a valid condonation? Yes because this is a
follows the rule that whoever alleges the fact must prove the fact. However, in certain form of implied condonation and therefore the law does not require a particular form nor
circumstances, the creditor or the plaintiff may not have the burden, because the law acceptance is required, Do you agree to this? ATTY URIBE: I do not agree to this answer, I
provides for a presumption that the cause of the loss was due to the debtor, when will this agree more to the alternative answer that as can be seen from the facts, what could be
happen? If at the time of the loss the thing is in the possession of the debtor. But take note more express than that? How express can this be? And therefore if this is an express
that the presumption is not an absolute presumption because the debtor can always post condonation this has to comply to the formalities of law as to donation, this is a donation of
a defense that even if the thing was in his possession the loss was due to the fault of credit and therefore under the law, if the credit is more than 5K, the condonation must be in
somebody else. However, even if a thing is lost while in his possession is it possible that writing and that there must be acceptance in writing, so there was a condonation in writing,
there is no presumption that it was due to his fault? Yes if the loss happened during a but there was no acceptance in writing, hence, there was no valid condonation. IMPLIED
calamity or on the occasion of a calamity. Because even if the thing was lost even if in the CONDONATION, WHEN WILL THIS HAPPEN? If the debt is evidenced by a promissory note,
possession of the debtor but it was during a calamity, more often than not, the calamity is and the promissory note after having been delivered to the creditor was found in the
the cause of the loss and not the fault of the debtor, therefore the burden again will be possession of the debtor was the obligation extinguished? At best there was only a
shifted to the creditor or plaintiff if he would claim that the loss was caused by the debtor. presumption, a presumption that the promissory note was voluntarily returned to the
Amen | Compiled Notes
 debtor. If it is voluntarily returned the effect is that the obligation is extinguished. Then only in 2008, 16 years after. BUT THE SC HELD THAT IT YES IT WILL PROSPER, THE TIME OF THE
when would the presumption arise that the delivery was a voluntary delivery? It will only MERGER TO THE TIME OF RESCISSION SHOULD NOT BE INCLUDED IN THE COMPUTATION OF THE
arise if the document is a private document, but if it is a public instrument, there is no such PRESCRIPTIVE PERIOD. This a very good decision because creditor and the debtor are one at that
presumption because a public document has several copies in custody of several people. At time. Therefore only 8 years has lapsed so the action has not yet prescribed.
any rate, the presumption here is only a disputable presumption. But ultimately if it was
voluntarily returned to the debtor, how was the obligation extinguished? DE LEON: Not by 7. COMPENSATION – By express provision of law, compensation may be total or partial. With
condonation but by payment. Thus, it was voluntarily returned because there was partial compensation may there be two or ten debts extinguished as partial compensation? Yes, there
payment, however, if the debtor cannot prove that payment, like for instance he does not can be two or 100 debts extinguished by compensation but it is still partial compensation why? As long
have a receipt, maybe he can invoke the presumption of the law that there was a as the debts of one are not equal to the debts of the other the compensation will only be to the
condonation, but again, the presumption is disputable. LAST RULE: A debtor of B, a ring concurrent amount and there will be no total extinguishment. Total extinguishment will only take
was delivered to B as a security, ordinarily this will be a pledge, now, after the perfection place when the debts are totally equal for instance if the debt is 1M and the other is 1M. Scenario: A
of the pledge, the thing again was found in the possession of A the debtor, is the owes B 100K, but B has several debts to A 2K, 1K, 5K, 20K but if you add it all up it is only 80K, with
obligation of A to B extinguished? NO! Is there a presumption that this obligation is compensation, all the debts will be totally extinguished, because the extinguishment is for the
extinguished if there is a presumption under the law it will pertain to the pledge. If the thing concurrent amount, the 80K will be totally extinguished, but A would still owe B 20K, why is this so
to be delivered by way of pledge is thereafter found in the possession of the debtor there important? This is important as to the liability to pay interest or as to whether or not there can be valid
may arise a presumption that it was voluntarily delivered and therefore the pledge was foreclosure etc. EXAMPLE: A obligation to B, B has obligation to A, A’s obligation is interest bearing,
extinguished. “PRESUMPTION MAY ARISE” because the presumption may not arise, why? after compensation can B still collect interest can A be held liable for interest? It will depend on the
The law requires that after the perfection of the pledge, the thing must be found in the amount involved, if B’s debt is smaller may be 50K, A’s debt is 100K, can be collect interest? Not
