OBLIGATIONS AND CONTRACTS Atty.

Joseph San Pedro

Title I. OBLIGATIONS

Chapter 1
General Provisions

Art. 1156. An obligation is a juridical necessity to give, to do or not to do.

WHAT IS AN OBLIGATION?
An obligation is a juridical necessity to give, to do, or not to do
“To give” means a delivery of a movable thing, while “to do” means the performance of all kinds
of services. “To give” being a real obligation while “to do” a personal obligation. “Not to do” means the
debtor fulfills the obligation by not doing what has been forbidden.

WHAT IS THE DISTINCTION BETWEEN AN OBLIGATION AND A CONTRACT?

An obligation is a more generic term, it may arise out of a contract. Contracts, are merely sources
of obligations, when there is a contract, there is always an obligation. But it does not necessarily mean that
if there is an obligation there is a contract.

WHAT DOES JURIDICAL NECESSITY MEAN?

Juridical necessity means it is mandatory. Non-compliance with the obligation can result in a
judicial or legal sanction. It means you simply cannot get out of an obligation.
Such a definition might seem incomplete and would therefore look only at one side – the debtor
side – of the obligation. Most commentaries on this definition reveal this criticism. However, such a
definition is in itself complete because of the concept of “juridical necessity”, which gives the creditor the
right to demand the fulfillment of the obligation due him.

WHAT ARE THE ELEMENTS OF AN OBLIGATION?

They are divided into three aspects
(1) WHO – the subjects who are at least two different parties.
a. there is a passive subject, the obligor or debtor who is required to perform or deliver an
obligation but he is not required to do anything if the active subject does not demand;
b. there is the active subject, the obligee or creditor, who is entitled to make the demand or
enforce the obligation.
 ANY PERSON, BE IT NATURAL, JURIDICAL OR EVEN INCAPACITATED
MAY BE THE SUBJECT OF AN OBLIGATION.
(2) WHAT – the object or the prestation of the obligation which may be to give, to do or not to
do.
 requisites to a prestation:
a. it must be lawful
b. it must be physically and juridically possible
c. it must be determinate or determinable or one which must be identified specifically
d. it must be useful
e. it must have a money equivalent or a pecuniary value
(3) WHY – the efficient cause, the vinculum or juridical or legal tie; it is the reason why the
obligations exists, and it may or may not be monetary in nature for sometimes a mere promise
is a sufficient cause of an obligation.
 IT IS THAT WHICH BINDS THE PARTIES.

Art. 1157. Obligations arise from:

(1) Law;
(2) Contracts;
(3) Quasi-contracts;

1
(4) Acts or omissions punished by law; and
(5) Quasi-delicts.

Art. 1158. Obligations derived from law are not presumed. Only those expressly determined
in this Code or in special laws are demandable, and shall be regulated by the precepts of the
law which establishes them; and as to what has not been foreseen, by the provisions of this
Book.

Art. 1159. Obligations arising from contracts have the force of law between the contracting
parties and should be complied with in good faith.

Art. 1160. Obligations derived from quasi-contracts shall be subject to the provisions of
Chaper 1, Title XVII, of this Book.

Art. 1161. Civil obligations arising from criminal offenses shall be governed by the penal
laws, subject to the provisions of Art. 2177, and of pertinent provisions of Chapter 2,
Preliminary Title, on Human Relations, and of Title XVIII of this Book, regulating
damages.

Art. 1162. Obligations derived from quasi-delicts shall be governed by the provisions of
Chapter 2, Title XVII of this Book, and by special laws.

WHAT ARE THE SOURCES OF OBLIGATIONS?

(1) LAWS which must be expressed, e.g. tax laws; in obligations, as distinguished from
contracts, meeting of the minds is not an essential element of an obligation.
(2) CONTRACTS where there is a meeting of the minds of the parties of the contract as consent
and adherence to the terms of the contract, e.g. the duty to repay a loan by virtue of an
agreement.
(3) QUASI-CONTRACTS which are lawful acts but its purpose is to prevent the unjust
enrichment of a person at the expense of another, such is unilateral, there being no meeting of
minds between parties.
(a) there is negotiorum gestio which is unauthorized management of another person’s
property there is no agreement between the manager and the owner; THE OBLIGATION
HERE BEING TO REIMBURSE THE PERSON WHO TOOK CARE OF IT.
(b) There is also solutio indebiti which is the duty to refund an overcharge of money or
undue payment; THE OBLIGATION HERE BEING TO RETURN WHAT YOU HAVE
RECEIVED THROUGH MISTAKE.
(4) DELICTS which are acts or omissions punishable by law; it is the civil liability arising from
the criminal act which is the source of the obligation.
(5) QUASI-DELICTS which are acts or omissions not punishable by law; it’s elements are
(a) fault or negligence (not tantamount to a delict)
(b) damage caused by the fault
(c) a person injured, and
(d) no pre-existing contractual relationship

ARE THERE OTHER SOURCES OF OBLIGATIONS?

No. This list is exclusive.

Chapter 2
Nature and Effect of Obligations

2
Art. 1163. Every person obliged to give something is also obliged to take care of it with the
proper diligence of a good father of a family unless the law or the stipulation of the parties
requires another standard of care.

Art. 1164. The creditor has a right to the fruits of the thing from the time the obligation to
deliver it arises. However, he shall acquire no real right over it until the same has been
delivered to him.

Art. 1165. When what is to delivered is a determinate thing, the creditor, in addition to the
right granted him by Art. 1170, may compel the debtor to make the delivery.
If the thing is indeterminate or generic, he may ask that the obligation be complied
with at the expense of the debtor.
If the obligor delays, or has promised to deliver the same thing to two or more
persons who do not have the same interest, he shall be responsible for any fortuitous event
until he has effected the delivery.

Art. 1166. The obligation to give a determinate thing includes that of delivering all its
accessions and accessories, even though they may not have been mentioned.

WHAT IS A PRESTATION “TO GIVE”?

“To give” involves the delivery of a thing which may be specific or generic.

WHAT IS A SPECIFIC AND A GENERIC THING?

A specific or determinate thing means something that may be set apart from the rest, e.g. Angelo’s
Pajero ( if Angelo’s other cars are BMW, Mercedez and Jaguar), a generic thing means something that
belongs to a class e.g. a car)

WHAT ARE THE ACCESSORY OBLIGATIONS IN OBLIGATIONS “TO GIVE”?

(1) exercise the diligence of a good father of a family—means the ordinary diligence the owner of
the property would exercise;
(2) delivery of the fruits – fruits are delivered when the obligation to deliver arises which may be
(a) from the perfection of the contract, if there is no term or condition or what is called a
pure obligation, and
(b) from the moment the term arrives or the condition happens, if there is a term or
condition;

 THE FRUITS BETWEEN PERFECTION AND TIME TO DELIVER BELONG TO

THE DEBTOR WHILE FROM THE TIME TO DELIVER TO ACTUAL DELIVERY,
THE FRUITS BELONG TO THE CREDITOR;

(3) delivery of accessories and accessions

(a) ACCESSORIES are those included in the principal for its better use of perfection, e.g.,
the keys to a car; while
(b) ACCESSIONS are those which are additions to or improvements upon the principal
which must be attached or incorporated.

 THE PARTIES CAN STIPULATE WHETHER ACCESSORIES SHOULD BE

DELIVERED OR NOT. IF THERE IS NO STIPULATION, THEN THERE MUST BE
A DELIVERY.

WHEN DOES THE PRESERVATION OF THE THING TO BE DELIVERED BEGIN?

The preservation or the exercise of the diligence of a good father starts from the perfection of the
obligation until actual delivery. If there is no time gap between the perfection and delivery, there is no
diligence of a good father that may be exercised.

3
MAY THE PARTIES STIPULATE ON ANY OTHER FORM OF DILIGENCE ASIDE FROM THAT OF
A GOOD FATHER’S?
The parties are at liberty to stipulate on what kind of diligence they would require of the other. If
there is no stipulation then the standard of diligence would be that of a good father’s.

WHAT ARE THE KINDS OF FRUITS?

They are:
(1) NATURAL – spontaneous products independent of human intervention, e.g. grass
(2) INDUSTRIAL – product of human labor, e.g. a mango
(3) CIVIL – derived by virtue of a juridical relationship, e.g. rent of a building.

DO THESE ACCESSORY OBLIGATIONS APPLY IN OBLIGATIONS TO DELIVER GENERIC

THINGS?
No, because (1) the debtor is not expected to deliver all the fruits of that class nor (2) is he
expected to take care of all things in that same class.

Art. 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, it may be decreed that what has been poorly done be undone.

Art. 1168. When the obligation consists in not doing, and the obligor does what has been
forbidden, it shall also be undone at his expense.

WHAT IS THE OBLIGATION “TO DO”?

This involves the performance of a certain service. You have to do it according to the terms of the
agreement. For example: Angelo is obliged to bring Arnie to a barbershop. (eh nabreach, breach will be
discussed later.)
The general rule is that the obligation “to do” must be performed according to the terms or
conditions stipulated by the parties EXCEPT when it has become physically or legally impossible.

WHAT IS THE ACCESSORY OBLIGATION IN AN OBLIGATION “TO DO”?

An accessory obligation of the prestation “to do” is to follow the tenor of the obligation.

MAY A DEBTOR AVAIL OF SUBSTITUTE PERFORMANCE IN AN OBLIGATION “TO DO”?

The general rule is that the debtor may substitute for another in the performance of the obligation
if the obligee consents EXCEPT
(1) if the obligation was made in consideration of the qualifications of a person, e.g. Aiza
Seguerra was supposed to sing “Pagdating ng Panahon” in Cy’s wedding in which the
services of Cy’s best friend (though he/she looks like Aiza Seguerra) cannot be availed of as a
substitute.
(2) If it is specifically agreed upon by the parties that the debtor should do it in which case it
cannot be endorsed to another person.

WHAT IS AN OBLIGATION “NOT TO DO”?

It means to refrain from doing a particular act. If you do it, it’s a breach, if you don’t do it, it’s
compliance.

MAY SUBSTITUTE PERFORMANCE BE AVAILED OF IN AN OBLIGATION “NOT TO DO”?

No. Substitute performance is not possible because it is purely personal to the debtor.

Art. 1191. The power to rescind obligations is implied in reciprocal ones, in case one of the
obligors should not comply with what is incumbent upon him.

4
 The injured party may choose between the fulfillment and the rescission of the
obligation, with the 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.
This is understood to be without prejudice to the rights of third persons who have
acquired the thing, in accordance with Arts. 1385 and 1388 and the Mortgage Law.

WHAT ARE THE REMEDIES FOR FAILURE TO COMPLY WITH THE REQUIRED PRESTATION?
To Give Specific General
(1) Damages (exclusively and in addition YES YES
to the other actions)
(2) Specific Performance YES YES
(3) Substitute Performance NO YES
(4) Rescission/ Resolution YES YES

To Do
(1) Damages
(2) Specific Performance
(3) Substitute Performance ONLY if not purely personal
(4) Rescission/ Resolution

Not To Do
(1) Damages
(2) Act be undone by third party at the debtor’s expense
(3) Act be undone by the debtor himself

 UNDO NOT POSSIBLE IF PHYSICALLY OR LEGALLY IMPOSSIBLE

 In impossibility of performance:
- If between perfection and delivery – the obligation is extinguished if without fault
- If after the delivery date – the obligation remains

WHAT IS RESOLUTION OR RESCISSION?

Basically, rescission means the cancelling of the obligation.

WHAT ARE RECIPROCAL OBLIGATIONS?

Reciprocal obligations are obligations in consideration of each other. There is a proximate relation
between obligations.

IS RESCISSION IMPLIED IN A RECIPROCAL OBLIGATION?

Yes. If one does not comply with his obligation, the other may choose to rescind or cancel his
obligation to relieve him as well.

IS RESCISSION IMPLIED IN A UNILATERAL OBLIGATION?

In unilateral obligations, there must be an agreement between parties for rescission as a remedy.

CAN RESCISSION ALWAYS BE AVAILED OF?

No. Rescission as a remedy can only be availed of to the extent that the creditor has been
prejudiced. (Central Bank v. Court of Appeals)
The power to rescind is not absolute. In slight or casual breach rescission is not proper. Breach
must be substantial and fundamental to be able to avail of rescission (Angeles v. Calasanz) There is no hard
and fast rule to determine is breach is slight or casual, it would always depend upon the circumstances of
each case. If the court finds the breach as slight, rescission is not awarded and the debtor is given additional
time to comply with the obligation.

5
HOW WOULD ONE BE RELEASED FROM AN OBLIGATION?
A complete and exact fulfillment of its terms and obligations, hence only STRICT
COMPLIANCE, releases one from an obligation.

ANGELES V. CALASANZ 135 SCRA 323

Facts: Angeles and Calasanz entered into a contract to sell a piece of land. Angeles cancelled the said
contract because the Calasanz failed to meet the subsequent payments. The aggregate payment (including
the interest) amounted to P4,533.38. On several occasions, Angeles accepted delayed installment payments.
The price of the land is P3,920.00

Issue: W/N the contract to sell has been validly cancelled by the appelants.

Ruling: NO. Rescission of a contract will not be permitted for a slight or casual breach, but only for such
substantial and fundamental breach as would defeat the very object of the parties in making the agreement.
The question of whether a breach of a contract is substantial DEPENDS UPON THE ATTENDANT
CIRCUMSTANCES.
The acceptance of delayed installment payment beyond the grace period amounts to waiver of
right to rescission.
The contract to sell, being a contract of adhesion, must be construed against the party causing it.

DE DIOS V. COURT OF APPEALS 212 SCRA 519

Bank ------------> Averdi (de Dios) ------------> Lopingco

Facts: Philippine Veterans Bank (PVB) conveyed a parcel of land under a conditional sale to de Dios. De
Dios entered into a contract transferring his right to Lopingco, upon the downpayment of 20% of the
purchase price to PVB through de Dios. De Dios failed to execute the deed of assignment. Lopingco
therefore asked for rescission of the contract.

Issue: W/N the rescission was valid.

Ruling: YES. Rescission will be ordered only where the breach complained of is so substantial as to defeat
the object of parties in entering into the agreement. There is a substantial breach in the case at bar. The
Supreme Court refers to de Dios (not Averdi) as the person liable.
 Consequences of resolution is restoration “Rule of Mutual Restitution”
 Supreme Court in this case improperly referred to Art. 1355 when it should have been Art.
1190, though the result would have been the same.

OCAMPO V. COURT OF APPEALS 233 SCRA 551

Facts: Seller Tolosa executed a contract “Agreement to Sell Real Property” whereby he “sells, cedes and
transfers” the land to Ocampo in consideration of P25,000, P12,500 upon signing, and the balance within 6
months. Before the 6-month period, Ocampo only paid P16,700. Nevertheless, Tolosa accepted her
subsequent late payments totaling P3,900. Tolosa was able to execute a “Contract to Sell” to Villaruz with
the same property. Villaruz’s full payment of the purchase price was made dependent on the cancellation of
Ocampo’s claim.

Issue: W/N the rescission made by Tolosa was valid.

Ruling: No. The sellers’ unqualified acceptance of payments after the 6-month period expired constitutes a
WAVIER OF THE PERIOD. Hence, constitutes a waiver of the ground to rescind the contract.

6
 The breach on the part of Ocampo was only SLIGHT OR CASUAL if not outweighed by the
BAD FAITH of Tolosa in reneging his own prestations, hence judicial rescission of the contract cannot be
justified.
Moreover, the letter of rescission of contract of sale by the seller must be NOTARIZED and
MUST BE RECEIVED BY THE BUYER.
 This is a peculiar provision, since it is involving land, there must therefore be a judicial or
notarial demand.

AREOLA V. COURT OF APPEALS 236 SCRA 643

Facts: Areola entered into a contract of insurance with the Prudential Guarantee and Assurance, Inc. Seven
(7) months later, Prudential unilaterally canceled the same. Finding that the cancellation was erroneous,
Prudential offered to reinstate the same policy. (The premiums were paid in full, but it was not remitted by
Malapit, Prudential’s branch manager).

Issue:
 W/N the erroneous act of cancelling the subject insurance policy entitle petitioner to
payment of damages;
 W/N the subsequent act of reinstating the wrongfully canceled insurance policy by
respondent insurance company in an effort to rectify such error, obliterates whatever
liability for damages it may have to bear.

Ruling: YES. A CORPORATION SUCH AS RESPONDENT INSURANCE COMPANY, ACTS

SOLELY THROUGH ITS EMPLOYEES. The latter’s acts are considered as its own for which it can be
held liable.
NO. Under the 2nd paragraph of Art. 1191, the injured party is given a choice by which fulfillment
or rescission of the obligation in case one of the obligors fails to comply with what is incumbent upon him.
However, said article ENTITLES THE INJURED PARTY TO PAYMENT OF DAMAGES,
REGARDLESS OF WHETHER HE DEMANDS FULFILLMENT OR RESCISSION OF THE
OBLIGATION. Nominal damages were awarded.
 Atty. San Pedro noted that the Supreme Court decision in this instant case is good and efficient.
 There was indeed specific performance, so no rescission, but as provided by law, damages can
be awarded, and was awarded indeed in this instance.

CENTRAL BANK V. BICHARA 328 SCRA 807

Facts :
 Bichara sold 2 properties (land) to CBP.
 The contract of sale states that (1) the payment will be effected only after the Deed of Sale shall
have been registered and a clean title is issued in the name of CBP and (2) the vendor will
undertake at their expense to fill the parcels of land with an escombro free from waste materials
compacted to the street level.
 A clean title was issued to CBP.
 CBP failed to pay the respondent
 Bichara did not fill up the lot with escombro despite several demands made by the CBP.
 Bichara commenced action for (1) rescission or (2) specific performance with damages.
 CBP tendered payment to Bichara net of amount it paid to another party for the filling up of the
lot.
 Bichara refused the tender.
 CBP filed a motion for consignation which was granted by the court.
 The TC decided in favor of the specific performance of the obligations.
 On appeal, the CA reversed the TC’s decision and ordered the rescission of the contract of sale
and the reconveyance (restoration) of the properties to respondents.

7
Issue : W/N the CA err in decreeing the rescission?

Ruling : YES. Bicharas should not be allowed to rescind the contract where they themselves did not
perform their essential obligation (the filling up of escombro) thereunder. It should be emphasized that a
contract of sale involves reciprocity between the parties. Since Bichara were in bad faith, they may not seek
the rescission of the agreement they themselves breached.

RELIANCE COMMODITIES, INC. V. INTERMEDIATE APPELATE COURT 332 SCRA 299

Facts :
 Reliance entered into a contract with Marvin Paez.
 The contract provides that Reliance will provide respondent with funds and equipment for the
operation of the manganese mining and that respondent will sell the same to Reliance.
 As security for more cash advances needs to sustain the mining operations, Paez executed a
deed of first REM on their property in favor of Reliance.
 A difference arose between the two. Reliance demanded the return of the mining equipment and
later foreclosed extra-judicially the mortgage executed by respondent.
 Paez filed action in the TC to order the annulment of the mortgage.
 TC dismissed the complaint and ordered the return of cash advances plus interest, among others,
to Reliance.
 Paez appealed to the CA.
 CA decided in favor of Paez saying in effect that the contact entered into as well as the deed of
mortgage were null and void.
 Reliance brought the matter to the SC.

Issue: W/N the CA erred in finding that the petitioner and not the respondent gave cause for
rescission of the contract and in ruling that restitution is not available in rescission of the contract
under Art 1191 of the Civil Code.

Ruling: YES. Respondent Paez failed to make even a single delivery of manganese ores as there was no
mining at all. In this case, the injured party is the petitioner and the latter properly rescinded the contract. In
reciprocal obligations, the power to rescind is given to the injured party. Moreover, the rescission of the
contracts requires the parties to restore to each other what they have received by reason of the contracts.

Art. 1169. Those obliged to deliver or to do something incur in delay from the time the
obligee judicially or extrajudicially demands from them the fulfillment of their obligation.
However, the demand by the creditor shall not be necessary in order that delay may
exist:
(1) When the obligation or the law expressly so declares; or
(2) When from the nature and the circumstances of the obligation it appears that
the designation of the time when the thing is to be delivered or the service to be
rendered was a controlling motive for the establishment of the contract; or
(3) When demand would be useless, as when the obligor has rendered it beyond his
power to perform.
In reciprocal obligations, neither party incurs in delay if the other doe not comply
or is not ready to comply in a proper manner with what is incumbent upon him.
From the moment one of the parties fulfills his obligation, delay by the other begins.

Art. 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.

8
Art. 1171. Responsibility arising from fraud is demandable in all obligations. Any waiver of
an action for future fraud is void.

Art. 1172. Responsibility arising from negligence in the performance of every kind of
obligation is also demandable, but such liability may be regulated by the courts, according
to the circumstances.

Art. 1173. The fault or negligence of the obligor consists in the omission of that diligence
which is required by the nature of the obligation and corresponds with the circumstances of
the persons, of the time and of the place. When negligence shows bad faith, the provisions of
Art. 1171 and 2201, par. 2, shall apply.
If the law or contract does not state the diligence which is to be observed in the
performance, that which is expected of a good father of a family shall be required.

WHAT ARE THE KINDS OF BREACH?

(1) TOTAL – no fulfillment at all.
(2) PARTIAL – fails in the test of completeness
(3) IRREGULAR – performance not in accordance with the tenor of the obligation; did not pass
the test of completeness.

WHAT ARE THE CAUSES OF BREACH?

(1) DOLO (fraud) – malice or bad faith with intent on the part of the debtor to cause damage;
there is consciousness of an obligation and knowledge that the debtor is committing a breach.
(2) CULPA (negligence) – by reason of a negligent act; no intent to violate but there is
negligence on the part of the debtor.
 NEGLIGENCE is the omission or failure to comply with the diligence required by the
terms or, in its absence, given by law.
(3) MORA (default) – failure to comply in accordance with the dates and periods required or
specified in the obligation; breach of an obligation with respect to a point in time.
(4) In contravention of the terms either by dolo or culpa.

WHAT ARE THE KINDS OF DOLO?

(1) DOLO CAUSANTE – fraud committed at the inception of the contract; this is an inducement
for other parties to enter into an obligation which in other words means that the other party
would not have entered into a contract without such fraud or malice; THIS CREATES A
VOIDABLE OBLIGATION.
(2) DOLO INCIDENTE – no defect in the obligation, therefore validly perfect; it is committed in
the performance of the obligation, in which case the remedy is to sue for damages.

WHAT ARE THE KINDS OF CULPA?

CONTRACTUAL AQUILIANA CRIMINAL
Pre-existing contractual No pre-existing relationship No pre-existing relationship
Relationship between the parties between the parties between the parties
The source of the liability is the The source of the liability is the The source of the liability is the
contract negligent act law
Preponderance of evidence Preponderanc of evidence Beyong reasonable doubt
Defense of due diligence is not Diligence as a defense applies Defense is not availbale
available (employer has subsidiary
liability)

WHAT IS THE MASTER-SERVANT RULE?

The master-servant rule asserts that the negligence of the employee is the negligence of the
employer. (RCPI v. Court of Appeals) The master, to escape liability, cannot put up the defense of a good

9
father in the selection and supervision of employees, except to mitigate this liability if such is duly proved.

HOW DO YOU DISTINGUISH BETWEEN DOLO AND CULPA?

DOLO CULPA

There is intellectual awareness and actual No intellectual awareness based on

knowledge possibility of knowledge (He could have
foreseen but did not exercise proper diligence)
Liable for all consequences whether seen or Liable only for consequences which could have
unforeseen been foreseen
Waiver for future fraud is void. (Past fraud can be There can be a waiver EXCEPT if it is violative of
waived – condonation.) public policy.

RCPI V. COURT OF APPEALS 143 SCRA 657

Facts: Petitioner is a domestic corporation engaged in the business of receiving and transmitting messages.
The basis of the action filed for damages is the telegram received by Dionella which reads as follows: “sa
iyo walang pakinabang dumating-ka diyan-wala kang padala dito-kahit bulbul mo”.” Dionella alleges that
the defamatory words on the telegram sent to him not only wounded his feelings but also caused him undue
embarrassment and affected adversely his business as well as because other people have come to know of
said defamatory words. Defendant corporation as a defense, alleges that the additional words in Tagalog
was a private joke between the sending and receiving operators which they failed to detach before sending
the telegram.

Issue: W/N the company is liable for negligence

Ruling: YES. There is no question that in the case at bar, libelous matters were included in the message
transmitted, without the consent or knowledge of the sender. There is a clear sense of breach of contract by
the petitioner in adding extraneous and libelous matters in the sent message to the private respondent. As a
corporation, the petitioner can only act through its employees. Hence the acts of its employees in receiving
and transmitting messages are acts of the petitioner. In most cases, negligence must be proved inorder that
plaintiff may recover. However, since negligence may be hard to substantiate in some cases, we may apply
the doctrine of RES IPSA LOQUITOR (the thing speaks for itself), by considering the presence of facts of
circumstances surrounding the injury.

SYQUIA V. COURT OF APPEALS, LUNA 217 SCRA 624

Facts: This involves a petition for recovery of damages from breach of contract filed by the heirs of
Vicente Syquia against private respondent, Manila Memorial Park Cemetery, Inc. Pursuant to the deed of
sale executed by Syquia’s and the aforementioned memorial park, the remains of Vicente was to be re-
interred conformably in accordance with the agreed procedures between the parties. Preparatory to the
transferring of said remains to the newly purchased lot in the same memorial park, the concrete vault
encasing of the deceased was removed from its niche underground. The family discovered that the
concrete vault had a hole, approximately three inches at the bottom of the vault that caused the flooding
inside the vault damaging entirely the coffin as well as the parts of the deceased’s remains. Due to the
alleged unlawful and malicious breach by the respondent of its obligation to deliver a defect free concrete
vaults designed to protect the remains of the deceased and the coffin against the elements which resulted to
in the desecration of the deceased’s grave and in the alternative, because of the respondent’s gross
negligence in failing to seal the concrete vault, an action was filed for the recovery of damages. The
memorial park interposed that boring a hole was necessary inorder to prevent the vault from floating in case
of heavy rains.

Issue: W/N the respondent liable for negligence in boring the hole in the vault

10
Ruling: NO. It cannot be denied that the hole made possible the entry of more water and soil than was
natural had there been no hole. The law defines negligence as the omission of that diligence which is
required by the nature of the obligation and corresponds with the circumstances of persons, of the time, and
of the place. The circumstances surrounding the commission of the assailed act-boring a hole- negate the
allegation of negligence as the act was necessary inorder that water could come in to the vault because in its
absence, the vault will float during heavy rains. The court ruled further that the obligation of the memorial
park is to deliver a sealed vault and not a waterproof vault.

FAR EAST BANK AND TRUST CO. V. COURT OF APPEALS 241 SCRA 671

Facts: Luna applied for, and was accorded a fareastcard issued by FEBTC. The latter also issued a
supplemental card to Luna’s wife. The wife’s card was lost and FEBTC was forthwith informed. When
Luna presented his card to pay for a despedida lunch, the bank failed to honor the credit card. Thus Luna
instituted a case for damages.

Issue: W/N Luna is entitled to damages

Ruling: YES. FEBTC’s negligence in failing to give personal notice to Luna is not considered so gross as
to amount to malice and bad faith. Moral and exemplary damages cannot be awarded (Arts. 21, 2220,
2219, 2176 are not applicable) but only nominal damages (Art. 2221).

WHAT ARE THE EXCEPTIONS TO THE NEED FOR DEMAND?

(1) When the law or obligation expressly states that demand is not necessary, e.g. filing of
income tax on the 15th of April; otherwise, penalties or surcharges are imposed without the
need of demand for payment by the government.
(2) When time is of the essence – time is the controlling motive for the establishment of the
obligation, e.g. order of the wedding cake, precisely because you need the cake on the
wedding day otherwise delivery after said date would not benefit the creditor anymore. Such
intent of time being of the essence, must be clear in the minds of both parties.
 When time is not of the essence, a slight delay is not sufficient ground for rescission. But if
time is of the essence, even a slight breach is a ground for rescission.
(3) When demand would be useless – debtor had rendered it beyond his ability to perform.
Debtor cannot comply by reason of his own fault.

WHAT ARE THE KINDS OF MORA?

(1) MORA SOLVENDI – default on the part of the debtor; requires a positive obligation; delay
should be due to dolo, or culpa, not to a fortuitous event.

 There is mora solvendi ex re which is delay in giving or delivering a thing and mora
solvendi ex persona, which is delay in obligations to do or perform personal service.
 As a general rule, there must first be a demand before delay arises
 There is (a) ordinary delay or failure to perform an obligation on time, and (b) legal delay,
or when there is already a demand by the creditor and the debtor fails to comply with such a
demand.

WHAT ARE THE EFFECTS IF DEBTOR IS IN DEFAULT?

(1) the creditor is entitled to pursue any of the remedies discussed earlier..
(2) the debtor is liable if loss is due to fortuitous event.

BRICKTOWN DEVELOPMENT CORP. V. AMOR-TIERRA REALTY 239 SCRA 126

Facts:
 Bricktown executed 2 contracts to sell in favor of Amor-Tierra whereby Bricktown will sell
residential lots with a total price of P21M+.

11
  Amor-Tierra was able to pay only P1.3M+.
 Bricktown sent Amor-Tierra a letter of ‘Notice of Cancellation of the Contract” and advised that
it still had the right to pay its arrears within 30 days from receipt of notice.
 Meanwhile, Amor-Tierra demanded the refund of its various payments made.

Issue : 1. W/N the contracts to sell were validly rescinded by Bricktown.

2. W/N the amount remitted by Amor-Tierra were rightly forfeited

Ruling: YES. In a contract to sell, the non-payment of the purchase price can prevent the obligation to
convey title from acquiring any obligatory force.
NO. While petitioner acted within its legal right to declare the contract to sell rescinded or
canceled, the peculiar circumstances of the case would make it unconscionable to likewise sanction the
forfeiture by petitioner of payments made to it by private respondent.
There has indeed been a constant dialogue between the parties during the period of their judicial
relation, i.e., prior to end of period, June 30, 1981. Bricktown not only contributed but had consented to the
delay or suspension of payments. They did not give the plaintiff a categorical answer that their
counterproposals will not materialize.
The SC set aside the forfeiture clause.

TAGUBA V. DE LEON 132 SCRA 722

Facts:
 Petitioner Taguba sold a portion of a lot consisting of 400 sq. m. to respondent De Leaon.
 The portion sold comprises the area occupied by the Asuncions (a lessee) and respondent.
 The deed evidencing said sale was denominated as “Deed of Conditional Sale”.
 Respondent had already actually paid P12,500 of the total price of P18,000 and had tendered
payment of the balance within the grace period of 6 mos.
 Petitioner never notified respondent by notarial act that he was rescinding the contract, and
neither had he filed suit in court to rescind the sale.

Issue: W/N the rescission is valid

Ruling: NO. Failure to notify the vendee by notarial act to rescind the contract nor to file suit in court to
rescind the sale entitles the defaulting vendee to pay the contract price even after expiration of the period
agreed upon.
Where time is not of the essence of the agreement, a slight delay by 1 party in the performance of
his obligation is not a sufficient ground for rescission of the agreement.

BARZAGA V. COURT OF APPEALS 268 SCRA 105

Facts:
 Petitioners went to private respondent’s store on 21 December precisely to inquire if the
materials he intended to purchase could be DELIVERED IMMEDIATELY.
 But he was told by the storekeeper that if there were still deliveries to be made that afternoon,
his order would be delivered the following day.
 With this in mind, the petitioner decided to buy the construction materials the following
morning after he was assured to his time frame.
 An information – that the delivery of materials would be delayed as the delivery truck will have
to deliver materials in another place – was withheld by respondent.

Issue: W/N respondent is guilty of delay in performance of obligation.

Ruling: YES. Art. 1167 (2) provides that “in the reciprocal obligation, neither party incurs in delay if the
other does not comply or is not ready to comply in a proper manner with what is incumbent upon him.

12
From the moment one of the parties fulfills his obligation, delay by the other begins. Art. 1170 provides
that those who in the performance of their obligation are guilty of fraud, negligence, or delay, and those
who in any manner contravene the tenor thereof, are liable for damages.
Under the prevailing circumstances, TIME WAS OF THE ESSENCE in the delivery of the
materials. THE DELIBERATE SUPPRESSION OF INFORMATION MANIFESTS A CERTAIN
DEGREE OF BAD FAITH, there should be moral damages. Because a DEMAND HAD BEEN MADE,
respondent should be held in breach.

MARIN V. ADIL 130 SCRA 408

Iloilo Lot
Marin <------------------ Armadas
------------------>
Cotabato Lot
Facts:
 Respondent and petitioner agreed to exchange properties.
 The exchange was executed in anticipation of a declaration of said hereditary rights.
 The exchange would be rescindible when it is definitely ascertained that the parties have
respectively no right to the properties sought to be exchanged.
 Marin conveyed her interest to her sister.
 Armadas indeed have the property but the other Armada had no authority to sigh for the other.

Issue: W/N the deed of exchange is valid and enforceable.

Ruling: NO. It is evident from the deed of exchange that the intention of the parties relative to the lots,
which are the objects of the exchange, CANNOT BE DEFINITELY ASCERTAINED. In this case,
DEMAND IS ALREADY USELESS, because Marin is considered in default. Thus, the deed is void or
inexistent.

 Can Marin sue the Armadas?

NO. Her actions would be barred under the rule of EXCEPTIO NON ADIMPLETI
CONTRACTUS (plaintiff is not entitled to sue because he has not performed his part of the
agreement.)

(2) MORA ACCIPIENDI – the creditor is in default by reason of unjustifiably refusing to accept
performance by the debtor.

WHAT ARE THE REQUIREMENTS FOR MORA ACCIPIENDI?

(1) There must be a mature obligation; The obligation must already be enforceable or due and
demandable.
(2) Strict and complete compliance by the debtor.
(3) Creditor refuses to accept the prestation due to an unjustifiable cause.

WHAT ARE THE EFFECTS OF MORA ACCIPIENDI?

(1) If the creditor is in default, risk of loss shifts to the creditor. If there is a fortuitous event and
there is no negligence debtor has no obligation or liability.
(2) Rescission – but in Mclaughlin v. Court of Appeals, the Court had occasion to mention that
when the creditor is in mora, this only means that creditor is in default; in other words the
obligation continues to exist. TO EXTINGUSH DEBTOR’S OBLIGATION THERE
SHOULD BE A CONSIGNATION OF THE PRESTATION IN COURT.

WHAT IS THE RULE ON DEMAND CONCERNING RECIPROCAL OBLIGATIONS?

The need for demand is no longer necessary.

WHAT IS THE FORM OF DEMAND IN RECIPROCAL OBLIGATIONS?

13
 It is compliance or fulfillment of your own obligation; from the moment one party performs or
fulfills, the other is already in default, with or without demand.
Where the two obligations are simultaneous, willingness and capacity to perform puts the other
party in default. If there is no such simultaneous exchange of consideration, mere willingness to perform is
not sufficient.

IS THE OBLIGATION OF THE DEBTOR EXTINGUISHED IN A CASE OF MORA ACCIPIENDI?

No. When a creditor is in mora, it only means that the creditor is in default but it does not mean
that the obligation is automatically extinguished.

REPUBLIC OF THE PHILIPPINES V. COURT OF APPEALS 133 SCRA 405

Facts:
 Respondent Laureano contracted with NEDA to supply the latter with plumbing materials.
 NEDA rejected the delivery for non-compliance with the agreed specifications.
 A compromise was arrived at which gave authority to Laureano to negotiate the sale of attached
properties.
 Laureano was able to sell the property before the authority to sell expired, and remitted the
proceeds to NEDA.
 Seven (7) months later, NEDA disapproved the sale due to the “low price”.

Issue: W/N creditor is in default

Ruling: YES. NEDA’s retention of the checks for 7 months without expressing any protest or objection
was clear procrastination and indecision. THE DELAY IN PAYMENT WAS CAUSED NOT BY THE
OBLIGOR BUT BY OBLIGEE.

MCLAUGHLIN V. COURT OF APPEALS, FLORES 144 SCRA 693

Facts:
 Petitioner and respondent entered into a contract of conditional sale of real property.
 A compromise was arrived at after respondent buyer failed to pay fully the installment
payments.
 Again, the buyer was not able to pay on the date agreed.
 However, the tendered payment was refused by petitioner.
 The buyer did not consign the sum with the court.

Issue: W/N the court of appeals erred in not canceling the contract of conditional sale.

Ruling: NO. After a PURCHASER BY INSTALLMENT has paid a substantial portion of the purchase
price, it would be inequitable to have the amount forfeited as LIQUIDATED DAMAGES, particularly if
tender of payment was made. The grace period has NOT yet expired when the tender of payment was
made, thus the respondent is protected under the Maceda Law.
WHEN AN OBLIGOR FAILS TO FOLLOW A VALID TENDER OF PAYMENT WITH A
COURT CONSIGNATION, THE COURT MAY ALLOW HIM TO PAY HIS OBLIGATION WITHOUT
RESCINDING THE DEED OF SALE.
 If not in default in the performance of obligation – there could be no resolution.
 Consequences of tender of payment:
1. Debtor not in default
2. Preserves the right of debtor (Flores) under the conditional sale.
3. Does not extinguish the obligation unless followed by consignation in court.

63 (3) COMPENSATIO MORAE – delay in reciprocal obligation. Both parties are guilty of the default.

14
  In compensatio morae, the default of one negates the default of another. In Central Bank v.
Court of Appeals, the liability of Island Savings Bank for damages in not furnishing the
entire loan is offset by the liability of Tolentino for damages in the form of penalties and
surcharges, for not paying his overdue P17T debt. Tolentino paid only the interest and not
penalties or surcharges because would be in form of damages.
CENTRAL BANK V. COURT OF APPEALS, TOLENTINO 139 SCRA 46

Facts :
 Island Savings Bank approved the loan application for P80K of respondent-Tolentino
 Only P17K, however, was released to respondent.
 Also, the advance interest for the P80K (amounting to P4,800) was deducted from the partial
release of P17K but was subsequently refunded.
 The Monetary Board prohibited ISB from making new loans and investments. Later, it was
prohibited from doing further business.

Issue :
 W/N respondent’s action for specific performance would prosper
 W/N respondent is liable to pay the P17K debt covered by promissory note
 W/N respondent’s liability to pay P17K subsists, can his real estate be foreclosed to satisfy
said amount

Ruling: NO. Rescission is the only alternative remedy left due to impossibility of performance of ISB but
it is only for the P63K balance. Art 1192 provides that in case both parties have committed breach of their
reciprocal obligation, the liability of the first infractor shall be equitably tempered by the courts. The
liability of ISB in not furnishing the entire loan is OFFSET by the liability of Sulpicio for damages for not
paying his overdue debt of P17K.
YES. The promissory note gave rise to Tolentino’s reciprocal obligation to pay P17K. His failure
to pay the overdue amortization under the promissory note made him a party in default, hence not entitled
to rescission.
YES. But only up to P21.25% (17/80) of the real estate mortgage. The other part is deemed
unenforceable.

Art. 1174.Except in cases expressly specified by law, or when it is 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 could not be foreseen, or which, though foreseen,
were inevitable.

WHAT IS A FORTUITOUS EVENT?

These are events which are unforeseen or if foreseen cannot be avoided, e.g., acts or God or force
majeure, war, rebellion, typhoon.

WHAT ARE THE REQUIREMENTS TO EXEMPT DEBTOR FROM LIABILITY?

(1) The event must be independent of the debtor’s will.
(2) The event must be unforeseen or unavoidable.
(3) The event must render it impossible for the debtor to perform his obligation. If the event will
only render the performance difficult but still possible, then the debtor still has to comply.
(4) The debtor must have no participation in the aggravation of the injury.

JUNTILLA V. FONTANAR 136 SCRA 624

Facts: Juntilla was a passenger of a jeepney being driven by respondent Camoro, registered under the
franchise of respondent Fontanar, but actually owned by respondent Banzon. The said jeepney turned turtle
and jumped into a ditch when its right rear tire exploded and thereby caused injuries to petitioner. Petitioner
thus filed for breach of contract with damages.

15
 The evidence shows that the jeepney was running at a very fast speed before the accident and that
it was overloaded.

Issue: W/N the defendants are exonerated from paying damages due to it being a fortuitous event.

Ruling: NO. While it may be true that the tire that blew-up was still good, THIS FACT ALONE DOES
NOT MAKE THE EXPLOSION OF THE TIRE A FORTUITOUS EVENT. No evidence was presented to
show that the accident was due to ADVERSE ROAD CONDITIONS or that PRECAUTIONS WERE
TAKEN BY THE JEEPNEY DRIVER TO COMPENSATE FOR ANY CONDITIONS LIABLE TO
CAUSE ACCIDENTS. In the case at bar, the cause of the unforeseen and unexpected occurrence was not
independent of human will.

TANGUILIG V. COURT OF APPEALS 266 SCRA 78

Facts: Petitioner entered into a contract whereby it will construct a windmill for a consideration of P60,000
payable by P15,000 down payment and P15,000 installments. Due to the refusal of the respondents to pay
P15,000 balance, petitioners filed a complaint. The P15,000 was paid by respondents to another party for
the construction of a deep well. The construction of a deep well, the court found, was not part of the
contract petitioners and respondents agreed upon. The windmill collapsed due to “strong winds” but there
was actually no typhoon on the day the windmill collapsed.

Issue:W/N the petitioner is under the obligation to reconstruct the windmill.

Ruling: YES. In order for a party to claim exemption from liability by reason of a fortuitous event under
Art.1174, the event should be the sole and proximate cause of the loss or destruction of the object of the
contract.
OOPS! A STRONG WIND IN THIS CASE CANNOT BE FORTUITOUS – UNFORESEEABLE
AND UNAVOIDABLE. HENCE, THE NEWLY-CONSTRUCTED WINDMILL SYSTEM WOULD
NOT HAVE COLLAPSED HAD THERE BEEN NO INHERENT DEFECT IN IT.
The negligence in this instance is arrived at by deduction. Tanguilig is not in default. In reciprocal
obligations, default will set in if the other party is not ready.

ACE-AGRO DEVELOPMENT V. COURT OF APPEALS 266 SCRA 429

Facts: Ace-Agro entered a service contact with Cosmos Bottlers whereby it would clean soft drink bottles
and repair wooden shells of Cosmos for a fee. The contract covers the period 01 January 1990 to 31
December 1990, and renewable yearly. On 25 April, 1990, a fire broke out in Cosmos’ plant. As a result,
Ace-Agro’s work was stopped.
 Ace-Agro then asked Cosmos to allow it to resume its service.
 Respondent advised petitioner that it is terminating their contract.
 Meanwhile, petitioner informed its employees of the termination of their employees which led
the employees to file a complaint of illegal dismissal.
 Petitioner then sent another letter reiterating its request for a reconsideration.
 Respondent advised petitioner that the latter resume work but the work had to be done outside
respondent’s premises.
 Petitioner refused the offer and asked for an extension of the terms of the contract instead,
which respondent turned down.
 Respondent later advised petitioner to resume work inside the respondent’s plant.
 Petitioner rejected citing the pending labor case.
 Petitioner brought the case to the RTC for breach of contract and damages.
 RTC decided in favor of the petitioner.
 Respondents appealed to the CA, CA reversed the RTC’s decision.

Issue: W/N respondents is guilty of breach.

