OBLICON MIDTERMS

DAY 1

SECTION 6 Obligations with a Penal Clause

Article 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. (p324)

- Concept of penal clause as substitute for damages

- It is demandable only if the principal obligation is due

- The concept of a principal and accessory obligation is necessary in determining

or understanding obligations with a penal clause

- Principal obligation is one which can stand by it self and does not depend
upon its validity the existence of another obligation however, an accessory
obligation, is an obligation which is attached to the principal and cannot
exist independently, cannot stand alone without the principal obligation.

- Obligation with a penal clause is one obligation which has an accessory

undertaking and that accessory undertaking is to pay the penalty which is
previously agreed upon or stipulated by the parties in case of breach of the
principal obligation and the purpose of the penal clause is to induce fulfillment.
Inducement for the debtor to pay faithfully on time, in the obligation

- Penal clause is something that they agree on as an accessory undertaking which

is attached to an obligation to assume liability on the part of the obligor in case of
breach and if not fulfilled or irregularly complied with.

- The purpose of the penal clause is that it is an inducement for faithful

performance of the obligation to ensure performance by creating an
effective deterrent against breach making consequences as onerous as it
may be possible. This is in general purpose of a penal clause.

- Penal provisions are deterrents for effective enforcement of the principal

obligation. It will require faithful performance, otherwise they will be made to
suffer the penalty.

- The penal clause is a substitute to a penalty for indemnity of damages and the
payment of interest in case of noncompliance and it is also to punish the debtor
 for the nonfulfillment or violation this obligation especially when such
nonfulfillment is tainted with fraud, it is a coercive force of the obligation by a
threat of greater liability.

- The penalty generally results the question of damages, if you breach an

obligation, you will either, for example in reciprocal obligation, in case of breach,
the delay of one starts when the other is ready, willing and able to fulfill his
obligation. In either instances you can claim for specific performance and or
recission whenever as an alternative remedy, you may also opt for rescission if
specific performance is not possible. And in both instances, the negligent,
faulting debtor who owes such obligation of specific performance or recission
claim may be held liable for damages.

- The penal clause which is entered into by the parties skips the determination of
how much is the damages that may be held against the erring debtor because if
they have agreed upon on what is the penalty then that is the measure of the
damages, it does not need the computation of how much, the one they have
agreed upon in the contract as penal clause will be the substitute for the
determination of the amount of damages

- When the purpose is reparation or compensation, the matter of damages is

generally resolved and the creditor is not obliged to prove them. The penalty
being considered an anticipated valuation of the damages so they can forsee
how many can satisfy the creditor in the for of damages and how much should be
paid as penalty by erring debtor which is in anticipation of future breach

- Under article 1226, it is presumed as a general rule that the penalty serves as a
means of determining damages which presupposes that if it is entered into by the
parties in the obligation

- A breach of contract entitles the other party to damages

- Penal clause serves as the measure of damages that the erring party or the
defaulting debtor may be held liable for even if no penalty in such breach is
prescribed in the contract

- It goes without saying that penal clauses are penal in nature, there is coercive
factor

- Interpretation of what is a reasonable penal clause is still subject to judicial

scrutiny, for instance the penal clause is 3x the value of the principal obligation,
that is an unconscionable penal clause.

o Although parties are at liberty in determining how penalty or the penal

clause is in their obligation, it is part of their freedom to contract such
obligation when it is found unreasonable and it proves a great injustice on
 the part of the debtor, the same may be stricken down by the court if
proved to be so

o Obligations in imposing penalties and forfeitures are strictly construed,

interpreted by courts

What are kinds of penal clause?