possession of the owner of the thing pledged. Is the debtor necessarily the owner of the anymore because the debt will be totally extinguished, the 100K will be reduced by 50K to the
thing pledged? No because pledge may be constituted by a third person, so if it was found in concurrent amount. On the other hand what if the 100K is secured by a mortgage after compensation
the possession of the debtor, then no presumption will arise, the presumption of voluntarily may A foreclose the mortgage? Yes! because there will still be a balance of 50K, a mortgage is an
returned if thereafter it is found in the possession of the owner of the thing pledged. indivisible contract, until the obligation is not extinguished the mortgage will remain in force. And
Again, this presumption is disputable presumption, because there are hundred and one therefore if B failed to pay A the fifty thousand A can still foreclose the mortgage. BAR EXAM
reasons why the debtor would return the thing to the owner, one of the reasons may be for QUESTION: A opened a savings account with Y bank in the amount of 1M, thereafter A borrowed
safe keeping. So again it is a DISPUTABLE PRESUMPTION. money from the same bank 800K, thereafter A wanted to withdraw the 1M, the bank said no you
cannot withdraw the 1M because your obligation to pay the 800K is already due we are invoking
6. CONFUSION OR MERGER OF RIGHTS – this mode can easily be understood by just imagining compensation, you can only withdraw 200K less the charges, A claimed you cannot do that because
the merger of banks in the past few years. Now, it is common that before the merger, one of the banks under 1287 there can be no compensation when one of the debts arises from a deposit. WHO IS
is indebted to the other banks and therefore instead of xxx the creditor may agree to just buy the CORRECT? The bank was correct because a savings account deposit is not a deposit it is a contract of
debtor bank. Obviously this is by agreement of the parties. Can there be confusion by operation of loan, that is why 1287 (compensation will not be proper if one of the obligations arises from depositum)
law? Yes if the creditor for example died and the only heir is the debtor, of course the heir will inherit will not apply. So if both are simple loan there can be compensation. 1287 provides that there can be
the credit, the heir now who is the debtor will now become the creditor, therefore there will be a no compensation when 1 of the obligations is arises from a deposit, this is known as, as some authors
meeting in one person of the character of the debtor and creditor and therefore the obligation will be would name it, a facultative obligation. However, other authors does not see this as independent
extinguished. What if the decedent is the debtor and the heir is the creditor, will the obligation be obligation, this is just treated as a modification of the other kinds of compensation recognized by law
extinguished? It seems like it will not be extinguished because the heir will not accept the obligation. So which is a facultative or conventional compensation the third one is judicial compensation the first
the creditor will normally demand from the executor payment. Can a guarantor invoke a merger or obviously is legal compensation. Legal compensation is considered as the xxx if the examiner does
confusion? YES! But he may invoke merger and confusion as to the character of debtor and creditor not mention any kind of compensation he is referring to LEGAL COMPENSATION. Voluntary
because if the principal obligation is extinguished then the guaranty will also be extinguished, the compensation: the consent of both parties is required. In facultative: it is only the consent of one of
guarantors will benefit with the confusion of the character of the principal debtor and the creditor, but the parties which is required. Judicial: this would normally happen when a case is filed for a sum of
if the confusion was between the guarantor and the debtor will the principal obligation be money but what would normally happen in cases, the defendant will have counterclaim, usually the
extinguished? NO! What will happen here is that there will no longer be security because the debtor counterclaim is bigger, so in the end the plaintiff becomes liable on the premise that the claim of
and the guarantor will be one. CAN THERE BE A PARTIAL EXTINGUISHMENT IN CONFUSION OR plaintiff is valid and was granted and the court also granted the counterclaim it is compensated up to
MERGER? YES! By express provision of law, in joint obligations and there was a confusion pertaining the concurrent amount. The obligations which are not yet liquidated at the time of the filing of the
to one of the joint debtors in the person of the creditor, the extinguishment will only be to the extent action, they can be liquidated during the proceedings. In compensation it is also called as set off or
of the debt of the joint debtor. This is different of course if the obligation is solidary, if there is counterclaim but it seems that this word is proper in judicial compensation because counterclaim is
confusion between the creditor and one of the solidary creditor the obligation is totally extinguished. usually used in the court.