16
Ruling: NO. Because the suspension of work was due to force majeure, there was no justification for
petitioner’s demand for an extension of the terms of the contract.
The period during which the work is suspended due to force majeure DOES NOT JUSTIFY AN
EXTENSION OF THE TERMS OF THE CONTRACT.

JUAN NAKPIL AND SONS V. COURT OF APPEALS 144 SCRA 596

Facts: Respondent Philippine Bar Association decided to construct an office building. The construction
was undertaken by respondent United Construction Co.. The plans and specifications were prepared by
petitioner Juan Nakpil and Sons. The building was completed in June 1966.
In August 2, 1968, an unusually strong earthquake hit Manila and the building sustained major
damages. PBA commenced an action for recovery of damages against UCCI. UCCI, meanwhile filed a
third party complaint against the architects who prepared the plans and specifications. Other earthquakes on
April 7, 9 and 12, 1970 caused further damage to the property.

Issue: W/N an act of God which caused the failure of the building exempts from liability parties who
are otherwise liable because of their negligence.

Ruling: NO. UCCI and Juan Nakpil and Sons are solidarily liable for damages.
To exempt the obligor from liability due to an act of God, under Art. 1174, the following
requisites must concur.:
 The cause of the breach must be INDEPENDENT OF THE WILL of the debtor.
 The event must be either UNFORESEEABLE or UNAVOIDABLE.
 The event must be such as to render it IMPOSSIBLE FOR THE DEBTOR TO FULFILL HIS
OBLIGATION in a normal manner.
 The debtor must be FREE FROM ANY PARTICIPATION in or aggravation of the injury to the
creditor.
If upon happening of a fortuitous event or an act of God, there concerns a corresponding fraud,
negligence, delay or violation or contravention in any manner of the tenor of the obligation as provided for
in Art. 1170 which results in loss or damages, the obligor cannot escape liability.
The principle embodied in the act of God doctrine strictly requires that the act must be one
OCCASSIONED EXCLUSIVELY BY THE VIOLENCE OF NATURE and all human agencies are to be
excluded from creating or entering into the cause of the mischief.
To be exempt from liability for loss because of an act of God, he must be FREE FROM ANY
PREVIOUS NEGLIGENCE or misconduct by which that loss or damage may have been occasioned.
One who negligently creates a dangerous condition cannot escape liability for the natural and
probable consequences thereof, although the act of a third person or an act of God for which he is not
responsible, intervenes to precipitate the loss.
In the case at bar, UCCI is liable for:
 Substantial deviation from plans and specifications.
 Failure to observe the requisite workmanship in construction.
 Failure to exercise the required degree of supervision.
Also, Juan Nakpil and Sons is liable for
 Inadequacies or defects in the plans and specifications.
 Supervision as to compliance.
Such negligence was arrived at by an extensive study (a scientific study, kuno!)by a
Commissioner who is amicus curae in this case.

NPC V. COURT OF APPEALS 222 SCRA 415

Facts: The Rayos and other complainants filed for damages against NPC And Benjamin Chavez. They
sought to recover actual and other damages for the loss of lives and destruction of property caused by the
inundiation of the town of Norzagaray, Bulacan. The flooding was caused by the negligent release by NPC
of the water through the spillways of Angat Dam.

17
 NPC contends that they exercised due care, diligence and prudence in the operation and
maintenance of the hydroelectric plant. The damages incurred by the petitioners were caused by a
fortuitous event or force majeure and NPC cannot be held liable for such damages.

Issue: W/N it should be considered a fortuitous event.

Ruling: NO. If upon the happening of the fortuitous event or an act of God, there concurs a corresponding
fraud, negligence, delay, violence or contravention in any manner of the tenor of the obligation as provided
for in Art. 1170, which results on the loss or damages, the obligor cannot escape liability.
NPC is guilty of negligence. The unholiness of the hour, the extent of the opening of the
spillways, and the magnitude of the water released, are all but products of NPC’s heedlessness, slovenliness
and carelessness. The early warning notice was ineffectual, insufficient and inadequate. It did not prepate
the persons so served, for the volume of the water to be released, which turned out to be of such magnitude,
that residents near or along the Angat River, should have been advised to evacuate.

Art. 1175. Usurious transactions shall be governed by special laws.

WHAT IS THE LAW AS REGARDS USURIOUS TRANSACTIONS?

Obviously, the Usury Law.
But by virtue of C.B. 905, the Usury Law was rendered legally ineffective, but it can be revived if
the Monetary Board sees it fit. Until a repealing legislation is provided, the Usury Law will be deemed
suspended.
Since the Usury Law is substantive law, it can be applied retroactively over procedural laws.

LIAM LAW V. OLYMPIC SAWMILL 129 SCRA 439

Facts : Petitioner Liam Law loaned P10,000 without interest to respondents Chi. The loan became due on
31 January, 1960 but was not paid on that date, with the debtors asking for an extension of up to 3 months.
Parties executed another loan document. Payment of the P10,000 was extended for 3 months but
was increased by P6,000 (as attorney’s fees, legal interest, and other incidental costs.)
Respondents Chi again failed to pay their obligation after the 3 months extension. Respondents
admitted that P10,000 loan but claimed that the addition P6,000 constituted usurious interest.

Issue: W/N respondents can be compelled to pay the P6,000.

Ruling: YES. The Supreme Court views the P6,000 obligation as liquidated damages suffered by
petitioner, representing loss of interest income, attorney’s fees and other incidentals.
For sometime now, usury has been legally non-existent under Central Bank Circular No. 905.
Interest can now be charged as lender and borrower may agree upon.

Art. 1176. The receipt of the principal by the creditor, without reservation with respect to
the interest, shall give rise to the presumption that said interest has been paid.
The receipt of a later installment of a debt without reservation as to prior
installments, shall likewise raise the presumption that such installment have been paid.

WHAT IS THE PRESUMPTION ON THE PAYMENT OF INTEREST WHEN THE PRINCIPAL HAS
BEEN PAID?
The receipt of the principal by the creditor, without reservation with respect to the interest, shall
give rise to the presumption that said interest has been paid.

WHAT IS THE PRESUMPTION ON THE PAYMENT OF LAST INSTALLMENT?

The receipt of the last installment of a debt without reservation as to prior interests, shall likewise
give rise to the presumption that such installments have been paid.

18
 Presumptions in Art. 1176 are so-called disputable or rebuttable presumptions. The burden of proof lies
on the creditor. Therefore, if the creditor shows that the debtor did not pay the interest or the prior
installment, there presumptions will be overcome.

Art. 1177. The creditors, after having pursued the property in possession of the debtor to
satisfy their claims, may exercise all the rights and bring all the actions of the latter for the
same purpose, save those which are inherent in his person; they may also impugn the acts
which the debtor may have done to defraud them.

Art. 1178. Subject to the laws, all rights acquired in virtue of an obligation are
transmissible, if there has been no stipulation to the contrary.

WHAT ARE SO-CALLED AUXILIARY ACTIONS?

These are actions which a creditor may avail of in case the ordinary actions of specific
performance, rescission, etc., are not available. Such are:
(1) to levy by attachment or execution upon all the property of the debtor, except such as are
exempt by law from execution such as the family home and those mentioned in Sec. 12 of the
Rules of Court;
(2) To exercise all the rights and actions of the debotr, EXCEPT such as are inherently personal
to him (accion subrogatoria), e.g., the right to go against the debtor of your debtor, in a case
where D owes C P1M and T owes D P1.5M and D cannot pay C the P1M, C can go afer the
debt of T to D provided there is a court order;
(3) To ask for the rescission of the contracts made by the debtor in fraud of their rights (accion
pauliana), e.g., A could not pay B his obligation in the amoung of P35T. However, A owns a
car worth about P20T and C is indebted to him for P5T. Before the due date of the obligation,
A sold his land worth P30 to D. Under these circumstances, B may ask the court to rescind or
cancel the sale made by A to D on the ground that the transaction is fraudulent in case B
cannot recover in any other manner his credit, stressing that this remedy can be resorted to
only if B could not collect in full his credit.

Chapter 3
Different Kinds of Obligations

Sec. 1 – Pure and Conditional Obligations

Art. 1179. Every obligation whose performance does not depend upon a future or uncertain
event, or upon a past event unknown to the parties, is demandable at once.
Every obligation which contains a resolutory condition shall also be demandable,
without prejudice to the effects of the happening of the event.

Art. 1180. When the debtor binds himself to pay when his means permit him to do so, the
obligation shall be deemed to be one with a period, subject to the provisions of Art. 1197.

WHAT ARE THE DIFFERENT KINDS OF OBLIGATIONS?

(1) Pure – means that there is no term, condition, and is legally demandable at once.
 All pure obligations are demandable at once. But not all obligations which are demandable
at once are pure obligations, e.g., a resolutory condition and term. The obligation terminates
upon the happening of the event or term.
(2) Conditional – subject to a condition which is something future and uncertain; a condition is
that which creates or terminates an obligation.
 FUTURE but CERTAIN  period

19
  PAST but UNCERTAIN  term (when reference is made to a past event unknown to the
parties and the uncertainty lies in the knowledge of the parties, it cannot be a condition, it
has to be a term.)
(3) With a Term – obligation occurs at a certain time which may be:
(a) future and certain,
(b) past and uncertain,
(c) when his means permit him to do so in accordance with Art. 1180, which means that
there should be intent to comply with the obligation. It is only the time which is
dependent on the debtor and not the payment, e.g. if you do not have money you cannot
escape liability because the obligation subsists.

Art. 1181. In conditional obligations, the acquisition of rights, as well as the extinguishment
or loss of those already acquired, shall depend upon the happening of the event which
constitutes the condition.

WHAT ARE THE KINDS OF CONDITIONAL OBLIGATIONS?

(1) Suspensive – that which gives rise to the obligation where you do not know whether or not
there would be an obligation; if the condition is not fulfilled there would be no obligation,
e.g., if you pass the bar, I’ll give you a black Pajero with plate number XDB709. THE
HAPPENING GIVES RISE TO AN OBLIGATION.

GONZALES V. CRUZ 314 SCRA 585

Facts: Gonzales paid P15K (2500X6has.) for the annual rental. He, however, did not exercise his option
to purchase the property immediately after the expiration of the 1 year lease. Thus, respondent filed a
complaint for recovery of possession of the property. The property in question is currently subject of an
extrajudicial partition and the title remains not in the name of the respondent yet but the latter’s
predecessors-in-interest. Paragraph 9 of the contract provides: The lessors hereby commit themselves and
shall undertake to obtain a separate and distinct TCT over the herein leased portion to the lessee within a
reasonable period of time which shall not in any case exceed 4 years, after which a new contract shall be
executed by the herein parties which shall be the same in all aspects with the contract of lease/purchase
insofar as the terms and condition are concerned.

Issue: W/N paragraph 9 is a condition precedent before petitioner could exercise his option to buy
the property.

Ruling: Yes. The 9th par. required respondents to obtain a separate and distinct TCT in their names thus it
is a condition precedent to the petitioner’s obligation to purchase and pay for the land.
When the consent of a party to a contract is given subject to the fulfillment of a suspensive
condition, the contract is not perfected unless that condition is first complied with.
The obligatory force of a conditional obligation is subordinated to the happening of a future and
uncertain event , so that if that event does not take place, the parties would stand as if the conditional
obligation had never existed.
There can be no rescission of an obligation as yet non-existent because the suspensive condition
has not happened.

WHEN SHALL PRESCRIPTION BEGIN TO RUN?

Prescription is counted from the time of fulfillment of obligation if the obligation is subject to a
suspensive condition (only from the time cause of action accrues) because only when it is fulfilled may one
bring action. (Cole v. Vda. de Gregorio)

COLE V. VDA. DE GREGORIO 116 SCRA 670

20
Facts: A contract was entered into on August 29, 1963. On August 31, 1963, services of a surveyor was
hired. Two “angry” letters dated October 20, 1964 and April 1, 1965 were written by Cole to the surveyor
with regard to the delay in the results of the survey. The survey plans were delivered on May 31, 1966 to
the children of Cole, the spouses Cole having died already. The children discovered that the property was
already transferred to respondent’s daughter. Respondent contend that Cole rescinded the contract and
respondent returned the downpayment of P1K. On July 25, 1974, petitioner filed for specific performance
or annulment of the subject deed of sale.

Issue: W/N the petitioner’s action to annul the deed of sale is barred by prescription (10 years)

Ruling: The prescriptive period cannot be counted from the date of execution of the deed of promise to buy
and sell where it was stipulated that the balance of the price shall be paid after the results of the land
survey.
The prescriptive period for filing action must be computed from the date the cause of action
accrues and should not be made to retroact to the date of execution of a conditional contract.

(2) Resolutory – that which terminates the obligation, e.g., I’ll lend you my car until you graduate
from law school, wherein the beginning of the obligation exists. THE HAPPENING
EXTINGUISHES RIGHTS ALREADY EXISTING.

DUCUSIN V. COURT OF APPEALS 122 SCRA 280

Facts: Ducusin entered into a contract of lease with Baliola whereby for a P220 monthly rental for X
years, Ducusin would lease his apartment unit. After almost 2 years, petitioner sent a “Notice to Terminate
Lease Contract” to respondent for the reason that petitioner’s children were getting married and did in fact
get married. Receiving no reply, petitioner filed an action for ejectment. Clause 2 of the contract provides “
The term of this contract shall be in a month-to-month basis XXX until terminated by mutual agreement or
by the lessor on the ground that his children need the premises for their own use and residence or upon any
ground provided for in accordance with law.”

Issue: W/N petitioner can unilaterally terminate the contract of lease under the terms and
conditions stated therein

Ruling : Yes. The need of the lessor’s children of the leased property is not a condition the happening of
which is dependent upon the will of the lessor. The happening of the condition depends upon the will of a
third person—the lessor’s children. The condition therefore is valid being a resolutory condition the
happening of which extinguishes the obligation.

JACINTO V. KAPARAZ 209 SCRA 246

Facts : Jacinto entered into an “Agreement to sell” with Kaparaz whereby the latter will convey a lot and
the former will pay P800 DP, the balance on installment at P100. The possession of the property sold was
immediately delivered to the petitioner. Respondent unqualifiedly bound themselves to execute the final
deed of sale ‘as soon as the settlement of the estate shall have been effected not later than March 31, 1967”
and after full payment of the purchase price. Respondent did not reserve the ownership of the property until
full payment of unpaid balance of P1K. There was no stipulation giving the respondent the right to
unilaterally rescind the contract the moment the vendee fails to pay within a fixed period. Upon the refusal
of respondent to execute the deed of sale, petitioner filed a complaint for specific performance.

Issue: W/N the “agreement to sell” is a contract of sale or a contract to sell.

Ruling: The agreement in the instant case has all the earmarks of a contract of sale. In a contract of sale,
the nonpayment of the price is a resolutory condition, the remedy of the seller under Art 1191 is to exact
fulfillment or to rescind the contract. But the delay of Petitioner, being a mere casual breach, does not

21
justify rescission. The prompt payment of the monthly amortization was not a condition precedent to the
execution of the final deed of sale.

Art. 1182. When the fulfillment of the condition depends upon the sole will of the debtor,
the conditional obligation shall be void. If it depends upon chance or upon the will of a third
person, the obligation shall take effect in confirmity with the provisions of this Code.

WHAT ARE THE KINDS OF CONDITIONS?

(1) POTESTATIVE – condition is dependent upon the sole will of any of the parties.
 if on the part of the CREDITOR – the obligation and condition is
valid because it is really the creditor who has the right or is entitled
to enforce or demand the obligation;
 if on the part of the DEBTOR – if suspensive, the condition and
obligation are void because it would be as if there would be no
obligation at all, and if resolutory, both the condition and the
obligation are valid, because the obligation subsists even before the
happening of the condition.
(2) CASUAL – means that the obligation is dependent upon chance, e.g. games of lottery; or
dependent upon the will of a third person. It doesn’t matter whether suspensive or resolutory.
(3) MIXED – instances:
(a) partly dependent upon the will of one of the parties and a third person.
(b) Chance and one of the parties
(c) Chance and a third person plus one of the parties
Mixed conditions do not affect the validity of the obligation.

SECURITY BANK AND TRUST CO. V. COURT OF APPEALS 249 SCRA 206

Facts : Building Contract

Security Bank P 1,760,000 Ferrer
Building

Ferrer was able to complete the construction within the agreed period. He, however, incurred
additional expenses of P360K due to drastic increase in construction cost, which was made known to
petitioner. Ferrer made a timely demand for payment of increased cost. Petitioner settled Ferrer’s claim but
only for P200K based on Art 9 of the building contract which states: “ If at any time prior to the completion
of work xxx increases in prices of construction materials and/or labor shall supervene through no fault on
the part of the contractor xxx owner shall equitably make the appropriate adjustment on mutual agreement
of both parties”. Respondent thus filed a complaint for breach of contract with damages.

Issue: W/N the conditional obligation is valid

Ruling: No. The “mutual agreement” is in effect a condition dependent on petitioner’s sole will, since
private respondent would naturally and logically give consent to such an agreement which would allow him
recovery of the increased costs.
NOTE: THE BANK OFFICER AND THE ARCHITECT RECOGNIZED THE VALIDITY OF
THE CLAIM AND THUS RECOMMENDED THE PAYMENT AT A REDUCED PRICE.

RUSTAN PULP V. COURT OF APPEALS 214 SCRA 665

Contract of Sale
Rustan P30 / cu. m. Lluch

pulpwood

22
Facts: Sec.7 of the contract provides: The Buyer shall have the right to stop delivery of the said raw
material XXX when supply of the same shall become sufficient XXX however, the seller is given sufficient
notice. Due to major defects in machinery, petitioners informed respondent to stop delivering of raw
material. Notwithstanding this, supply of raw materials continues to be delivered by respondent and other
suppliers. Later, petitioner decided to suspend taking delivery of raw materials from respondent.
Respondent thus filed for contractual breach.

Issue : W/N petitioner’s decision to suspend taking delivery of raw materials was in the lawful
exercise of its right under the contract of sale.

Ruling : No. There is no doubt that the contract speaks loudly about petitioner’s prerogative but what
diminishes the legal efficacy of such right is the condition attached to it which is dependent exclusively on
their will for which reason, We have no alternative but to treat the controversial stipulation as inoperative.
A purely potestative imposition of this character must be obliterated from the face of the contract
without affecting the rest of the stipulations considering that the condition relates to the fulfillment of an
already existing obligation and not to its inception.
 San Pedro held : “ Not really potestative, SC made a shortcut.”

Art. 1183. Impossible conditions, those contrary to good customs or public policy and those
prohibited by law shall annul the obligation which depends upon them. If the obligation is
divisible, that part thereof which is not affected by the impossible or unlawful condition
shall be valid.
The condition not to do an impossible thing shall be considered as not having been
agreed upon.

ARE PARTIES FREE TO STIPULATE ANY CONDITION?

YES. With the exception that it should not be impossible, immoral and illicit.

WHAT IS AN IMPOSSIBLE CONDITION?

It is that which is illogical or legally or physically unattainable.
There is physical impossibility when, for instance, you pose as condition “making a dead man live
again.” There is legal impossibility when the obligation cannot be fulfilled because it is prohibited by law.

WHAT IS AN ILLICIT CONDITION?

It is that which is against good customs or public policy.

WHAT IS AN IMMORAL CONDITION?

It is that which is against good morals.

WHAT IS THE EFFECT OF THESE CONDITIONS ON AN OBLIGATION?

It depends.
(1) If it is positive in nature (to do or to give) the obligation as well as the condition is void, so it
is as if there is no obligation EXCEPT in contacts involving succession and donation because
they are gratuitous and purely liberal and not given for any consideration.
(2) If it is negative (not do) just disregard the condition as if no condition was imposed at all but
the obligation remains valid e.g., I will give you P1M if you do not kill Imelda in which case
the condition is considered not written at all.

Art. 1184. The condition that some event happen at a determinate time shall extinguish the
obligation as soon as the time expires or if it has become indubitable that the event will not
take place.

23
Art. 1185. The condition that some event will not happen at a determinate time shall render
the obligation effective from the moment the time indicated has elapsed, or if it has become
evident that the event cannot occur.

Art. 1186. The condition shall be deemed fulfilled when the obligor voluntarily prevents its
fulfillment.

HOW LONG MUST THE PARTY WAIT IF THE CONDITION IS NOT YET MET?
People normally do not have to wait for eternity. It is possible for the parties to fix a period for the
condition to be fulfilled. This is what you call a conditional obligation coupled with a term.

WHAT IS THE EFFECT OF A CONDITION COUPLED WITH A TERM ON AN OBLIGATION?

It depends:
(1) If it is positive in nature, there is a fixed period, and if by said date there is no fulfillment, then
the parties are released from their obligation EXCEPT if it becomes indubitable i.e., there is
certainty that the condition will no longer occur, happen or exist. If before the period
stipulated the condition is fulfilled, then the obligation becomes effective.
(2) If it is negative in nature and there is a fixed period, and by said period the condition does not
occur, happen, or exist, then you are legally bound to fulfill the obligation, e.g., I will give
you P100 if there is no coup d’etat before December 31, 2002, in which case, if December 31
arrives and there is no coup d’etat, then you will have to give the P100, EXCEPT if it
becomes indubitable that no coup will ever happen before the 31st then you have to give the
P100 before December 31 arrives.

WHAT IF THE PARTIES DO NOT AGREE ON A PERIOD?

It depends:
(1) If there was no fixed period and there was no intent on the part of the parties to fix a period,
then they would have to wait for the condition to happen.
(2) If there was no fixed period but by the nature of the obligation there should be a fixed period
then Art. 1197 should be applied. Art. 1197 being a two-step process:
(a) It must be shown that the parties intended a period.
(b) If yes, the court actually fixes a period.

 Art. 1197 authorizes the court to fix a period but the court cannot do it at its own discretion.
They would have to ask what period was intended by the parties.

In Millare v. Hernando, the court cannot fix a period because there is no more obligation
because the lease has expired and the parties did not seem to have renewed it.

MILLARE V. HERNANDO 151 SCRA 484

Contract of Lease
Millare (Lessor) People’s Restaurant Co (Lessee)

P350/ month

Facts: Par. 13 of the contract provides that “THE CONTRACT OF LEASE IS ONLY SUBJECT TO THE
LAW AND REGULATIONS OF THE GOVERNMENT; AND THAT THIS CONTRACT OF LEASE”
maybe renewed after a period of 5 years UNDER THE TERMS AND CONDITIONS AS WILL BE
MUTUALLY AGREED upon the parties at the time if renewal; x x x”
Petitioner informed respondent that they could continue leasing the property if they were
amenable to paying increased rentals of P1,200 per month. Respondent counter offered P700. Respondent
filed a complaint ordering the renewal of the lessee.

Issue: W/N Art. 1191 applies

24
Ruling: NO. The duration of the renewal period was not left to the will of the lessee alone, but rather to the
will of both lessor and lessee. The parties reserved to themselves the faculty of agreeing upon the period of
the renewal of the contract.
ART. 1197 APPLIES ONLY IF THERE IS AN EXISTING CONTRACT, AND IN THE CASE
AT BAR, THERE IS NO MORE CONTRACT AS IT ALREADY EXPIRED.

AGCAOILI V. GSIS 165 SCRA 1

Contract of Sale
GSIS House and Lot Agcaoili

P3156/month

Facts: The condition of the contract was that “you are, therefore advised to occupy the said house
immediately. If you fail to occupy the same within 3 days x x x your application shall be considered
automatically disapproved.”
Agcaoili tried to fulfill the condition, but could not for the reason that the house was absolutely
uninhabitable. He refused therefore to make further installment payments unless GSIS made the house
habitable. GSIS canceled this award and required Agcaoili to vacate the premises. Thus, Agcaoili instituted
suit for specific performance and damages.

Issue: W/N GSIS was correct in canceling the award.

Ruling: NO. There can hardly be any doubt that the house contemplated was one that could be occupied
for purposes of residence in reasonable comfort and convenience.
There being a PERFECTED CONTRACT OF SALE, it was the duty of GSIS as seller to deliver
the thing sold IN A CONDITION FOR ITS ENJOYMENT BY THE BUYER FOR THE PURPOSE
CONTEMPLATED.
Since GSIS did not fulfill his obligation, and was not willing to put the house in a habitable state,
IT CAN’T INVOKE AGCAOILI’S SUSPENSION OF PAYMENT OF AMORITIZATION AS CAUSE
TO CANCEL THE CONTRACT.
Note that the Court exercised its equity jurisdiction. It adjusted the rights of parties in accordance
with the circumstances obtaining at the time of rendition of judgment due to significant difference from
those existing at the time of generation of those rights (contract execution).

ROSE PACKING V. COURT OF APPEALS 167 SCRA 309

Contract of Loan
Rose Packing loan PCI Bank

real estate and chattel mortgage

Facts: The conditions of the contract of loan was the PCI Bank will appoint its people in key positions. PCI
Bank approved the additional accommodation to petitioner consisting of P710,000 but released only
P300,000. Petitioner offered to partially pay off its account and requested the release of the real estate
mortgage. Respondent however refused stating that all obligation should be liquidated first before the
release of titles. Respondent filed a complaint for collection of indebtedness. It gave notice that it would
cause the real estate mortgage to be foreclosed. Petitioner filed with the court preliminary injunction but the
trial court denied.

Issue:
 W/N private respondent have the right to the extra-judicial foreclosure sale of petitioner’s
mortgaged properties before trial on the merits.
 W/N petitioner was in default.

25
  W/N respondent was in default.

Ruling: NO. When the lower court denied the issuance of the writ prayed for the dissolved the restraining
order it had previously issued, it practically adjudicated the case before trial on merits.
NO. The condition that petitioner set for the consolidation of the obligation of the petitioner –
liquidation of petitioner’s obligation together with it’s other obligation in the financing scheme already
approved by the NIDC and PDCP – did not happen.
YES. It failed to release the P710,000 loan it approved.
Note that in Filipinas Marble Corp. v. IAC, it was held that “where the lending corporation took
over the management of the borrowing corporation, as one of the conditions for the granting of the loan,
and the borrowing corporation was led to bankruptcy through mismanagement and misappropriation of
funds, thereby defeating the very purpose of the loan, it is as if the loan was never delivered, and thus there
was failure of consideration on the part of the lending institution.

Art. 1187. The effects of a conditional obligation to give, once the condition has been
fulfilled, shall retroact to the day of the constitution of the obligation. Nevertheless, when
the obligation imposes reciprocal prestations upon the parties, the fruits and interests
during the pendency of the condition shall be deemed to have been mutually compensated.
If the obligation is unilateral, the debtor shall appropriate the fruits and interests received,
unless from the nature and circumstances of the obligation it should be inferred that the
intention of the person constituting the same was different.
In obligations to do, and not to do, the courts shall determine, in each case, the
retroactive effect of the condition that has been complied with.

Art. 1188. The creditor may, before the fulfillment of the condition, bring the appropriate
actions for the preservation of his right.
The debtor may recover what during the same time he has paid by mistake in case
of a suspensive condition.

Art. 1189. When the conditions have been imposed with the intention of suspending the
efficacy of an obligation to give, the following rules shall be observed in case of the
improvement, loss or deterioration of the thing during the pendency of the condition:
(1) If the thing is lost without the fault of the debtor, the obligation shall be
extinguished;
(2) If the thing is lost through the fault of the debtor, he shall be obliged to pay
damages; it is understood that the thing is lost when it perished, or goes out of
commerce, or disappears in such a way that its existence is unknown or it
cannot be recovered;
(3) When the thing deteriorates without the fault of the debtor, the impairment is to
be borne by the creditor;
(4) If it deteriorates through the fault of the debtor, the creditor may choose
between the rescission of the obligation and its fulfillment, with indemnity for
damages in either case;
(5) If the thing is improved by its nature, or by time, the improvement shall inure to
the benefit of the creditor;
(6) If it is improved at the expense of the debtor, he shall have no other right that
that granted to the usufructuary.

WHAT ARE THE STAGES OF A SUSPENSIVE CONDITIONAL OBLIGATION?

I. Before fulfillment of the condition – no obligation yet but parties are given rights which
are merely protective in nature just simply to prevent parties from being left with nothing:

26
 Rights of the Creditors:
(a) to put property in escrow, whereby a thing will be held by a third person before the
condition is fulfilled;
(b) to ask for a bond, a security or collateral so that if the obligation is fulfilled, there is a
right to call upon the security or pay the bond.

Rights of the Debtors:

(a) if there is delivery by mistake, he can demand the return of whatever he delivered
with interest (solutio indebiti); mistake here is contemplated in situations when the
debtor thought that it is a pure obligation or when he thought that the condition has
arrived;
(b) if there is no mistake, then there is no right to demand, in which case there is
voluntary fulfillment, but if it is absolutely certain that the condition cannot be
fulfilled, one can demand the return of the object delivered.

In cases of loss, impairment, or improvement of SPECIFIC not GENERIC things, subject

to a SUSPENSIVE condition or term:

LOSS IMPAIRMENT IMPROVEMENT

Without the fault or No Obligation The creditor suffers the The creditor is entitled
negligenceor expense of Deterioration or should to the improvement
the debtor accept the property in its
Deteriorated state.

With the fault Or The debtor is made Creditor has options: Debtor has usufructuary
negligence Or expense liable for damages (a) SPECIFIC rights*
of the debtor PERFORMANCE with
delivery notwithstanding
damages; costs are
borne by the debtor
(b) RESCISSION and
DAMAGES

* Dean del Castillo says “usufruct” does not refer to the reimbursement but rather, the
debtor is given the right to remove the improvement as long as there is no damage to the
property to which it is attached, e.g., a fence that was built around a piece of land that is
supposed to be delivered which the debtor may remove as long as it would not cause
damage to the land.

However, the debtor can seek reimbursement for necessary expenses, e.g., mere
preservation of the property like maintenance expenses.

** Options (a) and (b) are not cumulative.

II. After the condition has been fulfilled – the arrival of the conditon gives birth to the
obligation. Its effect retroacts to the perfection of the obligation, so that if on the 1 st of
November, 2002, A obliged himself to deliver a car to B after the latter has passed the
bar; when results are released on the 13 th of March, 2003, B is considered the owner of
the car as of the 1st of November, which means any deed of sale A might have executed
in favor of C on the 1 st of January, 2003 is null and void. The transfer of ownership had
occurred by the 1st of November, 2002.

There are exceptions to the retoractivity rule:

27
 (1) REAL CONTRACTS – perfected only upon delivery. Delivery, therefore, is
essential. Examples: a pledge or pawn.
(2) FRUITS or INTEREST – in the case of unilateral obligations, the fruits belong to the
debtor UNLESS there is a contrary agreement by the parties. In a reciprocal
obligation, there is no obligation to deliver the fruits because they are deemed
mutually compensated.

TO WHAT PRESTATIONS DO ALL THESE APPLY?

These apply to prestations to give. For prestations to do and not to do, it is discretionary upon the
court to determine the effects of retroactivity.

WHAT IS THE DIFFERENCE BETWEEN “FRUITS” AND “IMPROVEMENTS”?

Improvements would refer to that which will add to the value of the property, e.g., a tree that
grows out of a piece of land, while fruits, would refer to spontaneous products of the soil, the young of
animals, and earnings of property, e.g., the mango that grows out of the tree.

Art. 1190. When the conditions have for their purpose the extinguishment of an obligation
to give, the parties, upon the fulfillment of said conditions, shall return to each other what
they have received.
In case of the loss, deterioration or improvement of the thing, the provisions which,
with respect to the debtor, are laid down in the preceding article shall be applied to the
party who is bound to return.
As for obligations to do and not to do, the provisions of the second paragraph of
Art. 1187 shall be observed as regards the effect of the extinguishment of the obligation.

WHAT ARE RESOLUTORY CONDITIONS?

In a resolutory condition, the happening of the condition signals the death of the obligation, e.g.,

A gives a house and lot to B on the condition that B does not marry before
turning 21. B marries before turning 21. B is obligated to return the house and
lot to A.

In resolutory conditions with prestations to give, when the condition is fulfilled, the debtor has to
return the object in his possession. If the object cannot be returned due to loss, impairment, apply the above
rules on suspensive conditions.
It is again discretionary on the courts in prestations to do or not to do.

Art. 1191. The power to rescind obligations is implied in reciprocal ones, in case one of the
obligors should 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 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.
This is understood to be without prejudice to the rights of third persons who have
acquired the thing, in accordance with Arts. 1385 and 1388 and the Mortgage Law.

WHAT IF THERE IS A BREACH IN CONDITION?

It depends:
(1) in suspensive conditions, parties are released from each other precisely because there has
never been an obligation;
(2) in resolutory conditions, the obligation continues to be effective.
(3) In reciprocal obligations, the fulfillment of the other is the CONDITION by which the other is
to perform his obligation because the obligation of one is dependent upon the obligation of the

28
 other; as long as both of them do not comply with their respective obligations no ine is in
delay.

CO V. COURT OF APPEALS 312 SCRA 528

Contract of Sale
Co (Seller) Lot Custodio (Buyer)

$100,000

Facts: The purchase price is $100,000 and is payable in 2 installments, $40,000 and $60,000. The payment
made is only P40,000 and $1,000 earnest money to be deducted from the total purchase price
Although period of payment had already expired, Custodio paid $30,000 as partial payment.
Co demanded for the balance. Instead of filing for specific performance or rescission of the
contract, Co forfeited the $30,000 payment.
Custodio attempted to pay the remaining balance of $70,000. Co refused to accept said payment.
Custodio thus sued for rescission of the contract and prayed for the return of the $30,000.

Issue: W/N the Court of Appeals erred in ordering the Cos to return the $30,000 paid by Custodio.

Ruling: NO. Despite the fact that Custodio’s failure to pay the amounts of $40,000 and $60,000 on the
agreed period was a breach of her obligation, the Co’s did not sue for either specific performance or
rescission of the contract. Instead it forfeited the “option” when she failed to pay the remaining $70,000.
In the absence of an express stipulation authorizing the sellers to extra-judicially rescind the
contract of sale, the Co’s cannot unilaterally and extra-judicially rescind the contract of sale.

WHAT ARE THE REMEDIES FOR BREACH IN RECIPROCAL OBLIGATIONS?

The party who has performed or is ready to perform may seek:
(1) SPECIFIC PERFORMANCE plus DAMAGES; or
(2) RESCISSION plus DAMAGES in accordance with Art. 1191.

IS THERE A NEED TO GO TO COURTS TO RESCIND A RECIPROCAL OBLIGATION?

The law states that there is no need as it is implied already BUT for practical purposes it would
still be necessary, e.g.:
A paid B P50T. B has the obligation to deliver the car to A within 10 days. After 10 days, B failed
to deliver the car. If B returns the P50T, there is no need to go to court. But if B refuses to return the P50T,
it is but natural for A to go to court.
While you are not required to go to court, by not going you are taking a risk that if the court finds
that you are not entitled to rescission, you would suffer the consequences. (University of the Philippines
v. de los Angeles)

UNIVERSITY OF THE PHILIPPINES V. DE LOS ANGELES 35 SCRA 102

Logging Agreement
UP right to cut, collect and remove timber ALUMCO

royalties and forest fees

Facts: Alumco incurred unpaid account of P220,000 which despite repeated demand by UP, the former
failed to pay. Alumco executed an instrument, which states: “In the event that the debtor fails to comply
with it’s promise x x it agrees without reservation that the creditor shall have the right and power to
consider the logging agreement as rescinded without the necessity of any judicial suit x x”
Alumco further incurred an unpaid accout of P60,000. UP thus rescinded the logging agreement.

Issue: W/N UP can treat its contract with the respondent rescinded.

29
Ruling: YES. There is nothing in law that prohibits the parties from entering into agreement that violation
of the terms of the contract would cause cancellation thereof, even without court intervention. It is not
always necessary for the injured party to resort to court act for the rescission of the contract.
Judicial action is necessary for the resolution of a reciprocal obligation; since in every case where
the extra-judicial resolution is contested only the final award of the court of competent jurisdiction can
conclusively settle whether the resolution was proper or not. It is in their sense that judicial action will be
necessary as without it, the extra-judicial resolution will remain contestable and subject to judicial
invalidation, unless an attack thereon should become barred by acquiescence, estoppel or prescription.
A resolution of reciprocal or synallagmatic contracts may be made extra-judicially unless
successfully impugned in court.

TAN V. COURT OF APPEALS 175 SCRA 657

Contract of Sale
Singsons (Seller) Lot Tan (Buyer)

P1.8 M and P200,000 down payment

Facts: Tan is to advance P200,000 to enable Singson to secure the cancellation of the mortgage and lien
annotated on the title of the property.
The parties agreed on an extension of 2 weeks for the execution of the deed of sale. Upon
execution by the DBP (mortgagee) of the deed of cancellation of mortgage, Singson tried to contact Tan
but to no avail. Instead, Tan canceled the sale and demanded return of the earnest money.

Issue: W/N respondent committed a substantial breach as to warrant petitioner’s exercise of her
right to rescind the contract of sale.

Ruling: NO. Singson substantially complied with the undertaking of clearing the title of the property.
Rescission will not be permitted for a slight of casual breach of the contract but only for such
breaches as are so substantial and fundamental as to defeat the object of the parties in making the
agreement.
In the absence of a stipulation to the contrary, the power to rescind must be invoked judicially; it
cannot be exercised solely on a party’s own judgment that the other has committed a breach of the
obligation. Where there is nothing in the contract empowering the petitioner to rescind it without resort to
the courts, the petitioner’s action in unilaterally terminating the contract in this case is unjustified.
Note that under the third paragraph of Art. 1191 of the Civil Code, the court is given a
discretionary power to allow a period within which a person in default may be permitted to perfrom his
obligation.

IS RESCISSION THE ONLY REMEDY?

NO. Rescission here is only one of the remedies but you are not required to choose just that
because you can also ask for specific performance.

IS THE RIGHT TO RESCIND ABSOLUTE?

NO. If a breach is only slight, the courts may not grant rescission. (Angeles v. Calasanz)

MAY ONE SIMULTANEOUSLY AVAIL OF SPECIFIC PERFORMANCE AND RESCISSION?

NO. You cannot choose both. However, if you have chosen specific performance and without fault
on your part the other party still cannot comply, then you may choose rescission. (Ayson-Simon v.
Adamos)
The reverse is not allowed. If one has chosen rescission and is allowed by the court, the cannot
avail of specific performance anymore as there is no longer a valid obligation.

WHAT IS THE DIFFERENCE BETWEEN RESCISSION IN ART. 1191 AND ART. 1383 AND 1384?

30
 ART. 1191
It is a principal action.
The basis is BREACH. Whether or not one suffers
economic prejudice, he can institute action for
rescission, e.g., even if debtor is willing to pay back
rents, one can still institute such action.
ART. 1383/1384
It is a subsidiary attack.
The basis is ECONOMIC PREJUDICE. If one
suffers economically and the other is willing to pay
the back rents, the former cannot be entitled to
rescission.

SURIA V. INTERMEDIATE APPELLATE COURT 151 SCRA 661

Deed of Absolute Sale with Mortgage

Crispin (Seller/Mortgagee) parcel of land/sell Suria (Buyer/Mortgagor)

mortgage the same

Facts: The conditions of the contract was that the mortgagee has the right to foreclose if mortgagor failed
to pay. Suria failed to pay stipulated installments. Respondent thus filed a complaint for rescission of
contract and damages.

Issue: W/N the seller’s resort to the remedy of rescission under Art. 1191 is tenable.

Ruling: NO. The petitioner’s breach of obligation is not with respect to the perfected contract of sale but in
the obligation created by the mortgage contract. THE REMEDY OF RESCISSION IS NOT A PRINCIPAL
ACTION RETALIATORY IN CHARACTER BUT BECOMES A SUBSIDIARY ONE WHICH BY LAW
IS AVAILABLE ONLY IN THE ABSENCE OF ANY OTHER REMEDY. Foreclosure here is not only a
remedy accorded by law but, is A SPECIFIC PROVISION FOUND IN THE CONTRACT OF THE
PARTIES.

Art. 1192. In case both parties have committed a breach of the obligation, the liability of
the first infractor shall be equitably tempered by the courts. If it cannot be determined
which of the parties first violated the contract, the same shall be deemed extinguished, and
each shall bear his own damage.

WHAT IF BOTH PARTIES ARE GUILTY OF BREACH?

If possible find out who the first infractor was and his liability will be tempered?

WHAT IS THE PURPOSE OF “TEMPERING”?

The second infractor is not justified in committing the breach just because of the first infraction.
One cannot derive any benefit from the fault of the other.

Sec. 2. – Obligations with a Period

Art. 1193. Obligations for whose fulfillment a day certain has been fixed, shall be
demandable only when that day comes.
Obligations with a resolutory period take effect at once, but terminate upon arrival
of the day certain.
A day certain is understood to be that which must necessarily come, although it may
not be known when.
If the uncertainty consists in whether the day will come or not, the obligation is
conditional and it shall be regulated by the rules of the preceding Section.

31
WHAT IS AN OBLIGATION WITH A TERM OR PERIOD?
This is an obligation which is to be performed at a period or determinable future time. This is a
future and certain event but the time of the happening is uncertain. The examples are death or subject to the
availability of funds.
The fulfillment of the period determines the demandability of the obligation as compared with an
obligation subject to a condition wherein the fulfillment of the condition determines the birth or death of
the obligation.

WHAT IS THE DIFFERENCE BETWEEN A SUSPENSIVE CONDITION AND A SUSPENSIVE

PERIOD?

CONDITION PERIOD

Happening of the condition signals the birth Obligation is already there but demandability is
of the obligation suspended upon arrival of the term or period.

Retroactively applies No retroactivity because the obligation is already

existing

Prescription begins from the moment the condition Prescription begins from the moment of thearrival
happens of the term

WHAT IS THE DIFFERENCE BETWEEN A RESOLUTORY CONDITION AND A RESOLUTORY

PERIOD?
In a resolutory condition, because the obligation terminates upon the happening of the condition,
there is a possibility that the obligation may continue to remain effective forever. This is because a
condition may or may not happen at all.
In a resolutory period, it is certain that sometime the obligation will terminate.

Art. 1194. In case of loss, deterioration or improvement of the thing before the arrival of the
day certain, the rules in Art. 1189 shall be observed.

WHAT IN CASES OF LOSS, DETERIORATION, OR IMPROVEMENT?

The same laws in obligations with a condition apply. See the table. But Dean del Castillo also
states that in obligations with a period, there is more reason to take care of the property because in some
future time you must deliver, in which case you must take care of such property before the arrival of the
period.

Art. 1195. Anything paid or delivered before the arrival of the period, the obligor being
unaware of the period or believing that the obligation has become due and demandable,
may be recovered, with the fruits and interests.

WHAT ARE THE RIGHTS OF THE DEBTOR IN CASE HE DELIVERS BEFORE THE ARRIVAL OF
THE TERM?
It depends. If there is a mistake – debtor thought that the period has arrived already or the
obligation is already due – the debtor may recover what has been paid or delivered.
If there is no mistake or when the payment is voluntary, then the debtor can no longer recover as it
becomes a natural obligation. This is a permanent prohibition.

 In conditional obligations, if the debtor delivers before the happening of the condition with no
mistake on his part and the condition does not happen then the debtor can recover what he
delivered.

IF THE MISTAKE WAS DISCOVERED AFTER THE OBLIGATION HAS BECOME DUE, MAY THE
DEBTOR STILL RECOVER?