1) Provided so by the law

2) Provided for by stipulation of the parties
3) Compensatory– when the penalty takes the place of damages which is 1226
4) Punitive – when the penalty imposed is merely a punishment for breach
5) Subsidiary – when only the penalty may be enforced
6) Joint or cumulative penal clause – both the principal and the penalty clause
can be enforced
The penalty substitutes for damages. The payment of the measure of damages is
substituted by the agreed upon penalty in the penal clause. We also have certain
stipulations which state that damages may be in the form of interest and that interest
takes the form of a penal clause for instance a certain amount of interest is agreed upon
by the parties over the principal obligation, in case of breach, as a form of penal clause
is valid and that interest also serves as a substitute for the measure of damages, in
such case, the interest that is agreed upon takes the form of the penalty which can
substitute the measure of damages.
There are certain instances and the law permits an agreement upon a penalty apart
from the interest that is agreed upon by the parties, the parties can still agree on a
penalty clause on top of the interest, should there be such an agreement, the penalty
does not include the interest and as such the two are different and distinct which may
be demanded separately.
A stipulation about payment of additional rate of interest partakes the nature of a
penalty clause which is actually allowed by law.
The creditor in addition to the penalty may recover interest when it is so
stipulated by the parties. When the obligor refuses to pay the penalty or when the
obligor is guilty of fraud in the fulfillment of the obligation, under 1226, damages
shall be paid if the obligor refuses to pay the penalty or is guilty of fraud in the
fulfillment of the obligation.
So damages which may also be in a form of penalty on top of the penal clause is
chargeable against the erring debtor if so stipulated by the parties. If there is no such
stipulations, damages and interest on top of penal clauses are not allowed, when both
the penalty and damages or interest may be recovered, it is that the purpose of the
penal clause is the punishment of the debtor for his breach of principal obligation
The penalty will be enforced only when it is demandable for the provisions of the code
meaning the penalty as a stipulation in the contract is demandable only if there is a
breach in the obligation and it is not contrary to law, morals, good custom, public order,
public policy, in fact the amount of penalty may be reduced if it is iniquitous or
unconscionable.
Can you state that you will pay the penalty instead of performing the obligation?
Article 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. (p332)
- The debtor cannot exempt himself in performing the obligation by paying the
penalty otherwise it will sanction misdeeds
- It should be stipulated that the penalty can substitute performance neither the
creditor can demand the fulfillment of the obligation and then the satisfaction of
the penalty at the same time because the penalty presupposes that there must
be a breach of the obligation
- The object of the penalty is to secure compliance with the obligation and
performance of the obligation requires performance in good faith, you cannot be
in good faith if you opt to pay the penalty instead of performing the obligation,
unless the parties agree that instead of performing the obligation you will pay a
higher penalty.
- If the debtors allowed to pay just the penalty this would in effect make the
obligation an alternative one
 - The debtor can exempt himself of the obligation when this right has been
expressly reserved for him. It should be expressly stated in the obligation as a
right reserved for the debtor.
- The liability for payment of liability is subsidiary meaning, it is dependent on the
breach
- The creditor cannot demand for the fulfillment of the obligation and the
satisfaction of the penalty at the same time, the primary purpose of the penalty is
to urge the debtor to the performance of the main obligation because if the debtor
is able to perform the obligation then there is no need for a penalty, that penalty
may only be charged against him, if in case of breach or violation of the contract,
once the obligation is fulfilled and the purpose of the obligation is attained, there
is no need for demanding the penalty, the penalty dies a natural death upon the
complete performance of the obligation.
- In case of noncompliance, the creditor may ask the penalty or require specific
performance and in both instances if you require specific performance, and if you
require a recission in case of bilateral obligation in which case there may be
liability in damages under the provisions of 1191
Article 1228. Proof of actual damages suffered by the creditor is not necessary in order
that the penalty may be demanded. (p335)
- All that the creditor has to prove is to enforce the penalty, there is no need of
proof of actual damages by evidence to adduce losses and damages suffered by
the creditor to the extent of the same, all that is required is proof of violation or
breach of the obligation is made meaning if a delivery is required on April 12 and
delivery was not made on April 12 and there is a penal clause that in case of non
delivery in April 12, there is a penalty of P5000, all that is needed for you to
charge him with the P5000 penalty is to prove that there is no delivery on April
12, there is no need for you to prove actual damages as to the amount of
damage caused to you by the nondelivery, by expenses incurred by the
nondelivery in order to charge him of the penalty of P5000, the proof of the
violation of the contract is sufficient
- You need not to go to court to charge the P5000 because that damages
stipulated in the penal clause substitutes the evidence needed for the damages
required under the rules. You need not to prove your right under the obligation
under 1228 in order for the penalty to be incurred, the creditor may enforce the
penalty whether he suffered damages or not but you cannot recover more than
the stipulated penalty even if he proves the amount of his damages exceed the
penalty, he cannot charge more than P5000 in our example if what was agreed
upon is the P5000 penalty, it cannot be increased unilaterally no because the