PROBLEM: THE OBLIGATION BECAME OVERDUE IN 1992, THE OBLIGATION IS 1M PESOS AND THERE a. VOLUNTARY COMPENSATION – this is by agreement of the parties, even if not all of the
WAS MEREGER IN 1999 BETWEEN THE DEBTOR AND THE CREDITOR, BUT JUST LIKE ANY OTHER requirements for legal compensation are present it does not matter the obligations will be
AGREEMENT THE AGREEMENT MAY BE RESCINDED, AND ASSUMING THAT THE CONTRACT WAS extinguished by agreement of the parties. For example: the debts are not yet due and they
RESCINDED IN 2007, 2008 B FILED AN ACTION AGAINST A TO RECOVER THE 1M, WHY? In rescission want to compensate, what can we do? The parties already agreed. Also, probably one of the
the effect is restitution, the parties will be reverted back to their status prior to the merger, so as if A debts pertain to a carabao and the other to a car, we cannot do anything about it. In fact in
owes B 1M, so B files an action today against A to recover the 1M, may the action prosper? It seems lay man’s term we call this “quits”.
that not anymore the action already prescribed, the obligation was due in 1992 and the action was filed
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b. FACULTATIVE COMPENSATION it occurs in depositum, commodatum, gratuitous support, Mindanao Portland xxx in these two cases the amounts which are the subject of
and civil liability arising from crime- this will arise if one of the debts arises from a compensation were attorney’s fees, these fees did not arise from contract.
depositum, in a depositum a thing is delivered to the depositary for safekeeping, this can Mindanao Portland is unlikely, company A filed a case against company B, one of
happen even also with a bank. If a person for example would deliver 1M pesos to the bank them won and the court awarded attorney’s fees, in another case the other
only for safekeeping, this will be a DEPOSITUM What if A deposited 1M not as a savings company won and attorney’s fees were also awarded, so the award is of the
account but in the safety deposit box, and A borrowed 800K, now if A would want to same amount, the obligation is of the same nature, COMPENSATION TOOK
withdraw the 1M from the safety deposit box can the bank invoke compensation? The PLACE. Ultimately the QUESTION HERE IS: Does it mean that all monetary
depositary cannot invoke compensation but the DEPOSITOR CAN! Aside from depositum, obligations may be the subject of legal compensation? No! If you have read the
mentioned COMMODATUM when one of the debts arises from commodatum xxx in this case of Francia v. IAC certain monetary obligations cannot be subject of legal
obligation the thing has to be returned upon demand however here, the bailor can invoke compensation like payment of taxes, customs duties, tariff etc.
consignation but not the bailee. SUPPORT should be gratuitous support and not contractual iii. BOTH PARTIES MUST BE PRINCIPALLY BOUND – Principally bound because in
support why? if this is legal support, a person needs this to survive thus, it cannot be subject a scenario where A is indebted to B and this obligation is secured by a guarantor
to compensation. But if it is support in arrears compensation may take place. CIVIL LIABILITY G on the other hand B is the debtor of G in this obligation, if G demands payment
ARISING FROM CRIME – probably the scenario here is A is indebted to B 100K when B tried from G Can he claim that G is also indebted to him because he is a guarantor in
to collect A cannot be so he stabbed A, so B was held criminally liable, then there was a B’s obligation to A? In its face NO, because the guarantor is not principally
monetary award, what if the award to A is 120K, if A demands for 100K from B can B invoke bound but take note the moment A defaults and his properties are already
compensation? NO! The convict cannot invoke compensation but the aggrieved party can exhausted, the GUARANTOR WILL NOW BE LIABLE TO B AND FROM THEN ON
invoke compensation. COMPENSATION WILL TAKE PLACE.