32
 E.g., The obligation is to pay P1T on the 31 st of January, 2003 and payment is made on the 1 st
January, 2003. The mistake of early payment was discovered only on the 14 th of February, 2003. As regards
the principal, it is settled that the debtor can no longer recover the principal because it is already
demandable. But as regards the interest, there are different views:

(1) PARAS – the debtor can sill recover interest even after the period has arrived.
(2) CAGUIOA – the debtor can no longer recover the principal as well as the interest.
(3) TOLENTINO – it will depend upon the good faith and the bad faith of the creditor. The
debtor can recover interest only if creditor is in bad faith.

Art. 1196. Whenever in an obligation a period is designated, it is presumed to have been

established for the benefit of both the creditor and the debtor, unless from the tenor the
same or other circumstances it should appear that the period has been established in favor
of one of the other.

FOR WHOSE BENEFIT IS THE TERM OR PERIOD FOR?

It is for the benefit of both the debtor and the creditor. This means that the debtor cannot be
compelled to pay before the period arrives and the creditor cannot be compelled to receive payment before
the arrival of the period. This rule is absolute as regards the creditor. There is no way to compel both
parties to do otherwise, even for whimsical reasons.

WHAT ARE THE EXCEPTIONS TO THE RULE THAT THE PERIOD IS FOR THE BENEFIT OF THE
CREDITOR AND THE DEBTOR?
(1) those provided by law – in a case of a deposit wherein the depositor may take out the property
deposited anytime he wants regardless of the fact that the term has no yet arrived;
(2) by stipulation in a contract – can be express or implied;
(a) can either give the benefit to creditor or debtor, so if it payable on or before a certain date
or when you say “within 30 days” that is always for the benefit of the debtor.
(b) If there is an acceleration clause, it is for the creditor.
(c) If it says payable on the 18th of January, it is for both.

Art. 1197. If the obligation does not fix a period, but from its nature and the circumstances
it can be inferred that a period was intended, the courts may fix the duration thereof.
The courts shall also fix the duration of the period when it depends upon the will of
the debtor.
In every case, the courts shall determine such period as may under the
circumstances have been probably contemplated by the parties. Once fixed by the courts,
the period cannot be changed by them.

WHEN MAY THE COURTS FIX A PERIOD?

(1) When from the tenor of the agreement, it can be deduced that the parties intended a period,
although they failed to state what the period is.
(2) When the stipulation is that the debtor will pay when able.

WHAT IF THE COURT FINDS THAT THERE WAS NO INTENTION BY THE PARTIES TO FIX A
PERIOD?
The court will dismiss the case, which means that the obligation is a pure one and is therefore
demandable at once.

WHAT IF THE COURTS FINDS THAT THE PARTIES THEMSELVES HAVE ALREADY SET THE
PERIOD?
When the period has been set by the parties, the courts have no authority nor personality to fix a
period (Lim v. People)

33
LIM V. PEOPLE OF THE PHILIPPINES 133 SCRA 317

Facts:
 Lim is a businesswoman. She proposed to sell Ayroso’s tobacco; Ayroso agreed to the
proposition.
 A document was signed by Lim stating that the “proceeds P799.50 will be given as soon as it
was sold.”
 Lim paid to Ayroso only P240.00 on 3 different dates.
 As no further amount was paid, Ayroso filed a complaint for estafa.
 Ayroso testified that Lim asked her to be her agent in selling the tobacco; Lim admitted that
there was an agreement that upon the sale of the tobacco, she would be given something.

Issue: W/N a period exists.

Ruling: Yes. Where a person obliged himself to pay to another the proceeds of the latter’s tobacco as soon
as they are disposed of, a period exists for payment of the obligation, and therefore, Art. 1197 does not
apply.
There is no contract of sale, but mere agency to sell. The fact that appellant Lim received the
tobacco to be sold at P1.30 per kilo and the proceeds to be given to Ayroso as soon as it was sold, strongly
negates a transfer of ownership to Lim.
 Why estafa? Because of judicial possession; if you don’t return the
property when you are the agent.
 Lim raised the fixing of a period as a defense.

ROXAS V. ALCANTARA 113 SCRA 21

Lease Contract
Roxas 2-Storey Building Sy

P500/mo. (for 10 years)

Facts:
 Roxas wrote Sy reminding him of the forthcoming termination of the contract adding that the
rental will be increased to P4K/ mo starting after the lapse of the period, new term is 3-year
rental to be paid in advance and annual 15% increase.
 Sy did not give a categorical answer
 Roxas demanded Sy to vacate the premises
 Sy meanwhile did not vacate, instead sent a check for P550 corresponding for 1 month rental
 Trial Court rendered a decision extending the contract for 10 years

Issue: W/N Art 1197 applies

Ruling: NO. The contract having expired already, and no new contact was constituted, Art 1197 is
inapplicable.

SHOULD A CREDITOR FILE TWO SEPARATE ACTIONS FOR FIXING A PERIOD AND SPECIFIC
PERFORMANCE?
NO. The creditor is allowed by jurisprudence to bring the action fixing a period and also the action
for specific performance. The creditor need not file two separate actions, in order to prevent multiplicity
suits.

FOR WHOSE BENEFIT IS FIXING THE PERIOD FOR?

It is for the benefit of the person who brings the action. The rule that the period is for the benefit
of both parties applies only when it is by voluntary or mutual agreement.

34
Art. 1198. The debtor shall lose every right to make use of the period:
(1) When after the obligation has been contracted, he becomes insolvent, unless he
gives a guaranty or security for the debt;
(2) When he does not furnish to the creditor the guaranties or securities which he
has promised;
(3) When by his own acts he has impaired said guaranties or securities after their
establishment, and when through a fortuitous event they disappear, unless he
immediately gives new ones equally satisfactory;
(4) When the debtor violates any undertaking, in consideration of which the
creditor agreed to the period; and
(5) When the debtor attempts to abscond.

WHEN DOES THE DEBTOR LOSE THE BENEFIT OF THE PERIOD?

(1) when the debtor becomes insolvent after the constitution of the obligation – insolvency here is
not a technical term; instead insolvency here would mean that the debtor’s assets are less than
his liabilities in which case there would be an acceleration of payment to protect the creditor
and enable him to enforce his claim with the remaining assets of the debtor, otherwise he may
lose legal personality to collect from the debtor; THERE ARE NO JUDICIAL
PROCEEDING IN ACCORDANCE WITH THE INSOLVENCY LAW;
(2) when the debtor fails to furnish the security he promised to the creditor;
(3) when there is loss or impairment in the said guaranty or security due to the debtor’s fault or
fortuitious event;
(4) when the debtor violates an undertaking which creditor relied upon in giving the debtor the
benefit of the period; the undertaking must be the reason for the extension of the period;
(5) when the debtor absconds or attempts to abscond – the reason here is that if the debtor
absconds then the creditor is prejudiced. Mere attempt will evidence the bad faith on the part
of the debtor hence he loses the benefit of the period.

WHEN DOES THE DEBTOR NOT LOSE THE BENEFIT OF THE PERIOD IN A CASE OF
INSOLVENCY?
He shall not lose the benefit of the period if he furnishes a security for his obligation which cannot
be touched by other creditors precisely because the creditor’s interest is already protected.

WHAT IS THE DIFFERENCE BETWEEN FAILURE TO FURNISH SECURITY AND LOSS OR

IMPAIRMENT OF THE SECURITY?
In failure to furnish a security, a debtor cannot give a substitute security. While in loss or
impairment, the debtor can give a substitute security PROVIDED that it is equal in value.

WHAT ARE THE EFFECTS OF LOSS OR IMPAIRMENT OF THE SECURITY?

If it is mere impairment and total loss due to debtor’s fault, the creditor can accelerate payment.
If impairment is due to a fortuitous event, creditor has to settle for the impaired security. If there is
a partial loss due to a fortuitous event, the creditor cannot accelerate payment. If there is total loss due to a
fortuitous event, the debtor loses the benefit of the period so the creditor can accelerate.

CAN THE CREDITOR LOSE THE BENEFIT OF THE PERIOD?

It is not possible for the creditor to lose the benefit of a period. There is no provision in the Civil
Code governing such.

HOW CAN A CREDITOR CLAIM PAYMENT IN AN OBLIGATION WITHOUT A PERIOD?

This is a two-step process:
(1) The creditor files an action before the court to fix the period. The court would ascertain the
intention of the parties, if they indeed intended to have a period in the obligation AND fix the
period, if the intention proves to have a period.

35
 (2) After which, upon arrival of the fixed period and the debtor fails to comply, the creditor may
demand payment.

Sec. 3. – Alternative Obligations

Art. 1199. A person alternatively bound by different prestations shall completely perform
one of them.
The creditor cannot be compelled to receive part of one and part of the other
undertaking.

WHAT IS A MULTIPLE OR CONJUNCTIVE OBLIGATION?

It is an obligation found in one and the same agreement where there are several prestations and all
of them are due. One must comply with all these prestations to extinguish the obligation.
WHAT IS AN ALTERNATIVE OBLIGATION?
It is an obligation where there are several prestations due but it is extinguished by the performance
of one. There is only one obligation and from among the several prestations the performance or delivery of
one will extinguish the obligation.

WHAT IS A FACULTATIVE OBLIGATION?

Here there is only one main prestation which is the principal prestation. There is only one
obligation because the second or the other prestations will be considered as substitutes.

IS AN ALTERNATIVE OBLIGATION DETERMINATE OR INDETERMINATE?

Initially, at the time the alternative obligation is entered into the parties do not know which one is
due, thus making it indeterminate. It only becomes determinate later when the choice is made by the debtor
from among the several prestations.

Art. 1200. The right of choice belongs to the debtor, unless it has been expressly granted to
the creditor.
The debtor shall have no right to choose those prestations which are impossible,
unlawful or which could not have been the object of the obligation.

WHO HAS THE RIGHT OF CHOICE? AND WHY?

The debtor usually has the right of choice. Art. 1200 is clear: “The right of choice belongs to the
debtor unless it has been expressly granted to the creditor. x x x ” The right of choice therefore has been
explicitly granted by law.

WHAT IF THE OBLIGATION DOES NOT SPECIFY WHO HAS THE RIGHT OF CHOICE?
It is the debtor’s choice.

WHO MAY ALSO MAKE THE CHOICE ASIDE FROM THE DEBTOR?
The creditor and a third person may make the choice.
This right of choice is assigned to these two by stipulation of the creditor and the debtor.

Art. 1201. The choice shall produce no effect except from the time it has been
communicated.

WHEN IS THE CHOICE DEEMED TO BE EFFECTIVE?

It becomes effective once it is communicated by whoever was given the right of choice.
If the choice belongs to:
a. the debtor, he informs the creditor;
b. the creditor, he informs the debtor;
c. a third person, he informs both debtor and creditor.

36
HOW DOES ONE MAKE THE COMMUNICATION?
The person making the choice can communicate whatever he chooses, orally or in writing. This is
an express communication.
The person may also make the delivery of the thing chosen. This is known as an implied
communication. For example, if the debtor delivers the jewelry and it is accepted by the creditor, then the
communication is implied.

IN AN IMPLIED COMMUNICATION, DOES IT MAKE ANY DIFFERENCE IF THE CHOICE IS

WITH THE DEBTOR OR THE CREDITOR?
Yes, at least in terms of notification.
In a case where the choice is with the debtor, the notification is not really very much required or
becomes impractical because once the debtor makes the delivery and it is accepted by the creditor there is
an implied choice and an implied notification.
In a case where the choice is with the creditor, the notification is very important because it is not
the creditor who is required to perform. It is the debtor. Therefore, the debtor cannot perform his obligation
because the right of choice is not with him, in which case, the creditor’s choice must be made known to the
debtor so that the latter may act on the obligation.

Art. 1202. The debtor shall lose the right of choice when among the prestations whereby he
is alternatively bound, only one is practicable.
The same rules shall be applied to obligation to do or not to do in case one, some or
all of the prestations should become impossible.

WHAT IS A TACIT CHOICE?

It is a choice wherein the debtor would do something to limit his choice or so that he would not
have any choice at all.
For example, if X chooses between a car, a house, and jewelry and sells both the car and the
house, he in fact has made the choice in the jewelry.

WHAT IF THE DEBTOR DELAYS IN CHOOSING?

Here the obligation has not become due, so the creditor may ask the court to compel for
performance to deliver any of the prestations.

IS THERE SUCH A THING AS A SHIFT OF CHOICE?

No. If the debtor does not want to make his choice, there is no way the creditor may ask the court
to shift the right of choice to him.

WHAT IS THE LIMITATION ON THE RIGHT OF CHOICE OF THE DEBTOR?

The answer is in the second par. of Art. 1200: “ x x x The debtor shall have no right to choose
those prestations which are impossible, unlawful, or which could not have been the object of the
obligation.”

Art. 1203. If through the creditor’s act the debtor cannot make a choice according to the
terms of the obligation, the latter may rescind the contract with damages.

Art. 1204. The creditor shall have a right to indemnity for damages when, through the fault
of the debtor, all the things which are alternatively the object of the obligation have been
lost, or the compliance of the obligation has become impossible.
The indemnity shall be fixed taking as a basis the value of the last thing which
disappeared, or that of the service which last became possible.
Damages other than the value of the last thing or service may also be awarded.

WHAT ARE THE EFFECTS OF LOSS ON ONE OR SOME OR ALL OF THE PRESTATIONS DUE?

37
 Debtor’s Choice

FAULT ONE/SOME ALL

Debtor Choose from the remaining Pays damages to the creditor
prestations because it’s his choice which is the monetary value of
anyway the last thing lost (because the
obligation by the time the last
thing remained became a simple
obligation; hence its loss leaves
the debtor liable.

Creditor Debtor may (a) choose from Rescission plus damages or

remaining prestations or (b) ask obligation extinguished
for damages plus rescission
(because the creditor in effect,
had limited the debtor’s choice
and so the creditor should suffer
for that)

Fortuitous Event Debtor chooses from the The obligation is extinguished

remaining prestations

Combinations (Debtors choice)

(1) 1st – debtor’s fault

2nd – debtor’s fault
3rd – fortuitous event
----------------------
Obligation is EXTINGUISHED

(2) 1st – fortuitous event

2nd – fortuitous event
3rd – debtor’s fault
---------------------
Convert third prestation to its monetary value for DAMAGES

(3) 1st – creditor’s fault

2nd – creditor’s fault
3rd – fortuitous event
--------------------
Debtor can ask for RESCISSION plus DAMAGES because creditor has destroyed the
debtor’s right of choice.

(4) 1st – fortuitous event

2nd – fortuitous event
3rd – creditor’s fault
---------------------
Debtor can ask for RESCISSION plus DAMAGES

Art. 1205. When the choice has been expressly given to the creditor, the obligation shall
cease to be alternative from the day when the selection has been communicated to the
debtor.
Until then the responsibility of the debtor shall be governed by the following rules:

38
 (1) If one of the things is lost through a fortuitous event, he shall perform the
obligation by delivering that which the creditor should choose from among the
remainder, or that which remains if only one subsists;
(2) If the loss of one of the things occurs through the fault of the debtor, the creditor
may claim any of those subsisting, or the price of that which, through the fault
of the former has disappeared, with a right to damages;
(3) If all the things are lost through the fault of the debtor, the choice by the
creditor shall fall upon the price of any one of them, also with indemnity for
damages.

Creditor’s Choice

FAULT ONE/SOME ALL

Creditor Creditor may choose any of the Obligation is extinguished
remaining prestations
Debtor Creditor may choose from the Creditor may choose the value of
remaining or the value of the one any of the objects plus damages.
destroyed by the debtor plus
damages
Fortuitous Event Creditor may choose from Obligation is extinguished
remaining prestations

Art. 1206. When only one prestation has been agreed upon, but the obligor may render
another in substitution, the obligation is called faultative.
The loss or deterioration of the thing intended as a substitute, through the
negligence of the obligor, does not render him liable. But once the substitution has been
made, the obligor is liable for the loss of the substitute on account of his delay, negligence or
fraud.

WHAT ARE FACULTATIVE OBLIGATIONS?

They are obligation with only one principal prestation. The other prestations are considered as
substitutes. For example, I bind myself to deliver a fountain pen or if I like I will deliver a ball pen.

WHAT IS THE DIFFERENCE BETWEEN AN ALTERNATIVE AND FACULTATIVE OBLIGATION?

ALTERNATIVE
a)As to the contents of the Various prestations as part of the
obligations obligations. Hence, the creditor
must demand all the prestations
before the debtor has made his
choice.
b) As to nullity The nullity of one prestation do
not invalidate the obligation,
which is still in force with respect
to have those which have no vice
c) As to choice The right to choose may be given
to the creditor
d) As to effect of loss Only the impossibility of all the
FACULTATIVE
Only principal prestation
constitutes part of the obligation.
Hence, the creditor can demand
only the principal prestations
before the debtor has made his
choice.
The nullity of the principal
invalidates the obligation, and the
creditor cannot demand the
substitute even when this is valid.
Only the debtor can choose the
substitute prestation
The impossibility of the principal

39
 prestations due without fault of prestation is sufficient to
the debtor extinguishes the extinguish the obligation, even if
obligation the substitute is possible.

IN FACULTATIVE OBLIGATIONS, TO WHOM DOES THE RIGHT OF CHOICE BELONG?

The right of choice belongs only to the debtor.

CAN THE PARTIES STIPULATE THAT THE RIGHT OF CHOICE BE GIVEN TO THE CREDITOR?
No. For if they stipulate that the creditor has the right of choice, then it cannot be a facultative
obligation, but rather an alternative obligation.

WHAT IS THE EFFECT OF THE LOSS OF THE SUBSTITUTE?

As a general rule, nothing. The debtor can still deliver the principal obligation.

If lost through the fault of the

Debtor – no effect at all because the debtor has the right of choice and must deliver the
principal
Creditor – no effect at all because substitute is not the principal obligation, converting the
obligation to a SIMPLE OBLIGATION;
Fortuitous event – does not affect the principal obligation.

BUT WHAT IF THE DEBTOR UPON LOSS OF THE SUBSTITUTE, CHOOSES SAID SUBSTITUTE?
If loss is through creditor’s fault, then the latter is held liable. Note that the choice must have been
communicated to the creditor.

WHAT IF THE SUBSTITUTE IS INVALID, IMPOSSIBLE OR ILLEGAL?

If the substitute is invalid, impossible or illegal it does not affect the valid principal obligation.

WHAT IF THE PRINCIPAL IS LOST?

CAUSE EFFECT
Debtor’s fault Debtor has made his choice; substitute now becomes principal
Creditor’s fault Obligation extinguished; once principal is extinguished, so goes the
substitute
Fortuitous event Obligation is extinguished.

WHAT IS THE RULE IF IT CANNOT BE DETERMINED WHETHER AN OBLIGATION IS

FACULTATIVE OR ALTERNATIVE?
It is considered alternative because it creates more reciprocity of rights and there is a provision in
the law that state that before it becomes a facultative obligation, the intent must be clear. IT MUST BE
CLEAR THAT ONE IS A PRINCIPAL AND THE OTHER IS THE SUBSTITUTE.

IS THERE A NEED FOR RATIFICATION OF CHOICE IN FACULTATIVE OBLIGATIONS?

The law does not provide for ratification. But a facultative obligation can be converted into a
simple one by elevating the substitute into a principal and before this can be done the choice and
notification has to be already done.

Sec. 4. – Joint and Solidary Obligations

Art. 1207. The concurrence of two or more creditors or of two or more debtors in one and
the same obligation does not imply that each one of the former has a right to demand, or
that each one of the latter is bound to render, entire compliance with the prestation. There
is a solidary liability only when the obligation requires solidarity.

WHAT ARE JOINT AND SOLIDARY OBLIGATIONS?\

40
 It is an obligation where there is multiplicity of parties – more than one debtor or more than one
creditor.
A joint obligation is one in which each of the debtors is liable only for a proportionate part of the
debt, and each creditor is entitled only to a proportionate part of the credit. A solidary obligation is one
which each debtor is liable for the entire obligation, and each creditor is entitled to demand the whole
obligation.

HOW MAY JOINT CREDITORS/DEBTORS DEMAND PAYMENT FOR THEIR SHARES?

If there are joint creditors, each creditor can demand only his share. If there are joint debtors, each
debtor may be compelled to pay only his share.
In solidary obligations, each creditor may enforce the entire obligation, and each debtor may be
obliged to pay it in full.

WHAT IS THE LIABILITY OF THE JOINT DEBTOR?

If A and B owe C P1,000, and there is nothing that will show that there is an unequal amount
owed it is presumed to be equal. The obligation of A is to pay P500 and B also P500. C can compel both A
and B to pay P500.

HOW DO JOINT CREDITORS COLLECT?

If A owes C and D, C can collect P500 from A, and likewise, D can also collect P500 from A.

Art. 1208. If from the law or the nature or the wording of the obligation to which the
preceding article refers the contrary does not appear, the credit or debt shall be presumed
to be divided into as many equal shares as there are creditors or debtors, the credits or
debts being considered distinct from one another, subject to the Rules of Court governing
the multiplicity of suits.

WHEN MAY AN OBLIGATION BE PRESUMED NOT TO BE JOINT?

(1) When expressly stipulated by the parties
(2) When required by law, e.g. joint tortfeasors
(3) When nature of the obligation requires solidarity.

WHAT DO THE WORDS “JOINTLY AND SEVERALLY” AND “JOINTLY” INDICATE?

“Jointly and severally” refers to a solidary obligation while, “jointly” refers to a joint obligation.
In addition, if the stipulation is “WE” with two signatories, it is joint and if “I” with two
signatories, it is solidary.
Individually and collectively are words to denote a solidary obligation.
Also, the following words are used to indicate solidarity, “in solidum”, “mancomunada o
solidaria.”

WHAT IS THE RULE AS REGARDS PRESUMPTION OF JOINT OBLIGATIONS?

The general rule is that every civil obligation is presumed to be joint, that is, that each one of the
creditors may demand from each of the debtors his proportionate part of the debt. So that there are as many
debts as there are debtors, and as many credits are there are creditors.

WHEN DO SOLIDARY OBLIGATIONS EXIST?

Solidary liability exists only in the following cases:
(1) When the obligation so provides:
For example, Ferdinand and Angelo borrowed P500 from Cyril. (Aba may pera si Cy). They
executed a promissory note as follows: “We hereby promise to pay solidarily the sum of P500
to Cyril.”
(2) When the law so provides:
For example, some instances are obligation arising from torts or quasi-delicts, obligations
arising from a quasi-contract, testamentary provisions regarding the obligation of devisees
and legatees, liability of business partners for loss or injury of third persons by partnership

41
 tort or wrongful act or omission, two or more bailees are liable solidarily for a thing loaned in
the same contract, and civil liabilty of principals, accomplices and accessories for a crime, etc.
 A tortious scheme denying a right such as collection of a certain amount of money may
hold those who set up such a sheme as solidarily liable for actual damages the Court may
award the aggrieved based on Art. 19 and 20 of the Civil Code (Rubio v. Court of Appeals)

RUBIO V. COURT OF APPEALS 153 SCRA 183

Facts:
 Rubio asks SC’s decision insofar as it (1) makes no finding against Phillips for moral and
exemplary damages and (2) absolves from joint and solidary liability Manufacturers Bank and
Trust Company(MBTC), Hacienda Benito (HB) and Victoria Valley Development Company
(VVDC)
 Rubio has still a collectible of P4,250,000 on sale of HB shares from ROPSI
 A Memorandum of Agreement was entered into by HB, MBTC anf VVDC whereby
 HBI will convey 78 hectares in favor of MBTC
 HBI to assign rithg to redeem property to VVDC
 MBTC will institute judicial foreclosure, HB and other companies will enter into compromise
agreement in full satisfaction of claim of MBTC
 This MOA was not fully implemented, though.

Issue: W/N VVDC, MBTC, HBI are solidarily liable

Ruling: YES. The scheme provided for in the MOA wherin all the properties of HB will be ultimately
transferred to VVDC without any mention at all and completely ignoring Rubio’s interest in said Hacienda
placed the petitioner’s rightful claim to the payment of his shares of stock in clear jeopardy.
All the respondents are, therefore, solidarily liable. The responsibility of 2 or more persons who
are liable for a quasi-delict is solidary. (Art. 2194)

(3) When the nature of the obligation requires solidarity.

For example, A was employed in the firm of B and C, partners. A was killed while working in
his assigned duty and in the place of his work. The heirs demanded compensation for the
death of A. Since the Workmen’s Compensation Act was enacted to give full protection to the
employee, reason demands that the nature of the obligation of the employers to pay
compensation to the heirs of their employee who died in the line of duty, should be solidary,
otherwise, the purpose of the law could not be attained.

TIU V. COURT OF APPEALS 228 SCRA 51

Facts:
 George and Rosalina Tiu filed an action for reformation of contract, delivery and personal
property, and damages against Juan Go and Spouses Lim.
 George Tiu (owner), executed a Deed of Sale (of Condo Units) with Right to Repurchase and a
Contract of lease with Spouses Lim.
 Rosalina Tiu had secured , on different dates, loan advances totalling P 1.060M, which has
remained unpaid despite the demands.
 Tius admitted that they have updated the real estate taxes due on the condo only up to the time
of transaction.
 They did not file an opposition to the petition for consolidation of ownership.
 George Tiu never signed the receipts nor received any money from Go; Joaquin Tiu signed and
received the money for and in behalf of Rosalina.

Issue: W/N George Tiu and Joaquin Tiu should be held jointly and severally liable with Rosalina.

42
Ruling: NO. They are not liable solidarily for the said amounts even if the money were used for their
tobacco business. And even if they admitted that they received the money, both are not liable in solidum
because there was no express provision in said receipts that appellants George and Joaquin should be liable
in solidum. There is solidary obligation only when the obligation expressly so states or when the law or
nature of the obligation requires solidarity.
Assuming arguendo that they admitted their solidary liability, still they are not liable. Supreme
Court ruled in Un Fak Leang v. Nigurra that an admission of two debtors in their brief that their liability in
the contract is a solidary one does not convert the joint character of their obligation as appearing in their
contract, for what determines the nature of the obligation is the tenor of their contract itself, not the
admission of the parties.

SMITH, BELL AND CO. V. COURT OF APPEALS 267 SCRA 530

Facts:
 Chua insured the shipment of materials he imported with First Insurance.
 The cargo was damaged and found to be 18.5 K kilo short by a cargo surveyor.
 Thus, Chua informed Smith Bell and demanded its settlement.
 Smith replied that its principal offered only 50% of Chua’s claim
 No settlement of the claim having been made, Chua caused the instant case to be filed.
 The TC rendered a decision in favor of Chua and ordered that Smith be made liable solidarily.

Issue: W/N a local claim agent of a disclosed principal (a foreign insurance company) can be held
jointly and solidarily liable, given that the agent is not a party to the insurance contract.

Ruling: NO. A settling agent acting within the scope of its authority cannot be held personally liable and
/or solidarily liable for the obligation of its disclosed principal. Salonga v. Wainer, Barnes & Co: An
adjustment agent is no different from any other agent from the point of view of his reponsibility xxx, his
actions is binding not upon himself but upon his principal. And here again, the ordinary rule of agency
applies.
Contracts are binding only upon parties who execute them. In the case at bar, the only
“involvement of Smith in the subject contract of insurance was having its name stamped at the bottom left
portion of the policy as ‘Claim Agent’”. Hence, there is no privity of contract, and correspondingly there
can be no obligation or liability, and thus no cause of action against Smith attaches. xxx There is absolutely
nothing in the contract which mentions the personal liability of Smith.
THE WELL-ENTRENCHED RULE IS THAT SOLIDARY OBLIGATION CANNOT
LIGHTLY BE INFERRED. IT MUST BE POSITIVELY AND CLEARLY EXPRESSED.

RONQUILLO V. COURT OF APPEALS 132 SCRA 274

Facts:
 Ronquillo was one of the four defendants in a civil case for a collectionof money.
 The checks issued by Ronquillo et al were dishonored by drawee bank
 The TC declared the case based on the compromise agreement submitted by the parties
 The compromise provides: “xxx defendants individually and jointly agree to pay xxx”

Issue: W/N the liability is solidary

Ruling: YES. Clearly then, by the express term of the compromise agreement and the decision based upon
it, the defendants obligated themselves to pay their obligation “ individually and jointly”.
An agreement to be “individually liable” undoubtedly create a several obligation, and a “several
obligation” is one by which one individual binds himself to perform the whole obligation.
The obligation in the case at bar being described as “ individually and jointly”, the same is
therefore enforceable against one of the numerous obligors.

43
Art. 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 insolvent, the others shall not be liable for his share.

HOW ABOUT A CASE OF PLURALITY OF CREDITORS AND DEBTORS?

If A and B owe C and D P1,000; the rule is that C or D cannot recover more than their respective
shares of the credit and the debtor cannot be required to pay more than his proportionate share in the debt.
If C demands P500 from A, C’s credit is extinguished. D can no longer demand from A because
A’s obligation has been extinguished. D, however, may collect from B.

WHAT IF THERE IS INEQUALITY OF CREDIT?

For example, C, D, and E are each entitled to 1/3 of the credit. A and B is each required to pay 1/2
of the debt.
Here, each creditor shall not be allowed to recover more than 1/3. Each debtor shall not be
required to pay more than 1/2.

C (1/3) [P300] A (1/2) [P450]

D (1/3) [P300] B (1/2) [P450]
E (1/3) [P300]

C can collect from A the P300 but shall not exceed P450, which is the maximum liability of A.
D, representing E, can collect the P450 from B and the remaining P150 from A. Nothing in the
law will compel C to go against A for the remaining P150.

ARE THE OBLIGATION TO EACH JOINT DEBTOR SEPARATE AND DISTINCT FROM ONE
ANOTHER?
Yes. Therefore, one debtor cannot use the defense of another debtor. Insolvency will not affect the
liability of the debtor.

Art. 1210. The indivisibility of an obligation does not necessarily give rise to solidarity. Nor
does
solidarity of itself imply indivisibility.

Art. 1211. Solidarity may exist although the creditors and the debtors may not be bound in
the same manner and by the same periods and conditions.

WHAT ARE THE KINDS OF SOLIDARITY?

(1) Active solidarity – when the solidarity exists among the creditors only

For example: Teresa promised to pay Susan, Marlene, or Joan the amount of P300. The
obligation is solidary. In this case, any one of the creditors can demand from teresa the whole
amount of P300. Susan can demand payment of P300 from Teresa, So also Joan can demand
the same amount. Teresa cannot, however, be compelled to pay more that P300. If Teresa
pays Susan the whole amount of P300, then the obligation is deemed extinguished. The
solidarity here exists among the creditors with respect to one and the same obligation.

(2) Passive Solidarity – when the solidarity takes place among the debtors only.

For example: Efren, Edmundo, and Reynaldo are solidarily indebted to Raymundo in the
amount of P300. Each debtor, namely Efren alone, Edmundo alone or Reynaldo alone, may
be required by Raymundo to pay the entire amount of P300. Raymundo may also demand
payment from from both Efren and Edmundo or from Edmundo and Reynaldo and from all of
them at the same time. Raymundo, however, may not demand more that P300.

44
 (3) Mixed Solidarity – when the solidarity exists both among the creditors and the debtors at the
same time

For example: Florenz, Ezer, and Leonido are solidary debtors and Enrique, Miguel and
Recaredo are solidary creditors for the amount of P300. Each of the debtors, namely Florenz
Ezer and Leonido, are liable to pay the entire amount of P300 to any one of the solidary
creditors namely Enrique, Miguel and Recaredo. Creditor Recaredo alone may demand from
any one of the debtors from some or all of them the payment of the amount of P300. The
same right belongs to creditors Enrique and Miguel. On the other hand, Florenz alone or Ezer
alone or Leonido alone may pay any one of the demanding creditors or any creditor (if there is
no demand) the entire amount of P300. Payment by one of the solidary debtors will cause the
extinguishment of the obligation.

Art. 1212. Each one of the solidary creditors may do whatever may be useful to the others,
but not anything which may be prejudicial to the latter.

Art. 1213. A solidary creditor cannot assign his rights without the consent of the others.

MAY EACH OF THE SOLIDARY CREDITORS DO SOMETHING FOR THEIR BENEFIT?

Each of the solidary creditors cannot do anything prejudicial to the others but each may do
anything that is beneficial?

WHAT ARE THE EXCEPTIONS TO THE RULE?

A solidary creditor cannot do anything prejudicial, EXCEPT:
(1) Condonation – this is valid BUT the condoning creditor still has the obligation to reimburse
the other creditors; CONSENT OF ALL THE CREDITORS IS NOT NEEDED;
(2) Assignment of shares – here consent of everyone is needed which may be prior or after such
assignment.

WHAT IF A CREDITOR ASSIGNS SHARES WITHOUT THE CONSENT OF THE OTHER

CREDITORS?
The assignment is voidable. It can be falsified by the other creditors or it can be annulled. It is an
unauthorized act.

WHAT IF THE CREDITOR ASSIGNS IT TO ANY OTHER SOLIDARY CREDITOR?

Consent is not required.

IS CONSENT NEEDED IN BENEFICIAL ACTS?

As a general rule, with respect to prejudicial acts, the consent of all is needed EXCEPT in
condonation and assignment. With respect to beneficial acts, there is no need for the consent of all
creditors.
An example of a beneficial act would be a demand of one creditor so that the debtor may comply
with the obligation. This is presumed to be in favor of the other creditors as well because this gives them a
chance to take any action. (e.g. specific performance against the debtor should he refuse to comply with the
obligation.) After all, as a general rule mora or delay only takes place upon demand.

Art. 1214. The debtor may pay any one of the solidary creditors; but if any demand, judicial
or extrajudicial, has been made by one of them, payment should be made to him.

IN ACTIVE SOLIDARITY, WHO MAY COLLECT THE DEBT?

There is no priority as among the solidary creditor as to who can collect the debt EXCEPT that the
one who first makes the demand is entitled to the payment because the rule is that the debtor is required to
pay the one who makes the demand first.

WHAT IF THE DEBTOR PAYS TO ONE WHO HAS NOT MADE A DEMAND?

45
 The obligation is not yet extinguished because payment was not made to the proper party.

DOES A DEMAND HAVE THE EFFECT OF ESTOPPEL?

A demand does not have the effect of estoppel, because in the case of several debtors, even if one
creditor makes a demand on one debtor, if for any reason, the debt is not yet paid, then he can still make a
demand on the other debtors. This is the difference between the rule of preference in an active and passive
solidarity. In the former, payment should be made to the creditor who made the demand. In the latter, the
creditor does not have to recover only from the person against whom the demand is made. In other words,
he is not estopped should he choose to go after the other debtors.

Art. 1215. Novation, compensation, confusion or remission of the debt, made by any of the
solidary creditors or with any of the solidary debtors, shall extinguish the obligation,
without prejudice to the provisions of Art. 1219.
The creditor who may have executed any of these acts, as well as he who collects the
debt, shall be liable to the other for the share in the obligation corresponding to them.

WHAT IS THE EFFECT OF THE FORMS OF EXTINGUSIHMENT SUCH AS NOVATION,

COMPENSATION, CONFUSION, OR REMISSION OF DEBT OF ONE OF THE SOLIDARY
CREDITORS WITH THE DEBTOR?
As between the solidary creditors and the debtor, the obligaion is extinguished BUT with respect
to the solidary creditors, as among themselves, there is an obligation on the part of the creditor who has
been satisfied, to reimburse the share of the other solidary creditors.

Art. 1216. The creditor may proceed against any 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 be directed against the others, so long as the debt has not
been fully collected.

Art. 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.
He who made the payment may claim from his co-debtors only the share which
corresponds to each, with the interest for the payment already made. If the payment is
made before the debt is due, no interest for the intervening period may be demanded.
When one of the solidary debtors cannot, because of his insolvency, reimburse his
share to the debtor paying the obligation, such share shall be borne by all his co-debtors, in
proportion to the debt of each.

HOW IS THE LIABILITY OF THE SOLIDARY CREDITORS DETERMINED?

If X owes A, B and C P3,000 and X pays A, with respect to the creditors and the debtor the
obligation is extinguished.

IN THE ABOVE EXAMPLE, AFTER X PAYS A, WHAT IS THE LIABILITY TO B AND C?

A has to reimburse B and C P1,000 each.
Among the creditors themselves, there is a relationship that exists. This is always joint. There
cannot be a stipulation that as among the creditors, there is solidary liability, otherwise the money would
just be going around.

ASSUMING THAT THE FORM OF EXTINGUISHMENT IS LEGAL COMPENSATION, AS WHEN X

OWES A AND A OWES X, IS A REQUIRED BY LAW TO REIMBURSE B AND C?
Yes. There is an obligation among all solidary creditors to reimburse one another regardless of
what is the cause of extinguishment EXCEPT due to loss to fortuitous event, where there is no
reimbursement of the obligation because the relationship among creditors is joint.

WHAT ABOUT SEC. 6, RULE 86 OF THE RULES OF COURT?

46
 Sec. 6 of Rule 86 of the Rules of Court: “Where the obligation of the decedent is solidary with
another debtor, the claim shall be filed against the decedent as if he were the only debtor, without prejudice
to the right of the estate to recover contribution from the other debtor. x x x”
This provides the procedure should the creditor desire to go against the deceased debtor. If the
creditor would go against the dead, then he should comply with this rule.
But then he could also go after the living debtors in which case you are not required to avail of the
proceedings in the estate of the deceased solidary debtor. (Imperial v. David)

IMPERIAL INSURANCE V. DAVID 133 SCRA 317

Facts:
 David and her husband, Reyes, executed 2 indemnity agreements in favor of Imperial Insurance
to assure indemnification for whatever liability it may have in connection with its posting of
security bonds to lift attachments in civil cases.
 Reyes died intestate; and David became administratix of the intestate estate.
 Judgment was rendered in the two civil cases against the spouses which became final and
executory.
 Writs of execution being unsatisfied, judgment was rendered against the surety bonds.
 Imperial filed for collection of sums of money after David failed to make payments upon
demand by Imperial.

Issue: W/N David is liable to pay.

Held: YES. If the husband and wife bound themselves jointly and severally, in case of his death her
liability is independent of and separate from her husband’s liability, and she may be sued for the whole
debt.
When the obligation is a solidary one, the creditor may bring his action in toto against any of the
debtors obligated in solidum.
She (David) may be sued for the whole debt and it would be error to hold that the claim against
her as well as the claim against her husband should be made in the decedent’s estate.
The Civil Code expressly allows the creditor to proceed against any one of the solidary debtors or
some or all of them simultaneously. Hence, there is nothing improper in the creditor’s filing of an action
against the surviving solidary debtors alone, instead of instituting a proceeding for the settlement of the
estate of the deceased debtor wherein his claim could be filed.

SHOULD THE COURT DISMISS THE CASE WHEN, PENDING A SUIT FOR THE COLLECTION OF
A SUM OF MONEY AGAINST SOLIDARY DEBTORS, ONE OF THE DEBTOR DIES, PURSUANT
TO SEC. 6, RULE 86 OF THE RULES OF COURT?
No. Creditors have a right to recourse against one, some or all of its solidary debtors under Art.
1216 of the Civil Code. Art 1216 grants the creditor the substantive right to seek satisfaction of his credit
from one, some or all of his solidary debtors, as he deems fit or convenient for the protection of his
interests. If during the pendency of an action in a collection suit against some or all of them one of the
defendants dies, the court retains jurisdiction to continue the proceedings and decide the case in respect to
the surviving defendants. (Philippine National Bank v. Independent Planters Association, Inc.)

PNB V. INDEPENDENT PLANTERS 112 SCRA 113

Facts:
 PNB appealed to the SC the order of CFI dismissing its claim against several solidary debtors
for the collection of a sum of money on the ground that one of the defendants died during the
pendency of the case.
 CFI relied on Sec 6 Rule 86 of the Rules of Court which states: “Where the obligation of the
decedent is solidary with another debtor, the claim shall be filed against the decedent as if he
were the only debtor xxx”

47
  PNB assails the order invoking Art 1216 of the Civil Code which states: “The creditor may
proceed against any one of the solidary debtors or some or all of them simultaneously xxx”

Issue: W/N PNB can claim from other solidary debtors

Ruling: YES. Sec 6, Rule 86 of the Rules of Court provides the procedure should the creditor desire to go
against the deceased debtor. Art 1216 of the CC expressly allows the creditpr to proceed against any one of
the solidary debtors or some or all of them simultaneosly. The former being merely procedural cannot
prevail over the latter which is a substantive law.
PNB v. Asuncion: Nothing in Sec 6, Rule 86 of the RRC prevents and creditor from proceeding
against the surviving solidary debtors.
If one of the alleged solidary debtors dies during the pendency of the collection case, the court
where said case is pending retains jurisdiction to continue hearing the charge as against the surviving
defendants.

HOW IS LIABILITY APPORTIONED AMONG THE CREDITORS?

Liability is apportioned or distributed proportionately if there is an agreement as to how much the
share of each is. If there is no agreement, the, it is equally apportioned.

Art. 1218. Payment by a solidary debtor shall not entitle him to reimbursement from his co-
debtors if such payment is made after the obligation has prescribed or become illegal.

Art. 1219. The remission made by the creditor of the share which affects one of the solidary
debtors does not release the latter from his responsibility towards the co-debtors, in case the
debt has been totally paid by anyone of them before the remission was effected.

Art. 1220. The remission of the whole obligation, obtained by one of the solidary debtors,
does not entitle him to reimbursement from his co-debtors.

Art. 1221. If the thing has been lost or if the prestation has become impossible without the
fault of the solidary debtors, the obligation shall be extinguished.
If there was fault on the part of any one of them, all shall be responsible to the
creditor, for the price and the payment of damages and interest, without prejudice to their
action against the guilty or negligent debtor.
If through a fortuitous event, the thing is lost or the performance has become
impossible after one of the solidary debtors has incurred in delay through the judicial or
extrajudicial demand upon him by the creditor, the provisions of the preceding paragraph
shall apply.

WHAT ARE THE CASES WHERE REIMBURSEMENT IS POSSIBLE OR NOT FOR A SOLIDARY
DEBTOR?
REIMBURSEMENT NO REIMBURSEMENT
 Payment  Total Condonation, e.g. A negotiates to X,
creditor, to forget the loan. There is no
 Novation – change of the object with the reimbursement for A as regards other debtors as
knowledge of the creditor, e.g., TAWAD.The no money of A was ever used.
debtor who paid the novated amount to the
creditor is entitled to reimbursement from the  Obligation is void.
other debtors based on the novated amount, not  Obligation has prescribed.
the original amount, e.g. A, B, C and D are  Debtor is guilty of loss
obliged as solidary debtors to pay X P1,000. If
A was able to lower the amount to P800 with
X’s knowledge, and A pays the whole amount

48
 to X, A can only ask for reimbursement from B,
C, and D based on the P800. Therefore, B, C,
and D must pay A only P200 each.

 Compensation
 Confusion – here the debtor later becomes the
owner of the object by some other means or the
debtor becomes the creditor

 Partial condonation – just like in novation; a

portion of the obligation has been condoned.

Art. 1222. A solidary debtor may, in actions filed by the creditor, avail himself of all
defenses which are derived from the nature of the obligation and of those which are
personal to him, or pertain to his own share. With respect to those which personally belong
to the others, he may avail himself thereof only as regards that part of the debt for which
the latter are responsible.