penalty stipulated is P5000 and should be the measure of damages could not go
above such amount of penalty
- We also have the concept of liquidated damages, it is a form of damages:
o MENTAL: forms of damages that may be charged
 o Moral
o Exemplary
o Nominal
o Temperate
o Actual
o Liquidated
- Liquidated damages under the civil code in the later portion, Title VIII
referring to liquidated damages
o The treatment of liquidated damages and penalty or penal clauses are
almost the same
o Liquidated means that it is already a determined damages, parties have
already predetermined it as to how much is the measure of damages, its
concept is the same as penalty because the penalty is already determined
by the parties as a measure of damages, by definition there is not
difference but in the civil code there is a different treatment to penal
clauses in obligations and liquidated damages as a form of damages in
the later portion of the civil code
o It has been held that in our jurisdiction there is no difference between the
penalty and liquidated damages so far as the legal results are concerned,
it is only a matter of language
- In either case the party whom payment to be made is entitled to cover the sum
stipulated without the necessity of proving damages, the purpose is the same, it
substitutes evidence of the measure of damages because the sum as a form of
penalty or liquidated damages is already predetermined by the parties as part of
their stipulations
- One of the primary purposes in fixing the penalty in liquidating damages is to
avoid such necessity of proving the amount of damage as stipulation on
liquidated damages is a penalty clause actually where the obligor assumes a
greater liability in case of breach
- The surcharges in certain obligation are considered as either liquidated damages
or penal clauses which separate from the agreed interest rates of the parties in
certain obligations.
Article 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. (p336)
- Penalty, surcharges are subject to judicial regulation meaning although the
parties can stipulate freely as to amount of damages that may be incurred as a
form of penalty or liquidated damages or penal clause, the same is subject to
court regulation meaning if the penalty is to much than that of the principal
obligation by threefold, it is not allowed when there is inequity, it is not fair
- If it is contrary to morals, public customs
- Penal clauses are sanctioned by the law as penalty in certain obligations
- What is iniquitous under the circumstances is always a question of fact that
should be weighed by the parties in certain circumstances a one percent penalty
may be equitable in some instance, it may not be so in certain instance but there
is no hard and fast rule meaning it is a subjective question. We are only guided
by experience and by jurisprudence. Therefore in determining situations of
similar nature
- In past cases where it was decided that the penalty entered into by the parties is
either iniquitous, unconscionable stipulation when there is partial or irregular
performance, the first refer to the extent of fulfillment the latter to the manner of
the penalty should more or less be proportionate with the extent of the breach of
the contract suffered, when there are only minor breaches, if it is sufficient as
substantial compliance may not cause the recission of a contract or of an
obligation or the extinguishment of an obligation
- Minor or slight breaches may not be a cause for the invocation of penalty
clauses, if it can be forgiven the court would allow it
- As a general rule an obligation is not deemed performed unless the thing or
service in which it is consist of completely delivered or rendered as the case may
be. However, if there is a total breach of contract or obligation then the stipulation
for penalty clause may be invoked in such instances
- There is no fixed rule in determining what is unconscionable and what is under
the circumstances, it is always a discretionary question on the part of the court to
determine how much is the sufficient or reasonable amount of penalty
- Development bank of the PH v CA, 2000 case, private respondent made
regular payments to petitioner DBP in compliance with their principal obligation,
they failed only on the dates stipulated in the contract, these indicates the
absence of bad faith on the part of the respondent and their willingness to comply
with the terms of the contract, their principal obligation in the amount 207K have
already been paid in favor of petitioner, these circumstances convince the SC of
the necessity of equitably reducing the interest due to petitioner and they did so
by reducing to 10% the additional interest of 18% per annum on the amortization
past due. The penalty share of 8% per annum is sufficient to cover whatever else
damages petitioner may have incurred, usury is legally in existent and the parties
can agree on the amount if interest including penalty that they may agree upon
that the safeguard are in the law and are in jurisprudence
- One of the safeguard is 1229 that if it is unconscionable and inequitable on what
was agreed upon although they had such freedom to enter into such stipulation
then, it can be reduce by the court, there can be court intervention
- In the case Bulyos v Yasuma 527 Scra 727 an interest rate of 4% per annum
per month, 48% per annum on a remaining balance of a loan obligation was held
as inequitable and therefore reduce to 12% per annum
- Paseo v Heirs of F De Guzman, 625 Scra 342, 2010, the stipulate monthly
interest of 24% per annum was reduced to 12% per annum
- Ligutan v CA, 376 scra 560, 2002, petitioner borrowed 12000 from a bank, the
promissory note provides for the payment of 15.19 interest per annum and the
interest charge 5% every month on the outstanding principal and interest in case
of default, when the debtors failed to pay at maturity date even after several
extensions, the bank sued for collection, the debtors asked for the reduction for
the penalty for being unconscionable. The SC found no cogent reason to modify
the award of 3% penalty a month from the 5% agreed upon, although the
stipulation for the penalty was upheld by the Sc, it was however, reduce to 3 %
per month
- In determining whether a penalty is iniquitous a court may take into account the
actual damages sustained by the creditor was compelled to sue a defaulting
creditor
- Dino v Jardiness 481 Scra 226, 2006