c. LEGAL COMPENSATION, THIS IS BY OPERATION BY LAW – From the moment all the iv. THEY MUST BE CREDITORS AND DEBTORS OF EACH OTHER IN THEIR OWN
essential requisites are present compensation takes place even without the knowledge of RIGHT: SYCIP v. CA: the owner of the shares of stocks authorized Lapuz to sell the
the parties, even before they invoke compensation . SCENARIO: A owes B due 1992, B owes shares of stock, lapuz on then authorized Sycip to sell the shares of stock, the
A due in 1999, possible that it’s both 1M based on different transaction, A filed an action latter was able to sell the shares of stock (5K), however, despite the demand to
against B the defense of B is compensation, however, A may claim that no you cannot invoke Sycip to remit the proceeds of the sale he refused to do so. A complaint for estafa
compensation because you credit has already prescribed since my debt has become due in was filed against Sycip, he was convicted in the lower court, on appeal Sycip
1992 is A correct? NO!!! in 1999 even without their knowledge when the debts become due claimed that Lapuz owed him (5K) so compensation took place, therefore he
and demandable compensation took place. REQUIREMENTS OF LEGAL COMPENSATION: cannot be liable for estafa, is Sycip’s contention correct? NO, even assuming that
i. THEY MUST BE MUTUAL CREDITORS AND DEBTORS - but if you have read one Lapuz is indebted to Sycip, the latter is really not indebted to Lapuz in his own
case and a few authors would consider this instead of mutual they would use right. The real creditor of Lapuz is the buyer of the shares.
reciprocal creditors ATTY. URIBE: I would not encourage you to use reciprocal v. BOTH DEBTS MUST ALREADY BE DUE AND DEMANDABLE – The MOST
creditors, if reciprocal debtors and creditors it will imply reciprocal obligations, if COMMON MISTAKE WHEN ASKED WHY IS THERE NO LEGAL COMPENSATION IS
it is reciprocal obligations then this obligations arose from the same transactions BECAUSE THE OBLIGAITON HAS NOT YET BECOME DUE AT THE SAME TIME.
if this is the case one of the requisites for legal compensation to take place will REMEMBER: the requirement of the law is that both debts are due and it is not
never be complied with. CASE: Francia vs. IAC was there legal compensation? required that the debts are due at the same time. But if one debt became due 3
NONE because in the case Francia was indebted to the city government of pasay years ago and the other debt became due today, compensation will only take
because of xxx however, Francia was invoking legal compensation because he place today, but there can be compensation. ANOTHER COMMON MISTAKE:
was the creditor of an expropriation proceedings, it just so happen that the city EXAMPLE: A borrowed money, the other one bought on credit, so they are
government did not expropriate his property the national government did since debtors and creditors of each other, however, they say that there can be no
the requirement no. 1 is not present there is no legal compensation. CASE: PNB v. legal compensation because the obligations do not pertain to sums of money,
ACERO: PNB was debtor of Isabela, this is simple loan, so PNB owed Isabela, one is money the other one car. HERE THE OBLIGATION OF THE BUYER IS TO
however ACERO was the judgment debtor of isabela who wants to have the PAY THE PRICE SO IT IS ALSO MONETARY LEGAL COMPENSATION WILL TAKE
savings of Isabela garnished, however PNB claimed that they invoked PLACE.