WHAT ARE THE DEFENSES FOR A SOLIDARY DEBTOR AGAINST HIS CREDITOR?
(1) Defenses which arise from the very nature of the obligation. This is a COMPLETE
DEFENSE, e.g. obligation is void or extinguished. The creditor cannot go against any of the
debtors.
(2) Personal defenses may be complete if such a defense pertains directly to the debtor, e.g.
minority or insanity. It can also be partial as for the other debtors (not the minor nor insane
debtor) e.g., solidary debtors A, B, C, and D are required to pay X P1,000 on 14 February,
2003. If A raises the defense of his being a minor, and X requires B to pay the whole amount,
A’s minority is a partial defense to B so B must pay, partially also, P750 only.

Sec. 5. Divisible and Indivisible Obligations

Art. 1223. The divisibility or indivisibility of the things that are the objects of obligations in
which there is only one debtor and only one creditor does not alter or modify the provisions
of Chapter 2 of this Title.

Art. 1224. A joint indivisible obligation gives rise to indemnity for damages from the time
anyone of the debtor does not 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.

Art. 1225. For the purposes of the preceding articles, obligation to give definite things and
those which are not susceptible of partial performance shall be deemed to be indivisible.
When the obligation has for its object the execution of a certain number of days of
work,. The accomplishment of work by metrical units, or analogous things which by their
nature are susceptible of partial performance, it shall be divisible.
However, even though the object or service may be physically divisible, an
obligation is indivisible if so provided by law or intended by the parties.
In obligations not to do, divisibility shall be determined by the character of the
prestation in each particular case.

49
 Sec. 6. Obligations with a Penal Clause

Art. 1226. In obligations with a penal clause, the penalty shall substitute the indemnity for
damages and the payment of interests in case of noncompliance, if there is no stipulation to
the contrary. Nevertheless, damages shall be paid if the obligor refuses to pay the penalty or
is guilty of fraud in the fulfillment of the obligation.
The penalty may be enforced only when it is demandable in accordance with the
provisions of this Code.

WHAT IS A PENAL CLAUSE?

A penal clause is an accessory undertaking to assume greater liability in case of breach. Also, it
may serve as liquidated damages, meaning damages that the courts need not decide upon in case one debtor
breaches in the obligation.

WHAT DOES AN OBLIGATION WITH A PENAL CLAUSE CONSIST OF?

In an obligation with a penal clause, there is both the principal obligation and the penalty. The
latter is to be deemed an accessory obligation, thus making its very existence dependent upon the principal.
Most obligations with a penal clause contain a stipulation to the effect that failure on the part of the debtor
to perform the prestation will make the debtor liable for a certain consideration. Example: If Angelo fails to
take Arnie to have his hair cut by 2 p.m. tomorrow, Angelo must deliver to Arnie a year of hair gel (Ang
ganda ng bagong buhok eh.)

WHAT IS THE PURPOSE OF THE PENAL CLAUSE?

Its purpose is to:
(1) strengthen the coercive force of the obligation by the threat of greater responsibility
in the event of breach [Tolentino]
(2) do away with the proof as to how much the damages are in all cases, which mostly
do not involve money [Dean del Castillo]

WHAT FORM SHOULD PENALTIES NORMALLY TAKE?

Normally, the penalty is in the form of money. There is no prohibition, however, to make the
penalty in the form of goods.

WHEN IS A PENALTY DEMANDABLE?

A penalty is demandable in cases of breach of an obligation, that is, in cases of:
(1) non-fulfillment
(2) partial fulfillment
(3) irregular fulfillment
(4) delayed fulfillment
However, breach alone does not make the creditor entitled to the penalty. The enforcement of the
penalty can be demanded by the creditor only when the non-performance is due to the fault of the
debtor. Nevertheless, non-performance gives rise to the presumption of fault; in order to avoid the
payment of the penalty, the debtor has the burden or providing a defense.

WHEN MAY A PENAL CLAUSE NOT BE ENFORCED THEN?

A penal clause may not be enforced:
(1) When the breach is due to the fault of the creditor;
(2) When a fortuitous event intervened, UNLESS the debtor expressly agreed on his
liability in case of a fortuitous event; and
(3) When the debtor is not yet in default.

MAY THE CREDITOR COLLECT DAMAGES AND INTEREST IN ADDITION TO THE PENALTY?
As a general rule, no. The penalty takes the place of indemnity for damages and for the payment
of interest. Liquidated damages, remember?

50
 Take for example, There is an obligation to pay P1,000 cash with interest at 12% per annum and a
penalty of 20% if the loan remains unpaid after a year. On the first year, the creditor can collect P1,000 plus
P120 which constitutes the interest. If the debt remains unpaid on the second year, the creditor can collect
P1,000 plus P120 interest and P200, which is the 20% penalty. In the latter case, the 12% interest cannot be
imposed on top of the penalty because the penalty itself takes the place of liquidated images and interest.

WHEN MAY THE CREDITOR COLLECT DAMAGES AND INTEREST IN ADDITION TO THE
PENALTY?
The creditor may do so, when:
(1) There is an express stipulation to that effect.
(2) The debtor refuses to pay the penalty; and
(3) The debtor is guilty of fraud in the fulfillment of the obligation.

Art. 1227. The debtor cannot exempt himself from the performance of the obligation by
paying the penalty, save in the case where this right has been expressly reserved for him.
Neither can the creditor demand the fulfillment of the obligation and the satisfaction of the
penalty at the same time, unless this right has been clearly granted him. However, if after
the creditor has decided to require the fulfillment of the obligation, the performance thereof
should become impossible without his fault, the penalty may be enforced.

WHAT ARE THE TWO BASIC PRINCIPLES IN AN OBLIGATION WITH A PENAL CLAUSE?
First, the debtor cannot pay the penalty in place of the principal. The creditor cannot be forced to
accept such an offer from the debtor. The reason for this is that if the debtor can just choose to pay the
penalty instead of fulfilling the obligation, the obligation will be, in effect, be an alternative obligation.
EXCEPT when there is an express stipulation by the parties, the debtor may pay the penalty in place of the
principal. Therefore, implied reservation of such right in favor of the debtor is not allowed.
Second, the creditor cannot collect both the principal and the penalty. It would be unjust on the
debtor’s part. The exception is when there is a contrary stipulation by the parties to that effect. Note
however that the second principle does not apply in the case of monetary obligations, because in monetary
obligation, the creditor collects both the principal and the penalty.

Art. 1228. Proof of actual damages suffered by the creditor is not necessary in order that
the penalty may be demanded.

Art. 1229. The judge shall equitably reduce the penalty when the principal obligation has
been partly or irregularly complied with by the debtor. Even if there has been no
performance, the penalty may also be reduced by the courts if it is iniquitous or
unconscionable.

WHO HAS THE RIGHT TO FIX THE AMOUNT IN A PENALTY?

The parties, of course. However, Art. 1229 also provides that the judge shall equitably reduce the
penalty when the principal obligation (1) has been partly or irregularly complied with x x x; or (2) even if
there is no performance, x x x if it is iniquitous or unconscionable.

JISON V. COURT OF APPEALS, ROBERT PHILLIPS 164 SCRA 339

Facts:
 Jisons entered into a Contract to Sell with ROPSI. The latter will sell to Jisons a subdivision lot,
agreed price is P55K, with 8% interest annually payable on installment.
 The contract also provides that it should be automatically rescinded upon failure of vendee to
pay 3 or more monthly installments and that any amount derived from sale shall be forfeited as
liquidated damages.
 Jisons defaulted for 3 months
 ROPSI informed Jisons that the contract was cancelled

51
  The execution of the contract was prior to the effectivity of RA6552 (Realty Installment Buyer’s
Protection Act) providing that the notice of cancellation be by notarial act.

Issue:
 W/N the cancellation was valid
 W/N the forfeiture of all payments was reasonable

Ruling: YES. The resolution of the contract to sell was valid as authority to rescind was stipulated in the
contract. Also a sufficient notice was sent to the defaulting buyer. Note that RA 6552 is not yet effective.
NO. The Court is convinced that the forfeiture of the amount of P47K, although it includes
accumulated fines for petitioner’s failure to construct a house), is clearly iniquitous considering that the
contract price is only P55K.
Art 2227: Liquidated damages, whether intended as an indemnity or a penalty, shall be equitably
reduced if they are iniquitous or unconscionable.
Art 1229: In obligation with a penal clause, the judge shall equitably reduce the penalty when the
principal obligation has been partly or irregularly complied with by the debtor.
The amount/character of indemnity is fixed without regard to the probable damages which might
be anticipated as a result of a breach of terms of contract.

Art. 1230. The nullity of the penal clause does not carry with it that of the principal
obligation.
The nullity of the principal obligation carries with it that of the penal clause.

IF THE PRINCIPAL OBLIGATION IS NULL AND VOID, WHAT BECOMES OF THE PENAL
CLAUSE?
Since the penalty is only an accessory obligation, if the principal obligation is null and void, the
penal clause is also void. For example: Angel is obliged to give Ogie a stash of Grade A hashish imported
from Sagada. There is a penal clause regarding the forfeiture of P500 in case of non-compliance with the
obligation. Here the subject matter is outside the commerce of man. (Di nga?) The penalty clause here,
although in itself valid, will also be considered null and void because the nullity of the principal obligation
carries with it that of the penal clause.

IF THE PENAL CLAUSE IS VOID, WHAT WILL HAPPEN TO THE PRINCIPAL OBLIGATION?
If the penal clause is void, the obligation remains valid. For example, Ferdie is obliged to
construct a house for Beryl within 6 months. The contract provides for a penalty clause in case Ferdie is not
able to perform his obligation within the stipulated period. The penal clause consists of Ferdie becoming
Beryl’s forever. Here the penalty clause is null and void because it is against good morals. (pero masaya.. si
Beryl) But the principal obligation, that of constructing the house, remains valid. The penal clause will be
disregarded. The law provides that the nullity of the penal clause does not carry with it that of the principal
obligation.

WHAT WOULD MAKE THE PENAL CLAUSE VOID?

The penal clause may be void because it is contrary to law, morals, good customs, public order
and public policy.

GSIS V. COURT OF APPEALS 145 SCRA

Facts:
 Medina’s application for loan with GSIS (P350K) was approved. The term includes (1) that
unpaid installments (which include principal and interest) bears interest and (2) that the interest
is 9% compunded monthly.
 Real estate mortgage was executed in favor of GSIS.
 Additional loan of P230K was approved by GSIS
 A real estate mortgage was amended to include guaranty of additional loan.
 Medina defaulted.GSIS thus imposed interest on unpaid installments.

52
  GSIS filed for application for foreclosure of mortgage and indeed the mortgage was foreclosed

Issue:
 W/N the amendment of the REM superseded the earlier mortgage contract particularly
with respect to compounding of interest
 W/N the interest rates on loan accounts are usurious
 W/N foreclosure was a proper remedy

Ruling: NO.
NO. Interest by way of damages is governed by Art 2209 which states: “ If the obligation consists
in the payment of sum of money, and the debtor incurs in delay, the indemnity for damages, there being no
stipulation to the contrary, shall be the payment of interest.
In Bachrach case, SC ruled that CC permits the agreement upon penalty apart from the interest.
Should there be such an agreement, the penalty does not include the interest, the 2 are distinct
things demandable separately.
In the Equitable Banking Corp case, SC held that stipulation about payment of such additional rate
partakes of the nature of a penalty clause, which is sanctioned by law.
YES. Medina’s failure to settle their accounts, GSIS had the perfect right to foreclose the
mortgage.

Chapter 4
Extinguishment of Obligations

General Provisions

Art. 1231. Obligations are extinguished:

(1) By payment of performance;
(2) By the loss of the thing due;
(3) By the condonation or remission of the debt;
(4) By the confusion or merger of the rights of creditor and debtor;
(5) By compensation;
(6) By novation.
Other causes of extinguishment of obligations, such as annulment, rescission, fulfillment
of a resolutory condition, and prescription, are governed elsewhere in this Code.

WHAT ARE THE MODES OF EXTINGUISHMENT OF AN OBLIGATION?

Art. 1231 provides that “obligations are extinguished:
(1) By payment of performance;
(2) By the loss of the thing due;
(3) By the condonation or remission of the debt;
(4) By the confusion or merger of the rights of creditor and debtor;
(5) By compensation;
(6) By novation.”

IS THIS LIST EXCLUSIVE?

No. Art. 1231 goes on to say that “other causes of extinguishment of obligations, such as
annulment, rescission, fulfillment of a resolutory condition, and prescription are governed elsewhere in this
Code.”
Also, an obligation may be extinguished by death, when the obligation is of a purely personal
character, apart from its extinctive effects in some contracts, such as partnership and agency, remission by
the creditor, compromise, rescission of the contract, the fulfillment of a resolutory term, a change of civil
status, the occurrence of a fortuitous event, impossibility of performance and mutual dissent.

53
 Sec. 1 – Payment or Performance

Art. 1232. Payment means not only the delivery of money but also the performance, in any
other manner, of an obligation.

GENERALLY, WHAT MODE WOULD BE MOST PREFERABLE TO THE PARTIES?

The parties generally would want to avail of payment.

WHAT IS PAYMENT?
Art. 1232 provides that “Payment means not only the delivery of the money but also the
performance, in any manner, of an obligation.”
Tolentino says that payment is the fulfillment of the prestation due, a fulfillment that extinguishes
the obligation by the realization of the purposes for which it was constituted.
For legal purposes, payment does not only mean payment of a money obligation. It includes
performance of an obligation not payable in money, such as delivery of property or performance of
services. In an obligation not to do, payment would mean refraining from the act which has been
prohibited.
Note that “payment” as used herein refers to a pre-existing obligation. If there is no such
obligation exists, strictly speaking, the delivery of money will not constitute payment. Thus, in the exercise
of an option, Arts. 1232 to 1236 cannot apply.

Art. 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.

WHO HAS THE BURDEN OF PROVING PAYMENT?

The debtor has the burden of proving that he has paid his debt, granted that the creditor has shown
that a valid debt exists.

WHAT IS THE ONE OF THE BEST WAYS OF PROVING PAYMENT?

One of the best ways of proving payment is the presentation of a receipt. The debtor has a right to
demand a receipt from the creditor.

WHAT ARE THE THREE PRINCIPLES INVOLVED IN PAYMENTS?

The three principles involved in payments are:
(1) Integrity; (complete fulfillment)
(2) Identity; and
(3) Indivisibility.

WHAT IS INTEGRITY OF PAYMENT?

Integrity of payment means the complete and full performance or payment of the obligation. The
principle of integrity of payments (as well as that of indivisibility) is embodied in Art. 1233 which provides
that “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.”
If it is an obligation to do, it must be completely performed.
If it is an obligation to give, it must be completely delivered and always in accordance with the
terms and conditions agreed upon between the parties.

HAHN V. COURT OF APPEALS, SANTOS___________________________ 173 SCRA 675

Facts:
 Santos received 2 diamond rings with a total value of P47K from Hahn.
 Santos issued separate receipts acknowledging the delivery for sale on commission and to be
returned upon demand if unsold.
 The rings were not sold nor were they returned when demanded by Hahn.
 Hahn sued for recovery of the rings or their value

54
  The TC ordered Santos to return the 2 rigns or pay Hahn their value, which was increased to
P65K (from P47K) based on Art. 1250
 On appeal, CA found Art 1250 inapplicable. It disallowed however the grant of moral and
exemplary damages.
Issue:
 W/N the refusal of Hahn to accept Santos’ offer (1) to pay for the rings on installmen and (2) to
return the solitaire ring was valid
 W/N upward adjustment under Art 1250 can be sustained

Ruling: YES. Art. 1233 requires full or complete payment. And creditor cannot be compelled to receive a
different thing, even if equal to or more than the value which is due.
Note: Moral and exemplary damages were awarded due to Santos’ dubious conduct
NO. There has been no “extraordinary inflation” of currency within the meaning of Art 1250.
Extraordinary inflation or deflation of currency is understood to be any uncommon decrease or increase in
the purchasing power of currency which the parties could not have reasonably foreseen and which has been
due to war and the effects thereof, or any unusual force majeure or fortuitous event.

Art. 1234. If the obligation has been substantially performed in good faith, the obligor may
recover as though there has been a strict and complete fulfillment, less damages suffered by
the obligee.

WHAT ARE THE EXCEPTIONS TO THE NEED FOR COMPLETE PERFORMANCE OF PAYMENT?
The exceptions are:
(1) Substantial compliance in good faith on the part of the debtor; and
(2) Waiver on the part of the creditor.

WHAT ARE THE REQUISITES FOR SUBSTANTIAL COMPLIANCE?

The pertinent provision is Art. 1234, which provides that “if the obligation has been substantially
performed in good faith, the obligor may recover as though there had been a strict and complete fulfillment,
less damages suffered by the obligee.
The requisites are:
(1) The debtor must have complied in good faith. Good faith here means that there must be a
reasonable attempt to comply with the obligation and the failure to perform the obligation
completely is not due to the fault or negligence of the debtor but because of some other factor.
(2) There must only be slight and casual breach. What is slight or what is material will have to
depend on the facts and circumstances of each case, and the nature of the obligation. Slight
and casual breach means the performance must approximate the full and complete
performance of the obligation. Thus, if the breach is material, the rule on substantial
compliance cannot be applied.

WHAT IS THE RATIONALE BEHIND THIS PROVISION?

According to the Code Commission, in case of substantial performance, the obligee is benefited.
So the obligor should be allowed to recover as if there had been a strict and complete performance, less
damages suffered by the obligee. This last condition affords a just compensation for the relative breach
committed by the obligor. (Tolentino, p. 278)

WHAT DOES “RECOVER” OR “RECOVERY” MEAN IN ART. 1234?

“Recovery” here does not mean that the obligor will recover what he has already paid. Such
recovery partakes of the action for rescission. The recovery referred to here means that if there is
substantial compliance in good faith, the debtor is entitled to enforce the obligation as if he has already
completed the agreement. The recovery here is in relation to the enforcement, not the rescission, of the
obligation.
For example, if the obligation is to deliver 100 bags of coffee for a sum of money, and the debtor
delivers 99 bags of coffee, the delivery of the 99 bags, if done in good faith, is considered substantial
compliance. The debtor may thus require the creditor to perform his part of the obligation, that is, to pay for

55
the 99 bags. The debtor may even institute an action for specific performance to compel the creditor (or the
buyer) to pay for the coffee. However, in a separate action for as a counterclaim, the buyer may ask for
damages from the debtor for his non-delivery of 1 bag of coffee.

IS THERE RECOVERY IN UNILATERAL OBLIGATIONS?

Strictly speaking, there is no recovery, but merely an extension of time for the obligor, since he
cannot ask the creditor to perform his part of the obligation (as only the obligor is obliged to do, not to do,
or to give something.)

IS SUBSTANTIAL COMPLIANCE DEEMED TO BE FULL COMPLIANCE THEN?

Technically, there is no full performance. The creditor may still sue for damages but he cannot
seek relief in actions that flow from the breach, such as specific performance and rescission. Such rights are
suspended. After seeking damages, the court will give the debtor time to pay for the remaining part of the
obligation so that there may be full compliance. This period is given as an “additional lease on life,” to give
the debtor time to fulfill his obligation completely. Such period does not give the debtor all the time in the
world to comply. After this period, the creditor becomes entitled to the remedies for the breach, if the
debtor has not yet fully complied with the obligation. During this period, it is as if there has been no breach
by the debtor.

 There is really no fixed yardstick to measure substantial compliance. It really all depends upon
the court who, in turn, will have to consider the output of the debtor and the facts and
circumstances of each case.
 Substantial compliance here takes the debtor’s side of a situation concerning the right of
rescission (i.e., the right of rescission is not absolute.) Inasmuch as the creditor could not avail
of rescission where there is only a slight breach, it cannot be gainsaid that likewise, the debtor
can still enforce the obligation even if there has only been substantial compliance.

Art. 1235. When the obligee accepts the performance, knowing his incompleteness or
irregularity, and without expressing any protest or objection, the obligation is deemed fully
complied with.

WHAT CONSTITUTES A WAIVER?

There is a waiver when, in accordance with Art. 1235, “x x x the obligee accepts the performance,
knowing it incompleteness or irregularity, and without expressing any protest or objection x x x,” in which
case, “the obligation is deemed fully complied with.”
However, there must be an intentional relinquishment of a known right. A waiver will not result
from a mere failure to assert a claim for defective performance when the thing or work is received, or from
mere payment in accordance with the terms of the contract. There must have been acceptance of the
defective performance with actual knowledge of the incompleteness or the defect, under circumstances that
would indicate an intention to consider the performance as complete and renounce any claim arising from
the defect. The word “accept” as used in Art. 1235 means to take as satisfactory or sufficient, or agree to an
incompatible or irregular performance.
The essential condition of a waiver is that the person making the waiver knows that he is waiving.

MAY A RECEIPT CONSTITUTE A WAIVER?

No. The mere receipt of a partial payment is not equivalent to the required acceptance of
performance as would extinguish the whole obligation. (Esguerra v. Villanueva)

MAY A CREDITOR OBJECT TO A DEFECTIVE PERFORMANCE AFTER HE HAS MADE A VALID

WAIVER?
No. The creditor is said to be estopped. The failure to protest beforhand precludes the obligee
from thereafter questioning the performance of the obligor’s obligation under the contract. (Grace Park
Engineering v. Yuzon)

56
 Also, where a party makes particular objections to the sufficiency of performance, he is estopped
to later set up other objections (Kansas Union Life Insurance Co. v. Burman)

WHAT IS THE DIFFERENCE BETWEEN A WAIVER AND SUBSTANTIAL PERFORMANCE?

Substantial performance does not per se extinguish the obligation. It only stops the clock insofar
as payment is concerned. Whatever is lacking would still have to be delivered or performed.
In a waiver, the creditor decides to forego the balance.

AZCONA V. JAMANDRE 151 SCRA 317

Facts:
 The parties entered into a contract of lease whereby Azcona would lease 80 hectares of his
150 hectares (pro diviso) share to Jamandre.
 Tha annual payment was pegged at P7,200
 Jamandre actually entered the premise after payment of P7,000. The premises was not
delivered to Azcona.
 The payment was acknowledged by Azcona in a receipt. He did not however express any
objection as to the P200 balance.

Issue: W/N the amount of P7000 paid by Jamandre and accepted by Azcona represented full
payment

Ruling: Yes. Where landlord signs a receipt for P7,000 as rental payment “ as per contract” he cannot ask
for cancellation of the lease on the ground that the lessee did not pay the full rent of P7,200 fixed in the
contract. The landlord should have made an express reservation for the deficiency

INTESTATE ESTATE OF THE LATE RICARDO PRESBITERO SR. V. CA 217 SCRA 373

Facts:
 Presbitero entered into a “Contract of Service” with Canoso. Canoso will negotiate with the
LBP and DAR for the sale of Presbitero’s property. The latter will pay Canoso 17 ½% (the
reduced rate) of gross sales
 Presbitero requested LBP to allocate 17 ½% of the cash and LBP bonds to Canoso until the
final release.
 On his second letter-request, Presbitero informed LBP to refrain from releasing Canoso
proportionate share. He will personally deliver it to Canoso
 Canoso was not given his proportionate share by Presbitero.
 Canoso filed a complaint

Issue: W/N the obligation of Canoso (of negotiating in behalf of Presbitero) is deemed fully complied
with

Ruling: Yes. Presbitero’s act of writing a letter to LBP authorizing the re;ease of 17 ½ % of the proceeds
to Canoso is evidenced that strict compliance with the contract were no longer expected and demanded by
Presbitero, resulting in a waiver of the stipulations or a novation of the agreements entered into.
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.. (Art 1235)
Moreover Art 1234 states: If the obligation has been substantially performed in good faith, the
obligor may recoverer as though there had been a strict and complete fulfillment, less damages suffered by
the obligee.

Art. 1236. 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.

57
 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 beneficial to the debtor.

Art. 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.

Art. 1238. Payment made by a third person who does not intend to be reimbursed by the
debtor is deemed to 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.

Art. 1239. In obligations to give, payment made by one who does not have the free disposal
of the thing due and capacity to alienate it shall not be valid, without prejudice to the
provisions of Art. 1247 under the Title on Natural Obligations.

WHO MAKES THE PAYMENT?

Three persons may make the payment:
(1) The debtor at the time of payment, and includes heirs, successors-in-interest;
(2) A third person who is not a debtor, heir, or successor; and
(3) A third person who has no intention of being reimbursed.

WHAT IF THE CREDITOR REFUSES THE DEBTOR’S PAYMENT?

The creditor’s refusal would be tantamount to mora accipiendi.

WHAT IF THE DEBTOR AT THE TIME OF PAYMENT IS INCAPACITATED?

His legal representatives, e.g., his guardian, shall have the right to annul such payment.
The obligation, aside from the payment, is likewise voidable in this case.
This envisions a situation where the incapacity does not exist at the time of the constitution of the
obligation. If it did exist then, the obligation will be deemed as void.
But note that there is an exception in Art. 1427, which provides that when a minor between 18 and
21enters into a contract without the consent of the parent or guardian and voluntarily pays a sum of money
or delivers a fungible thing in fulfillment of the obligation, there shall be no right to recover said payment
from the obligee who has spent or consumed it in good faith. In this case, the legal representatives may not
annul payment.

MAY THIRD PERSONS MAKING PAYMENT BE INTERESTED IN THE OBLIGATION?

They may or may not be interested in the obligation.
If they are interested, their interest must be in such a way that they may be found liable in the cast
that the debtor fails to pay, e.g., in the case of guarantors.

MAY THE CREDITOR BE COMPELLED TO ACCEPT PAYMENT BY THIRD PERSONS?

It depends.
If payment was made by a third person interested in the obligation, then the creditor is still
compelled to accept payment. Otherwise, he will be considered in mora accipiendi.
If payment was made by a third person not interested in the obligation, the creditor’s consent is
necessary. In other words, the creditor cannot be compelled to accept payment. Tolentino, quoting Camus,
said that the reason is that whenever a third person pays, there is a modification of the prestation that is due.
If the creditor does not accept and payment is not made in due time, the debtor will be considered in
default.

WHY MAY A CREDITOR REFUSE PAYMENT BY AN UNINTERESTED THIRD PERSON?

According to the Code Commission, “The creditor should not be compelled to accept payment
from a third person who he may dislike or distrust. The creditor may not, for personal reasons, desire to

58
have any business dealings with a third person; or the creditor may not have confidence in the honesty of
the third person who might deliver a defective thing or to pay with a check which may not be honored.”

WHAT IF THE CREDITOR ACCEPTS PAYMENT FROM A THIRD PERSON WHO IS NOT
INTERESTED IN AN OBLIGATION?
The payment is considered valid. Actually, in a relationship between a third person payor and the
creditor, what is crucial is the creditor’s consent to the former’s payment. This must be distinguished from
the created relationship between the third person payor and the debtor.
Though payment by a third person payor is valid once accepted by the creditor, this is not the end
of the story. In fact, insofar as the third person and debtor are concerned, it can only be the beginning. And
with this, the crucial is the knowledge or consent of the debtor to the third person’s payment.

HOW IMPORTANT, REALLY, IS THE DEBTOR’S KNOWLEDGE OR CONSENT TO THE

PAYMENT?
It bears repeating that the consent or non-consent of the debtor is only essential for purposes of
reimbursement and not for purposes of validity of payment. As long as the creditor accepts payment, such
payment is valid.
Note that the creditor’s consent may be express, implied, or tacit.

WHAT IF THE DEBTOR CONSENTS TO THE PAYMENT BY A THIRD PERSON?

There is full reimbursement and subrogation.
Full reimbursement simply means that a person is entitled to recover what he has paid.
Subrogation, by lay man’s language, means taking the place of the creditor. In legal terms, this will entitle a
third person payor to enforce all other rights which the creditor may exercise against the debtor.

IN THE CASE OF SUBROGATION, IS THE CREDITOR’S CONSENT NECESSARY SO THAT THE

THIRD PERSON MAY EXERCISE CREDITOR’S RIGHTS?
No. Art. 1302 states that legal subrogation is presumed. “x x x (2) when a third person, not
interested in the obligation, pays with the express or tacit approval of the debtor; x x x”.
Therefore, what is being spoken of here is that subrogation takes place by operation of law. The
law provides for an automatic subrogation of rights as soon as the third person, with the consent of the
debtor, pays the creditor.
Despite the clarity of the law as to the automatic operation of subrogation, government people still
would not accept deeds of sale that bear names different from those of the persons possessing them.
Government probably does not accept this aspect of the law.

IS ASSIGNMENT OF RIGHTS OF THE CREDITOR NECESSARY?

No. As stated, right of subrogation is automatic.
However, for practical purposes, there is no hard to move for an assignment of right by the
creditor to the person. But remember this is not really necessary.
But it is noteworthy to state that a creditor may assign his rights to a third person. But in this case,
the resulting rights and obligations of the creditor and the third person would be different from those arising
from payment. (Tolentino, Manresa)

IS PAYMENT INSOFAR AS IT HAS BENEFITED THE DEBTOR MATERIAL HERE?

No. The debtor gave his consent anyway, so it is assumed that he will accept the consequences
that may arise from the third person’s payment.
For example, debtor D owes creditor E a sum of money. As a security, debtor mortgages his house
to creditor. Third party X through debtor’s express approval pays the debt. Now creditor’s rights are
subrogated to the third party X. May X now foreclose the mortgage on the house? NOT RIGHT AWAY.
Mortgages are merely accessory to the principal obligation. This along with collateral agreements,
penalties, and surcharges can only be enforced if debtor fails to make a full reimbursement of the sum paid
by third party X.

WHAT IF THE DEBTOR DOES NOT CONSENT TO THE PAYMENT BY A THIRD PERSON?
There is only beneficial reimbursement.

59
 This means that the debtor shall pay the third person only to the extent that it has benefited the
debtor.
For example, if Ferdie, without the knowledge or consent of Beryl, pays R****  P1,000 instead
of P500 which is the actual indebtedness of Beryl, the obligation of Beryl to Ferdie will only be P500 and
not P1,000 because it is only to the extent of the P500 that Beryl has been benefited.
Another example, A owes B P1,000. C, without A’s consent, pays B P1,000 which the latter
graciously accepted. Much to C’s surprise though, A had already paid the said debt a week before. May C
still recover what he has paid? YES. The right of recovery of C will be against the creditor B, subject to the
rules of solutio indebiti.
Yet another example, what if for instance, instead of A having paid B, C discovered that the
obligation to pay the debt had already prescribed? STILL YES. The rules of solutio indeiti and natural
obligations still apply.

WHAT IF PAYMENT WAS MADE BY A THIRD PERSON AGAINST THE DEBTOR’S WILL?
There is also beneficial reimbursement.

WHAT IF A THIRD PERSON PAYS WITHOUT THE INTENTION OF BEING REIMBURSED?

Art. 1238 provided that “Payment made by a third person who does not intend to be reimbursed by
the debtor is deemed to 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.”
For example, Cy is indebted to Ferdie (may utang na naman si Cy) in the amount of P1,000. On
the due date of the obligation, Tonette tells Cy, “I will pay your debt to Ferdie. You do not have to repay
me.” (Scary) Cy, being Cy, consents, so Tonette pays Ferdie the P1,000. The payment made by her to
Ferdie, shall be considered a donation to Cy. However, if Cy does not consent to the payment of Tonette
but Ferdie accepts the payment, the debt is extinguished, Ferdie cannot be compelled to return to Tonette
the amount paid. On the other hand, Cy may refuse to accept Tonette’s liberality (HAHAHA Cy, refuse?
HAHAHA) and so he may compel the latter to receive the reimbursement.
Note, that it is a donation as between the payor and the debtor.

IS CONSENT OF THE DEBTOR IN THIS CASE NECESSARY?

Yes. The rules on donation require consent because the debtor or any person receiving a donation
may not be compelled to accept such a donation. Consent, therefore, is necessary so that the donation may
be perfected.
The Code Commission states that “no one should be compelled to accept the generosity of
another.”

WHAT IS THE EFFECT IF THE DONATION HAS THE DEBTOR’S CONSENT?

It will be considered both a valid payment and donation.
The creditor who has accepted it as payment deems the obligation as between him and the debtor
as extinguished.
As to the debtor and the third person, this being a perfect donation does not require that the former
reimburse the latter. However, if the third person should want to collect, he is entitled to collect on the basis
of beneficial reimbursement.

WHAT IF THE DEBTOR OBJECTS TO THE VERY PAYMENT?

The effect would be as if the obligation was paid by a third person without the knowledge and
consent of the debtor in which case the third person is only entitled to beneficial reimbursement.

WHAT IF THE OBJECTION PERTAINS ONLY TO THE DONATION?

If, for instance, a debtor says, “Go ahead and pay but I do not want this to be a donation,” the
effect is that this is payment with the knowledge and consent of the debtor, in which case he is entitled to
full reimbursement and subrogation.

Art. 1240. Payment shall be made to the person in whose favor the obligation has been
constituted, or his successor in interest, or any person authorized to receive it.

60
TO WHOM SHOULD PAYMENT BE MADE?
Three persons may accept payment:
(1) The creditor at the time of payment which includes his heirs, assigns, or successors-in
interest;
(2) A third person authorized by law or by agreement of the parties; and
(3) A third person who is not authorized by law or by agreement.

For example, Angel, a member of a partnership of, entered into a contract with Mark for the
construction of a building. He signed the contract personally, and did not mention that it was made
on behalf of the partnership. In reality, however, it was on behalf of the partnership, and actually it
was the partnership which performed the work agreed upon. Should payment on the contract be
made to the partnership?
It appearing that everything Angel might have done under the contract and after its fulfillment has
been done by the partnership, and that the real party to the contract was the partnership, the result
is the same whether the action is brought by Angel personally or by the partnership. The payment
will be made to the partnership under these circumstances will be perfectly legal. (Tuazon and San
Pedro v. Zamora and Sons, 12 Phil 305)

Art. 1241. Payment to a person who is incapacitated to administer his property shall be
valid if he has kept the 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 benefit to the creditor need not be proved in the following
cases:
(1) If after the payment, the third person acquires 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 receive the payment.

WHAT IF THE CREDITORS IS INCAPACITATED?

Art. 1241 states that “Payment to a person who is incapacitated to administer his property shall be
valid if he has kept the thing delivered, or insofar as the payment has been beneficial to him. x x”
If payment is made to the creditor who is incapacitated, it shall be valid only insofar as it accrued
to the creditor’s benefit. In the absence of this benefit, the debtor may be made to pay again by the
incapacitated himself when he attains capacity, or his legal representatives during such incapacity
[Tolentino, Manresa]
Payment shall be considered as having benefited the incapacitated person if he made an intelligent
and reasonable use thereof, for purposes necessary or useful to him, such as that which his legal
representatives should have done under similar circumstances, even if at the time of the complaint the
effect of such use no longer exists. [Tolentino, Gasperi]
Dean del Castillo also suggest that payment should be made to the legal representative of the
incapacitated in order to avoid double payment. Tolentino adds that if there I no legal representative, the
remedy is consignation pursuant to Art. 1256: “x x the debtor shall be released from responsibility by the
consignation of the thing or sum due x x x” (2) when [the creditor] is incapacitated to receive payment x x
x”
For example, Angel delivers P1,000 to Mark, a minor under guardianship, in payment of a debt.
Mark loses P700 of the money in gambling, or due to negligence or ignorance. In this case, the payment
should be considered as made only to the extent of P300. On the other hand, if Mark kept the money paid
or spent that for purposes useful to him, the payment shall be valid; otherwise, Mark should unduly enrich
himself at the expense of Angel.

Art. 1242. Payment made in good faith to any person in possession of the credit shall release
the debtor.

61
Art. 1243. Payment made to the creditor by the debtor after the latter has been judicially
ordered to retain the debt shall not be valid.

WHAT IS THE EFFECT OF PAYMENT TO THE CREDITOR?

It extinguishes the obligation, of course. Kung binasa mo pa yung sagot na to, magdrop ka na,
habang hindi pa nagmimidterms.

WHEN MAY PAYMENT TO A CREDITOR NOT EXTINGUISH THE OBLIGATION?

Art. 1243 provides that “Payment made to the creditor by the debtor after the latter has been
judicially ordered to retain the debt shall not be valid.”
For example, Cy owed Angelo P10,000. Angelo sued Cy for collection and obtained a judgment in
his favor. But when he tried to engorce the judgment, he found out that Cy had no property. However,
Angelo learned that Ferdie owed Cy P8,000 which would fall due a month later. (di nga, may napapautang
si Cy?) So Angelo obtained an order from court ordering Ferdie not to pay Cy. Ferdie, therefore should not
pay Cy as he was ordered to retain such debt. If Ferdie pays Cy, he may pay Angelo again, as the whole
process of retention of the debt was for Angelo. But note that if Angelo filed suit against Cy and the court
orders Cy to pay the amount given by Ferdie, Ferdie need not pay Angelo.
In the above example, considering that the court ordered Ferdie not to pay her debt to Cy, what
happens if as based on the original agreement Ferdie’s debt had long become due and demandable? May he
be declared in default?
If the debt is overdue, the judicial order for retention of debts becomes a legal excuse. Ferdie
should not be held liable for any penalties or surcharges. Dean del Castillo also states that the risk of
disobeying the court is greater, therefore Ferdie is still safe.

WHAT IS AN EXAMPLE OF A THIRD PERSON AUTHORIZED BY LAW TO ACCEPT PAYMENT?

An example would be a guardian or legal representative of an incapacitated creditor.
Dean del Castillo suggest that when making payment, always ask for the authority of the person to
receive such payment.

WHAT IS THE EFFECT OF PAYMENT MADE TO THIRD PERSONS AUTHORIZED BY LAW OR

BY THE AGREEMENT OF THE PARTIES?
The obligation is extinguished.

WHAT IF PAYMENT MADE TO THIRD PERSONS NOT AUTHORIZED BY LAW NOR BY THE
PARTIES?
The general rule is that the obligation will be extinguished only insofar as it benefitted the
creditor.
For example, Cy is indebted to Angelo in the amount of P1,000. (na naman) On the maturity of the
debt, Cy pays his indebtedness to Ferdie, a third person. Ferdie delivers P800 of the amount to Angelo, the
creditor. The payment is valid to the extent that the payment to Ferdie had benefitted Angelo, which is
P800 only.

WHO IS REQUIRED TO PROVE THAT BENEFIT REDOUNDED TO THE CREDITOR?

It is the debtor.

WHAT IF THERE IS NO PROOF OF BENEFIT?

In the absence of proof, it will be considered as though no benefit had been derived by the
creditor. Thus, the debtor can be made to pay again.

WHEN MAY A DEBTOR NOT PRESENT PROOF OF BENEFIT?

Art. 1241 provides that “x x benefit to the creditor need not be proved in the following cases: (1) if
after payment, the third person acquires the creditor’s rights; x x”
For example, Cy owes Rhys the amount of P1,000 (Hay naku, wala kang cases nyan). Later, Cy
pays Jane, a third person, the P1,000. After Cy’s payment to Jane, creditor Rhys assigns his credit to Jane.
In this case there is no need for Cy to prove that Rhys has been benefited by his payment to Jane.

62
 (2) “x x if the creditor ratifies the payment to the third person; x x”
In the example above, suppose Rhys does not assign credit to Jane. Instead, after learning of the
payment made by Cy to Jane, Rhys notifies Cy that the payment to Jane is valid. In such case there is no
need on the part of Cy to prove that the payment to Jane has benefited Rhys, because the latter had ratified
payment.
(3) and “x x if by the creditor’s conduct, the debtor has been led to believe that the third person
had authority to receive the payment.”
Supposing in the above example, at the time of payment, Rhys, Cy and Jane are together and Jane
demands the payment. Rhys who hears the demand and sees the payment to Jane offers no objection or
protest. The payment extinguishes the obligation.
Note that this is an extreme example. Mere silence of the creditor in cases where the latter was not
around at the time of payment is not enough.
Another good example of this third exception is when utility companies send collectors to
periodically receive payment from clients. If the collector has been fired and comes to collect payment
wearing the required uniform and issues an official receipt, it can be taken to be the company’s fault that it
failed to repossess the uniform and the official receipts. But the payor must be able to prove that the
payment redounded to the payment of the company. Failure to prove such benefit to the company will
require the payor to pay again. It is not the duty of the creditor to go after the third person who received the
unauthorized payment. It is for the debtor to pay the creditor again, and then the debtor may elect to go
after the collector whom he paid by mistake.

MAY PAYMENT BE MADE TO A PERSON IN POSSESSION OF THE CREDIT?

Art. 1242 provides that “Payment made in good faith to any person in possession of the credit
shall release the debtor.”
For example, Cy executed a negotiable promissory note for P100 in favor of Ferdie. On the
maturity date of the promissory note, Angelo, a third person, presented the note, properly endorsed , and
demanded payment of the same. Cy paid in good faith. The truth was, Angelo obtained the note from
Ferdie without paying the promised consideration. The payment released Cy because he paid in good faith
to a person in possession of the credit who the law presumes to be the owner of the note properly endorsed.
Note that there are two major requirements here: (1) possession of the credit which must be legal;
and (2) good faith on the part of the debtor as far as payment to the third person in possession is concerned.
Dean del Castillo states that instruments payable to order requires endorsement UNLESS the
creditor has been shown to have benefitted.

ARANAS V. TUTAAN, UNIVERSAL TEXTILE MILLS, INC. 127 SCRA 828

Facts:
 The Trial Court declared the owner of 400 UTEX shares are the spouses Aranas. It ordered
that the dividends (cash and stock) pertaining thereto shall be paid to Aranas. Only the cash
dividends which accrued after the rendition of the decision excluding dividends already paid
to Manuel and Castaneda.
 Trail Court’s decision became final and executory. Nevertheless, Utex chose to pay the wrong
parties, notwithstanding its full knowledge and understanding of the final judgment.

Issue: W/N UTEX’s payment is valid

Ruling: NO. The payment made by a judgment debtor to a wrong party cannot extinguish the obligation of
such debtor to its creditor.

Art. 1244. The debtor of a thing cannot compel the creditor to receive a different one,
although the latter may be of the same value as, or more valuable than that which is due.
In obligations to do or not to do, an act or forbearance cannot be substituted by
another act or forbearance against the obligee’s will.

WHAT DOES IDENTITY OF PAYMENT MEAN?

63
 Art. 1244 provides that “the debtor of a thing cannot compel the creditor to receive a different one,
although the latter may be of the same value as, or more valuable that that which is due.”
In obligations to do or not to do, an act or forbearance cannot be substituted by another act or
forbearance against the obligee’s will.
Identity of payment simply means that the very prestation due must be complied with. The debtor
cannot compel the creditor to accept something different from what was agreed upon even if the debtor
wants to deliver something of a higher value. Note, however, that this rule is a rule against compulsion.
Thus, if the creditor decides to accept a thing different from that which is due, he or she has the right to do
so.
In the case of an obligation to deliver a specific thing, a thing different from that due cannot be
offered or demanded against the will of the creditor or the debtor, as the case may be.
For example, Cy is obliged to deliver to Ferdie 2 cases of Absolut vodka. On the due date, Cy
cannot deliver Stolichnoya vodka and compel Ferdie to accept the same precisely because what was agreed
upon was Absolut not Stolichnoya. Hence, Ferdie would be justified in refusing to accept. If Cy consigns
the Stolich vodka, such consignation will not be considered proper, since Ferdie was justified in refusing to
accept. Also, Ferdie may not be considered in mora accipiendi.

DOES THE RULE OF IDENTITY OF PAYMENT APPLY TO PERSONAL OBLIGATIONS?

Yes. The act to be performed or the act prohibited cannot be substituted against the obligee’s will.
Of course if the obligee consent, this is all right.