Article 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.(p340)

- UCPB v Spouses Belloso, the nullity of the penal clause does not carry with it
that of the principal obligation because accessory is separable from the principal,
if the accessory is invalid then the principal obligation subsist, the fact that the
penalty obligation is considered inequitable and therefore either stricken out or
reduced, that does not have an effect on the principal obligation, it is due, if the
principal obligation is nullified then the accessory obligation of the penal clause,
accessory follows the principal.

CHAPTER 4
Extinguishment of Obligations

General Provisions

Article 1231. Obligations are extinguished:

(1) By payment or 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(p342)
 Other cause of extinguishment of obligation:

- Death may cause the cessation of an obligation

- Mutual desistance
- Arrival of resolutory period
- Compromise
- Fortuitous event
- Impossibility of fulfillment
- Illegality
1) These two are interchangeable

SECTION 1
Payment or Performance

Article 1232. Payment means not only the delivery of money but also the performance,
in any other manner, of an obligation.(p346)
 - Payment is not only that of monetary obligation but also payment of the
obligation, any form of obligation as long as you have performed it, you already
paid for it
- Performance of the obligation in the obligation to do to paint a house, if you
complete paint the house in accordance with the terms of the obligation then you
are considered to have paid for the obligation or you have performed the
obligation completely
Elements of payment
1) Persons – who is supposed to pay and to whom will you pay, who must pay and
to whom the payment must be made
2) The thing or the object if which payment is to consist – what to pay
3) Mode or form – mode or form of payment that is required
4) Place of payment – where it should be paid
5) Time of payment – reasonable time for payment
Imputation of expenses occasioned by payment – if you are in kalibo and you need to
pay in Bacolod. Not only monetary payment, if you need something to deliver, who pay
which, that should also be considered in terms of payment or performance
When do you consider a debt to be paid?
Article 1233. A debt shall not be understood to have been paid unless the thing or
service in which the obligation consists has been completely delivered or rendered, as
the case may be (p347)
1) The first principle that you will consider in determining payment is integrity
- This enjoins the obligor to pay or perform the obligation completely meaning that
the prestation be fulfilled completely
- A debt to deliver a thing or to render a service is not understood to have been
paid unless the thing or service have been completely delivered or rendered as
the case may be
- Partial or irregular performance will not produce the extinguishment of the
obligation as a general rule neither is late payment or performance able to
extinguish the obligation, there must be integrity of the payment, it must be
complete or not at all
2) Identity of prestation
- The second requisite requires that in payment, the same thing promised must be
delivered or paid it must not be a different thing and even in the standard of
generic obligation the same class or genus is required for performance of the
obligation. More so if it is a specific obligation what was specifically stated in
performing the obligation should be the same or identical thing that should be
paid or performed.
- It is also mention in Article 1244
 Article 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
- If it is stipulated that you would do something you cannot give that task to
another as your were the one chosen unless the creditor is okay with it
- What is agreed upon should be the same thing delivered or perform
- If the obligation has been substantially performed in good faith, the obligor can
recover as though their might have been a strict and complete fulfillment and less
damages suffered by the obligee 1234 is an exception to 1233
Article 1234. 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 (p349)
- The reason is that if it is substantial performance, the creditor is benefited but the
catch is that there must be substantial performance
- The obligor should be allowed to recover the debtor as if there has been strict
and complete fulfillment, to make it equitable less damages, proportionate
reduction of the obligation
- The last condition affords a just compensation for the relative breach committed
by the obligor so if the service performed is to make a land scape of the yard, if
there is a lacking plant, that can be considered a minor breach that might not
affect the integrity and therefore there can be considered as a substantial
performance minus the value of that plant for the whole contract price agreed
upon by the parties to make it equitable
- Substantial performance in addition to it in good faith is equivalent to complete
payment. It goes hand in hand to have substantial performance and good
faith
- When there is compliance with the essential requirement whether of the contract
or statute, if the breach is of inconsequential nature that cause no serious harm
to the creditor the law deems the performance as substantial
- The principle of substantial performance is inappropriate when the incomplete
performance constitutes a material breach on the contract and is not merely
slight or technical in nature, if your contract is to provide for a sound system and
its in low performance, it affects the material performance of the obligation. It is a
question of fact if there is substantial breach or not
Article 1235. When the obligee accepts the performance, knowing its incompleteness