compensation because Isabela was also their debtor, who is correct? No claim is vi. THE DEBTS MUST BE LIQUIDATED AND DEMANDABLE – In other words there
correct, although PNB is the debtor of Isabela, there was no proof that Isabela is should be no claim by a third person over this right or credit, because if the claim
the debtor of PNB. is subject of legal proceeding, there can be no legal compensation. Example:
ii. BOTH DEBTS MUST BE IN SUMS OF MONEY OR IF THEY PERTAIN TO GOODS International Corporate Bank v. IAC: Fajardo borrowed money from ICB 50M the
THEY MUST BE OF THE SAME KIND AND QUALITY – in other words may the bank released only 20M to secure this obligation, Fajardo mortgaged properties
obligations be both in sums of money if they are reciprocal obligations? It cannot amounting to 110M, thereafter she also delivered 1M to the bank for money
happen. In reciprocal obligations there are different prestations one is delivery market investment, so just like any other investments it matured, so she
and the other monetary, it can never be both sums of money. Reading several demanded for the return of the 1M, the bank claimed that she has nothing to
cases it might appear that this compensation may occur only when the obligation recover from the bank because as to her loan which she failed to pay, when the
arise from contracts, is this correct, will there be legal compensation only if the foreclosed the mortgage she still has deficiency of 6M, so compensation took
debt in money arose from contract? NOT TRUE! Even if the obligation arose from place, however Fajardo questioned the mortgage the SC HELD: there can be no
other sources there can be compensation. In fact if you read the CASES: legal compensation because one of the claims is still being litigated.
Amen | Compiled Notes
 vii. ONE OF THE DEBTS MUST NOT ARISE FROM 1287 AND 1288 Because in such
cases legal compensation will not take place since in depositum the depositor or
the bailor must invoke legal compensation.

d. EFFECT OF ASSIGNMENT OF A CREDIT AS TO THE RIGHT TO INVOKE COMPENSATION –

Scenario: A was indebted to B 50K, 30K, and 20K, B on the other hand is indebted to A 100K,
A assigned his credit to X, X demanded payment from B, how much can X demand from B?
Questions on assignment the first thing to look at is the DATE OF ASSIGNMENT! If the date
of assignment took place long after the deed of assignment took place, For example: 50K
June 15, 2002, 30K Oct. 15, 2002, 20K Dec. 15 2002, the 100K due November 15, 2002, if
the assignment was made, Jan. 15, 2003, how much can X demand from B? 10,000 Pesos
only as of Dec. 15, 2002, compensation took place as to the extent of 90K pesos. PROBLEM:
Let us assume the 100K obligation became due on November 15, 2002, this obligation may
be assigned even in March of the same year, so it was assigned in March 2002, if the
demand was made Oct. 1, 2002, how much can X demand from B? NONE!!! Because the
obligation is not yet due! PROBLEM: Due date, November 15, 2002, assignment July 2002,
as of November 15, the X demanded from B, how much can B be compelled to pay? The first
factor you have to consider: WHETHER THE ASSIGNMENT WAS WITH THE KNOWLEDGE OF
B OR WITHOUT KNOWLEDGE: IF WITH KNOWLEDGE, YOU HAVE TO DETERMINE WHETHER
OR NOT THERE WAS CONSENT TO THE ASSIGMENT OR NONE: IF CONSENT IS GIVEN, YOU
HAVE TO DETERMINE WHETHER OR NOT HE MADE A RESERVATION OR NO RESERVATION:
(so the scenario here is A and X advised B that A is assigning the credit to X, B consented but
he reserved his right to invoke compensation) IF B RESERVED, HOW MUCH CAN X COLLECT
FROM B? ONLY 50K BECAUSE AS OF THE DATE OF THE ASSIGNMENT WHICH WAS WITH THE
KNOWLEDGE OF B, THE DEBT IN JUNE 15 IS ALREADY DUE, AS TO DEBTS OWING TO B WHICH
ARE ALREADY DUE HE CAN INVOKE COMPENSATION OR AT LEAST RESERVE COMPENSAITON
BECAUSE COMPENSATION WILL TAKE PLACE ONLY NOV. 15, SO AS TO 30K AND 10K B
CANNOT INVOKE COMPENSATION, AT THE TIME OF ASSIGNMENT JULY 15, THE CREDITS ARE
NOT YET DUE TO HIM. NO RESERVATION HOW MUCH CAN X DEMAND FROM B? 100K
BECAUSE BY AGREEING WITHOUT RESERVATION HE WAIVED HIS RIGHT TO COMPENSATION,
B’S REMEDY HERE IS TO DEMAND THE PAYMENT OF THE DEBTS FROM A. WITHOUT
KNOWLEDGE: X demanded from B in December, how much can B be compelled to pay? 10K
he can invoke compensation to those debts which became due if the assignment is without
his knowledge.

Amen | Compiled Notes