WHEN MAY THERE BE A SUBSTITUTION OF THE PRESTATION?

The following are the exceptions to the above rule of identity of payment, where substitution of
the thing due is allowed:
(1) where the obligation is facultative. In such cases, the debtor may substitute another in lieu of
that which is promised, since the right of choice belongs to the debtor;
(2) in case of waiver by the creditor, expressly or impliedly or by novation;
(3) where there is another agreement resulting in Dation in payment, (Dacion en pago) There was
apparently a mistranslation. Here, instead of paying a monetary obligation with money, the
debtor delivers property.

Art. 1245. Dation in payment, whereby property is alienated to the creditor in satisfaction
of a debt in money, shall be governed by the law of Sales.

WHAT IS DACION EN PAGO?

It is that mode of extinguishing an obligation whereby the debtor alienates in favor of the creditor
property for the satisfaction of a monetary debt. Dacion en pago is possible only if the creditor consents.
The debtor cannot compel the creditor to accept the property in lieu of money.
Dacion en pago has also been defined as the delivery and transmission of ownership of a thing by
the debtor to the creditor as an accepted equivalent of the performance of the obligation. The property
given may consist, not only of a thing, but also of a real right (such as usufruct), or a credit against a third
person.

WHY IS DACION EN PAGO GOVERNED BY THE LAW ON SALES?

This is so because the transfer or conveyance of ownership of a thing as an accepted equivalent of
performance, really partakes in one sense of the nature of the sale, that is, the creditor is really buying some
property of the debtor, payment for which is to be charged against the debtor’s debt.

TO WHAT EXTENT DOES DACION EN PAGO EXTINGUISH THE OBLIGATION?

Tolentino says that the dacion en pago extinguishes the obligation to the extent of the value of the
things delivered, either as agreed upon by the parties or as may be proved, unless the parties by agreement,
express or implied, or by their silence, consider the thing as equivalent to the obligation, in which case the
obligation is totally extinguished.

64
WHAT IS THE IMPLICATION OF THE FACT THAT DACION EN PAGO SHALL BE GOVERNED
BY THE LAW ON SALES?
The effect of this is that the provision on sales, regarding warranty against eviction and hidden
defects of the thing, are applicable to the object given in exchange of the credit, with the debtor being
considered as the vendor.
For example, Cy owes Angel P1,000. (Kung kani-kanino na lang) Instead of giving or paying
Angel in cash, Cy after having obtained the consent of Angel, delivers instead his brand new Calvin Klein
underwear thereby extingushing his debt to the latter.
What if later on, Angel discovers that the “Calvin Klein” underwear was actually made in
Bacnotan, La Union? Angel may recover the P1,000 from Cy, but not on the basis of the dacion (for
technically, the former obligation has been extinguished), but based on the warranty attached to the sale.

WHAT HAPPENS IF THE DEBTOR PAYS THE WRONG PERSON?

If the debtor later proves he paid by mistake, he can recover, not the price by which the thing was
apparently conveyed the very thing itself, because the person to whom it was delivered received it solely as
a creditor.

DISTINGUISH SALE FROM DACION EN PAGO.

SALE DACION EN PAGO

No pre-existing credit There is pre-existing credit

This gives rise to obligations This extinguishes the obligation
The cause or consideration here is the price from the Cause or consideration here is the extinguishment of
viewpoint of the seller or the obtaining of the object the debt from the viewpoint of the debtor; or
from the viewpoint of the buyer. acquisition of the object offered in credit.

There is greater freedom in the determination of the
price.
The giving of the price may generally end the
obligation of the buyer
There is less freedom in determining the price.
The giving of the object is lieu of thecredit may
extinguish completely or partially the credit
depending on the agreement.

WHAT ARE THE CONDITIONS UNDER WHICH A DATION IN PAYMENT WOULD BE VALID?
(1) If the creditor consent for a sale presupposes the consent of both parties.
(2) If the dation in payment will not prejudice the other creditors for the absence of this requisite
may lead the debtor to connive with one creditor in defrauding the other creditors.
(3) If the debtor is not judicially declared insolvent for here his property is supposed to be
administered by the assignee.

WHAT RULES APPLY AS REGARDS DACION EN PAGO?

Dacion en pago is an onerous contract of alienation, because an object is given in exchange of
credit. The provisions on sales, regarding warranty against eviction and hidden defects of the thing are
therefore applicable, the debtor being considered as a vendor (Tolentino)

TO WHAT OBLIGATIONS WOULD DACION EN PAGO APPLY?

It applies to monetary obligation. If it is not a monetary obligation, for instance in an obligation to
deliver a car, and the debtor delivered something else and was accepted by the creditor, there is also a
complete extinguishment of the obligation, but here there is novation.

CALTEX V. INTERMEDIATE APPELLATE COURT 215 SCRA 580

65
Facts:
 Caltex entered into an agreement with Asia Pacific whereby it will supply aviation fuel to Asia
Pacific for 2 years
 Caltex indeed supplied Asia’s fuel requirements
 Asia had outstanding obligation of P4M+
 Asia thus executed a Deed of Assignment of receivables/refunds from National Treasury in
favor of Caltex
 National Treasury issued to Caltex P5.4M+
 Caltex refunded P900K+ to Asia but withheld P510K+ representing interest and service charges

Issue: W/N the Deed of Assignment constituted dacion en pago

Ruling: No. The SC ruled that the Deed of Assignment is not a dation en pago and did not totally
extinguish Asia’s obligation.
The concept of dation is that “DATION IN PAYMENT DOES NOT NECESSARILY MEAN
TOTAL EXTINGUISHMENT OF THE OBLIGATIONS. THE OBLIGATION IS TOTALLY
EXTINGUISHED ONLY WHEN THE PARTIES, BY AGREEMENT, EXPRESS OR IMPLIED, OR BY
THEIR SILENCE, CONSIDER THE THING AS EQUIVALENT TO THE OBLIGATION.”
In the instant case, it can be gleaned from the express recitals of the Deed of Assignment that it
speaks of 3 obligations—outstanding obligation of P4M+, interest charges, and avturbo fuel.

Art. 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
a superior quality. Neither can the debtor deliver a thing of inferior quality. The purpose of
the obligation and other circumstances shall be taken into consideration.

HOW DOES THE RULE OF IDENTITY OF PAYMENT APPLY TO OBLIGATIONS TO DELIVER

GENERIC OR DETERMINATE THINGS?
Art. 1246 provides the rule of the medium quality, and states that, “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 deliver a thing of inferior
quality. The purpose of the obligation and other circumstances shall be taken into consideration.
Where there is disagreement between the parties or when there is lack of precise declaration in the
obligation as when the contract does not specify the quality, the following principles should be followed to
determine the quality or kind of thing to be delivered after having taken into consideration the purpose of
the obligation, the nature of the obligation, and other circumstances:
(a) the creditor cannot demand a thing of superior quality (but if he desires, he may demand and
accept one of inferior quality.)
(b) the debtor cannot deliver a thing of inferior quality, but if he so desires, he may deliver one of
superior quality (provided it is not a different kind.)

For example, Cy promised to deliver to Mark a car. (Obviously breach lang aabutin nito ) Mark
cannot compel Cy to deliver a BMW and neither can Cy compel Mark to accept a dilapidated Kia Pride.
Note, however, that in the case of an obligation to deliver generic things, the parties have to agree
upon the kind or class of the thing, and the quantity must be determinable. Otherwise, there will be no
obligation, because there will be no object to the obligation.
Now let us look into the purpose of the obligation and the other circumstances:
(1) If Mark owns a race driver and being a driver is his main diversion in life, which fact is
known to Cy, and the price agreed upon is the reasonable price of a decent car, then must
deliver a race car.
(2) If Mark happens to be a taxi driver and Cy agreed to pay for the car on amount which is the
reasonable price for a car for a taxi, then that kind of car may be delivered.
(3) If Mark is a mechanic, and his only purpose is to examine its machine in connection with his
research, this, and other circumstances show that the old dilapidated Kia Pride was intended
by the parties to be delivered.

66
WHO DECIDES WHETHER THE QUALITY OF THE THING DELIVERED COMPLIES WITH THE
OBLIGATION?
If there is a disagreement between the debtor and the creditor as to quality of the thing delivered,
the court should decide whether the thing delivered complies with the obligation.

Art. 1247. Unless it is otherwise stipulated, the extra-judicial expenses required by the
payment shall be for the account of the debtor. With regard to judicial costs, the Rules of
Court shall govern.

WHO BEARS THE EXTRA-JUDICIAL EXPENSES REQUIRED BY PAYMENT?

Art. 1247 provides that “unless it is otherwise stipulated, the extra-judicial expenses required by
the payment shall be for the account of the debtor. With regard to judicial costs, the Rules of Court shall
govern.”
The reasons for this is because the payment is the debtor’s duty, and payment inures to hos benefit
in that he is discharged from the burden of the obligation.

Art. 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 payments.
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.

WHAT IS THE PRINCIPLE OF INDIVISIBILITY OF PAYMENT?

Art. 1248 provides that:
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
payments.
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.
Performance therefore must be complete. The creditor cannot be compelled to receive partial
prestations in which the obligation consists and neither may the debtor be required to make partial
payments. In case of refusal by the creditor to accept partial payments, the creditor cannot be held to in
mora accipiendi.
For example, Cy is indebted to Jay for P500 due today. Cy cannot compel Jay to receive P400 in
partial payment of the obligation and neither can Jay require Cy to pay only P400.

WHAT ARE THE EXCEPTIONS TO THE RULE ON INDIVISIBILITY?

(1) Contrary Stipulation.
When there is an agreement between the parties to make the obligation divisible, dividing in
several determinable parts. However, the rule of indivisibility will still apply with respect to
each part.
For example, Cy is indebted to Paul for P50,000 (Cy naman, san mo naman yan gagamitin?)
They agreed that Cy will pay his debt in 2 equal installments. However, with regard to each
installment Cy cannot compel Paul to receive less that P25,000, in the same way that Paul
cannot compel Cy to pay less than that stipulated. This is because the rule of indivisibility
shall be applied with respect to each part.
(2) Partial Liquidation
When the debt is in part liquidated (definitely determined or determinable through simple
computation) and in part unliquidated. In which case, the debtor can compel the creditor to
accept that portion which has already been liquidated because the parties cannot wait until
such time as the remaining portion will be liquidated before the making of the payment. This
rule applies to running accounts.

67
 For example, Cy owes Angelo P500 plus damages. Even if the amount of damages has not yet
been ascertained, and the P500 is already liquidated, the P500 is already demandable and
payable.
(3) When the obligation is subject to different terms and conditions. From the moment the first
condition has been complied with, the debtor can compel the creditor to accept payment. If
the obligation is payable in different terms, from the time each term arrives, the debtor can
compel the creditor to accept payment.
For example, If P400 of the debt of Cy to Angel is due today, and P100 is due tomorrow, the
obligation can be complied with partially as of today.
(4) Compensation.
In cases of compensation, when the parties become creditor and debtor with respect to each
other, if one debt is larger than the other, it follows that a balance is left.
For example, if Cy owes Mark 75 cents and Mark owes Cy 45 cents, there is automatic
compensation. This way, Cy will only have to pay Mark 30 cents.
Remember though that a necessary requisite of compensation is that the obligations are of the
same kind and quality.

Art. 1249. The payment of debts in money shall be made in the currency stipulated, and if it
is not possible to 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 produce the effect of payment only when they have been cashed,
or when through the fault of the creditor they have been impaired.
In the meantime, the action derived from the original obligation shall be held in
abeyance.

WHAT IS LEGAL TENDER?

Legal tender is such currency which in a given jurisdiction can be used for the payment of debts,
public and private, and which cannot be refused by the creditor.
Art. 1249 (1) provides that “The payment of debts in money shall be made in the currency
stipulated, and if it is not possible to deliver such currency, then in the currency which is legal tender in the
Philippines.”

IN CASES INVOLVING PAYMENT OF FOREIGN CURRENCY, OR OF GOLD, OR OF THE VALUE

OF THE PHILIPPINE PESO COMPUTED ON THE BASIS OF FOREIGN CURRENCY, THE
OBLIGATION TO PAY REMAINS. BUT WHICH CONVERSION RATE SHALL BE USED?
It depends on the time the obligation was entered into.
(1) In the case of an obligation entered into before 1950 and payable before 1950, any currency
stipulation will generally be valid.
(2) In the case of obligations incurred prior to 1950, if the required payment is in a particular kind
of coin or currency other that the Philippine currency, the rate of exchange to be used would
be that prevailing at the time the obligation was incurred.

For example, If in 1949, Judge Pimentel (Oscar) borrowed P10,000 from Atty. San Pedro
(Joseph), payable in 1990 in its dollar equivalent, come 1990, the rate of exchange as of 1949 will
be used to compute the peso equivalent due Joseph, so that if the rate of exchange in 1949 was
P=$1, then Oscar’s principal debt would be $500 X 2 = P10,000. In other words, the creditor is not
made to gain from any currency appreciation.

(3) If the obligation was entered into before 1950 and is payable after 1950, the rate of exchange
prevailing at the time of the stipulated date of payment shall be applied if the loan was made
in foreign currency and is payable in local currency.

For example, Oscar borrowed $500 from Joseph in 1948, payable in US dollars in 1990, then
Joseph must be paid the $500 in the Philippine currency computed at the prevailing rate in 1990.

68
 (4) In the case of obligation entered into and payable after 1950, the exchange rate to be used is
that prevailing at the time of the payment of the obligation.

Note that there is the apparent ineffectivity of the stipulation against payment in an amount of
money of the Philippines measured in terms of foreign currency or gold, because although such
stipulation would be void, to give effect to the obligation to pay, the foreign currency will still
have to be converted to a peso value equivalent thereby.

WHAT IS THE EFFECT OF PAYMENT OF PROMISSORY NOTES, BILLS OF EXCHANGE, OR

OTHER MERCANTILE DOCUMENTS?

Art. 1249 (2) provides that “the delivery of promissory notes payable to order or bills of exchange
or other mercantile documents shall produce the effect of payment ONLY when they have been cashed, or
when through the fault of the creditor they have been impaired.
In the meantime the action derived from the original obligation shall be held in abeyance.

HOW ABOUT PERSONAL CHECKS?

Personal checks are not considered legal tender. Therefore, creditors can refuse to accept personal
checks, UNLESS there is a prior agreement. Once a personal check is accepted, though, it shall produce
payment only when such check is impaired through the act of the creditor.

WHAT IS MEANT BY “IMPAIRED” BY THE ACT OF THE CREDITOR?

The law, through such phrase, contemplates a situation where, through the act of the creditor, the
value of the check or mercantile document is impaired. The usual example given is that of a stale check, a
check which is not cashed within 6 months after its issuance. (Trivia: did you know that Albert Einstein
was so absent-minded that he once used a check for $100,000 as a bookmark and forgot about it?)
Note, however, that Dean del Castillo considers a stale check per se not an impairment of the
check which would have the effect of payment, because as long as money can still be withdrawn, the check
is not really impaired. The creditor can still ask the debtor to replace the check, but during the intervening
period, you cannot charge the debtor additional penalties or interest, because if you had cashed or deposited
the check with due diligence, payment would have been effected. It was not his fault that the payment was
not produced immediately. If, however, you as creditor accept a check, which you lose later on, if such
check is cashed by another person, such encashment would constitute an impairment of the check sufficient
to effect payment. Another example would be if you don’t deposit or cash the check promptly, and the
PCGG or other creditor’s manage to get hold of your debtor’s bank account ot the BSP order the closing of
the bank.
See the cases of New Pacific Timber v. Seneris, Tibajia v. Court of Appeals and Mclaughlin
v. Court of Appeals for more on checks and their applicability.

WHAT IS MEANT BY “IN THE MEANTIME, THE ACTION DERIVED FROM THE ORIGINAL
OBLIGATION, SHALL BE HELD IN ABEYANCE?”
Art. 1249 (3) means that although the issuance of a mercantile document or check produces the
effect of payment only upon encashment or its impairment by the creditor’s act, once the debtor pays his
obligation using instruments, no penalties shall be charged during the intervening period between the
acceptance of the creditor of these instruments and their encashment or impairment, granted that such
instruments are eventually encashed. In other words, the effect of payment retroacts to the day the
instrument was received by the creditor.
For example, Joseph borrowed from RCBC, his favorite bank, the amount of P1M, which he paid
the day before its maturity, on 28 February, with an Equitable Bank check, although such is cleared only 3
days after the payment is received by RCBC, in the meantime, no penalties will be charged to him.
However, if Joseph’s check bounces, then he will be considered in default, until he pays the loan.
Another example, in payment of his debt, Cy paid Jay a promissory note payable to Jay’s orders.
Jay accepted the note. Does this mean that the payment has been effected? No, not yet. The effect of
payment in this case will be produced only when the note has been cashed; and also, even if it cannot be
cashed because of the creditor’s fault.

69
 Yet another example, Cy, in payment of a debt paid Paul with the latter’s consent, a promissory
note payable 2 months later. During the intervening period, may Paul bring an recover from Cy? No, at
least not under the law, pending the cashing of the mercantile document, ”the action derived from the
original obligation shall be held in abeyance.”
Hay naku isa pang example. Cy was in possession of a bill of exchange endorsed to him or his
prder. In payment of merchandise, Cy indorsed the bill of exchange to Ferdie who willingly accepted it.
When Ferdie presented the bill of exchange to the bank, the bank refused to pay, on the ground that the
supposed acceptance (written on the bill) by the bank was a forgery. Ferdie did not make a protest and in
the course of time, the bill completely lost its value. Later, Ferdie sued Cy for the price of the merchandise.
Can Ferdie recover? OO, ikulong si Cy.  Actually, no. Ferdie cannot recover from Cy. By reason of the
neglect of Ferdie, the creditor, the valur of the bill has been impaired. Ferdie cannot blame Cy, and
therefore the delivery of the bill by Cy to Ferdie amounts to complete payment of the merchandise. (Quiros
v. Tan Guinlay)

NEW PACIFIC TIMBER AND SUPPLY CO., INC. V. SENERIS 101 SCRA 686

Issue: W/N private respondent can validly refuse acceptance of the payment of the judgment
obligation consisting of P50,000 in Cashier’s check and P13,130 in cash.

Ruling: No. It is a well known and accepted practice in the business sector that a cashier’s check is
DEEMED AS CASH.
Where a check is certified by the bank on which it is drawn, the certification is equivalent to
acceptance. It implies that:
 The check is drawn upon sufficient funds
 Funds have been set apart for debts satisfaction.
 Funds shall be so applied whenever the check is presented for payment.
The object of certifying a check, is to enable the holder to use it as money. Sec. 63 of the Central
Bank Act provides that “checks representing deposit money do not have legal tender power and their
acceptance in payment of debts, both public and private, is at the option of the creditor. Provided however,
that a check which has been cleared and credited to the account of the creditor shall be equivalent to a
delivery to the creditor in cash in an amount equal to the amount credited to his account.”

TIBAJIA, JR. V. COURT OF APPEALS 223 SCRA 163

Ruling: A check is not legal tender and that a creditor may validly refuse payment by check, whether it be
a manager’s, cashier’s or personal check.

MCLAUGHLIN V. COURT OF APPEALS 144 SCRA 693

Note: This case followed the ruling of New Pacific that offer of payment by certified check is valid tender
of payment

Art. 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 agreement to the contrary.

WHAT HAPPENS IN A CASE OF EXTRAORDINARY INFLATION OR DEFLATION?

Art. 1250 provides that “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 agreement to the contrary.”

WHAT IS EXTRAORDINARY INFLATION OR DEFLATION?

Extraordinary inflation or deflation exists when “there is a decrease or increase in the purchasing
power of the Philippine currency which is unusual or beyond the common fluctuations in the value of such

70
currency, and such decrease or increase could not have been reasonably foreseen or was manifestly beyond
the contemplation of the parties at the time of the establishment of the obligation.

WHO SHALL DETERMINE THE EXISTENCE OF EXTRAORDINARY INFLATION OR

DEFLATION?
The existence of extraordinary inflation or deflation is something for the court to exclusively
determine. If the courts do not pronounce the existence of extraordinary inflation or deflation, the
provisions of Art. 1250 cannot be applied. In any case, if the courts do declare the existence of an
extraordinary inflation or deflation, they would do so on the basis of the consumer price index (CPI) which
show how much prices of a selected basket of goods have changed from a certain base year.
For example, Cy borrows P1,000 from Angelo this year, and promises to pay him back in 2006
with interest, if , between then and now, the CPI rises from 100 in 2003 to 500 in 2006, then that means
(malaki na mga sweldo natin, pero wala pa rin tayong mabibili. ) the peso in 1990 will be worth only 20
cents in 1993, so if the court declare such situation to be one of extraordinary inflation, Cy will have to pay
P5,000+ interest. (UNLESS, by reason of interest, Angelo condones such obligation.)

SHOULD THE DETERMINATION OF AN EXTRAORDINARY INFLATION OR DEFLATION BE

BASED UPON THE PESO-DOLLAR EXCHANGE RATE?
No. The lesson that we learn from Sangrador v. Valderrama is that, strictly or technically
speaking, there is no connection between the peso-exchange rate and the inflation rate. The parties in this
case made the mistake of assuming that by proving an extraordinary fluctuation in the peso-dollar exchange
rate, they could prove the extraordinary inflation contemplated in Art. 1250. If they had instead simply
stipulated that the amount to be paid upon maturity of the debt would be dependent on the change in the
exchange rate, such would have been a valid stipulation.
In fact, the Sangrador case made mention of the German experience of extraordinary inflation in
1920:
“More recently in the 1920’s Germany experiences a case of hyperinflation. In
early 1921, the value of the German Mark was 42 to the US Dollar. By May of the same
year, it had stumbled to 62 to the US Dollar. And as prices went up rapidly, so that by
October 23, it had reached 4.2 trillion to the US Dollar.
As reported prices were going up every week, then every day, then every hour.
Women were paid several times a day so that they could rush out and exchange their
money for something of value before what little purchasing power was left dissolved in
their hands. Some workers tried to bear the constantly rising prices by throwing their
money out of the window to their waiting wives, who would rush to unload the nearly
worthless paper. A postage stamp cost millions of marks, and a loaf of bread, billions.”
Simply, it would take this kind of situation before the courts would declare an extraordinary
inflation or deflation.
If you want to prove the existence of extraordinary inflation or deflation to the justices of the
court, you must show them the CPIs for the years in question, not the peso-dollar exchange rate. Also, do
not make the mistake of simply using the inflation rate, because the inflation rate refers only to the change
in the value of the peso from year to year.
Assuming that there is an extraordinary inflation or deflation, payment shall be made on the basis
of the value at the time of the constitution of the obligation.
Note that this article admits of a contrary stipulation. Thus, if the parties stipulate in the contract
that the amount to be paid will be computed based on the CPI for the year when payment is to be made,
regardless of the existence or non-existence of extraordinary inflation or deflation, such stipulation would
govern.

SANGRADOR V. VALDERRAMA 168 SCRA 214

Facts:
 On April 6, 1984, the Valderramas obtained a P1M loan from Sangrador. A real estate mortgage
was undertaken as security of the loan.

71
  Part of the agreement was that in the event that an extraordinary inflation of the Philippine peso
should supervene, the value of the currency at the time of the execution of the contract should
be the basis of payment pursuant to Art. 1250. (Escalation clause takes effect in the event of
extraordinary inflation.)
 Sangrador contended that since April 6, 1984, the exchange rate was P14 to $1 and on
December, 1984, the exchange rate was P19.70 to $1, there was an increase of 40.7%, thus the
amount of loan had to be adjusted by the same percentage resulting to an additional P569,000.

Issue: W/N adjusting the value of the Philippine peso is warranted.

Ruling: NO. There is no reason or basis, legal or factual, for adjusting the value of the Philippine peso in
the settlement of Valderrama’s obligation.
In Filipino Pipe and Founding Corp. v. NAWASA, it states that “extraordinary inflation exists
when there is a decrease or increase in the purchasing power of the Philippine currency which is unusual or
beyond the common fluctuation in the value of said currency, and such decreases or increases could not
have been reasonably foreseen or was manifestly beyond the contemplation of the parties at the time of the
establishment of the obligation. (Tolentino)
AN EXTRAORDINARY INFLATION CANNOT BE ASSUMED. Petitioner’s failed to prove the
supervening of extraordinary inflation by which on April 6, 1984 and December 7, 1984, no proofs were
presented on how much for instance, the price index of goods and services had arose during the intervening
period.

SERRA V. COURT OF APPEALS 229 SCRA 60

Facts: Petitioner is the owner of a 374 square meter parcel of land located at Quezon St., Masbate,
Masbate. Sometime in 1975, respondent bank, in its desire to put up a branch in Masbate, Masbate,
negotiated with petitioner for the purchase of the then unregistered property. On May 20, 1975, a contract
of LEASE WITH OPTION TO BUY was instead forged by the parties. The contract indicated that the
Lessee can lease the land for 25 years for P700 a month. The lessee shall have the option to buy the land
within the period of 10 years for P210/sqm with the condition that the Lessor will register under the
Torrens system within 10 years. It also mentions that if, for any reason, said parcel of land is not registered
under the Torrens system within the aformentioned ten-year period, the lessee shall have the right, upon
termination of the lease to be paid by the lessor the market value of the building and improvements
constructed on said parcel of land.
The lessee is authorized to construct a building and such other improvements. However, if the
lessee shall fail to exercise his option on the right to purchase in case the lessor was able to register the land
under the Torrens system within 10 years, the lessor shall have the right to forfeit the building and
improvements after the expiration of 25 year lease period.
Thereby, a building and other improvements were constructed on the land, which housed the
branch office of RCBC in Masbate, Masbate. Within three years from the signing of the contract, petitioner
complied with his part of the agreement by having the property registered and placed under the Torrens
system.
Petitioner kept on pursuing the manager of the branch to effect the sale of the lot as per their
agreement. It was not until September 4, 1984, however, when the respondent bank decided to exercise its
option and informed petitioner, through a letter of its intention to buy the property at the agreed price of not
greater than P210.00 per square meter or a total of P78,430.00 But much to the surprise of the respondent,
petitioner replied that he is no longer selling the property.
A complaint for specific performance and damages was filed by respondent against petitioner. In
the complaint, respondent alleged that during the negotiations it made clear to petitioner that it intends to
stay permanently on the property.

Issue:
 W/N there is no basis in granting no basis in granting an adjustment in rental.

72
Ruling: YES. There is no basis, legal or factual, in adjusting the amount of the rent. The contract is the law
between the parties and if there is indeed reason to adjust the rent, the parties could by themselves negotiate
for the amendment of the contract.
Neither could we consider the decline of the purchasing power of the Philippines peso from 1983
to the time of the commencement of the present case in 1985, to be SO GREAT AS TO RESULT IN AN
EXTRAORDINARY INFLATION.
Extraordinary inflation exists when there is an UNIMAGINABLE increase or decrease if the
purchasing power of the Philippine currency, or fluctuation in the value of pesos manifestly beyond the
contemplation of the parties at the time of the establishment of the obligation.

HUIBONHUA V. COURT OF APPEALS 320 SCRA 625

Facts:
 Huibonhua entered into a contract of lease with Gojoccos whereby she would lease from their
commercial lots. Part of the contract is the construction of 4-storey building within 8 months
from date of execution of lease contract.
 Huibonhua failed to complete the construction of the building within the stipulated 8 month
period from July 1, 1983. He also failed to pay the rental which is supposed to start in March
1984.
 During the construction of the building, Ninoy was assassinated.
 Huibonhua contended that the inflation borne by the Filipinos in 1983 justified the delayed
accrual of monthly rental, the reduction of its amount and the extension of the lease by 3
months.

Issue: W/N Huibonhua’s contention is meritorious.

Ruling: NO. While it is of judicial notice that there has been a decline in the purchasing power of the
Philippine peso, this downward fall of the currency cannot be considered unforeseeable CONSIDERING
THAT SINCE THE 1970’S WE HAVE BEEN EXPERIENCING INFLATION. IT IS SIMPLY A
UNIVERSAL TREND THAT HAS NOT SPARED OUR COUNTRY.
No decrease in the peso value of such magnitude (referring to the 1920 Deutsche Mark example)
having occurred, Huibonhua has no valid ground to ask this Court to intervene and modify the lease
agreement to suit her purpose.
HUIBONHUA EVEN FAILED TO PROVE BY EVIDENCE, DOCUMENTARY ON
TESTIMONIAL, THAT THERE WAS AN EXTRAORDINARY INFLATION FROM JULY 1983 TO
FEBRUARY 1984. AN EXTRAORDINARY INFLATION CANNOT BE ASSUMED.

Art. 1251. Payment shall be made in the place designated in the obligation.
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.
In any other case the place of payment shall be the domicile of the debtor.
If the debtor changes his domicile in bad faith or after he has incurred in delay, the
additional expenses shall be borne by him.
These provisions are without prejudice to venue under the Rules of Court.

WHEN SHOULD PAYMENT BE MADE?

If it is a pure obligation, payment should be upon demand of the creditor.
If it is an obligation with a period, payment should be made upon arrival of the period. Unless
excepted by law, there still should be demand when the period arrives.

WHERE SHOULD PAYMENT BE MADE?

Art. 1251 provides that:
(1) “Payment shall be made in the place designated in the obligation.”

73
 For example, Cy obliged himself to deliver to Angelo a stash of chongks (This is considering
chongks is a valid prestation. ) They agreed that Cy should deliver the stash at Rockwell. Since the
parties have designated a place of delivery, the place specified must be followed and payment must be
made in that place.
(2) “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.”
In the above example, if the parties did not agree as to the place of delivery, then delivery or
payment must be made by Cy in the place where the chongs (assuming there is determinate) was at the time
the obligation was constituted.
(3) “In any other case, the place of payment shall be the domicile of the debtor.”
Thus, if Cy, a resident of Makati owes Angelo, a resident of Mandaluyong, a sum of money and
there is no agreement as to the place of payment, then the place of payment must be the domicile of Cy. If
Cy changes his residence in bad faith, then he is liable for the expenses of payment to Angelo, the creditor.
Ordinarily, a tenant of a house has the right to wait for the landlord in the house since this is an
obligation to pay money, a generic thing.
This includes cases where a determinate thing to be delivered at the time of the constitution of the
obligation was in a certain place for only a temporary period of time, as when it is on a vessel or a train in
transit.

WHY MUST THE CREDITOR COLLECT IN THE DEBTOR’S DOMICILE IN MOST CASES?
The creditor is known to be the active party in an obligation. Therefore, the debtor has the right to
wait until the creditor arrives demanding payment. So long as the creditor does not arrive the debtor will
not be considered in default.

WHAT IF PAYMENT IS TO BE MADE AT THE DOMICILE OF THE DEBTOR, AND THE LATER
CHANGES HIS DOMICILE IN BAD FAITH?
The duty of the creditor to go to the debtor remains. However, the debtor bears all extra charges
occasioned by such transfer.

Subsection 1. – Application of Payments

Art. 1252 He who has various debts of the same kind in favor of one and the same creditor,
may declare at the 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 not be made as to debts which
are not yet due.
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.

WHAT ARE THE SPECIAL FORMS OF PAYMENT?

The special forms of payment are:
(1) Application of payment (Art. 1252)
(2) Dacion en Pago (Art. 1245)
(3) Payment by Cession (Art. 1255)
(4) Tender of Payment and Consignation (Art. 1256-1261)

WHAT IS APPLICATION OF PAYMENTS?

It is the designation of the debt to which should be applied a payment made by a debtor who owes
several debts in favor of the same creditor.

WHAT ARE THE REQUISITES FOR APPLICATION OF PAYMENT?

(1) There must be two or more debts.

74
 (2) There must be the same debtor and creditor (which means one debtor and one creditor). There
can be several debtors but they must represent ONE INTEREST, like in the case of co-debtor
and co-creditor.
(3) All the debts must be due.
(4) Payment is not sufficient to cover all obligations.
(5) The obligations are of the same kind. If one obligation is payable in property and the other are
payable in money, then necessarily, under the rules of identity and integrity of payment, if
payment is made in money, it has to be applied and credited to the obligation which is payable
in money.
(6) There is no previous stipulation with respect to application.

MAY THERE BE APPLICATION TO DEBTS WHICH ARE NOT YET DUE?

Yes. When, according to Art. 1252: “UNLESS
(1) The parties so stipulate, or
(2) When the application of payment is made by the party whose benefit the term has been
constituted, application shall not be made to debts which are not yet due.”

For example, Cy owed Jay P100 due on March 7, 2003 and P200 due and demandable on or
before March 19, 2003. Come March 7, 2003, Cy may make the application to the P100 and P200
obligation since the period stipulated for the latter obligation is for his benefit.

WHO HAS THE RIGHT TO MAKE THE APPLICATION?

The law gives the debtor the right to select which of the debts he is paying.

Art. 1253 If the debt produces interest, payment of the principal shall not be deemed to
have been made until the interest have been covered.

WHAT ARE THE LIMITATIONS TO SUCH RIGHT?

(1) If the debtor owes 2 debts, one for P50 and another for P200, and he makes a payment of P50,
he cannot choose to apply it to the P200 debt because the creditor cannot be compelled to
accept partial payment. Art. 1248 provides that “UNLESS there is an express stipulation to
that effect, the creditor cannot be compelled partially to receive the prestation in which the
obligation consists. x x” This is, of course, the rule of indivisibility of payment
(2) Art. 1253 provides “if the debt produces interest, payment of the principal shall not be
deemed to have been made until interest have been covered.”
(3) The debtor cannot apply the payment to a debt that is not yet liquidated, Art. 1248 (2)
provides that “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.”
(4) He cannot choose a debt with a period for the benefit of the creditor, when the period has not
yet arrived. (Tolentino)
(5) When there is an agreement as to the debts which are to be paid first, the debtor cannot vary
the agreement (Tolentino, Salvat)

WHEN MUST APPLICATION BE MADE?

Application must be made at the time of payment by the debtor and NOT afterwards.

MAY AN APPLICATION BE REVOKED?

No, UNLESS both parties agree. Even if both parties agree, however, still the revocation or
change in the application will not be allowed if third persons are prejudiced.

WHAT HAPPENS IF THE DEBTOR DOES NOT MAKE AN APPLICATION AT THE TIME OF
PAYMENT?
The right of application is deemed waived if not raised at the time of payment. The right to make
the application itself does not shift to the creditor. The latter only has the right to make a proposal.

75
HOW MAY THE PROPOSAL BE MADE?
Either, EXPRESSLY, by telling or asking the debtor that he (the creditor) will apply patment to a
certain obligation and if the debtor agrees, then application is made, and, IMPLIEDLY, as when the
creditor gives a receipt to the payment, like when a receipt indicates, “this is payment for you so-and-so.”
Atty. Tolentino adds “the real intent of the law is that the application made by the creditor can be
contested by the debtor if the latter’s assent to such application was vitiated by such causes as mistake,
violence, intimidation, fraud, etc,” which can invalidate not only contracts but also other judicial acts.”

WHAT HAPPENS WHEN THE CREDITOR MAKES APPLICATION WITHOUT THE KNOWLEDGE
OR CONSENT OF THE DEBTOR?
The application is not valid.

Art. 1254 When the payment cannot be applied in accordance with the preceding rules, or if
application can not be inferred from other circumstances, the debt which is most onerous to
the debtor, among those due, shall be deemed to have been satisfied.
If the debts due are of the same nature and burden, the payment shall be applied to
all of them proportionately.

WHAT HAPPENS WHEN THE DEBTOR DOES NOT MAKE AN APPLICATION AND THE
CREDITOR DOES NOT MAKE A PROPOSAL?
There are two possible scenarios.
First, apply payment to the most onerous debt. But this is ONLY in case the due and demandable
debts are of different natures.
Art. 1254 (1) provides that “when the payment cannot be applied in accordance with the preceding
rules or if application can not be inferred from other circumstances, the debt which is most onerous to the
debtor, among those due, shall be deemed to have been satisfied.”
This is still subject to the rules on integrity, identity, and indivisibility of payment.
For example, Cy is obligated to pay the following to Jay: P100 which is not secured, P200 which
is guaranteed by Mark and Angel Co., and P300 which is interest bearing. Cy has only P100. Thus, he has
to make an application. It cannot be applied to the P300 obligation notwithstanding the fact that it is, by far,
the most onerous because it would violate the rule on indivisibility of payment. Therefore, application can
be had only to the P100 despite its being the least onerous.
As to which of 2 debts is more onerous is fundamentally a question of fact, which courts must
determine on the basis of the circumstances of each case. The condition of being more burdensome is
relative, and cannot be determined with precision by general rules. However, there may be stated as bases
for such determination.

AS PRINCIPAL AS SOLE DEBTOR OLDEST DEBTS

Over Over Over
AS SURETY AS SOLIDARY DEBTOR RECENT DEBTS

WITH INTEREST HIGHER INTEREST PENAL CLAUSE

Over Over Over
NO INTEREST LOWER INTEREST GENERAL DAMAGES
EVEN IF OLDER

UNSECURED DEBT WITH GUARANTY LIQUIDATED

WITH INTEREST Over Over
Over WITHOUT GUARANTY UNLIQUIDATED
SECURED DEBT
WITHOUT INTEREST
IN DEFAULT
Over
NOT IN DEFAULT

76
 Second, if the obligations are of the same burden – which means (a) they are equally onerous or
(b) it cannot be determined which is most onerous – then application will have to be made proportionately.
Application will have to be proportionate BUT NOT necessarily equal.
Art. 1254 provides that “when the payment cannot be applied in accordance with the preceding
rules, or if application can not be inferred from other circumstances, the debt which is most onerous to the
debtor, among those due, shall be deemed to have been satisfied.
If the debts due are of the same nature and burden, the payment shall be applied to all of them
proportionately.
The rules on payment — integrity, identity and indivisibility – will no longer apply.
For example, Cy set up a bond of P10,000 by a surety who agreed to be solidary responsible with
Cy but only up to P8,000. Cy pays P1,500 to the creditor without specifying the application in payment.
Cy’s obligation may now be divided into 2 – P8,000 which is guaranteed, and P2,000 which is not. The
payment should be applied to the P2,000 obligation because as regards the principal debtor, Cy, such is the
more onerous obligation. This happened because the surety fixed his liability in an amount lower than that
due from the principal debtor.
Another example, Cy owes Ferdie 2 debts both of which are already due. The first is secured by a
mortgage, the second is not. Cy tells Ferdie that the payment he is now making should be applied to the
second debt instead of the first. Ferdie refused to accept such application with the contention that the first
debt is more onerous to Cy and that therefore, payment must be applied to the first debt. Ferdie’s
contention is without merit. The “more burdensome” rule does not apply when the debtor has made the
application of payment. Art. 1254 cannot be espoused in case application has been made by the debtor in
consonance with Art. 1252.
Yet another example, Cy owes Paul P12,000 and P6,000, each constituting one obligation. He
gives P3,000 without making any application. In this situation, the payment will be applied proportionately.
Hence P2,000 will be deducted from the first debt and P1,000 from the second. The first obligation will
now be P10,000 and the second P5,000.

Subsection 2. – Payment by Cession

Art. 1255 The debtor may cede or assign his property to his creditors in payment of his
debts. This cession, 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 creditors shall be governed by
special laws.

WHAT IS PAYMENT BY CESSION (ASSIGNMENT OF PROPERTY)?

This is another special form of payment. It is the assignment or abandonment of all the properties
not subject to execution of the debtor for the benefit of his creditors in order that the latter may sell the
same and apply the proceeds thereof to the satisfaction of their credits. (Manresa)

WHAT ARE THE KINDS OF ASSIGNMENT?

(1) Legal. This is governed by the insolvency law. Here majority of the creditors must agree to
the assignment of property. (involuntary)
(2) Voluntary. Art. 1255 provides that “The debtor may cede or assign his property to his
creditors in payment of his debts. This cession, 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 creditors
shall be governed by special laws.”
For example, Cy is indebted to Angelo, Mark and Jay in the amount of P10,000. He has more
debts than assets. Because Cy cannot pay all of them for the full amounts of their credits, Cy
may assign or cede to Angelo, Mark and Jay her properties valued at P6,000 so that they can
sell the same and the net proceeds applied in payments of his debts proportionately. However,
the consent of the creditors is necessary in order that the cession may be valid.

77
WHAT ARE THE REQUISITES OF PAYMENT BY CESSION?
(1) There must be more that one debt.
(2) There must be two creditors or more.
(3) There must be complete or partial insolvency of the debtor.
(4) The abandonment of all the debtor’s property which is not exempt from execution.
Exemption, however, may be validly waived by the debtor.
(5) The acceptance or consent on the part of all the creditors.

WHAT IS THE EFFECT OF PAYMENT BY CESSION?

(1) Unless there is a stipulation to the contrary, the assignment does not make the creditors the
owners of the property of the debtor. They are merely assignees with authority to sell. (If
ownership is transferred, there is dacion en pago.)
(2) The debtor is released up to the amount of the net proceeds of the sale, UNLESS there is a
stipulation to the contrary. The balance remains collectible.
(3) Creditors will collect credits in order of preference agreed upon, or in default of agreement, in
the order established by law.

WHAT ARE THE DIFFERENCES BETWEEN DACION EN PAGO AND ASSIGNMENT OF

PROPERTY?
DACION EN PAGO
Transfers ownership of thing alienated
May totally extinguish obligation
Only cession of some specific thing
Transfer is only in favor of one to satisfy a debt. There are various creditors
PAYMENT BY CESSION
Only possession and administration are transferred
with an authorization to convert the property into
cash with debts shall be paid
Only extinguishes credits to the extent of the
amount realized from the properties assigned
UNLESS otherwise agreed upon.
Assignment involves all the property of the debtor.

Note that both are substitute forms of the performance of the obligation.

WHAT IS THE RULE TO BE FOLLOWED CONSIDERING THAT THERE ARE SEVERAL

CREDITORS AND THEY WANT TO BE SATISFIED IN FULL?
If they can agree to particular portions then that would be followed.
If not, then the rules regarding preference of payment must be followed.

WHAT IS THE RULE REGARDING PREFERENCE OF PAYMENT?

The credit which is preferred will necessarily have to be satisfied first. Those credits which have
no security at all will have to take their share on the basis of proportionate sharing.

WHAT IS THE DIFFERENCE BETWEEN PAYMENT BY CESSION AND APPLICATION OF

PAYMENT?
PAYMENT BY CESSION APPLICATION OF PAYMENT
Only one creditor but with several debts. Several creditors and several debts.

Note that both only involve one debtor.

Subsection 3. – Tender of Payment and Consignation

Art. 1256 If the creditor to whom tender of payment has been made refuses without just
cause to accept it, the debtor shall be released from responsibility by the consignation of the
thing or sum due.
Consignation alone shall produce the same effect in the following cases:

78
 (1) When the creditor is absent or unknown, or does not appear at the place of
payment;
(2) When he is incapacitated to receive the payment at the time it is due;
(3) When, without just cause, he refuses to give a receipt;
(4) When two or more persons claim the same right to collect;
(5) When the title of the obligation has been lost.