or irregularity, and without expressing any protest or objection, the obligation is deemed
fully complied with (p350)
 - meaning although the creditor knows that performance is incomplete but he
accepted the performance without objection knowing its irregularity, the
obligation is deemed to be fully complied with.
- Before a property is turned over to you by a subdivision developer, you are
required to inspect the same before its complete delivery, if you see any
imperfections you must make an objection and you do not accept the unit
otherwise if you accepted, you are deemed to have waived your objections to the
incomplete performance or incomplete payment of the obligation.
- Make sure to determine that the creditor has knowledge of the incompleteness
and he failed to object prior to acceptance
- PALANCA v GUIDES, 452 scra 461, 2005, what is the protest needed, a protest
may be of any form, written protest, objection prior to acceptance as long as the
creditor at the time of the delivery is able to express disagreement to the
incomplete or unsatisfactory delivery
DAY 2
Article 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.
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.(p351)
- The creditor is bound to accept payment or performance of the obligation from
the debtor or from any person who has an interest in the obligation like a
guarantor who guarantees payment of obligation to a third person who has no
interest in the obligation when there is a stipulation that he can makes such
payment
- The creditor can refuse payment from any person who has no interest in the
obligation
- The integrity of payment requires that it should be from the person who is obliged
to make such payment
2nd par: recognizes that payment or performance may be made by any person not
incapacitated even without the knowledge or against the will of the debtor even though
he has no interest in the obligation, it serves as an exception to the rule.
- Such payment would produce an enforceable right in favor of the third person
- If made without the knowledge or against the will of the debtor the payer can
recover from the debtor, in so far as the payment has been beneficial to the
debtor himself. The recovery is only up to the extent or the amount of the
debt at the time of payment furthermore the third person is not subrogated
to the rights of the creditor such as those arising from mortgage, guarantee
or penalty.
 - Second instance is if it made with the knowledge of the debtor, the payer
shall have the rights of reimbursement and subrogation. That is to recover
what he has paid, not necessary the about of the debt but only up to the
amount that he has paid and to acquired all the rights of the creditor.
Meaning there is subrogation to the rights of the creditor.
- If payment is made with or without the knowledge or against the will of the
debtor, it is a defense that may be availed of only by the debtor meaning it
is the debtor who can interpose such defense that such payment of a third
person did not or was not with his knowledge or against his will. This
cannot be availed of by the creditor as he accepts payment that by the third
person, he has participation in that situation
- Once the creditor has accepted payment his status and rights as such becomes
automatically extinguished
Article 1237. Whoever pays on behalf of the debtor without the knowledge or against
the will of the latter, cannot compel the creditor to subrogate him in his rights, such as
those arising from a mortgage, guaranty, or penalty. (p357)
- The effect of 1236, if the payment is without the knowledge or against the will of
the debtor, the third person cannot compel the creditor to subrogate to accessory
rights such as mortgage, guarantee or penalty
- There is no transfer of rights of a creditor to foreclose any mortgage, guarantee
or penalty if payment was done without the knowledge or against the will of the
debtor
- You pay at your own risk, whatever may be the intention or the motive of
the payment of the third person becomes his peril. It is his risk for payment of
something that he is not initially part of
- May there be subrogation if the creditor willingly permits the payer to be
subrogated to his rights
o For instance, the creditor actually says that he will accept that payment
and will consent to it. Therefore, you can have my rights to foreclose the
mortgage, if for instance the payment is not enough to cover the entire
obligation
o Since the provision in 1237 is for the benefit of the debtor, the subrogation
can only take place with his consent, without the consent of debtor he
cannot acquire it by means of subrogation the rights of the creditor to
foreclose the mortgage and the security because it is the debtor who
interposed the accessory obligation which supports the main obligation so
if there is no participation of the debtor, you cannot spread his liability to
other persons
o The third person who without the necessity paid under such condition is
amply protected by right of reimbursement only but not subrogation to the
rights of mortgage, guarantee
Article 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. (361)
- The only right of that third person who paid in behalf of the debtor may be
subjected to the rights of reimbursement but not subrogation but if indeed he paid
without having been involved of the obligation and merely paid it without the
intention of being reimbursed that could be interpreted as donation
- For a donation to be valid it must be in a public instrument and subject to
acceptance
- If the debtor did not accept the donation, you are not bound to accept it as a
debtor but the creditor is bound by the payment
- No one should be compelled to accept the generosity of another