WHAT IS TENDER?
Tender, as defined by Tolentino, is the manifestation made by the debtor to the creditor of his
desire to comply with his obligation, with the offer of immediate performance. In Dean del Castillo’s terms,
tender is nothing more than making an offer to one’s creditor, “I want to pay, please accept my payment.”
No matter how you define tender, it is important to keep in mind that one’s offer to pay, in order to be
considered tender, must actually express, whether expressly or impliedly, the ability to pay. Otherwise, you
can imagine how may bad debtors not actually having the ability to pay, will pretend to make a valid tender
to enjoy its effects. Thus, we learned from Vda. de Zulueta v. Octaviano that a letter with an offer to pay is
not sufficient to constitute tender, in the absence of proof of ability to pay.
Tender, as a general rule, is extrajudicial. However, nothing will prevent you from going to court
for tendering payment. This was illustrated by the case of Hulganza v. CA where the court held that the
institution of action to compel the owner of land to sell such land to its occupants was considered valid
tender.

WHAT ARE THE EFFECTS OF TENDER?

From the moment that a valid tender is made, automatically (or by operation of law)
(1) The prescription period stops.
This means that once a valid tender is made within the period of payment, one’s option or
right of redemption is preserved. (In effect, there is a lengthening of the period during which
the person who has a right or option may exercise such right.
(2) The liability to pay interest, either for the use of the money or one the basis of duty, also
stops:
Note that there are two types, interest for the use of money, and interest for the delay in
payment. Both types of interest can not be collected after a valid tender has been made
because, assuming that a valid tender has been made within the prescribed period, although
such tender does not produce payment, such valid tender gives the debtor the right to continue
as an obligor who is not in default. Thus, as we learned from Mclaughlin v. CA, once valid
tender has been made, the creditor has no right to rescind.

According to Art. 1256, consignation without a previous valid tender shall release the debtor from
responsibility when:
(1) The creditor is absent or unknown, or does not appear at the place of payment.
The first part contemplates of a situation where the creditor’s address is unknown, or the
debtor does not even known if the creditor is dead or alive. In Dean del Castillo’s, in such
case, you are not required to search the whole world to pay your creditor, because you’ll lose
too much time.
For the second part, relate this provision to Art. 1251, which speaks of the place where
payment shall be made.
If a place is designated for the payment, or when there is no express stipulation and if the
understanding is to deliver a determinate thing, so that payment shall be made wherever the
thing may be at the moment the obligation was constituted, if at the designated time of
payment, the creditor does not appear, then the debtor may validly make a consignation.
In any other case, the place of payment shall be made at the domicile of the debtor, but
note that in this case, the debtor is not required to go anywhere, but simply waits for the
creditor to appear. Thus, as long as the creditor does not go to the debtor’s domicile to collect
payment, the debtor is not in default, and it may not be necessary to consign the payment.
(2) The creditor is incapacitated to receive the payment at the time it is due.

79
 The incapacity here should exist at the time of the payment and not at time the obligation
was incurred because if the creditor was incapacitated at the time the obligation was incurred
then the obligation is considered as annullable or voidable. Remember that when payment is
made to an incapacitated creditor, such payment will be considered valid only to the extent
that such incapacitated creditor is benefited or has kept such payment.
Thus, in the absence of a legal representative or guardian (or, according to Paras, even in
the presence of one, if his presence could not have reasonably been known by the debtor),
consignation without a prior valid tender will be valid. If there is a guardian or legal
representative, the tender or payment (if such tender is subsequently accepted) must be made
to him.
(3) When, without just cause, the creditor refuses to give a receipt.
Come to think of it. How can you say that the creditor has refused to give a receipt
without just cause if you have not made a valid tender of payment? If there has been no valid
tender in the first place, there naturally, the creditor would be justified in refusing to issue a
receipt. This situation sounds more like an example of a situation where, after valid tender,
consignation must be made.
(4) Two or more persons claim the same right to collect.
Tolentino points out that it is not enough in this case that various persons capriciously
claim the right to collect from the debtor. They must have the appearance of a right to collect
such that the debtor would have a reasonable doubt, not based on negligence, as to who is
entitled to payment.
There are several options, actually, aside from the consignation, such as the remedy of
interpleader (where the person in possession of the property, who has not interest in it, asks
the persons claiming ownership to litigate between them regarding ownership). However,
consignation is one of the safest options, as consignation will release the holder of such
property from any liability for less or damage of the property after consignation.
Consignation without prior valid tender would be proper here because if the debtor just
makes payment to any of those claiming payment, and it turns out that such payment is
erroneous, the debtor will be doubly burdened.
(5) The title of the obligation has been lost
What makes consignation without prior valid tender would be proper here because if the
debtor just makes payment to any of those claiming payment, and it turns out that such
payment is erroneous, the debtor will be doubly burdened.

IS THE ENUMERATION AN EXCLUSIVE ONE?

No. Tolentino says, “The enumeration in this article.. must not be interpreted in a restrictive sense,
but in the light of the purpose of the institution of consignation, which is to avert the performance of an
obligation being more onerous to the debtor by reasons of causes not imputable to him.”

WHAT THEN ARE OTHER EXAMPLES?

One other example, added by jurisprudence, is the case where, in advance, the creditor tells the
debtor that he will not accept payment. In such case, it would be useless to make a prior tender to the
creditor. Such is the case, for example, when a lessor who is determined to eject his lessee, refuses to
accept payment from him, and the issue of whether or not the lessee has a right to remain must be resolved.

WHAT ARE THE REQUIREMENTS OF A VALID TENDER?

The requirement of a valid tender are the same as those for payment, that is, INTEGRITY,
IDENTITY, INDIVISIBILITY, and the rules on LEGAL TENDER.

STATE INVESTMENT HOUSE, INC. V. COURT OF APPEALS 198 SCRA 390

Facts:
 Aquinos secured a first loan from State Investment House. As a security thereof, they pledged
certain shares of stocks.

80
  Prior to the execution of the pledge, Aquinos served as accommodation party for another
spouses’ debt to State Investment House.
 Upon due of Aquinos’ debt, they paid State Investment House.
 They however, secured a second debt from State Investment House, part of which was used to
pay the first debt. This second debt is secured by the same pledge agreement on the first loan.
 When the new loan matured, State Investment House demanded payment.
 Spouses expressed willingness to pay, requesting that upon payment, the shares of stock pledged
be released.
 State Investment House denied the request on the ground that the loan it extended to the other
spouses (where Aquinos were accommodation parties) was not yet settled.
 Aquinos failed to consign.

Issue: W/N Aquinos are liable to pay the interest.

Ruling: YES. Fact that respondent Aquinos were not in default did not mean that they were relieved from
the payment not only of penalty (compensatory interest of 24% p.a.) but also of regular or monetary interest
of 17% per annum.
The regular or monetary interest continued to accrue under the terms of the relevant promissory
note until actual payment is effected. The payment of regular interest constitutes the price or cost of the use
of money and this, until the principal sum due is returned to the creditor, regular interest continues to
accrue since the debtor continues to use such principal amount.
Tender of payment alone, without consignation in court of the sum due, does not suspend the
accruing of regular or monetary interest.

VALARAO V COURT OF APPEALS 304 SCRA 155

Facts:
 Valarao sold to Arellano a parcel of land under a “Deed of Conditional Sale.”
 The Deed of Conditional Sale provided for automatic rescission in case Arellano failed to pay 3
successive monthly installments.
 The installments for October and November 1990 were not paid.
 Arellano offered to pay P48,000 (total amount due in October, November and December) to
Gonzales, Valarao’s maid but the latter refused to accept upon instruction of Valarao.
 Gonzales, had accepted the previous payment made by Arellano
 Arellano filed a petition for consignation, but the money was nevertheless deposited in court.

Issue: W/N Valarao can enforce the automatic forfeiture clause.

Ruling: NO. Valarao’s were not justified in refusing to accept the tender of payment made by Arellano.
They are estopped from denying that the maid had no authority to accept payment.
Art. 1241. “If by the creditor’s conduct, the debtor has been led to believe that the third person had
authority to receive payment.”
The tender of payment could block the enforcement of forfeiture clause because the latter is
premised on default.
Arellano’s obligation is not extinguished as he failed to consign the amount due.

FAR EAST BANK V. DIAZ REALTY 23 AUGUST, 2001

Facts:
 Diaz got a loan from Pacific Banking. The loan was secured by a real estate mortgage.
 FEBTC purchased the credit of Diaz after Pacific was placed under receivership.
 Diaz tendered payment through a check made on 14 November, 1988.
 FEBTC was in the possession of the money for several months. It contended that if treated the
check as a deposit.
 Diaz subsequently withdraw the money.

81
Issue:
 W/N there was a valid tender of payment
 W/N consignation is necessary.

Ruling: YES. True, jurisprudence holds that, in general, a check does not constitute legal tender, and that a
creditor may validly refuse it. IT MUST BE EMPHASIZED, HOWEVER, THAT THIS DICTUM DOES
NOT PREVENT A CREDITOR FROM ACCEPTING A CHECK AS PAYMENT. IN OTHER WORDS,
THE CREDITOR HAS THE OPTION AND DISCRETION OF REFUSING OR ACCEPTING IT. Subject
to the rule of actual encashment. In the case at bar, FEBTC waived the defect of the tender of payment.
NO. For a consignation to be necessary, the creditor must have refused without just causes, to
accept the debtor’s payment.
 On applicable interest rates: because there was a valid tender of payment on 14 November,
1988, the accrual of interest based on the stipulated rate should stop on that date.

 What is a valid tender of payment? It is a manifestation by debtor to creditor, that the former is
ready, willing and able to pay. Therefore intent, ability and capability is important.
 Assignment of credit is the purchase by FEBTC of Diaz’ account.

IS TENDER SUFFICIENT?
Tender alone is sufficient when what is to be paid is not a debt. Keep in mind the fact that a debt
means an obligation to pay. Thus, when there is only an option or right to purchase, consignation is not
necessary to preserve such right. We do not apply the rules of tender and consignation to these two.
However, if the persion in whose such right for option has been established follows tender with
consignation, then, not only would he have preserved such right for option, but actually exercised it.

MCLAUGHLIN V COURT OF APPEALS 144 SCRA 693

Facts:
 Mclaughlin and Flores entered into a contract of conditional sale of real property.
 A compromise was arrived at after Flores failed to pay fully the installment payment.
 Again, Flores failed to pay on the date agreed upon.
 After due date, Flores tendered payment which was refused by Mclaughlin.
 Flores did not consign the sum due with the court.

Issue: W/N tender of payment was valid.

Ruling: YES. Under the Maceda law, a lot installment buyer is given a grace period to pay installments in
arrears. In the case at bar, the grace period has not yet expired, when a tender of payment was made.
The offer of payment by certified check is valid tender of payment.
Where an obligor fails to follow a valid tender of payment with a court consignation, the court may allow
him to pay his obligation without rescinding the deed of sale.

LEGASPI V. COURT OF APPEALS 142 SCRA 82

Facts:
 Legaspi sold 2 parcels of land to Salcedo with a right to repurchase the same within 5 years
from the execution of the deed of sale.
 Before the expiry date of the repurchase period, Legaspi offered and tendered to Salcedo the
amount of purchase price.
 Salcedo refused without justifiable legal grounds.
 Legaspi deposited the amount with the court. (These factual findings was confirmed by the trial
court.)

Issue: W/N tender of payment is sufficient for the exercise of right to repurchase.

82
Ruling: YES. A showing that petitioner made a valid tender of payment is sufficient. It is enough that a
sincere or genuine tender of payment and not a mock or deceptive one was made. The fact that he deposited
the amount of the repurchase money with the Clerk of Court was simply an additional security for Legaspi,
it was not an essential act that had to be performed after the tender of payment was refused by Salcedo
although it may serve to indicate the veracity of the desire to comply with the obligation.

VDA. DE ZULUETA V. OCTAVIANO 121 SCRA 314

Facts:
 Vda. de Zuleta sold to Octaviano 55 hectares of riceland.
 Octaviano, in a separate document, gave Vda. de Zulueta the “option to repurchase” the
property
 Two years after the “deadline to repurchase,” Vda. de Zulueta desired to “repurchase” the land.
 Meanwhile, Octaviano has already sold the property to his brother.

Issue:
 W/N there is contract of redemption.
 W/N there is a valid tender of payment, granting first issue to be true.

Ruling: NO. Where the vendee in a subsequent document gave the vendor the right to buy back the
property sold, there is no contract of redemption. A contract of redemption is not a right guaranteed by the
vendee to the vendor.
In Villarica v. CA, the right of repurchase is not a right granted the vendor by the vendee in a
subsequent instrument, but is a RIGHT RESERVED BY THE VENDOR in THE SAME INSTRUMENT
of sale as one of the STIPULATIONS OF THE CONTRACT.
NO. Mere letter expressing intention to pay without accompanying payment is not a valid tender
of payment.
To effectively exercise the right to repurchase, the vendor a retro must MAKE AN ACTUAL
AND SIMULTANEOUS TENDER OF PAYMENT OR CONSIGNATION.

HULGANZA V. COURT OF APPEALS 147 SCRA 77

Facts:
 Hulganza, before her death, sold a property to Basilia
 Hulganza’s heirs and wife filed a complaint seeking to repurchase the property under the provisions of
Sec 119 of Public Land Act 141, as amended.

Issue: W/N it is necessary that a formal offer to redeem the land in question be accompanied by a
bona fide tender of payment, or the repurchase price be consigned in court, within the period of
redemption even if the right is exercised through the filing of a judicial action.

Ruling: NO. Mere judicial action even without tender of payment is sufficient.
The formal offer to redeem, accompanied by a bona fide tender of redemption price, within the
period of redemption prescribed by law, is only essential to preserve the right of redemption for future
enforcement beyond such period of redemption and within the period prescribed for the action by the
statute of limitations.
Where, as in the instant case, the right to redeem is exercised through the filing of judicial action
within the period of redemption prescribed by the law, the formal offer to redeem, accompanied by a bona
fide tender of redemption price, might be proper, but is not essential. The filing of the action itself, within
the period of redemption, is equivalent to a formal offer to redeem.

WHAT IS CONSIGNATION?

83
 Consignation, according to Tolentino, is the deposit of the object of the obligation in a competent
court in accordance with rules prescribed by law, after the tender of payment has been refused or because
of circumstances which render direct payment to the creditor impossible or inadvisable.

WHAT ARE THE DIFFERENCES BETWEEN TENDER AND CONSIGNATION?

As a general rule, tender and consignation must go together. These 2 steps are intricately
connected, so that in general, consignation is not valid without legal tender, and tender is not valid without
consignation. However, there are several differences:
(1) Tender does not extinguish the obligation because tender is merely preparatory to the act of
consignation. It merely preserves one’s rights or options. It is the act of consignation that
extinguishes the obligation.
(2) Tender is generally extra-judicial (However, such requirement is merely directory) However
in the case of consignation, such consignation must be judicial. (The only exception being BP
877 which says that in case of a lessor-lessee relationship, the lessee is allowed to deposit the
rentals in a bank account under the name of the lessor, upon notice of the lessor.

WHAT IS THE GENERAL RULE AS REGARDS THE REQUIREMENT OF TENDER BEFORE

CONSIGNATION?
As a general rule, consignation must be preceded by a valid tender.

WHEN DOES CONSIGNATION PRODUCE THE EFFECT OF PAYMENT?

Consignation produces the effect of payment:
(1) from the moment that the court approves the consignation and orders the cancellation of the
obligation; or
(2) even before such order, when the creditor accepts the payment.

WHEN TENDER PRIOR TO CONSIGNATION IS NOT REQUIRED, WHEN DO THE INTEREST

AND PRESCRIPTIVE PERIOD STOP RUNNING?
The effects of cessation of the running of the interest and the prescriptive period are automatic
effects of the declaration of the validity of the consignation and retroact to the date of actual consignation.

Art. 1257 In order that consignation of the thing due may release the obligor, it must first
be announced to the persons interested in the fulfillment of the obligation.
The consignation shall be ineffectual if it is not made strictly in consonance with the
provisions which regulate payment.

Art. 1258 Consignation shall be made by depositing the things due at the disposal of judicial
authority, before whom the tender of payment shall be proved, in a proper case, and the
announcement of the consignation in other cases.
The consignation having been made, the interested parties shall also be notified
thereof.

SOCO V. MILITANTE 123 SCRA 163

Facts:
 Soco entered into a contract of lease whereby Soco will lease her commercial building and lot to
Francisco for a monthly rental of P800 for a period of 10 years
 Francisco had religiously paid Soco the corresponding rentals
 However, beginning May 1977, Francisco has not made valid payments upon demand by Soco
 Francisco contended that payments of rental thru checks were made to Soco but the latter
refused. He instructed, thus, his bank to make consignation with the court.
 The letter allegedly delivered to Soco in May 1977 did not contain cash money, check, money
orders, etc.

84
  No actual consignation and prior or subsequent notice were given to Soco
 Soco filed for eviction

Issue: W/N the consignation of the rentals was valid

Ruling: NO. The tenant must comply strictly and fully, not merely substantially with the requisites of
consignation for the same to produce the effects of payment
Without the notice first announced to the persons interested in the fulfillment of the obligation the
consignation as a payment is void.
SC held that Francisco failed to prove the following requisites of a valid consignation
1st- Tender of payment of monthly rentals to Soco except that indicated in June 9, 1977 letter
2nd – First notice to Soco prior to consignation except payment referred to in Exhibit 10
3rd- Second notice to Soco, that is after consignation has been made, except that referred in
Exhibit 12
4th- Actual deposit or consignation of the monthly rentals except the 2 cashier’s check referred to
in Exhibit 12

 Purpose/ Rationale of Notice Prior and After Consignation

a. In order to give the creditor an opportunity to reconsider his unjustified refusal and to accept
payment thereby avoiding consignation and the subsequent litigation (True to 1st Notice)
b. To enable the creditor to withdraw the goods or money deposited. Indeed, it would be unjust to
make him suffer the risk for any deterioration, depreciation or loss of such goods or money by
reason of lack of knowledge of the consignation.

WHAT IS THE FIRST REQUIREMENT FOR A VALID CONSIGNATION?

The first requirement is the existence of a valid debt which is already due. In other words, there
must be an obligation to pay.
The first question to ask then is this: Is there an exercise of a right or privilege, or the discharge of
an obligation? It is important to ask this question because for the purposes of a valid consignation, options
and right are not considered debts. Thus, if there is only a right or privilege, valid tender will be sufficient
to entitle the person to such right or privilege. However, the rights over the property in the case of rights
and options are acquired only upon actual payment or the completion of the consignation. If there is a debt,
tender and consignation are necessary to release the debtor from the obligation. Compare the situation
where tender is sufficient to those situations where consignation without tender is sufficient.
For example, if Cy enters into a contract with Angel whereby upon payment of P6,000 to Angel,
Cy would have the right to cancel the same, what is involved?
A right, not an obligation, is involved. Therefore, tender would be sufficient to entitle Cy to
cancellation.

WHAT IS THE SECOND REQUIREMENT FOR A VALID CONSIGNATION?

The second requirement is a prior valid tender unless the case falls within one of the exceptions
given in Art. 1256. If the reason for consignation is the unjust refusal of the creditor to accept payment,
such unjust refusal will be established by showing:
(1) that there was a previous tender of payment;
(2) that the tender of payment was of the very thing due or, in case of money obligation, that legal
currency was offered;
(3) that the tender of payment was unconditional;
(4) that the creditor refused to accept payment without just cause.
According to Tolentino, at the time the deposit is made, it is not necessary for the debtor to show
the insufficiency of cause for the refusal of the creditor. Such fact may be established during the hearing of
the case.

WHAT IS THE THIRD REQUIREMENT?

There must be previous notice by the debtor to the other parties who are interested in the
obligation. The purpose of this notice prior to the filing of the consignation in court is to enable the creditor

85
and parties interested (such as the mortgages, pledges, guarantors, solidary co-creditors and solidary co-
debtors) to reconsider the previous refusal; and thus avoid litigation by the simple expedient of accepting
payment.
Note that in cases falling within the purview of BP877 (rental which are deposited in the bank),
prior notice to the persons interested is also essential. Thus, in Valdellon v. Tengco, where the lessee
continued to deposit his rentals to the CA without giving any notice to the lessor, his deposits were
considered invalid consignation. Furthermore the CA was no longer the proper entity to receive the
deposits since the case has already been remanded to the City Court.

VALDELLON V. TENGCO 141 SCRA 321

Facts:
 Valdellon, upon a verbal agreement to pay a monthly rental to the original owner, constructed
his house on the lot in question
 Geraldez had bought the lot and thus notified Valdellon to vacate the premises. They also
demand payment of monthly rental until Valdellon have actually vacated the land
 Valdellon refused to vacate
 During the pendency of the case, Valdellon has been depositing his monthly rentals
 The CA ruled in favor of Geraldez ; CA’s rule became final
 Valdellon offered to pay rentals for April, May and June 1979
 Geraldez refused to accept payment

Issue: W/N the consignation was proper

Ruling: NO. For consignation to be valid, the notice requirements must be complied with--Art 1257, pre-
consignation notice and Art. 1258, post-cogsignation notice.
Deposit of rentals in the CA after that court had already rendered a final decision in a prior
ejectment case between the parties is ineffectual as consignation.
“Petitioner was undoubtedly aware of the fact that the case pending between him and respondents
in said appellate court had already been terminated and therefore, there was no justifiable cause for him to
continue making said deposits in that court as private respondents had in fact so advised petitioners by
letter on Feb 19, 1970.”
Note: BP 877 specifically directs that notice of the deposit should thereafter be given to the person
in whose favor such deposits are made.

WHO ARE THE PERSONS INTERESTED IN THE OBLIGATION?

The person most interested in the obligation is, of course, the creditor. Other persons interested in
the obligation are those persons who would be prejudiced by the non-fulfillment of the obligation, such are
guarantors and sureties.

MUST THE CREDITOR THEN, BE NOTIFIED?

The courts have consistently held (borrowing Dean del Castillo’s words) that the requirement of
prior notice does not apply to the creditor anymore because the tender is sufficient notice. Remember to
that if no tender is necessary because the case is any of those enumerated in Art. 1256, notification is
likewise excused. (After all, if you couldn’t find the creditor when you wanted to pay him, how do you
expect to find him now?)
To those poor souls disturber by Tolentino’s remark that lack of prior notice does not invalidate
the consignation, but simply makes the debtor liable for the expenses incurred thereby, your worries are
over. The conflict as J.J. Laurel would say, is only apparent, not real. Tolentino made this conclusion based
on case involving rights and options – not debts. Thus, the rules on consignation necessarily did not apply
to such cases.

WHAT IS THE FOURTH REQUIREMENT?

The debtor files the action for action in court.

86
 This step is initiated by filing a complaint for consignation, with the debtor as plaintiff and the
creditor as defendant, with a prayer to compel the creditor to accept the object consigned. In case of real
property, it is unnecessary (and impossible, really) to deposit such with the judicial authorities. However, it
is still possible to consign real property because, going back to our definition, what is necessary is that the
debtor places such property at the disposal of the judicial authority. When the obligation consists in the
payment of a sum of money, currency which is legal tender must be deposited with the court. You must
apply all the rules of payment to your deposit.

WHAT IS THE FIFTH REQUIREMENT?

Subsequent notice must be given to those persons interested in the obligation to inform them that
the action for consignation has been filed. The subsequent notice here refers to the separate notices (service
of summons) to be given to these persons, other than the creditor, who are interested in the obligation. The
creditor is deemed notified of the consignation upon service of the summons (which compels him to answer
the complaint), and the complaint itself. Without this requisite, the consignation will be void.

WHAT MAY HAPPEN AFTER THE CONSIGNATION?

There are three possibilities:
(1) The creditor may accept the thing or amount deposited, in which case the matter of payment is
terminated.
(2) He may refuse to accept the thing or amount, in which case a trial must be had to determine
the validity of the consignation.
(3) He may neither accept nor refuse, in which case the debtor may ask the court to cancel the
obligation after showing that the requisites of consignation have been complied with.

WHAT IS THE SIXTH REQUIREMENT?

A hearing on the merits to determine:
(1) Whether or not there has been a valid tender and an unjustifiable refusal and;
(2) Whether the procedure for consignation has been properly followed.

WHAT IS SEVENTH REQUIREMENT?

If the court finds that the answer to (1) and (2) above are complied, it can make a declaration that
the consignation has been properly made and order the cancellation of the obligation. This order is what
will extinguish the obligation.

WHAT IF AT THE HEARING, THE COURT FIND (1) AND (2) NOT TO BE IN ORDER?
The debtor shall revert to his original condition before he made the tender and consignation. He
shall be considered in delay of payment from the time the debt is due, and the prescription period will
continue to run.

Art. 1259 The expenses of consignation, when properly made, shall be charged against the
creditor.

Art. 1260 Once the consignation has been duly made, the debtor may ask the judge to order
the cancellation of the obligation.
Before the creditor has accepted the consignation, or before a judicial declaration
that the consignation has been properly made, the debtor may withdraw the thing or the
sum deposited, allowing the obligation to remain in force.

MAY THE DEBTOR WITHDRAW THE THING CONSIGNED BEFORE THE COURT’S
DECLARATION OR BEFORE THE ACCEPTANCE BY THE CREDITOR OF THE AMOUNT?
Yes. After all, the debtor is still the owner of the thing or amount deposited, and by withdrawing
such thing or amount, the debtor is merely exercising his right. After the courts declaration, however, or
acceptance by the creditor of the payment, the debtor can no longer withdraw the amount because the
amount or thing no longer belongs to him. In case of withdrawal by the debtor, he bears the expenses of
consignation.

87
REISENBECK V. COURT OF APPEALS 209 SCRA 656

Facts:
 Reisenbeck filed with RTC a complaint for consignation and damages against Maile
 He consigned and deposited with clerk of court of the RTC the sum of P113,700
 Maile filed a Manifestation Accepting Consignation “without necessarily admitting the
correctness of the obligation” of Reisenbeck to him.

Issue: W/N the acceptance of consignation with reservation is valid.

Ruling: YES. There is authority for the view that before a consignation can be judicially declared proper;
the creditor may prevent the withdrawal of the amount consigned by the debtor, by accepting the
consignation, even with reservations. (Tolentino)
When the creditor’s acceptance of the money consigned is conditional and with reservations, he is
not deemed to have waived the claim he reserved against his debtor. thus, when the amount consigned does
not cover the entire obligations, the creditor may accept it, reserving his right to the balance (Tolentino)
As respondent-creditor’s acceptance of the amount consigned was with reservation, it did not
completely extinguish the entire indebtedness of the petitioner-debtor. It is apposite to note that
consignation is completed at the time the creditor accepts the same without objections, or, if he objects, at
the time the court declares that it has been validly made in accordance with law. (Tolentino)
The consignation has retroactive effect. The payment is deemed to have been made at the time of
the deposit of the money in court, or when it was placed at the disposal of the judicial authority.

Art. 1261 If, the consignation having been made, the creditor should authorize the debtor to
withdraw the same, he shall lose every preference which he may have over the thing. The
co-debtors, guarantors and sureties shall be released.

WHAT IS THE EFFECT OF CONSENT BY THE CREDITOR ON THE WITHDRAWAL?

First of all, keep in mind that this refers to consent by the creditor to the withdrawal before the
court’s declaration of the existence of a valid consignation and before the creditor’s acceptance. In other
words, at this point, the creditor need not consent. But if he does, the effect is that the creditor loses
whatever right of preference he has (if he has any), and the co-debtors, guarantors and sureties should be
released

WHAT IS THE RATIONALE FOR SUCH EFFECT?

The creditor loses his preference because the object was already consigned and if such
consignation had subsequently been declared valid, the creditor would have had preference. His
authorization amounts to a waiver of the preference. As to the release of the guarantors, sureties and co-
debtor, such is only a logical consequence since the debtor, by withdrawing the action for consignation,
imposes upon such person’s additional risk.

WHAT MUST THE CREDITOR DO THEN TO PRESERVE HIS RIGHTS?

The creditor must object to the withdrawal to preserve his right of preference to payment and to
preserve the accessory obligations.

CAN THE DEBTOR OBJECT TO THE WITHDRAWAL BY THE CREDITOR? IF SO, FOR WHAT
REASON?
The only reason why the debtor may object, technically, is if the acceptance of the creditor of the
thing consigned is conditional. After all, the debtor filed the action for consignation to compel the debtor to
accept payment, so normally, the debtor would not object to the creditor’s accepting such payment.
For example, if creditor Ferdie accepts the P10,000 consigned by debtor Cy, but says, with one
eyebrow raised, that he will accept such amount only upon condition that Cy will still pay interest, then Cy
may validly object to such acceptance.

88
WHAT IS THE EFFECT OF THE LOSS OF THE THING OR AMOUNT CONSIGNED?
Loss or deterioration of the thing or amount consigner occurring without the fault of the debtor,
granted that the consignation is valid, is borne by the creditor. Any such loss or deterioration through the
fault of the debtor is borne by him. Also, if the consignation was invalid, the loss is likewise borne (With
more reason) by the debtor, no matter what the reason for such loss or deterioration may be, since he had
no right to consign the object.
If the consignation was valid and the object is lost through the fault of the court or the fault of the
sheriff or anyone who is in possession of such object, the creditor assumes whatever action the debtor may
take against the judge, sheriff, or whoever.

HOW ABOUT AN INCREMENT OR INCREASE IN THE VALUE OF THE THING?

Granted that the consignation is valid, such increment or increase inures to the benefit of the
creditor.
These requisites are not applicable to the deposit of the amount of a judgment in court.

Sec. 2 – Loss of the Thing Due

Art. 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.
When by law or stipulation, the obligor is liable even for fortuitous events, the loss
of the thing does not extinguish the obligation, and he shall be responsible for damages. The
same rule applies when the nature of the obligation requires the assumption of risk.

WHEN IS THERE LOSS?

In obligations TO GIVE: Art. 1189(2) provides that “ x x it is understood that the thing is lost
when it perishes, or goes out of commerce, or disappears in such a way that its existence is unknown or it
cannot be recovered.”
It means that aside from the destruction of the thing due, its disappearance by loss, theft, or
robbery, that is to say its non-existence in the hands of the obligor or when, through any cause, the
compliance of the obligation becomes impossible.
In obligation TO DO and NOT TO DO: Art. 1266 provides that “The debtor in obligations to shall
also be released when the prestations becomes legally or physically impossible without the fault of the
obligor.”
Therefore, in obligation to do and not to do “loss” means the impossibility of the performance.

AS A GENERAL RULE, WHAT HAPPENS IF, DURING THE PENDENCY OF THE CONDITION,
THE THING IS LOST THROUGH THE FAULT OF THE DEBTOR?
The debtor shall be obliged to pay damages amounting to the value of property lost, in addition to
other damages incurred upon the creditor, as provided in Art. 1189(2).

WHAT HAPPENS IF, DURING THE PENDENCY OF THE CONDITION, THE THING IS LOST
WITHOUT THE FAULT OF THE DEBTOR?
If the thing is lost without the fault of the debtor, the obligation shall be deemed extinguished as
provided by Art. 1189(1)

WHAT ARE THE REQUISITES SO THAT LOSS MAY EXTINGUISH THE OBLIGATION AND
EXEMPT THE OBLIGOR FROM ANY FURTHER LIABILITY?
(1) The thing lost must be determinate.
Art. 1262 provides that “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.”
(2) The obligor must not be at fault (culpa) –
Art. 1163 provides that “Every person obliged to give something is also obliged to take care
of it with the proper diligence of a good father of a family x x”

89
 Art. 1170 also provides that “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.”
Note that Art. 1265 provides that the burden or proving that the loss occurred without the
obligor’s fault rests upon himself.
(3) The obligor must not incure in delay (mora)
Art. 1165 provides that “ x x if the obligor delays x x he shall be responsible for any
fortuitous event until he has effected the delivery.”
(4) The obligor must not act in bad faith (dolo)
Art. 1165 also provides that “ x x if the obligor x x has promised to deliver the same thing to
two or more persons who do not have the same interest, he shall be responsible for any
fortuitous event until he has effected the delivery.”

WHAT ARE THE EXCEPTIONS TO THE RULE THAT LOSS OF THE DETERMINATE OBJECT BY
FORTUITOUS EVENT EXTINGUISHES THE OBLIGATION?
Art. 1174 provides the three exceptions:
(1) expressly specified by law, or when
(2) It is otherwise declared by stipulation of the parties, or when
(3) The nature of the obligation requires the assumption of risk.

ARE STIPULATIONS STATING THAT A DEBTOR SHALL REMAIN LIABLE EVEN IN THE
OCCURRENCE OF A LOSS BY FORTUITOUS EVENT VALID?
YES. Art. 1174 permits them.

WHAT PROVISIONS OF LAW HOLD A DEBTOR LIABLE IN CASES OF LOSS DUE TO

FORTUITOUS EVENT?
(1) Art. 1170 and Art 1165(3) provides that even if the loss should occur by reason of fortuitous
event, if the obligor is in delay, he is not exempt from liability.
(2) Art. 1165(3) provides that an obligor who has promised to deliver the same thing to two or
more persons shall in any case be responsible for any fortuitous event. There is obviously
fraudulent design here.
(3) Art. 104 of the Revised Penal Code provides that the civil liability incurred by the
commission of criminal acts includes restitution, loss of the thing to be delivered due to a
fortuitous event does not extinguish the obligation of the offender.
Also, Art. 1268 of the Civil Code provides that “When the debt of a thing certain and
determinate proceeds from a criminal offense, the debtor shall not be exempted from the
payment of its price, whatever may be the cause for the loss, unless the thing having been
offered by him to the person who should receive it, the latter refused without justification to
accept it.”
(4) Art. 1492 provides that “The bailee is liable for the loss of the thing, even if it should be
through a fortuitous event:
a. If he devotes the thing to any purpose different from that which it has been loaned;
b. If he keeps it longer than the period stipulated, or after the accomplishment of the
use for which the commodatum has been constituted;
c. If the thing loaned has been delivered with appraisal of its value, UNLESS there is a
stipulation exempting the bailee from responsibility in case of a fortuitous event;
d. If he lends or leases the thing to a third person, who is not a member of his
household;
e. If, being able to save either the thing borrowed or his own thing, he chose to save the
latter.”
Dean del Castillo also explains that as a general rule in a contract of commodatum (a
gratuitous contract where one of the parties delivers to another something not consumable
so that the latter may use the same for a certain time and return it) loss by fortuitous event
also extinguishes the obligation. She did mention letters (c) and (d) as exceptions to this
general rule. For our purposes, it is safe to consider (a), (b) and (e) as exceptions, too.

90
Art. 1263. In an obligation to deliver a generic thing, the loss or destruction of anything of
the same kind does not extinguish the obligation.

IN AN OBLIGATION TO DELIVER A GENERIC THING, DOES LOSS BY FORTUITOUS EVENT

EXTINGUISH THE OBLIGATION?
Art. 1263 provides that “In an obligation to deliver a generic thing, the loss or destruction of
anything of the same kind does not extinguish the obligation.”
As long as there are things of the kind stipulated, whether or not they are possessed by the obligor,
the obligation subsists, because the generic objects are not considered lost. Genus nunquam perit. (The
genus never perishes.)
Remember that an obligation to pay money is generic. Failure to raise funds is not a defense.
For example, A obtained a loan from a bank. As security, A executed a mortgage on his crops.
The crops however, were destroyed by the Japs during the war. Is he still liable?
YES. A is still liable for his obligation was not to deliver determinate things, the crops, but to
deliver a generic thing, money. (Republic of the Philippines v. Grijaldo)

IS THERE AN EXCEPTION TO THIS RULE?

This rule has an exception in what is known in German law as a delimited generic obligations.
Under this exception, when there is a limitation of the generic object to a particular existing mass or a
particular group or of things, the obligation is extinguished by the loss of the particular mass or group or
limited quantity from which the prestation has to be taken, or by the impossibility of getting from it the
things for the prestation.
For example, when a person is obliged to deliver the first 50 cavans of rice from his harvest, and
the harvest is destroyed by fortuitous event, or to deliver 10 heads of cattle from his stock, and all his cattle
perish without his fault, the obligation is extinguished and it is not necessary for the debtor to get rice or
cattle of the same kind from the open market for delivery to the cattle.
Furthermore, in the above examples, after 50 cavans of rice or 10 heads of cattle have been
individualized and segregated from the rest, and this is made known to the creditor who agrees to them,
they become determinate objects; if they are thereafter lost without fault of the debtor, the obligation is
extinguished, even if the debtor has other rice or cattle. (Tolentino)

Art. 1264. The courts shall determine whether, under the circumstances, the partial loss of
the object of the obligation is so important as to extinguish the obligation.

IS THE LOSS WHICH WILL GIVE RISE TO THE EXTINGUISHMENT NECESSARILY TOTAL?
NO. Art. 1264 provides that “The courts shall determine whether, under the circumstances, the
partial loss of the object of the obligation is so important as to extinguish the obligation.”
Ordinarily, partial loss does not extinguish the obligation; the thing should be delivered to the
creditor in its impaired condition, without any liability for damages on the part of the debtor.
But, if the portion that is lost is of such an extent or nature that the obligation would not have been
constituted without it, then the obligation is extinguished. Thus, in a sale of a house and lot, where the
house is accidentally destroyed by fire, the obligation subsists if the house is negligible in value and the lot
was the main object of the sale, but the obligation is extinguished if the acquisition of the house was the
principal purpose of the buyer.
The intention of the parties is the controlling factor in the solution of each case of partial loss.
(Tolentino)

Art. 1265. Whenever the thing is lost in the possession of the debtor, it shall be presumed
that the loss was due to his fault, unless there is proof to the contrary, and without prejudice
to the provisions of Art. 1165. This presumption does not apply in case of earthquake, flood,
storm or other natural calamity.

WHAT IS THE PRESUMPTION WITH RESPECT TO LOSS?

91
 Art. 1265 provides that “Whenever the thing is lost in the possession of the debtor, it shall be
presumed that the loss was due to his fault, UNLESS there is proof to the contrary, and without prejudice to
the provisions of Art. 1165. x x”
Here, the burden of explaining the loss of a thing in the possession of the debtor rests upon the
latter.

WHEN IS THIS PRESUMPTION INAPPLICABLE?

Art. 1265 provides that “x x this presumption does not apply in case of earthquake, flood, storm or
other natural calamity.”
In cases like these, he who alleges the loss due to the debtor’s fault must prove such fault.

WHAT ABOUT ACCIDENTAL CALAMITIES OTHER THAN EARTHQUAKES, FLOODS OR

STORMS?
Art. 1265 must be construed in relation to Art. 1262 (An obligation x x shall be extinguished if it
should be lost or destroyed without fault of the debtor x x) Thus, where it is found, and the fact is
undisputed, that the fire which destroyed the thing was accidental, this is equivalent to a finding that the
fire was not attributable to the fault of the defendant and negatives the very idea of negligence on his part
with reference to the origin of the fire.
Although this it not a natural calamity, there would be a casus fortuitus as would exempt the
defendant from liability.

WHAT IF THE CAUSE OF THE LOSS IS UNKNOWN?

The aforesaid presumption prevails.

Art. 1266. The debtor in obligations to do shall also be released when the prestation
becomes legally or physically impossible without the fault of the obligor.

Art. 1267. When the service has become so difficult as to be manifestly beyond the
contemplation of the parties, the obligor may also be released therefrom, in whole or in
part.

IN OBLIGATIONS TO DO AND NOT TO DO, WHEN SHALL THE DEBTOR BE RELEASED?

Art. 1266 provides that “x x in obligations to do (the obligor) shall be released from the prestation
becomes legally or physically impossible without the fault of the obligor.”
In place of loss by fortuitous event, the more appropriate term in cases of obligations to do and not
to do is impossibility of performance.

WHEN SHOULD THE IMPOSSIBILITY EXIST?

Art. 1266 refers to an impossibility which arise after the obligation has been constituted.
There is a distinction between impossibility existing at the time the obligation is constituted,
which brings about the nullity of the contract, and impossibility which supervenes at the time of
performance, which brings about a modification or extinguishment of the obligation, depending on whether
or not it is imputable to the debtor.
For example, Charles sold a half-interest in his motorboat to B. It was agreed that the price to be
paid by B would be used in installing a motor on the vessel. Later, the vessel was destroyed by a fortuitous
event. Is B’s obligation to pay the price extinguished?
NO. B must still pay because his obligation is generic. This is so even if there is no more use of
installing the motor since the boat has already been destroyed by the fortuitous event. It should be noted
that it is not the paying that has become impossible. Thus, the obligation remains.

WHAT IS PHYSICAL AND LEGAL IMPOSSIBILITY?

There is physical impossibility when the act by reason of its nature cannot be accomplished.
For example, in an obligation to paint a particular building, if the building is razed to the ground
by an earthquake before the work can be begun, there is physical impossibility thus making the obligation
extinguished.

92
 Dean del Castillo has the more morbid example of a painter having his hands cut off before
painting a portrait.
There is legal impossibility when the act, by reason of a subsequent law, is prohibited.
For example, in an obligation to render services as an entertainer in a night club, a subsequent law
or ordinance prohibits the employment of entertainers in night clubs, the obligation may also be
extinguished as it is legally impossible to perform the obligation.

WHAT IS MORAL IMPOSSIBILITY?

Dean del Castillo would like to distinguish legal from moral impossibility. The difference would
be between the degree of impossibility and intent or purpose of the parties. If an obligation was rendered
impossible to perform it is a legal impossibility. However, if an obligation was rendered difficult by law
passed and such difficulty could not have been foreseen by the parties, there is moral impossibility. It is
basically an additional burden placed upon the parties in the performance of the obligation.
In determining whether or not there is a moral impossibility, the circumstances concerning
inserviceablility and difficulty to perform the obligation must be considered.

IS THERE SUCH A THING AS TEMPORARY IMPOSSIBILITY?

YES. Temporary obstacles to the performance of the prestation, which may be expected to
disappear in the near future, do not extinguish the obligation, but merely delay its fulfillment UNLESS by
its nature or by the will of the parties it has to be performed at a determinate time.
But if the obstacles are of an unknown and unforeseen duration, the obligation may be considered
juridically impossible of performance; it is extinguished, and is not revived by the fact that it becomes
possible later when circumstances change. (Tolentino)

Art. 1268. When the debt of a thing certain and determinate proceeds from a criminal
offense, the debtor shall not be exempted from the payment of its price, whatever may be
the cause for the loss, unless the thing having been offered by him to the person who should
receive it, the latter refused without justification to accept it.

Art. 1269. The obligation having been extinguished by the loss of the thing, the creditor
shall have all the rights of action which the debtor may have against third persons by
reason of the loss.

WHAT IF THE LOSS IS DUE TO A THIRD PERSON’S FAULT?

Art. 1269 provides that “The obligation having been extinguished by the loss of the thing, the
creditor shall have the rights of action which the debtor may have against third persons by reason of the
loss.”
This means that if the loss is due to the act of a third persons for which the debtor is not
responsible, such loss extinguishes the obligation. But the debtor’s rights to that third person are subrogated
to the creditor. The article refers not only to the tights and actions which the debtor may have against third
persons, but also to any indemnity which the debtor may have already received. (Tolentino) The right of
action for indemnity may only be exercised by the creditor, for otherwise the debtor would profit by such
loss if his obligation is extinguished and he can still recover indemnity from another. (Padilla)

WHAT IF THE DEBTOR IS IN COLLUSION WITH THE THIRD PERSON?

The debtor is guilty of fraud. If there is collusion, the act of the third person is also considered the
act of the debtor in which case, it will be considered as lost through the fault of the debtor.

Sec. 3. – Condonation or Remission of the Debt

Art. 1270. Condonation or remission is essentially gratuitous, and requires the acceptance
by the obligor. It may be made expressly or impliedly.
One and the other kind shall be subject to the rules which govern inofficious
donations. Express condonation shall, furthermore, comply with the forms of donation.

93
WHAT IS CONDONATION OR REMISSION?
It is an act of liberality by which the obligee, who receives no price or equivalent thereof,
renounces the enforcement of the obligation, which is extinguished in its entirety or in that part or aspect of
the same to which the remission refers. (Manresa)
It is the gratuitous abandonment by the creditor of his right. (Sanchez Roman)

WHAT ARE THE KINDS OF CONDONATION?

As to FORM, the remission may be express or implied. It is express when it is made formally and
should be in accordance with the forms of ordinary donations. It is implied when it can be inferred from the
acts of the parties.
As to EXTENT, the remission may be total or partial. Partial remission may refer to the amount of
the indebtedness, or to an accessory obligation only, such as pledge or interest, or to some other aspect of
the obligation, such as solidarity.
As to MANNER OF REMISSION, it may be inter vivos (effective during the lifetime of the
creditor) or mortis causa (effective upon the death of the creditor). When the remission is mortis causa, it
must be contained in a will or testament.

WHAT IS AN ESSENTIAL REQUISITE OF A CONDONATION?

It is an essential characteristic of remission that it be gratuitous, that there is no equivalent
received for the benefit of given; once such equivalent exists, the nature of the act changes. Dean del
Castillo really considers condonations in a concept of a donation.
It may become a dation in payment when the creditor recieves a thing different from that
stipulated.
It may become a novation when the object or principal conditions of the obligation should be
changed.
It may become a compromise when the matter renounced is in litigation or dispute and in
exchange of some concession which the creditor receives. (Tolentino, Manresa)

WHAT THEN IF A CONDONATION IS ESSENTIALLY A DONATION?

It is therefore, subject to the rules on donations with respect to (1) acceptance, (2) amount, and (3)
revocation.
In relation to remission, the rules on donation should be read so that “donor” refers to the creditor,
“donee” to the debtor, and “donation” to the remission or condonation.

WHAT ARE PROVISIONS ON DONATIONS IN THE CIVIL CODE?

As to:
(1) MANNER OF ACCEPTANCE: Art. 745 provides that “The donee must accept the donation
personally, or through an authorized person with a special power for the purpose, or with a
general and sufficient power; otherwise, the donation shall be void, Art. 746 also provide that
“Acceptance must be made during the lifetime of the donor and of the donee.
(2) AMOUNT: Art. 750 provide that “The donation may comprehend all the present property of
the donor, or part thereof, provided he reserves, in full ownership or in usufruct, sufficient
means for the support of himself, and of all relatives who, at the time of the acceptance of the
donation, are by law entitled to be supported by the donor. Without such reservation, the
donation shall be reduced on petition of any person affected. Art. 752 also provide that “The
provisions of Art. 750 not withstanding, no person may give or receive by way of donation,
more than he may give or receive by will.
The donation shall be inofficious in all that it may exceed this limitation.
(3) REVOCATION: Art. 760 provides that “Every donation inter vivos made by a person having
no children or descendants, legitimate or legitimated by subsequent marriage, or illegitimate,
may be revoked or reduced as provided in the next article, by the happening of any of these
events.
(1) If the donor, after the donation should have legitimate or legitimated or illegitimate
children, even though they be posthumous;

94
 (2) If the child of the donor, whom the latter believed to be dead when he made the
donation, should turn out to be living;
(3) If the donor should subsequently adopt a minor child.
Art. 761 provides that “In the cases referred to in the preceding article, the donation shall be
revoked or reduced insofar as it exceeds the potion that may be freely disposed of by will,
taking into account the whole estate of the donor at the time of the birth, appearance or
adoption of a child.
Art. 764 provides that “The donation shall be revoked at the instance of the donor, when the
donee fails to comply with any of the conditions which the former imposed upon the latter.
In this case, the property donated shall be returned to the donor, the alienations made by the
donee and the mortgages imposed thereon by him being void, with the limitations established,
with regard to third persons, by the Mortgage Law and the Land Registration Laws.
This action shall prescribe after 4 years from the non-compliance with the condition, may be
transmitted to the heirs of the donor, and may be exercised against the donee’s heirs.
Art. 765 provides that “The donation may also be revoked at the instance of the donor, by
reason of ingratitude in the following cases:
(1) If the donee should commit some offense against the person, the honor, or the
property of the donor, or his wife or children under his parental authority;
(2) If the donee imputes to the donor any criminal offense, or any act involving moral
turpitude, even though he should prove it, unless the crime or the act has been
committed against the donee himself, his wife or children under his authority;
(3) If he unduly refuses him support when the donee is legally or morally bound to give
support to the donor.

WHAT ARE THE REQUISITES OF A CONDONATION?

(1) The debtor must accept the condonation personally. (Art. 1270[1] in consonance with Art.
745)
(2) It must be gratuitous (Manresa – already mentioned above)
(3) If it is an express condonation, it must follow the formalities set by law concerning donations.
(Art. 1270[2])

WHY IS ACCEPTANCE OF THE DEBTOR NEEDED?

Dean del Castillo explains this by saying that one cannot be compelled to accept any act of
benevolence or generosity from another.

WHAT HAPPENS IF THE DEBTOR DOES NOT ACCEPT THE CONDONATION?

Refusal on the part of the debtor means that the obligation remains outstanding. The suggested
remedy of the creditor here, if he is insistent on the extinguishment of the obligation without payment from
the debtor, is to let the obligation prescribe.

WHEN MAY ACCEPTANCE BE GIVEN?

It depends.
If it is a condonation inter vivos, acceptance must be made during the lifetime of the credtior. Here
the acceptance must be EXPRESS. (Art. 745 provides that “The donee must accept the donation personally
xxx”)
If it is a condonation mortis causa, it must be made from the death of the creditor. Here an
IMPLIED condonation is available. The rules of succession on the legacy of the debt states that if the
legacy had not be repudiated within 30 days, there would be implied acceptance.

WHAT ARE FORMALITIES?

They are the written form which govern those in the rules of donation.

WHAT IF THE REMISSION IS NOT GRATUITOUS?

It would amount to dation en pago or a novation.

95
 For example, Maro brought furniture from Val on credit. On the date of payment, Val told Maro
that she would condone the debt provided that Maro would return the furniture which has been furnished
him. Maro agreed. Is there remission here?
This is a compromise since there is no remission for it is not gratuitous.

WHAT IF THE DEBTOR PAYS IN PROPERTY?

It would also be considered as dacion en pago.

WHAT IF THERE IS NO CONSIDERATION OFFERED FOR THE REMISSION?

If consideration is offered for the dropping of whatever claim against the debtor, then there would
be a novation or a compromise. Whatever the situation is, there is, essentially, no condonation if there is a
consideration made.

WHAT FORMALITIES SET BY LAW ARE REQUIRED IN A CONDONATION?

It is important to stress that the formalities apply only to express condonation. In an implied
condonation, no formalities are necessary.
In inter vivos remission, if the donation involves the delivery of real property, then such donation
must be included in the instrument.
If the condonation involves the delivery of personal property valued more than P5,000, it must be
written at least in a private document.
If the condonation involves the delivery of personal property valued at less that P5,000, the
delivery must be accompanied by the instrument of credit evidencing the debt.
In mortis causa remission, the formality of the condonation requires that it must take the form of a
will.

MAY A CONDONATION BE REVOKED?

As a general rule, an obligation that is once condoned is condoned forever.

ARE THERE ANY EXCEPTIONS?

YES. Dean del Castillo gives two instances: (1) ingratitude, and (2) inofficiousness.
Padilla adds two more birth, appearance, or adoption of children in Art. 760 and non-compliance
of condition in Art. 764. (Both provisions are included above.)

WHEN MAY A CONDONATION BE REVOKED BY REASON OF INGRATITUDE?

See Art. 765 above. But for purposes of review, there are three instances enumerated by law:
(1) If the donee should commit some offense against the person, the honor or the property of the
donor, or his wife or children under his parental authority;
(2) If the donee imputes to the donor any criminal offense, or any act involving moral turpitude,
even though he should prove it, UNLESS the crime or the act has been committed against the
donee himself, his wife or children under his authority;
(3) If the donee unduly refuses to give the donor support when the former is legally or morally
bound to give support to the latter; and
(4) Reappearance or birth of child.

WHAT IS THE ESSENCE OF “INOFFICIOUSNESS”?

Art. 752 provides that “x x no person may give or receive, by way of donation, more than he may
give or receive by will. x x The donation shall be inofficious in all that it may exceed its limitations.”
Art. 771 provides that “donation which x x are inofficious, bearing in mind the estimated value of
the donor’s property of the time of his death, shall be reduced with regard to the excess; x x”
While a person may make donations, no one can give more that that which he can give by will,
otherwise, the excess shall be inofficious, and shall be reduced accordingly. And as a rule, testamentaty
dispositions which impair the legitime shall be reduced on petition of the heirs insofar as they are
inofficious or excessive.
For example, If Charles died, and is survived by his only heir, Val, his son, and in his last will and
testament, Charles renounced a debt due him from Maro in the amount of P50,000. The debt constituted his

96
only estate. Since Charles could only dispose of one-half of his estate as the other half belonged to his heir,
Val, as his legitime, the renunciation was inofficious and should be reduced.

Art. 1271. The delivery of a private document evidencing a credit, made voluntarily by the
creditor to the debtor, implies the renunciation of the action which the former had against
the latter.
If in order to nullify this waiver it should be claimed to be inofficious, the debtor
and his heirs may uphold it by proving that the delivery of the document was made in virtue
of payment of the debt.

WHEN IS THERE AN IMPLIED CONDONATION?

When according to Art. 1271, there is “delivery of a private document evidencing the credit, made
voluntarily by the creditor to the debtor.”
For example, Charles is indebted to Mark in the amount of P500 which is evidenced by a
promissory note. Angel returns the promissory note to Charles. A promissory note is an evidence of credit;
its voluntary return by Mark to Charles is an implied condonation of Charles’ debt. The reason for this is
that Mark would not have returned the promissory note to Charles had he still wanted to collect Charles’
debt. (There is disputable presumption that there has been a remission. The presumption is merely
disputable and not conclusive because it may be that the instrument was delivered only for examination by
Mark or for collection.)
Whenever there is a document or an instrument of credit, the creditor keeps such documents
evidencing the credit until such time as the obligation is paid or condoned. Hence, if there is voluntary
delivery of these instruments then the creditor is said to have permitted the obligation to be extinguished.
The delivery of the document evidencing the obligation by the creditor to his debtor implies a
waiver of the right to collect said credit. The possession by the debtor of said document gives rise to the
presumption that it was voluntarily delivered to him by the creditor, either because the debt has been paid
or the obligation has been remitted. (Padilla)

NOTE: The mere fact that the creditor has omitted a certain debt or the name of the debtor from an
inventory made by him does not imply a tacit remission.

WHERE IS THERE TACIT CONDONATION?

Along with the aforesaid provision (Art. 1271), there is also tacit condonation when the creditor
voluntarily destroys or cancels the evidence of the credit, with the intent to renounce his right. (Tolentino)

WHAT IF THE DOCUMENT EVIDENCING CREDIT IS STILL IN THE CREDITOR’S HANDS?

A creditor who is in possession of the document by which his credit is proven, has in his favor the
presumption of law that the amount of the debt has not yet been recovered, UNLESS, the debtor
satisfactorily shows, by one of the methods recognized by law, that he had already satisfied the claim.
(Bantug v. del Rosario, 11 Phil 511)

WOULD ART. 1271(1) APPLY TO PUBLIC DOCUMENTS EVIDENCING CREDIT?

NO. In Art. 1271(1), the Code presupposes that when the creditor delivers a private document
evidencing a debt to his debtor, he surrenders the weapon for the enforcement of his right. (Valverde)

WHAT DOES ART. 1271(2) PRESUME?

Art. 1271(2) provides that “x x If in order to nullify this waiver (of the right to collect credit by
voluntary delivery of the instrument evidencing such credit), it should be claimed to be inofficous, the
debtor and his heirs may uphold it by proving that the delivery of the document was made in virtue of
payment of the debt.”
It presumes that the voluntary return of the title of the credit is by reason of condonation and not
by reason of payment of the debt. Some commentators would lead us to believe that this act of declaring an
implied condonation as inofficious is, in effect, an act of rebutting this presumption.

97
 Dean del Castillo dissents, for in the very desire to annul an implied condonation it must be
assumed that it was an implied condonation in the first place. She also adds, by the way, that ingratitude as
another ground to assail an implied condonation.
Note that inofficiousness applied ONLY in cases where there is a donation.

WHAT IF THE CREDITOR GRANTS A RELASE TO HIS DEBTOR BY MISTAKE?

Tolentino offers an answer for this. The debtor is obliged to recognize the debt again. And if the
debtor refuses to make a voluntary recognition, the judgment compelling him to recognize the debt will
serve as the title of the obligation upon its maturity.
These can be justified by Art. 22, which provides that “Every person who through an act or
performance by another, or by any other means, acquires or comes into possession of something at the
expense of the latter without just or legal ground, shall returen the same to him.” There is also Art. 2154 on
solution indebiti, which provides that “If something is received when there is no right to demand it, and it
was unduly delivered through mistake, the obligation to return it arises.”

Art. 1272. Whenever the private document in which the debt appears is found in the
possession of the debtor, it shall be presumed that the creditor delivered it voluntarily,
unless the contrary is proved.

WHAT IF THE PRIVATE DOCUMENT EVIDENCING DEBT IS IN THE HANDS OF THE DEBTOR?
Art. 1272 provides that “Whenever the private document in which the debt appears is found in the
possession of the debtor, it shall be presumed that the creditor delivered it voluntarily, UNLESS the
contrary is proved.”
The possession of the debtor of the private document evidencing his debt gives rise to the
presumption that it was voluntarily delivered to him by the creditor.
For example, Charles owed Maro a sum of money. Maro sent a receipt signed by him to Charles
through a collector who was supposed to collect the debt. Charles did not pay however, although he kept
the receipt. Maro was able to prove that the only reason he had sent the receipt was to collect the money. Is
there remission here?
NO. There is no remission. Maro was able to prove the real reason why the debtor has in his
possession the receipt. Hence, the presumption of remission has been overcome.

WHAT IF THE OBLIGATION IS JOINT?

When the obligation is joint, and the private document evidencing debt is found in the possession
of one debtor, the presumption of condonation can refer only to the portion of the debtor who is in
possession of the instrument.
For example, if the private document is found in the possession of Val, who is a joint debtor
(together with his son Charles), what is the presumption?
The presumption is only Val’s debt has been remitted.
If delivery was made to one joint debtor, only the share pertaining to him shall be deemed remitted
or condoned. (Manresa)

WHAT IF THE OBLIGATION IS SOLIDARY?

If the obligation is solidary, the remission must be considered as total. (Manresa)
For example, if the private document is found in the possession of Maro, who is a solidary debtor,
what is the presumption?
Since this is a solidary obligation, the presumption is that the whole obligation has been remitted.

MAY THIS PRESUMPTION OF VOLUNTARY DELIVERY BE OVERCOME?

OF COURSE. The presumption cannot stand when from the evidence it appears that the evidence
of the obligation was not returned to debtor, but was sent to him solely for the purpose of collecting the
debt, and that the creditor’s purpose was to leave the instrument evidencing the credit in possession of the
debtor, if the latter did not forthwith pay the amount mentioned therein.

TO WHOM DOES THE BURDEN OF OVERCOMING THE PRESUMPTION LIE?

98
 It rests on the creditor. (Padilla)
If the creditor cannot prove evidence to dispute the presumption, the latter stands.

Art. 1273. The renunciation of the principal debt shall extinguish the accessory obligations;
but the waiver of the latter shall leave the former in force.

Art. 1274. It is presumed that the accessory obligation of pledge has been remitted when the
thing pledged, after its delivery to the creditor, is found in the possession of the debtor, or of
a third person who owns the thing.

IS THERE SUCH A THING AS A “PRESUMPTION OF IMPLIED CONDONATION”?

Dean del Castillo says NO. Art. 1271(1) makes voluntary delivery the basic element of an implied
condonation. Once there is voluntary delivery, implied condonation immediately arises. The presumption
lies in the voluntary delivery.

WHAT ARE THE OTHER KINDS OF IMPLIED CONDONATION?

(1) Art. 1273 provides that “The renunciation of the principal debt shall extinguish the accessory
obligation; x x”
For example, Cy is indebted (Nabuhay din ang mga utang ni Cy) to Angel in the amount of
P1,000. The debt of Cy is guaranteed by Ferdie. The principal debt here is P1,000 while the
accessory obligation is the guaranty of Ferdie. If Angel should renounce the obligation of Cy
in the amount of P1,000 then the accessory obligation of Ferdie is thereby extinguished
because it follows the rule that accessory derives it life from the principal obligation. Once the
principal goes, so goes the accessory. But, based on the second sentence of Art. 1273, which
is, “xxx but the waiver of the latter shall leave the former in force,” if what is renounced by
Angel is the guaranty of Ferdie, then the principal obligation of Cy subsists.
(2) Art. 1274 provides that “It is presumed that the accessory obligation of pledge has been
remitted when the thing pledged, after its delivery to the creditor, is found in the possession of
the debtor, or of a third person who owns the thing.”
For example, Cy is indebted to Angel in the amount of P100, secured by his new white barong
as a pledge. After receiving the amount of P100 from Angel, Cy delivers to Angel his new
white barong in pledge for the performance of the principal obligation of P100. Later the
white barong is found in the possession of Cy. In such case, the presumption of law is that the
accessory obligation of pledge must have been remitted leaving the principal obligation of
P100 without secutiry. It does not affect the principal obligation, which remains subsisting.

WHY DOES ART. 1274 ONLY APPLY TO PLEDGES?

Dean del Castillo wants to differentiate a pledge from a mere chattel mortgage.
In a pledge, the pledged property is delivered to creditor. A contract of pledge can only be
perfected this way. (Art. 1316) Therefore, in a pledge, you actually lose retention of your property. To be
later found in the possession of pledged property would indeed be unusual and so we have the presumption
of condonation in Art. 1274.

MAY THE PRESUMPTION IN ART. 1274 BE DISPUTED?

OF COURSE. It may be shown that the debtor recovered the thing pledged without the consent of
the creditor, who may have lost it, or from whom it may have been stolen, or that the return to the debtor is
for a limited time and a special purpose, such as to make repairs thereon or to allow the owner to make
particular use thereof. (Manresa)
The presumption is not conclusive but only disputable or prima facie subject to proof that the
delivery to the debtor or the thif person was not voluntary.

WHY DOES ART. 1274 SPEAK OF A THIRD PERSON AS ONE WHO HAVE IN HIS POSSESSION
THE PLEDGED PROPERTY?
A contract of pledge may involve a third party.

99
 Sec. 4. – Confusion or Merger of Rights

Art. 1275. The obligation is extinguished from the time the characters of creditor and
debtor are merged in the same person.

WHAT IS CONFUSION OR MERGER OF RIGHTS?

This is the meeting in one person of the qualities of creditor and debtor with respect to the same
obligation. In simple words, the creditor becomes the debtor in the same obligation.
Confusion or merger extinguishes the obligation precisely because it would be absurd to enforce
one’s claim against oneself. Such extinguishment takes place by operation of law.
At the start of the obligation, there are two parties, but because of subsequent events, the role of
debtor and creditor are merged into one party.
For example, Cy owes Angel P500. Angel assigns her credit to Ferdie who later on assigns it to
Cy. So, after a series of assignments, Cy who is originally the debtor, now becomes the creditor thereby
extinguishing the whole obligation.

WHAT IF ANGEL ASSIGNS HIS RIGHTS DIRECTLY TO CY, WOULD THERE BE CONFUSION?
NO. Three would instead be a case of condonation. In confusion, it is necessary to have an
intermediary.

WHAT ARE THE REQUISITES FOR A VALID MERGER?

Paras gives the following requisites for a valid merger:
(1) The merger should take place between the principal debtor and creditor. (Thus, confusion of
the creditor with the person of the guarantor does not extinguish the principal obligation.
There can also be no confusion or merger if the debtor and creditor represent different judicial
entities even if the officers of both are the same. (Kapisanan ng mga Manggagawa sa MRR v.
Credit Union, etc., L-14322)
(2) The merger must be clear and definite.
(3) The very obligation involved must be the same or identical.

NOTE: The mere transfer to a third person of rights belonging to both the debtor and the creditor BUT not
the credit as against the debt does not result in confusion.

Art. 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.

HOW DOES CONFUSION AFFECT THE LIABILITY OF THE GUARANTOR?

Merger in the person of the principal debtor or creditor extinguishes the obligation. Hence, the
accessory obligation of guaranty is also extinguished in accordance with the principle that the accessory
follows the principal.
For example, Cy is indebted to Jay with Mark as guarantor. The merger of the characters of debtor
and creditor in Cy shall free Mark from liability as guarantor.

WHAT IS THE EFFECT OF MERGER IN THE PERSON OF THE GUARANTOR?

The extinguishment of the accessory obligation does not carry with it the extinguishment of the
principal obligation. Consequently, merger which takes place in the merger of the guarantor, while it
extinguishes the guarantee, leaves the principal obligation in force.
For example, Cy is indebted to Angelo with Ferdie as guarantor. Angelo assigns his credit to
Mark, who in turn, assigns his credit to Ferdie, the guarantor. In this case, the contract of guarantee is
extinguished.

Art. 1277. Confusion does not extinguish a joint obligation except as regards the share
corresponding to the creditor or debtor in whom the two characters concur.

100
DOES CONFUSION HAVE TO BE TOTAL TO EXTINGUISH THE OBLIGATION?
NO. There can be partial confusion, which leads to partial extinguishment of the obligation.
(1) Art. 1277 provides that “Confusion does not extinguish a joint obligation except as regards
the share corresponding to the creditor and debtor in whom the two characters concur.”
For example, Cy and Paul are joint debtors of Charles for P1,000. Then Charles assigns his
credit to Ferdie, who in turn assigns his credit to Cy. Therefore, Cy becomes creditor for
P1,000 and debtor for P500. P500 was extinguished on the basis of confusion but P500
remains collectible from Paul, his co-debtor.
(2) There may also be partial confusion if the creditor assigns only part of his credit.
For example, Cy is the debtor and Charles is the creditor for the sum of P1,000. If Charles
assigns P500 to Angel, and Angel assigns this credit to Cy, there will be partial confusion to
the extent of P500.

IN THE CASE OF SOLIDARY OBLIGATION, IF THERE IS FULL ASSIGNMENT OF CREDIT IS

THE CONFUSION TOTAL OR PARTIAL?
The confusion is total, but on the basis of legal subrogation, the solidary debtor has a right to
collect from his other co-debtors.

MAY A MERGER OR CONFUSION BE REVOKED?

YES. If the reason for the confusion ceases, the confusion or merger may be revoked, and the
obligation is revived.

WHAT IS THE EFFECT IF THE MORTGAGEE BECOMES THE OWNER OF THE MORTGAGED
PROPERTY?
If the mortgagee becomes the owner of the property that has become mortgaged to him, the
mortgage is naturally extinguished, but the principal obligation may remain. (Yek Ton Lin Fire v.
Yusingco, 64 Phil 1062)
For example, Cy borrowed P10,000 from Jay, and as a security, and mortgaged his land in Jay’s
favor. Later, Cy sold the land to Jay. The mortgage is extinguished but Cy still owes Jay P10,000.
Had he assigned his credit of P10,000 to a friend and the friend assigned the credit to Cy, both the
principal obligation and the mortgagee would have been extinguished.

Sec. 5 – Compensation.

Art. 1278. Compensation shall take place when two persons, in their own right, are
creditors and debtors of each other.

Art. 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 other;
(2) That both debts consist in a sum of money, or if the things due are consumable,
they be of the same kind, and also of the same quality if the latter has been
stated;
(3) That the two debts be due;
(4) That they be liquidated and demandable;
(5) That over neither of them there be any retention or controversy, commenced by
third persons and communicated in due time to the debtor.

WHAT IS COMPENSATION?
Compensation is the extinction in the concurrent amount of obligations of those persons who are
reciprocally debtors and creditors of each other.
It is a special mode of extinguishing an obligation.

101
DISTINGUISH COMPENSATION FROM MERGER OR CONFUSION?
COMPENSATION MERGER OR CONFUSION
There are at least two persons who are debtors and There is only one person who is both debtor and
creditors of each other. creditor

There are two debts. There is only one debt

WHAT ARE THE KINDS OF COMPENSATION?

(1) Legal – Takes effect by operation of law, therefore, need not be pleaded.
(2) Judicial – Also called “set-off,” which must be pleaded and is effective by decision of the
court.
(3) Facultative – When one of the parties has the option to claim compensation or to object to it.
(4) Voluntary and Conventional – Parties agree to compensate their respective obligations even
though all the requisites are not yet present.

IN ORDER THAT LEGAL COMPENSATION MAY BE PROPER, WHAT IS NECESSARY?

(1) Both parties must be principally bound.
For example, Cy, owes Paul P100 and Paul owes Cy, P100, there can be compensation since
both of them are principally bound to each other.
Charles, as guardian for Maro, is a creditor of Val. Val in turn is a creditor of Charles who
owes him a personal debt. There can be NO compensation because it is Maro who is the real
creditor, not Charles.
(2) Both debts consist in the sum of money or if the things are consumable (fungible) they be of
the same kind, and also of the same quality.
For example, Cy owes Mark a shirt (generic). Mark owes Cy also a shirt (generic). There can
be compensation here because the object are fungible (although not consummable)
NOTE: Ten sacks of rice cannot be compensated with ten sacks of corn. They must be of the
same quality and kind.
(3) The two debts are due.
For example, Paul owes Cy P5000 payable April 1,2003. Cy owes Paul P5000 payable in
June 4, 2003, legal compensation cannot happen on April 1, 2003, for the debts are not yet
due. However, there can be voluntary compensation upon agreement.
(4) They be liquidated and demandable.
(5) Neither of them there by any retention or controversy, commenced by third persons and
communicated in due time to the debtor.

PNB V, VDA DE ONG ACERO 148 SCRA 166

Facts: Isabela Wood Construction and Development Corporation (Isabela) opened with the PNB on
March 9, 1979 a savings account in the amount of P2M. This amount is the subject of two conflicting
claims. One claim is asserted by the Aceros, judgment creditors of the depositor, who seek to enforce
against said savings account the final and executory judgment rendered in their favor by the CFI. The other
claim has been put forth by PNB, which claims that since Isabela was at some point in time both its debtor
and creditor, there had occurred a mutual set-off between them, which effectively precluded the Aceros’
recourse to the deposit.
PNB’s main thesis is that when it opened a savings account for Isabela, it (PNB) became indebted
to Isabela. So that when Isabela itself subsequently came to be indebted to it on account of Isabela’s breach
of the terms of the credit agreement, (the agreement here establishes a deferred letter of credit for Isabela’s
account in favor of a German corporation), it and Isabela became creditors and debtors of each other.

Issue: W/N legal compensation took place

102
Ruling: No. There is no compensation where the parties are not creditors and debtors of each other. The
insuperable obstacle to the success of PNB’s cause is the factual finding of the the IAC, by which upon
firmly established rules even this Court is bound, that it has not proven by competent evidence that it is a
creditor of Isabela. The only evidence presented by PNB towards this end, the IAC cogently observed, do
not prove any indebtedness of Isabela to PNB. All they prove is that a letter of credit might have been
opened for Isabela’s foreign correspondent, or that the goods thereby covered were in fact shipped, and
received by Isabela.

MINDANAO PORTLAND CEMENT V. CA 120 SCRA 930

Facts: Atty. Laquihon, in behalf of Pacweld Steel Corp., filed a pleading addressed to the defendant
Mindanao Portland Cement Corp. (MPCC) entitled ‘Motion To Direct Payment Of Attoney’s Fees To
Himself”, invoking that MPCC, in a court decision, was adjudged to pay Pacweld the sum of P10K as
attorney’s fees. MPCC filed an opposition stating that it has been set-off by a like sum of P10K which
MPCC has in its favor from Pacweld by way of attorney’s fees which MPCC recovered in a different case.

Issue: W/N legal compensation may take place

Ruling: Both corporations were creditors and debtors of each other arising from final and executory
judgments in different cases. The two obligations respectively offset each other, compensation having taken
place by operation of law pursuant to Arts. 1278, 1279, and 1290 of the Civil Code.

UY TONG V. SILVA 132 SCRA 448

Facts: Uy Tong was indebted to Lopez in the amount of P100,575. Lopez, in turn, is indebted to Uy
Tong for rentals of a building from February 28, 1955 to June 16, 1961. However, Uy Tong filed a petition
for voluntary insolvency proceedings on 25 May 1955.

Issue: W/N compensation of the rentals due in favor of the insolvent before and after the filing of
the insolvency proceedings may be compensated with the debt of the insolvent.

Ruling: Compensation may take effect only with regard to the rentals due before the bankruptcy because
applying Article 1279, the 5th requisite is “that over neither of them there be any retention or controversy,
commenced by third persons xxx”. Thus, compensation is limited to the rentals due in favor of the bankrupt
Uy Tong from 28 February to 25 May (the date of the filing of the petition for voluntary insolvency), and
not the whole amount because to allow full compensation would be to give undue preference to Lopez over
the other creditors of Uy Tong.

EGV REALTY DEVELOPMENT V. CA 310 SCRA 657

Facts: EGV is the owner of a condominium. Cistina Condominium Corporation (CCC) is in charge of
managing, maintaining and administering the common areas and providing security of the said property.
Unisphere is an occupant of the unit thereof. On two occassions, Unisphere alledged that robbery has taken
place and the total value of the items lost amounted to P12,295. Unisphere demanded reimbursement from
CCC but the latter denied liability since, it alleged, that the goods lost are not owned by Unisphere but by
Amtrade. Unisphere withheld payment of rental installments. EGV issued deed of absolute sale but the
corresponding title thereto was annotated with the unpaid balance which Unisphere withheld from CCC.

Issue: W/N set-off or legal compensation has taken place

Ruling: Compensation may take effect when two persons are creditors and debtors of each other. A
distinction must be made between a debt and a mere claim. A debt is a claim which has been formally
passed upon by the highest authority to which it can, in law, be submitted and has been declared to be a
debt. A claim, on the other hand, is a debt in embryo. It is mere evidence of a debt and must pass through
the process prescribed by law before it develops into what is properly called a debt.

103
 It is undisputed that Unisphere is indebted to EGV, while the latter does not admit of
responsibility. At best, what Unisphere has is a just claim and not a debt. Under Art 1279, one requisite for
legal compensation is “that they be liquidated and demandable”. Hence, in the instant case, compensation
may not take effect.

BPI V. CA 232 SCRA 302

Facts: Eastern Plywood Corp. (Eastern) and Lim, an officer and stockholder of Eastern, held one joint
bank account (and/or account) with CBTC, predecessor-in-interest of BPI. Subsequently, Lim and Velasco
opened a joint account (“and” account) with funds withdrawn from the account of Eastern and/or Lim
account. Velasco died and a case for settlement for his estate was filed. On 9 September 1986, the court
authorized the heirs of Velasco to withdraw the balance of P331,261.44 after the withdrawal of Lim of half
of the amount of the Lim and Velasco joint account
Meanwhile, on 18 August 1978, Eastern obtained a loan of P73,000. This loan was subjected to a
“holdout agreement” on the joint account of Lim and Velasco as a security for the loan, which CBTC
accepted. Sometime in 1980, CBTC merged with BPI and on 1987 BPI filed a case demanding payment of
the loan. Eastern, on the other hand, filed a counterclaim for the return of the balance of the joint account
after deducting the amount of the loan. The trial court ruled, and was affirmed by the CA, that it was the
duty of BPI to set-off the loan in accordance with the holdout agreement. With regard to the counterclaim,
the TC denied it since there is already a decision in the intestate court authorizing the withdrawal by the
heirs of Velasco and to do so (meaning to grant the counterclaim) would disturb the intestate court’s ruling
as the heirs have already withdrawn the money. CA, however, reversed and granted the counterclaim
saying that as they were not privy to the intestate case, the counterclaim can be granted.

Issue: W/N BPI can demand payment of the loan despite the existence of the Holdout Agreement

Ruling: Yes. What the agreement conferred on CBTC (later BPI) was a power and not a duty. To apply the
deposit to the payment of the loan is a privilege, a right to set-off which the bank has option to exercise.
The bank is not precluded from demanding payment. BPI had opted not to exercise the right to apply part
of the deposit subject to the Holdout Agreement. With respect to the counterclaim, the SC ruled that BPI
should still pay because they knew that the real owner is Eastern and not Lim and Velasco. Also, the order
of the intestate court was only authorization not judicial compulsion to release to the heirs half the amount
of the joint account.

CAN A STOCKHOLDER’S DEBT BE COMPENSATED WITH THE VALUE OF HIS SHARES

THEREIN?
NO. There being no relation of debtor and creditor with regard to such shares. (Garcia v. Lim Chu
Sing, 59 Phil 562)
But a party’s debt to the corporation as treasurer is compensable with his credit against the
corporation. (Brima v. Goldenberg, 69 Phil 502)

CAN A BANK SET-OFF A DEPOSIT IN ITS HANDS TO EXTINGUISH THE INDEBTEDNESS OF

ITS DEPOSITOR?
YES. The relation between the bank and depositor being that of a creditor and debtor. (Gullas v.
PNB, 62 Phil 519)
Art. 1980 of the Civil Code expressly rules that bank deposits are regarded as loans (to the bank)

NOTE: Credits or debts of a person as guardian, agent or trustee are not debtors or creditors in his
own right.

Art. 1280. Notwithstanding the provisions of the preceding article, the guarantor may set up
compensation as regards what the creditor may own the principal debtor.

CAN A GUARANTOR SET UP COMPENSATION?

104
 YES. In case the payment is demanded from him, the guarantor may set up compensation, not
only for what such creditor owes him, but also for what such creditor owes the principal debtor.

NOTE: This is an exception to the rule stated in Art. 1279 (1), in relation to Art. 1278.

Art. 1281. Compensation may be total or partial. When the two debts are of the same
amount, there is total compensation.

WHAT IS THE EXTENT OF COMPENSATION?

(1) Total – If the debts are of the same amount (Art. 1281)
(2) Partial – When debts to be compensated are not equal in amount.

CAN COMPENSATION TAKE PLACE IF BOTH DEBTS ARE NOT EQUAL?

YES. It extinguishes both debts on the concurrent amount.

Art. 1282. The parties may agree upon the compensation of debts which are not yet due.

CAN THERE BE COMPENSATION, EVEN IF BOTH DEBTS ARE NOT YET DUE?
YES. If by agreement of the parties. This is an example of what is known as voluntary
compensation.

Art. 1283. If one of the parties to a suit over an obligation has a claim for damages against
the other, the former may set it off by proving his right to said damages and the amount
thereof.

CAN A PARTY TO A SUIT OVER AN OBLIGATION WHO HAS A CLAIM FOR DAMAGES
AGAINST THE OTHER SET UP COMPENSATION AGAINST THE LATTER?
YES. In reality what is set off against the other party is the counterclaim. The counterclaim must
be pleaded to be effectual.

NOTE: When the defendant who has an unliquidated claim for damages against the plaintiff sets if
off by proving his right to said damages and the amount thereof, it is controverted into a liquidated
claim by court decree, in which case compensation shall take effect from the moment the
judgment liquidating the claim has become final.

Art. 1284. When one or both debts are rescissible or voidable, they may be compensated
against each other before they are judicially rescinded or voided.

WHAT IS THE RULE IN CASE OF RESCISSIBLE OR VOIDABLE DEBTS?

They may be compensated against each other before they are judicially rescinded or avoided.

Art. 1285. The debtor who has consented to the assignment of rights made by a creditor in
favor of a third person, cannot set up against the assignee the compensation which would
pertain to him against the assignor, unless the assignor was notified by the debtor at the
time he gave his consent, that he reserved his right to the compensation.
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.
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.

WHAT IS THE EFFECT OF AN ASSIGNMENT OF THE OBLIGATIONS TO A STRANGER?

105
 (1) If compensation has taken place:
If the assignment is made AFTER both debts has become due and the other requisites of Art.
1279 concur, the assignment is ineffective, both debts having been previously extinguished by
compensation.
(2) When compensation has NOT taken place:
(a) With consent of debtor
If the debtor consented to the assignment by his creditor in favor of a third person, the
debtor cannot set up (is estopped) against the assignee, the compensation which would
pertain to him (the debtor) against the assignor; unless the assignor was notified by the
debtor at the time the debtor gave his consent, that he (the debtor) reserved his right to
compensation.
(b) With knowledge, but without the consent of debtor.
The debtor may set up compensation of debts (maturing) previous to the cession but not
of subsequent ones.
(c) Without the knowledge of the debtor
The debtor may set up compensation of all credits (maturing) prior to the assignment and
also later ones until he had knowledge of the assignment (even creditors against the
assignor maturing after the assignment but before the debtor learned of it.)

Illustration:
A owes B, the latter assigns the credit to X obligation 1
B owes A obligation 2

CAN YOU HAVE COMPENSATION IN THE ABOVE CASE?

If B assigns his credit to X after both debts became due, the assignment is ineffective because both
debts are already extinguished.
If A gives his consent to the assignment of credit, he waives his right to compensation.
If A gives his consent to the assignment of credit, but makes a reservation as to his right to
compensation, he can enforce the compensation.

NOTE: The most important point to consider is the time the assignment was made.
Any assignment which takes place AFTER the knowledge of the debtor, is binding and bars
compensation.
Any assignment which takes place BEFORE the knowledge of the debtor, still gives the debtor the
right to claim compensation.

Date of cession: February 12, 2003

R owes S, the latter assigns the credit to Y obligation 1
S owes R obligation 2

WHAT WILL HAPPEN IF S COMMUNICATED THE CESSION TO R?

If R did not consent to the cession, R may set up compensation previous to Feb 12, 2003, but not
to debts after Feb 12,2003. But if R consented he may not set up compensation before and after the cession.

WHAT IF THE CESSION TO Y WAS NOT COMMUNICATED TO R?

R may set up compensation of all credits prior to an after the cession until he had knowledge of
the cession.

NOTE: The assignment does not affect the right of R until such time that he is informed.

REASON FOR ART. 1285?

To prevent one party from being fraudulently deprived of the benefits of compensation. (Manresa)

PEREZ V. CA 127 SCRA 636

Facts:

106
 CONGENERIC is a corporation engaged in “money market” operations.
On 8 May 1974, CONGENERIC issued a promissory note (Bill 1298) amounting to P111,973.58
to Ramon C. MOJICA. The promissory note was to mature on 6 August 1974.
On 15 May 1974, CONGENERIC issued another bearer promissory note (Bill 1419) for the sum
of P208,666.67, also in favor of MOJICA. The promissory note was to mature on 13 August 1974.
On 5 June 1974, MEVER Films borrowed P500K from CONGENERIC. It issued in favor of
CONGENERIC a negotiable promissory note (NCI-0352) to mature on 5 August 1974.
On 3 July 1974, CONGENERIC received from Perez P200K and issued to the latter a
confirmation of sale (CS-0366). Under the terms of CS-0366, Perez was to be paid P203,483.33 on 5
August 1974, CONGENERIC would make collection on behalf of PEREZ, and ALL OF CONGENERIC’S
INTEREST IN NCI-0352 WAS BEING TRANSFERRED TO PEREZ.
On 5 August 1974, MEVER paid P100K to CONGENERIC on account of NCI-0352.
Also, on 5 August 1974, CONGENERIC paid Perez the sum of P103,483.33, the P3,483.33
coming from its own funds.
On 6 August 1974, CONGENERIC paid MOJICA the interest due Bill 1298, the principal being
rolled-over to mature on 4 October 1974. The roll-over was annotated on the original of Bill 1298.
On 13 August 1974, CONGENERIC paid MOJICA the interest due on Bill 1419, the principal
being rolled-over to mature on 11 October 1974. The roll-over was annotated on Bill 1419.
ON 9 SEPTEMBER 1974, MOJICA ASSIGNED BILL 1298 AND BILL 1419 TO MEVER
THROUGH A NOTARIZED DEED.
On 3 October 1974, MEVER surrendered the originals of BILL 1298 AND BILL 1419 to
CONGENERIC, and asked the latter to compute the balance of the account of MEVER with
CONGENERIC, taking into account the amount of the two bills, which balance MEVER would pay.
On 7 October 1974, MEVER was served with garnishment in two collection cases filed against
CONGENERIC by two of its creditors.
On 7 the same date, CONGENERIC advised MEVER by telephone that of the original amount of
P500K of NCI-0352, the sum of P200K was sold on July 3, 1974 to a third party, but not naming PEREZ as
the third party.

Issue: Should Article 1626 of the Civil Code, which refers to a debtor who pays his creditor before
knowledge of an assignment, be applied, or was there compensation rather than payment.

Ruling. No Compensation. Since on the respective dates of maturity, specifically August 6, 1974 and
August 13, 1974, Ramon Mojica was still the holder of those bills, it can be safely assumed that it was he
who had asked for the roll-overs on the said dates. MEVER was bound by the roll-overs since the
assignment to it was made only on September 9, 1974. The enivitable result of the roll-overs of the
principals was that Bill No. 1298 and Bill No. 1419 were NOT YET DUE AND DEMANDABLE AS OF
THEIR DATE OF ASSIGNMENT BY MOJICA TO MEVER ON SEPTEMBER 9, 1974 NOR AS OF
OCTOBER 3, 1974 WHEN MEVER SURRENDERED SAID BILL TO CONGENERIC. As a
consequence, no legal compensation could have taken place because, for it to exist, the two debts, among
other requisites, must be due and demandable.
The SC found no apllicability of Article 1285, 3 rd parargraph of the Civil Code. Rather it is the
first paragraph of the same legal provision that is applicable.

CAN COMPENSATION BE WAIVED?

YES. At the time the obligation is incurred or later since its waiver is not contrary to public policy
but the waiver must be agreed to.
For example, Cy owes Ferdie P5,600. Paul is the guarantor of Cy. Ferdie owes Cy P600. If Ferdie
sues Cy and Cy cannot pay, how much will Paul be liable?
Paul will only be liable for P5,000 because he can set up the P600 credit of Cy as the basis for
partial compensation.

ARE TAXES SUBJECT TO COMPENSATION?

FRANCIA V. IAC 167 SCRA 636

107
Facts: Francia is owner of the subject land and a two-storey house built on it. On 15 October 1977, 125
sqm portion of Francia’s property was expropriated for the sum of P4,116. Since 1963 up to 1977, Francia
failed to pay his real estate taxes. Thus, on 5 December 1977, his property was sold at a public auction in
order to satisfy a tax delinquency of P2,400.
Ho Fernandez was the highest bidder for the property. Francia was not present during the auction
sale. Francia discovered that a Final Bill of Sale had been issued in favor of Ho Fernandez on 11 December
1978. On 20 March 1979, Francia filed a complaint to annul the auction sale.

Issue: W/N the supposed tax delinquency of P2,400 was set-off by the amount of P4,116 which the
Government owes Francia.