Article 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 Article 1427 under the Title on "Natural Obligations. (361)
- Free disposal of the thing due in 1239 means that the thing to be delivered must
not be subject to any claim or lean or encumbrance of a third person is not
subject to any superior right to any third person and capacity to alienate means:
- 1239 mentions of two things
o Free disposal of the thing and capacity to alienate
o Capacity to alienate means that the person is not incapacitated enter into
contracts and to make dispositions of the thing due
o Free disposal of the thing and capacity to alienate required should go
hand in hand
o You are obliged to give something, that something is not within your free
disposal and that something cannot be given by you because you have no
capacity to give it then there is no payment
o In both instances you must have free disposal thereof.
 If you are obliged to give land, that land should not have any
encumbrance, not subject of litigation, no lean or encumbrance
there of, it is not attached by any court judgment and you must
have capacity to alienate meaning you must have freedom to
transfer it or right to absolutely transfer it
 Otherwise if you are civilly interdicted you cannot dispose
properties
Article 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.
(362)
 - To whom do you pay?
o To the creditor or to his successor or interest like an heir or an assignee or
to any person authorized to receive it
o If he has a special power of attorney, given to another person to receive
payment
o General rule is that payment should be made to the creditor or to his
successor or interest or any person authorized to receive it
o To an agent who has specific authority

Article 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.(369)
- The general rule is that if you make payment to a person who was subsequently
considered incapacitated to administer and manage his property, the same is not
valid unless that incapacitated person get the thing paid or delivered or was
benefited of the payment
- In the absence of this benefit, the debtor may be made to pay again by the
creditor’s guardian or by the incapacitated person when he acquires or recovers
his capacity and proof of such benefit is incumbent upon the debtor who paid. it
is important to know that the creditor is capacitated otherwise when you
make such payment becomes subject to attack, it can be discredited or
nullified because he did not have capacity to accept that payment at that
time. You must determine that the creditor is able to make such deceit upon
payment, it is possible that that incapacitated person may accept payment and
that payment has the effect of extinguishing the obligation if in this instance he
has kept the thing delivered so all the while the thing was preserved or it has
been beneficial to him
o Both instances has the effect of payment because the integrity of the
thing was persevered while it is at the custody of the incapacitated
person
o In 1240 if payment is made to an incapacitated person it must be through
a person authorized to receive it
 o If he has no legal guardian, there is what you call consignation
wherein you deposit in court what you are supposed to pay in order
for it to be preserved. In the absence of an authorize person to
receive for or in behalf of the incapacitated person, the mechanics of
consignation and tender of payment come into play.
Article 1242. Payment made in good faith to any person in possession of the credit
shall release the debtor. (p372)
- Another instance when there is valid payment to a third person to any
person in possession of a credit, it is the possession itself and not merely a
document
- The person who is in possession of the credit should be in possession of
the credit both physically and legally
Article 1243. Payment made to the creditor by the debtor after the latter has been
judicially ordered to retain the debt shall not be valid (375)
- The creditor is not allowed when payment to creditor becomes not valid
- This is an instance when you make payment to the creditor but he is not
authorized by law legally to accept that payment
- In an action against the debtor who is the creditor of another during the pendency
of the case the same may be ordered by the court to retain the debt until the right
of the plaintiff, the creditor of the litigation is resolved
- Payment made by the debtor stranger shall not be valid if the plaintiff in the case
cannot collect from the debtor to whom the payment is made
o D owes C P1000, E in turn owes D P1000, in an action of the creditor
against the debtor E upon petition of C may be ordered by the court not to
pay D and to retain the debt in the meantime. In this case the debt of E is
said to be garnished or subjected to payment to C. This garnishment is a
proceeding for the purpose of subjecting the debtors credit from
another person to payment of his debt to another person. That credit
would be used to pay for the creditor. It is a specie of attachment by
means of which the plaintiff seeks to subject to his claim the
property of the defendant in the hands of a third person or money
owed by such third person to the defendant. It protects the rights of the
debtor from third persons so that the money taken from that third person
may be used as payment to the original creditor. That is by means of
judicial order to retain the debt not to pay at the mean time until such time
that the action is considered and ruled in favor of the debtor, mechanics of
garnishment come into play when we speak of 1243

Article 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 (377)

- In integrity of payment when you are obliged to deliver something, that same
thing should be delivered, the debtor of a thing cannot be compelled the creditor
to receive a different one although the later may be of the same value or more
valuable.
- 2nd par: in an obligation to deliver a specific thing, that very thing must be
delivered or paid in order to extinguish the obligation you cannot say to the
creditor that I will pay you similar thing of the same value or a thing more
valuable than the other.
o It refers to personal obligation, the act should be performed by the person
himself, he cannot be substituted by another, there is integrity of the same
act to be done or personal obligation to be done by the person himself.
o If you are contracted to do a portrait of the creditor and you were
contracted because of your skill or ability to make that portrait, you cannot
substitute it with another person’s skill or ability regardless of that value of
that skill or ability.
- This is subject to waiver of the creditor, if the creditor agrees that a more
valuable thing will be delivered to him, it will extinguish the obligation or if
he agrees that a substitute thing is delivered to him is ok with him, as long
as he voluntarily agrees to it.
o Or if the service is to be done by a substitute as long as the creditor
accepts it, then that is subject to waiver, obligations may be waived

Article 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 (378)

- We have special forms of payment:1245, dacion en pago, application of

payments 1253, payment by cession 1255, and tender of payment and
consignation 1256, 1261
o The four special payments in the civil code are governed by different
articles although in the same chapter ; dacion en pago or dation in
payment, application of payments, payment by cession and tender of
payment and consignation
- Dation in payment is conveyance or ownership of a thing by a debtor to the
creditor as an acceptant equivalent of an outstanding performance of a
monetary obligation. Meaning the debtor is obligated to pay the creditor in
monetary terms but instead of money he offers a thing in substitution of the
monetary obligation and this is with the consent of the creditor.
o The effect is that instead of delivering money he delivers a thing.
o It is a special form of payment because it is not the ordinary way of
extinguishing the obligation, the ordinary way if extinguishing an ordinary
obligation is payment. But if there is an agreement that instead of paying
the amount, there would be a thing, that is dacion en pago
 o In order that there may be a valid payment by means of dation in payment
there must be a performance of a prestation in lieu of payment which may
be the delivery of the thing or real right or a credit to a third person or to
the creditor, there must be some difference between what was delivered
and what was obligated to pay which is you are obligated to pay money
but in dacion en pago instead of paying a money you are paying a thing
o There must be an agreement between creditor and debtor that the
obligation is extinguished once you deliver that thing to the creditor and
that ends the obligation
o In treating dacion en pago is the same as sale, it treats it as a sale
because you borrowed P10K, you received P10K from the creditor but
instead of returning the P10K on the due date, you will instead deliver a
laptop as a form of payment, the thing is in exchange of the money. The
undertaking partakes the nature of that of a sale. The creditor is
actually buying the thing or the property of the debtor. The payment
of which shall be charged against the debtor debt.
o It has the effect of extinguishing the obligation, the mode of payment
presupposes an existing debt which is extinguished to the extent of the
value of the thing delivered or totally if such is the intention of the parties.
o It is the law on sales the governs dacion en pago
o As long as the parties agree or consent to the dation in payment then
that is the mode in extinguishing the obligation
o When you deliver the thing to the creditor as a form of payment instead of
delivering cash, the ownership of the property is transferred to the creditor
through the dation en pago, you also transfer possession of the thing to
the creditor, it is not sufficient that you only transfer ownership and retain
possession, because it is a sale there must be a delivery meaning you
deliver not only the thing but ownership and possession of the thing itself.

Article 1246. When the obligation consists in the delivery of an indeterminate or

generic thing, whose quality and circumstances have not been stated, the creditor
cannot demand a thing of superior quality. Neither can the debtor deliver a thing of
inferior quality. The purpose of the obligation and other circumstances shall be taken
into consideration (380)

- If it is generic and the quality and the circumstances have not been stated
- Medium quality should be given in a generic obligation
- You mee half way, the creditor cannot demand if it is an obligation to deliver a
cellphone. Can the creditor demand the delivery of an iphone? It depends,
you have to take into consideration the last sentence. If you think that the iphone
is of superior quality then the creditor has no right to demand a superior quality
but you have to determine the circumstances and the purpose of the obligation
upon which that obligation is contracted by the parties. You can also say that
the iphone is of superior quality and the law only says medium quality and
neither can the debtor deliver a cellphone of inferior quality.
 o If in his lifestyle Iphone is too much then the court can consider it as a very
superior quality. If the parties are really use to exchanging iphones then
they can consider that as of medium quality then it is allowed.

Article 1247. Unless it is otherwise stipulated, the extrajudicial expenses required by

the payment shall be for the account of the debtor. With regard to judicial costs, the
Rules of Court shall govern. (382)

- Extrajudicial expenses, who pays the extrajudicial expenses, it is for the account
of the debtor

These includes expenses for the purpose of extinguishing the obligation, delivery fee –
usually the debtors obligation

Article 1248. Unless there is an express stipulation to that effect, the creditor cannot be
compelled partially to receive the prestations in which the obligation consists. Neither
may the debtor be required to make partial 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. 