Ruling: No. By legal compensation, obligations of persons, who in their own right are reciprocally debtors
and creditors of each other, are extinguished. The following requisites, (1) and (3), for legal compensation
are absent in the instant case: (1) that each one of the obligors be bound principally and that he be at the
same time a principal creditor of the other; 3) that the two debts be due.
There can be no off-setting of taxes against the claims that the taxpayer may have against the
government. A person cannot refuse to pay a tax on the ground that the government owes him an amount
equal to or greater than the tax being collected. The collection of a tax cannot await the results of a lawsuit
against the government.
Taxes are not in the nature of contracts between the parties, but grow out of duty to, and are
positive acts of the government the making and enforcing of which, necessitates not the personal consenbt
of individual taxpayers. A claim for taxes is not such a debt, demand, contract or judgment that may be set-
off.
Moreover, the tax was due to the city government while the expropriation was effected by the
national government. Also, the amount of P4,116 paid by the national government for the 125 sqm lot was
deposited with the PNB long before the sale at a public auction of his remaining property. Notice of the
deposit dated 28 September 1977 was received by the petitioner on 30 September 1977. The latter admitted
in his testimony that he knew about the P4,166 amount deposited but he did not withdraw the same. It
would have been an easy matter to withdraw from PNB so that he could pay the tax obligation, thus
aborting the sale at a public auction.

Art. 1286. Compensation takes place by operation of law, even though the debts may be
payable at different places, but there shall be an indemnity for expenses of exchange or
transportation to the place of the payment.

CAN COMPENSATION TAKE PLACE IF THE DEBTS ARE PAYABLE AT DIFFERENT PLACES?
YES. But there shall be an indemnity for expenses of exchange or transportation to the place of
payment.

Art. 1287. Compensation shall not be proper when one of the debtors arises from a
depositum or from the obligations 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 par. 2 of Art. 301.

Art. 1288. Neither shall there be compensation if one of the debts consists in civil liability
arising from a penal offense.

WHAT ARE THE DEBTS OR OBLIGATIONS WHICH ARE NOT SUSCEPTIBLE OF LEGAL
COMPENSATION?
(1) Debts arising from contracts of depositum;
(2) Debts arising from contracts of commodatum;
(3) Claims for support due by gratuitous title;
(4) Obligations arising from criminal offenses; and
(5) Certain obligations in favor of the government.

108
 For example, taxes, fees, duties and other similar form.

Art. 1289. If a person should have against him several debts which are susceptible of
compensation, the rules on the application of payments shall apply to the order of the
compensation.

CAN COMPENSATION TAKE PLACE IF THERE ARE SEVERAL DEBTS AGAINST A DEBTOR
WHICH ARE SUSCEPTIBLE TO COMPENSATION?
YES. The rules on application of payment shall apply to the order of compensation.

Art. 1290. When all the requisites mentioned in Art. 1279 are present, compensation takes
effect by operation of law, and extinguishes both debts due to the concurrent amount, even
though the creditors and debtors are not aware of the compensation.

Sec. 6. – Novation

Art. 1291. Obligations may be modified by:

(1) Changing their object or principal conditions;
(2) Substituting the person of the debtor;
(3) Subrogating a third person in the rights of the creditor

WHAT IS NOVATION?
Novation is understood as the substitution or change of an obligation by another, which
extinguishes or modifies the first.

HOW MAY OBLIGATIONS BE MODIFIED BY NOVATION?

Art. 1291 provides that “Obligations may be modified by:
(1) Changing their object or principal conditions;
(2) Substituting the person of the debtor;
(3) Subrogating a third person in the rights of the creditor.

WHAT ARE THE KINDS OF NOVATION ACCORDING TO ITS PURPOSE OR OBJECT?

(1) REAL or OBJECTIVE. This is a change in the object or principal conditions of the
obligation. (Art. 1291[1])
For example, Cy agreed to deliver to Ferdie a car. Later, they entered into another contract
whereby instead of Cy delivering a car, he would deliver 10 air conditioners. The obligation
to deliver a car is extinguished by the obligation to deliver the air conditioners. This is real
novation since the object of the obligation, the car, was changed.
If a contract of pledge is changed into a dacion en pago, this would be a real novation, as this
change in the cause.
If the novation involves the terms, there is a true novation; but if the change is one on same
incidental points, there is only MODIFICATORY novation. Here you have to pick out the
principal and accidental conditions, the former being that which moved the parties to enter
into agreement. But as a general rule, the following applies:
(a) If the period is extended, it is merely MODIFICATORY
(b) If the period is shortened, it is EXTINCTIVE.
(c) If there is change in the rate of interest, MODIFICATORY.
(d) If there is a change in amount, MODIFICATORY.
(e) If there is a change in manner of payment (i.e. from full to installment),
MODIFICATORY.
(2) PERSONAL AND SUBJECTIVE NOVATION. There is a change in the parties, either the
creditor or the debtor (Art. 1291[2] and [3])
(a) Substitution of the person of the debtor (Art. 1291 [2])

109
 There is EXPROMISION when the initiative for change does not emanate from the
debtor and may be made even without his knowledge, since it consists in a third person
assuming the obligation. It logically requires the consent of the third person and the
creditor.
For example, Cy is indebted to Angelo in the amount of P1,000. Ferdie, a third person,
goes to Angelo and requests that he be made the debtor instead of Cy. If Angelo accepts
Ferdie in place of Cy, then a substitution of debtor by expromision takes place and the
obligation of Cy to Angelo extinguished and a ner own (The obligation of Ferdie to
Angelo) is created. The consent of Angelo to the substitution even if made without the
knowledge and consent of Cy is necessary because Ferdie, the third person may not be
reliable or solvent.

There is DELEGACION when the debtor offers and the creditor accepts a third party
who consent to the substitution, so that the consent of there three is necessary. Note that
delegation notably differs from the mere indication made by the debtor that a third person
shall pay the debt.

For example, Cy obliged himself to deliver to Paul ten sacks of first class sugar.
Subsequently, Cy brought to Paul, his friend Mark and proposed to Paul that Mark take
her place as obligor as the latter was willing to undertake the delivery of the ten sacks of
first class sugar. If Paul agreed to the proposal of Cy, then Cy’s obligation was
extinguished and a substitution of debtor by delegacion took place. In this kind of
novation, the consent of the three parties is necessary.

(b) Subrogating a third person in the rights of the creditor. (Art. 1291[3]) may be LEGAL or
CONVENTIONAL subrogation.

If after the constitution of the above obligation both parties agree that Angel will
substitute for Cy or that Jay will be subrogated in the rights of Angelo, there is personal
novation as the changes are in the persons of the debtor or the creditor (the air con
example)

(3) MIXED. This is a change in the object and the parties.

For example, if all of them decided that Angel will deliver to Jay the 10 airconditioners,
instead of Cy delivering a car to Angelo, there is mixed novation, because the object of the
obligation and the creditor are changed. (Still not done with the air con)

WHAT ARE THE KINDS OF NOVATION ACCORDING TO ITS EFFECT?

(1) TOTAL or EXTINCTIVE NOVATION. The old obligation is extinguished by the new
obligation.
(2) PARTIAL or MODIFICATORY. The old obligation here is merely modified thus still
remains in force except insofar as it has been modified. Should there by any doubt as to
whether the novation is total or partial, it shall be presumed to be merely modificatory.

Art. 1292. In order that an obligation may be extinguished by another which substitute the
same, it is imperative that it be so declared in unequivocal terms, or that the old and new
obligations be on every point incompatible with each other.

WHAT ARE THE OTHER KINDS OF NOVATION ACCORDING TO ITS FORM OF ITS
CONSTITUTION?
(1) EXPRESS. The parties declare that the old obligation is extinguished and the new one is to
take its place.
For example, “P’re ipalit na lang natin ‘tong ibibigay mong chongks para d’un sa
pagkakautang mong bagoong. Oks ba? – Syur p’re. Basta ikaw.”

110
 (2) IMPLIED. It takes place when there is no express agreement between the parties. They
similar enter into a new obligation which is essentially incompatible with the old and
irreconcilably different from the old obligation. (Art. 1292—last phrase)

WHAT IS THE RULE REGARDING THE PRESUMPTION OF THE EXISTENCE OF NOVATION?

Novation is never presumed. It must be clearly and unmistakably established either by the express
agreement of the parties or acts of equivalent import or by the incompatibility of the two obligations with
each other in every material aspect.

WHAT IS THE TEST REGARDING THE INCOMPATIBILITY BETWEEN TWO OBLIGATIONS OR

CONTRACTS?
The test is whether they can stand together, each one having an independent existence. If they
cannot, they are incompatible and the subsequent obligation novates the first. Upon the novation, the
former obligation loses all its force and effect only the new obligation can be enforced.

WHAT ARE EXAMPLES OF IMPLIED NOVATION?

(a) Cy owed the the sums of P500 and P3,000 upon two overdue promissory notes. These
obligations were included in a new instrument under which Cy is obligated to pay P3,500 on a
specified future date. The latter obligation novated the former debts because both were
merged into a new obligation under new terms and conditions. The former cannot legally exist
with the latter, thus incompatibility.
(b) The duration if a right of way given to Cy as one of the principal conditions of two contracts
of different dates. The second contract reduced the stipulated duration in the first. Obviously,
these cannot exist at the same time. The second agreement has effectively novated the first.

FORTUNE MOTORS V. CA 267 SCRA 653

Facts: Chua and Rodrigueza entered into a surety undertaking with Filinvest. Under the undertaking,
Chua and Rodrigueza are solidarily bound for all obligations of Fortune Motors. Meanwhile, an
Automotive Wholesale and Financing Agreement (“Financing Agreement”) was entere into by Carco,
Fortune Motors and Filinvest. Under such agreement, Carco will deliver motor vehicles to fortune for
resale; Fortune will thereafter issue trust receipts after delivery. It will also have to assign receipts and
invoices to Filinvest, will execute trust receipts over vehicles in favor of Filinvest, and will remit and report
proceeds of sale without necessity of demand to Filinvest. If there will be unsold vehicles, they shall be
turned-over to Filinvest.
Fortune failed to remit some of the proceeds. It also failed to turn-over several unsold vehicles to
Filinvest covered by the trust receipts. Filinvest sent demand letters to Fortune, Chua and Rodrigueza.

Issue: W/N there was novation

Ruling: None. The Financing Agreement did not contain onerous obligations not contemplated in the
surety undertakings, thus changing the principal terms therof and effecting a novation.
The test of incompatibility is whether the two obligations can stand together, each one having its
independent existence. If they cannot, they are incompatible and the latter novates the first. Novation must
be established either by the express terms of the new agreement or by the acts of the parties clearly
demonstrating the intent to dissolve the old obligation as a consideration for the emergence of the new one.
The will to novate, whether totally or partially, must appear by express agreement of the parties, or by their
acts which are too clear and unequivocal to be mistaken.
Under the Surety Undertakings, there were no qualifications, conditions or reservations stated
therein as to the extent of the suretyship but mere solidary guarantee of payment by Chua and Rodrigueza.
The Financing Agreement, on the other hand, merely detailed the obligations of Fortune to Carco
(succeeded by Filinvest as assignee). The allegation of novation is, therefore, misplaced. There is no
incompatibility of obligations to speak of in the two contracts. They can stand together without conflict.
Furthermore, the parties have not performed any explicit and unequivocal act to manifest their
agreement or intention to novate their contratc. Neither did the sureties object to the Financing Agreement
nor try to avoid liability thereunder at the time of its execution.

111
RILLO V. CA 274 SCRA 461

Facts: Rillo entered into a contract to sell with Corb Realty. The subject of such contract is the sale of a
condominium unit at P150K with the following condition: (1) half of the amount shall be paid upon
contract execution, (2) half will be paid in 12 monthly installments, (3) forfeiture clause: payments shall be
forfeited upon 3-4 times default in payment of installments. Rillo defaulted. Corb Realty informed Rillo
thru a letter that it is cancelling the contract, and expressed willingness to return Rillo’s money.
Cancellation did not take place. Therafter, Rillo paid 6K. Rillo defaulted for the 4 th time. Thus, Corb Realty
informed Rillo that it was rescinding the contract.
A compromise agreement was entered into by the parties where the balance of Rillo was fixed
down to P50K; other terms of payment were also agreed upon including the monthly installments of P20K.
Rillo defaulted again.

Issue: W/N there was novation thru the compromise agreement

Ruling: No. Art. 1292 of the Civil Code provides that “ In order that an obligation may be extinguished by
another which substitutes the same, it is imperative that it be so declared in unequivocal terms, or that the
old and new obligations be on every point incompatible with each other.” Novation is never presumed.
Parties to a contract must expressly agree that they are abrogating their old contract in favor of a new one.
In the absence of an express agreement, novation takes place only when the old and the new obligations are
incompatible on every point.
In the case at bar, the parties execute their “compromise agreement” precisely to give life to their
“Contact to Sell”. It merely clarified the total sum owed by petitioner Rillo to private respondent Corb
Realty with the view that the former would find it easier to comply with his obligations under the Contract
to Sell. In fine the “compromise agreement” can stand together with the Contract to Sell.

ESPINA V. CA 334 SCRA 186

Facts: Diaz is a lessee of the condo unit owned by Espina. Later, they executed a Provisional Deed of
Sale, whereby Espina sold to Diaz the said condo unit for P100K to be paid upon the execution of the
contract and the balance to be paid through PCI bank postdated checks.
Diaz informed Espina, through a letter, that his checking account in PCI bank has been closed and
a new one was opened for practical purposes in the same bank. The wife of Diaz paid Espina a partial
payment for the condo unit. Espina sent a “Notice of Cancellation” of the Provisional Deed of Sale.
However, Espina still accepted the payment from Diaz per Metrobank check. Espina filed a complaint for
unlawful detainer.

Issue: W/N the “Provisional Deed of Sale” novated the existing contract of lease

Ruling: No. Novation must clearly be proved since its existence is not presumed. It must be proven as a
fact either by express stipulation of the parties or by implication derived from an irreconcilable
incompatibility between old and new obligations or contracts. Novation only takes place only if the parties
expressly so provide, otherwise the original contract remains in force. Where ther is no clear agreement to
create a new contract in place of existing one, novation cannot be presumed to exist, unless the terms of the
new contract are fully incompatible with the former agreement on every point. Thus, a deed of cession of
the right to repurchase a piece of land does not supersede a contract of lease over the same property.
The contention of Diaz that the subsequent acceptance of payment withdrew the cancellation of
provisonal sale, SC did not agree. Unless the application of payment is expressly indicated, the payment
shall be applied to the obligation most onerous to the debtor. In this case, the unpaid rentals constituted the
more onerous obligation of Diaz to Espina. As the payment did not fully settle the unpaid rentals, Espina’s
cause of action for ejectment survives.

COCHINGYAN, JR. V. R & B SURETY AND INSURANCE CO., INC. 151 SCRA 339

112
Facts: PAGRICO applied for and was granted an increase in its line of credit from P400K to P800K with
the PNB. As an undertaking, PAGRICO submitted a surety bond issued by R & B Surety and Insurance
Co., Inc. in favor of PNB. Under the terms of the surety bond, PAGRICO and R&B bound themselves
jointly and severally to comply with the “terms and conditions of the advance line of credit established by
the PNB. PNB had the right under the Surety Bond to proceed directly against R & B Surety.
In consideration of R&B Surety’s issuance of the surety bond, two indemnity agreements were
entered into with R&B Surety: (a) one agreement executed by CCM and by petitioner Cochingyam, the
latter signed not only as President of CCM but also in personal and individual capacity; and (b) another
agreement executed by PAGRICO, PACOCO, Jose Villanueva and Liu Tua Beh; Villanueva signed both as
Manager of PAGRICO and in his personal capacity, Mr Liu signed as President of PACOCO and in his
personal capacity. Under both indemnity agreements, the indemnitors bound themselves jointly and
severally to pay R&B Surety an annual premium until the surety ond is discharged.
Meanwhile, a Trust Agreement was executed by Cochingyan, as Trustor, Baesa, a PNB official as
Trustee and PNB as beneficiary. The Trust Agreement provided, among others, that the Trustor guaranteed
the bond issued by R&B Surety amounting to P400K at the instance of PAGRICO, and the bond issued by
CONSOLACION insurance in the amount of P900K at the instance of PACOCO, all in favor of PNB as the
beneficiary.

Issue: W/N the Trust Agreement had extinguished by novation, the obligation of R&B Surety to
the PNB under the Surety Bond which, inturn extinguished the obligations of the petitioners
Cochingyam and Villanueva under the Indemnity Agreement.

Ruling: No. It is at once evident that the Trust Agreement does not expressly terminate the obligation of
R&B Surety under the Surety Bond. On the contrary, the Trust Agreement expressly provides for the
continuing subsistence of that obligation by stipulating “the Trust Agreemnt shall not in any manner release
R&B Surety from the obligation uinder the Surety Bond”.
What the trust agreement did was, at most, merely to bring in another person or persons—the
Trustor—to assume the same obligation that R&B Surety was bound to perform under the Surety Bond. It
is not unusual in business for a stranger to a contract to assume obligations thereunder; a contract of
suretyship or guarantee is the classical example. The precise legal effect is the increase of the number of
persons liable to the obligee, and not the extinguishment of the liability of the first debtor.
Under the Trust Agreement, the Trustor also became directly liable to PNB. So far as the PNB was
concerned, the effect of the Trust Agreement was that where there had been only two, there would now be
three obligors directly and solidarily bound in favor of the PNB: PAGRICO, R&B Surety and the Trustor.

PEOPLE’S BANK AND TRUST CO. V. SYVEL’S INC. 164 SCRA 247

Facts: Syvel’s made a chattel mortgage in favor of People’s Bank and Trust Company (PBTC) for a
credit line of P900K. This was to expire on May 20, 1966. One year earlier, the Syyaps made advances in
the form of promissory notes from Syvel’s, which were taken from the P900K credit line. At the same time,
the Syyaps signed a document that guaranteed that they would pay any indebtedness of Syvel’s that would
result from the P900K credit line. Afterwards, Syvel’s was not able to pay PBTC. So, PBTC started to
extrajudicially foreclose the chattel mortgage. But this forclosure did not push through because the parties
tried to have an amicable settlement. However, no payment was made so PBTC filed the casein the CFI of
Manila.
PBTC accused Syvel’s of disposing of its assets in fraud of creditors. Because of this, the court
issued a writ of preliminary attachment and Syvel’s made a counterclaim for damages. After this, Antonio
Syyap initiated the second round of talks with PBTC. Here, he offered to mortgage his own real estate in
Bacoor, Cavite so that he would maintain his goodwill with Syvel’s. Because of this mortgage, PBTC
moved to have the case be dismissed. Syvel’s would not agree to it since PBTC’s moton to dismiss meant
that Syvel’s counterclaim would be dropped. Syvel’s made its own motion to dismiss on the ground that the
real estate mortgage of Antonio Syyap novated the original Chattel Mortgage. However, this was dismissed
and so the trial continued.
Syvel’s and Syyaps appealed to the SC. They claimed that the Chattel Mortgage was novated by
the real estate mortgage executed between Antonio Syyap and PBTC.

113
Issue: W/N the real estate mortgage novated the chattel mortgage

Ruling: No. There is no novation. Novation takes place when the object or principal condition of an
obligation is changed or altered. It is elementary that novation is never presumed. It must be explicitly
stated or there must be a manifest incompatibility between the old and the new obligation in every aspect.
The real estate mortgage did not state anything that showed that the parties intended to novate the
original chattel mortgage. There was no explicit novation. There was also no incompatibility on every point
between the “old and the “new” agreements as the real estate mortgage even stated that it was only an
additional security to the chattel mortgage.

WHAT ARE THE REQUISITES OF A VALID NOVATION?

(1) An old, previous obligation which must be valid, and not yet extinguished.
If you do not have a valid existing obligation, that is a VOID obligation, there would be
nothing to novate in the first place. The creatgion of the new obligation then is not novation
but simply the constitution of the new obligation.

For example, Cy agreed to deliver to Ferdie a tin of chongks. (Legal talaga chongks, organic
naman eh.) Later on, the object was changed to P50,000. The novation is void because the
original obligation is void.

If the obligation is VOIDABLE, novation is still possible as long as the obligation has not yet
been annulled. There is no need to ratify the old obligation, but defenses which may have
been raised under the old obligation may also be raised in the new obligation.
But if the creditor is the one entitled to annulment of the old obligation and all other
requirements are present, the creditor can avail of defenses only if at the time second
obligation, it would amount to ratification of the old obligation on his part so there can be no
novation.

For example, Cy was induced through fraud by Ivy to sign a contract whereby the former was
obliged to be hers. (valid na rin dapat to.) Subsequently, it was agreed that Cy would give her
George instead of him. The original obligation is voidable only. As it has not yet been
annulled at the instance of Cy. The second contract is valid. On the other hand, if Cy
confirmed to deliver George in entirety, the ratification will cleanse the old contract from all
the defects and makes it valid, making the novation, valid as well.

NOTE: There is a difference when the annulment may be claimed by debtor or the creditor
because in every case of novation, creditor’s consent is necessary, whereas the debtor’s
consent is not required in expromision.

For example, an agent without authority from his principal, bought merchandise from a
company. Shortly after he had learned of his agent’s acts, the principal told the seller to
deliver another kind of merchandise, completely different from the first. The seller agreed.
Although the first contact was unauthorized, ratification by the principal has cured the defects
and therefore, the second contract is valid.

If the obligation has PRESCRIBED, there may still be a VALID novation as there is still a
valid obligation, a natural obligation. Furthermore, prescription is only a matter defense,
therefore, it can be waived.

(2) The new obligation must be valid.

If the new obligation is void, the old obligation subsists, EXCEPT if the parties agreed that
the old obligation is nonetheless extinguished.
If the new obligation is subject to a suspensive condition, and the condition does not
materialize, such new obligation never became valid or effective, so no novation has resulted.
EXCEPT, if the parties agree otherwise.

114
INTEGRATED CONSTRUCTION SERVICES, INC.V. RELOVA 146 SCRA 360

Facts: Petitioner sued respondenrt MWSS for breach of contract in CFI of Manila. Meanwhile, the
parties submitted the case to arbitration. The Arbitration Board rendered a decision-award which was
confirmed by the Judge, and the same has long become final and executory.
In a letter-agreement, petitioner agreed to give MWSS some discounts provided MWSS would
pay the judgment award within fifteen (15) days or up to October 17, 1972. Upon the request of MWSS,
petitioner extended the period to pay the judgment award up to October 31, 1972. MWSS, however, paid
only on December 22, 1972, the amount stated in the decision but less the reductions provided for in the
agreement.

Issue: W/N the judgment award was novated by the letter-agreement

Ruling: No. While the tenor of the subsequent letter-agreement in a sense novates the judgment award
there being a shortening of the period within which to pay, the suspensive and conditional nature of the said
agreement (making the novation conditional) is expressly acknowledged and stipulated in the 14 th whereas
clause of MWSS Resolution No. 132-72.
MWSS’ failure to pay within the stipulated period removed the very cause and reason for the
agreement, rendering some ineffective. Petitioners, therefore, were remitted to their original rights under
the judgment award.

(3) Intention of the parties to abandon the obligation..

This intention may be expressed or implied. Expressly stated, the parties expressly agree and
state clearly their intention. Impliedly stated, when the two obligation are patently
inconsistent.

GONI V CA 144 SCRA 222

Facts: In 1949, Praxedes Villanueva negotiated with TABACALERA to buy 3 haciendas. Since he was
not rich enough to pay for them all, he offered to sell Hacienda Sarria to Santiago Villegas with Gaspar
Vicente as the guarantor for Villegas (the guantee was put in writing as “Escritura de Traspaso de Cuenta”).
Afterwards, Villanueva promised to sell to Vicente fields nos. 3, 4 and 13 of Hacienda Dulce Nombre de
Maria for the sum of P13,807 (either because Villanueva still neede more cash or as a thank you to Villegas
for being a nice guarantor). This was put into writing and was signed by Goni as attorney-in-fact of
Villanueva.
Vicente then told TABACALERA to debit from his account the amount of P13,807 as payment
for the balance of the purchase price. However, only P12,460.24 was debited since the difference was
supposedly already paid by Vicente to Villanueva (although there was no receipt and so Goni, et al dipute
this)
Goni, et al. claim that Villanueva was, thereafter, able to sell his property in Negros Oriental and
so he went to Vicente to rescind the contract to sell. However, because of the previous debit arrangement, it
was agreed that 2 out of the 3 stipulated lots (field nos. 4 and 13 of the Haciend Dulce Nombre de Maria0
would merely be leased to Vicente for 5 years starting with crop year 1950-51 at a yearly rental of 15% of
the gross income. The rent would be deducted from the money advanced by Vicente and any balance still
owed to Villanueva would be paid along with the delivery of the lots at the end of the lease period.
On 10 December 1949, TABACALERA executed a formal deed of sale covering the 3 haciendas
in favor of Villanueva. The leased fields were also registered in the name of Villanueva. The fields were
mortgaged by Villanueva to rehabilitation Finance corporation (RFC), which were later transferred to PNB
on 16 December 1955, for a total indebtedness of P334,400.
On 17 June 1950, Villanueva executed an absolute deed of sale to Joaquin Villegas, covering lot
no. 314 of Hacienda Sarria along with its sugar quota.
Villanueva died on 12 November 1951, causing intestate proceedings to start on 24 November
1951. On te day before the closure of the proceedings, Vicente filed an action for recovery of property and
damages based on the contract to sell. Goni, et al filed a counterclaim and they called for the surrender of
the leased fields.After a stipulation of facts and Goni’s testimony regarding the verbal lease agreement

115
agreed to by both parties, Vicente won in the trial court and was awarded damages as well as the delivery
of field no. 3.
Bothe appealed to the Court of Appeals. Vicente won again as the CA modified damages to
amount to the total net income of Field no. 3 from the crop year 1950-51 until fully paid. After they were
denied in a motion for reconsideration, Goni et al filed a petition for certiorari with the SC.

Issue: W/N a written promise to sell may be novated by the verbal agreement of lease

Ruling: Yes. The verbal agreement novated the the written promise to sell.
The novattion of the written contract/promise to sell into a verbal agreement of lease was clearly
and convincingly proven not only by the testimony of petitioner Goni, but likewise by the acts and conduct
of the parties subsequent to the execution of the contract/promise to sell. After the milling season of crop
year 1949-50, only fields nos. 4 and 13 were delivered to private respondent Vicente. The fields subject of
the original promise to sell (nos. 3, 4 and 13) were registered in Villanueva’s name and mortgaged with
RFC. Villanueva also executed a deed of sale covering hacienda Sarria in favor of Joaquin Villegas.
Vicente knew all this but did not take appropriate steps to assert or protect his claim over the fields. He
should have demanded their delivery during the lifetime of Villanueva and execution of a similar document
in his favor, or at least maing his adverse claim annotated on their TCT. If he did make demands on
Villanueva for the surrender of field no. 3 and the execution of a deed of sale, he should have upon
Villanueva’s refusal, immediately or within a reasonable time, instituted an action for recovery, or caused
his adverse claim to be annotated on the TCT. Field no. 3 is the biggest among the three lots. An ordinary
prudent man would have takem these steps if he honestly believed he had any right thereto. Vicente’s
inaction even persisted during the pendency of the intestate proceedings wherein he could have readily
intervened to seek the exclusion of the fields from the estate.
Vicente reasoned that field no. 3 was not initially delivered because TABACALERA still had
sugarcane growing on it. But the SC said it could not explain why it took him four years before instituting
an action in court, and very conveniently, only after Villanueva had died and at te time when the verbal
contract of lease was about to expire.
Both the trial and appellate courts chose to believe in the contract/promise to sell rather than the
lease agreement, simply because the former had been reduced to writing, while the latter was merely
verbal. It must be observed, though, that the contract/promise to sell was signed by petitioner Goni as
attorney-in-fatc of the late Villanueva, an indication, to our mind, that the final arrangements were made by
petitioner Goni in the absence of Villanueva. It was therefore natural for private respondent Vicente to have
demanded that the agreement be in writing to erase any doubt of its binding effect upon Villanueva. On the
other hand, the verbal lease agreement was negotiated by and between Villanueva and private respondent
Vicente themselves. Being close friends and relatives, it can be safely assumed that they did not find it
necessary to reduce the same into writing. Thus, the SC ordered Vicente to comply with the verbal lease
agreement.

There is no novation if the requirements of express and implied novation are not present. The
second obligation is a mere implementation of the first or old obligation.

(4) Capacity and consent of all the parties. EXCEPT in case of expromision, where the old debtor
does not participate.

WHEN IS THERE REAL NOVATION?

There is real novation when there is a change in the object of the obligation. This is always an
extinctive obligation. If the change is in the condition of the contract, it may be extinctive or modificatory.
The test to determine whether it is extinctive or modificatory is whether the condition altered is a
principal or essential condition or a mere incidental condition.
For example, a change in the term—if shortened extinctive; if extended modificatory. A change in
the rate of interest is modificatory, while a change in its amount is extinctive. This has been discussed
above, but it helps to go through it again.

WHEN IS THERE PERSONAL NOVATION?

116
 There is personal novation when there is a change in the parties, either the debtor (passive) or the
creditor (active). The former is referred to as substitution while the latter is referred to as subrogation. This
is always extinctive.

WHAT ARE TWO INSTANCES REGARDING THE CHANGE OF THE DEBTOR?

These are EXPROMISION and DELEGACION.

Art. 1293. Novation which consists in substituting a new debtor in the place of the original
one, may be made 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 Art. 1236 and 1237.

Art. 1294. If the substitution is without the knowledge or against the will of the debtor, the
new debtor’s insolvency or non-fulfillment of the obligation shall not give rise to any
liability on the part of the original debtor.

Art. 1295. The insolvency of the new debtor, who has been proposed by the original debtor
and accepted by the creditor, shall not revive the action of the latter against the original
obligor, except when said insolvency was already existing and of public knowledge, or
known to the debtor, when he delegated his debt.

WHAT IS EXPROMISION?
Expromision takes place when a third person of his own initiative and WITHOUT knowledge or
AGAINST THE WILL of the original debtor assumes the latter’s obligation WITH THE CONSENT OF
THE CREDITOR. It logically requires the consent of the third person and the creditor. It is essential that
the old debtor be released from obligation, otherwise there is no expromision. (Art. 1293)

WHAT ARE THE REQUISITES FOR EXPROMISION TO TAKE PLACE?

(1) The initiative to (assume the obligation) comes from a third person.
(2) The new debtor (third person) and the creditor must consent.
(3) The old debtor must be excused or released from his obligation.

WHAT IS THE EFFECT OF INSOLVENCY OR NON-FULFILLMENT BY THE NEW DEBTOR IN

EXPROMISION?
The old debtor cannot be held responsible for the new debtor’s insolvency or non-fulfillment The
expromision was made without his consent or worst, against his will, so how can he be liable.

WHAT ARE RIGHTS OF THE NEW DEBTOR IN EXPROMISION?

In expromision, the new debtor is entitled only to beneficial reimbursement, that is reimbursement
for the remaining balance unpaid by the old debtor which the new has shouldered.
For example, if Cy owed Ferdie P100, and Paul without the consent of Cy pays to Ferdie P100,
when all along Cy has already paid partially in the amount of P85, Paul can only ask reimbursement from
Cy for only the P15 unpaid balance.

WHAT IS THE DIFFERENCE BETWEEN EXPROMISION AND PAYMENT BY A THIRD PERSON?

In payment by a third person, the original parties to the contract, particularly the debtor is not
substituted at all. The third person does not become the new debtor. In expromision, the old debtor is
substituted by a new debtor and old debtor is released from the obligation.
SIMILARITY: Both cases provide fro a right of reimbursement. Expromision entitles the new
debtor to beneficial reimbursement which is also true for payment by a third person.

WHAT IS DELEGACION?

117
 Delegacion takes place by the replacement of the old debtor with a new debtor, who has proposed
to the creditor, and which replacement has been agreed to by said creditor and by said new debtor (Art.
1293).

WHAT ARE THE REQUISITES OF DELEGACION TO TAKE PLACE?

(1) The initiative to substitute comes from the old debtor.
(2) All the parties concerned must consent or agree.
(3) The old debtor must be released from the obligation.

WHAT IS THE RIGHT OF THE NEW DEBTOR IN DELEGACION?

The new debtor is entitled to full reimbursement and subrogation.

WHAT IS THE EFFECT OF THE NEW DEBTOR’S INSOLVENCY IN DELEGACION?

Generally, the old debtor is not liable for insolvency of the new debtor. Take note that non-
fulfillment due to other causes is not mentioned in Art. 1295.
The exceptions to this rule are, if (a) the insolvency was already existing and publicly known; and
if (b) the insolvency was already existing and known to the old debtor. These exceptions are intended to
prevent fraud on the part of the old debtor.

WHAT ARE THE DIFFERENCES BETWEEN DELEGACION AND EXPROMISION?

Expromision Delegacion
Change of the debtor has no consent or against the Change of debtor at the latter’s initiative
will of the latter.
New debtor entitled only to beneficial New debtor entitled to full beneficial reimbursement
reimbursement
Old debtor not liable for new debtor’s insolvency Old debtor liable for new debtor’s insolvency if
such face was existing at the time of the substitution
or of publicknowledge.

SERVICEWIDE SPECIALISTS V. IAC 174 SCRA 80

Facts: Siton bought a car from Car Traders Philippines for P25K down payment and the balance of
P68,400,in 6 monthly installments of P1,900. He issued a promissory note that stated that demand is no
longer needed in recognizing the loan and the 14% interest in the obligation. As further security, a chattel
mortgage of the car was executed in favor of Car Traders Philippines. The chattel mortgage transferred
from Car Trader to another until it landed with Servicewide Specialist Inc.
Siton sold the car to Judge Dumo and the latter used his personal shecks to pay Siton’s loan. Judge
Dumo defaulted on the payment, petitioners filed a case against Siton and Dumo. Siton sets up the defense
that there was novation.

Issue: W/N there was novation

Ruling: None. The purchase of the car by respondent de Dumo from respondent Siton does not necessarily
imply the extinguishment of the liability of the latter. Since it was neither established nor shown that Siton
was released from responsibility under the promissory note, the same does not constitute novation.
Likewise, the fact that petitioner company accepts payments from a third person like respondent de Dumop,
who has assumed the obligation, will result merely to the addition of debtors and not novation. Hence, the
creditor may therefore enforce the obligation against both debtors.

AJAX MARKETING V. CA 248 SCRA 222

Facts: Ylang-ylang Merchandising Company, a partnership between rodriguez and Tan obtained a loan
of P250K from Metrobank and Trust Company by undertaking a real estate mortgage over their property in
Paco Manila. Afetr some time, the partnership became Ajax Marketing Company with the same owners.

118
This time they borrowed P150K secured by the same real estate mortgage. Still further, the company was
turned into Ajax Marketing and Development Corporation with the same partners plus three (3) other
members. Again the company obtained a loan for P600K with the use of the same real estate mortgage.
Shortly after the third loan, the three loans were consolidated into one loan amounting to P1M.
The bank’s president and the company’s treasurer signed the new promissory note. The company
subsequently could npt pay the loan and the bank moved to foreclose the land. The company raised the
defense of novation since the consolidation was to their mind, a novation of the real estate mortgage, thus
the land could not be foreclosed.

Issue: W/N the consolidated promissory note constitutes novation

Ruling: No. The rule is that in novation it is imperative that the new obligation expressly declares that the
old obligation is extinguished, or that the new obligation is incompatible with the old one. Nowhere in the
consolidated loan did it state that the real estate mortgage was novated. In fact the consolidated contract
refer to the parties as mortgagor and mortgagee. Nor can it be said that the contract is incompatible with the
old one because the object, creditor and debtors are still the same. Thus, there was no novation.

Art. 1296. When the principal obligation is extinguished in consequence of a novation,

accessory obligations may subsist only insofar as they may benefit third persons who did
not give their consent.

Art. 1297. If the new obligation is void, the original one shall subsist, unless the parties
intended that the former relations should be extinguished in any event.

Art. 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.

Art. 1299. If the original obligation was subject to a suspensive or resolutory condition, the
new obligation shall be under the same condition, unless otherwise stipulated.

Art. 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 order that it may take effect.

WHAT IS SUBROGATION?
Subrogation is effected by changing the person of the creditor. It is the transfer to a third person of
all rights appertaining to the creditor, including the right to proceed against guarantors, or possessors of
mortgages, subject to any legal provision or any modification that may be agreed upon.

WHAT ARE THE KINDS OF SUBROGATION ACCORDING TO CAUSE OR ORIGIN?

(1) CONVENTIONAL or VOLUNTARY. This is made with the consent of all the parties.
(2) LEGAL. This takes place by operation of law.

WHAT ARE THE KINDS OF SUBROGATION ACCORDING TO ITS EXTENT?

(1) Total
(2) Partial subrogation

Art. 1301. Conventional subrogation of a third person requires the consent of the original
parties and of the third person.

WHAT IS CONVENTIONAL SUBROGATION?

Conventional subrogation of third person requires the consent of the original parties and of the
third person. (Art.1301)

119
WHY IS THE CONSENT OF ALL THE PARTIES NECESSARY?
The debtor’s consent is necessary because he becomes liable under a new obligation while the old
obligation ends.
The old creditor’s consent is necessary because his credit is affected. The new creditor now
becomes a party to the obligation.

WHAT ARE THE DIFFERENCES BETWEEN CONVENTIONAL SUBROGATION AND

ASSIGNMENT OF CREDIT?

ASSIGNMENT OF CREDIT CONVENTIONAL SUBROGATION

There is mere transfer of the same right or credit;
only one continuing obligation
This does not require the debtor’s consent; mere
notification to him
The defect in the credit or rights is not simply by
assigning the same; debtor has still the right to
present against the new creditor any defense
available against the old debtor as there is still one
and the same obligation
Extinguished the old obligation and creates a new
one
Requires the debtor’s consent
The defect in the old obligation may be cured in
such a way that the new obligation becomes entirely
valid; defenses available in the first obligation is not
available at the time the second is entered into

LICAROS V. GATMAITAN GR NO.142838

Facts: Licaros, a businessman, invested in an off-shore banking institution, Anglo-Asean Bank around
the 1980’s. Much to his dismay, he had a hard time meeting the interest much more his initial investment.
He ought the help of Gatmaitan to recover his investment in Anglo-Asean. Gatmaitan agreed to help and
they entered into a memorandum of agreement. Under the said agreement, Gatmaitan gave a surety that in
case he could not pay the P3.5M, which represented the principal of Licaros’ account. The latter is entitled
to the dividends of his stocks in a certain life insurance policy. In return, Gatmaitan is entitled to keep all
funds that he could recover in the said doomed investment of Licaros in the said bank.
As it turns out, Gatmaitan could not also recover the money invested in the said bank because of
which he did not pay Licaros the P3.5M. Not having paid by Gatmaitan, Licaros moved to enforce the
dividends agreement. Gatmaitan refused to have his dividends taken because he believed that he should not
pay Licaros since he did not recover anything in the said bank. Licaros went to court contending that the
agreement entered into is an assignment of credit. Gatmaitan posited that it was a conventional subrogation.

Issue: Is the agreement an Assignement of Credit or a Conventional Subrogation

Ruling: It is a conventional subrogation. The contract entered into had a “whereas” clause that showed it
was in a form of a conventional subrogation, plus the fact that at the bottom of the contract the name of the
bank is one of the conforme. Since no signature was affixed over the nameof the bank as a representative
therefore, the onsent of the bank was not obtained and thereofre the contract is ineffective without the
signature. Since the contract is one of subrogation and the consent of the debtor was not taken, the said
contract is incomplete and unenforceable.
Note: In assignment of credit, the consent of all parties concerned need vot be obtained while ia a
conventional subrogation the consent is essential to the effectivity of the agreement.

WHAT IF IT CANNOT BE DETERMINED IF IT IS SUBROGATION OR ASSIGNMENT?

Assignment of credit should be preferred for it has advantages without the corresponding
disadvantages of conventional subrogation. Remember, novation is never presumed.

Art. 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.

120
 (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 obligations pays, without prejudice to the effects of confusion as to
the latter’s share.

WHEN IS THERE LEGAL SUBROGATION?

Legal subrogation takes place by operation of law. It is presumed that there is legal subrogation:
1. When a creditor pays another creditor who is preferred, even without the debtor’s knowledge.
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
obligations pays, without prejudice to the effects of confusion as to the latter’s share.

WHAT COULD BE AN INSTANCE WHEN A CREDITOR HAS PAID ANOTHER CREDITOR WHO
IS PREFERRED?
In subrogation, the concept is the acquisition of credit and comes whatever the credit is and not
how much the new creditor pays.

Example: Maro has 2 creditors, Charles, who is a mortgage creditor only for P13,000, and Val, who is an
ordinary creditor of P6,000. Val, without Maro’s knowledge paid Maro’s debt of P15,000 to Charles. Val is
thus subrogated in the rights of Charles which means Val will himself now be a mortgage creditor for
P15,000 and an ordinary creditor for P6,000. Val can have the mortgage foreclosed in the event Maro fails
to pay.
Suppose in the same example, Val paid Charles only P13,000 for Maro’s total indebtedness, and Charles
agreed because of friendship, Val may successfully recover the whole amount of P15,000 from Maro
because he steps completely into Charles stinking shoes.
However, if, at the time Val paid the P13,000 though Maro’s debt has been reduced to P3,000 na lang
because of prior partial payments, only P3,000 may be recovered by Val from Maro as it was his fault that
he did not first inform Maro of her intention to pay. His remedy is to recover from Charles.

WHAT COULD BE AN INSTANCE WHEN A THIRD PERSON, NOT INTERESTED IN THE

OBLIGATION, PAYS WITH THE EXPRESS OR TACIT APPROVAL OF THE DEBTOR?
Here, whatever is paid is recovered. There is, therefore, reimbursement and subrogation.
Example: BJ owes Nina P10000 secured by a mortgage. Cy, with the approval of BJ, paid Nina
the P10000. Cy is subrogated in Nina’s place as paid off with the approval of the debtor.

If Cy, who is Nina’s friend, paid only P7000 for the extiguishment of BJ’s obligation, but the
payment was without the express or tacit approval of BJ, no legal subrogation takes place. All the Cy can
recover is the amount with which she is to be reimbursed. If BJ does not pay, Cy cannot have the mortgage
foreclosed for no subrogation is effected.

WHAT COULD BE AN INSTANCE 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?
Here, the person paying becomes the new creditor.
Example: Paul owes Jay P10K secured by a mortgage and by the guarantee of Angelo. If Angelo,
without Paul’s knowledge, pays Jay P10,000, Angelo will be subrogated in Jay’s place. The guarantee is
extinguised for the states; “ Without prejudice to the effects of confusion as to the latter’s share in the
obligation”.

Art. 1303. Subrogation transfers to the person subrogated the credit with all the rights
thereto appertaining, either against the debtor or against third persons, be they guarantors
or possessors of mortgages, subject to stipulation in a conventional subrogation.

121
Art. 1304. A creditor, to whom partial payment has been made, may exercise his right for
the remainder, and he shall be preferred to the person who has been subrogated in his place
in virtue of the partial payment of the same credit.

WHAT IS THE RULE REGARDING PARTIAL PAYMENT?

A creditor to whom partial payment has been made, may exercise his right for the remainder, and
he shall be preferred to the person who has been subrogated in his place in virtue of the partial payment of
the same credit. (Art 1304)
There are two (2) creditors in this case:

1. The old creditor, who still remains a creditor as to the balance (because only partial payments has been
made to him).
2. The new creditor who is a creditor to the extent of what he had paid the creditor.
Example: Angel owes Mark P5000. With the consent of both, Val pays Mark P2,500. Mark and Val
are now creditors of Angel to the amount of P2,500. In case Angel has only P2,500, Mark, the original
creditor, would be preferred in as much as he is granted by the law preferential rights to recover the
remainder, over the person subrogated in her place by virtue of the partial payment of the same credit.

122