- This contemplates where there is only one creditor and when there is only one
debtor unless there is an express stipulation to that effect, the creditor cannot be
compelled to partially to receive the prestation in which the obligation consists,
- This is the principle of completeness of the payment, complete performance of
the obligation is necessary, you cannot compel the creditor to pay, to receive the
payment which is only partial payment
- Neither can you compel the debtor to make partial payments as well if the whole
thing is due
- It is also in the interest of the debtor to extinguish the obligation
- In order that payment has the effect of extinguishing the obligation, it is
necessary that there be complete performance of the prestation meaning
complete payment
- The creditor may accept but he cannot be compelled to accept partial
payment or performance, the debtor has the duty to comply with the whole
of the obligation but he cannot be required to make partial payments if he
does not wish to do so

When is partial payment allowed? When can debtor make partial payments? the
general rule is that payment should be complete, creditor must accept complete
payment and debtor must be obliged to make the complete payment.

- There are some instance where partial payments are allowed:

o When there is a stipulation, if the parties stipulate that they can make
partial payments on particular times then it is ok
 o when the debt is partly liquidated and in part unliquidated, it has
different terms and for instance there is a stipulation for interest and the
first obligation to mature has become due and demandable and therefore
liquidated. In here, you can pay in partial. But in unliquidated, which
becomes due at a later date cannot be paid at the meantime, in effect you
payment becomes partial. There is the effect of making partial
payments because of the maturity of the obligations as different
times
o when the different prestations are subject to different conditions or
different terms; for instance it is subject to different resolutory conditions,
the first obligation is subject to resolutory condition, the second obligation
is subject to a suspensive condition then both may not be due at the same
time so who would arrive first is the one who will be paid by the debtor in
effect, there is partial payment as well because the obligation is subjected
to different conditions. It is also possible that the obligation is expected by
parties to be incapable of performance at one time.
 In construction contracts, they have different phases; phase 1
digging or excavation, phase 2 is foundation, phase 3 the structure
itself and phase 4 is the roof, it contains one contract only to built a
structure, however, you are not expected to comply with the
obligations in that particular contract all at the same time. The
parties really expected partial performance by means of phases,
the nature of the contract itself. The expectation of the parties that
that obligation cannot be completed at one instance only, it
expected to be done partially therefore partial payment is possible
in such case

Article 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 the
abeyance. (384)

- Legal tender
- 1st par: you have to look in many laws, RA 529 which was repealed by RA 8183
approved on June 11, 1996, in which case there is no longer any legal
impediment to having obligations or transactions paid in foreign currency as long
as the parties agree to such an arrangement or agreement
- So by agreement of the parties, obligations can be paid in currencies other than
legal tender
What is legal tender? Legal tender is that currency which a debtor can legally compel
a creditor to accept in payment of an obligation in money when tendered by the debtor
in the right amount.

- In PH: the currency prescribed by law to be accepted for payment of debts, the
currency means under RA 7653 that there is a law establishing our currency. All
Philippine notes and coins issued and circulating in accordance with the Bangko
Sentral act
o In the ph all coins and note issued by the BSP constitute as legal tender
for all debts, tender means the act of paying
o All notes and currency issued by the BSP in accordance with RA 7653 are
considered of legal tender because it is the currency that is considered to
be applicable
o It is legal tender for all public and private obligations however, we also
have legal tender in its second sense which means that notes and coins
have a threshold quantity for it to be considered as valid for payment
o It is not possible that your obligation is to pay or you have a loan in the
amount of one million pesos, it is not possible that you pay your one
million obligation by means of 25 cents in the value of one million.
o The law also sets certain limits for notes or bills to be a threshold
amount for it to be considered as legal tender.

Under the monetary board, which is the governing body of the BSP, coins are
legal tender for amounts that exceed P50 for denomination of 25 cents so if you
pay 25 cents it is only up to P50 worth. Meaning creditor can refuse payment of
25 centavo coins beyond P50

- For denomination of 10 cents or less, it is only up to P20.

- All coins and bills above P1 are for valid legal tenders for any amount
unless there is a subsequent law and that subsequent law that is BSP
circular no. 537
o In July 18, 2006 which took effect on august 11, 2006, the maximum
amount of coins to be considered as legal tender is adjusted as follows:
o P1000 for denominations of P1, P5, P10 coins and for other bills
regardless of value
o 1 cent, 5 cent , 10 cent and 25 cent is only up to P100
o All paper bills is legal tender for any amount
o The unit of monetary value is called peso, Philippine peso (Php) to
distinguish from P which is the denomination for Mexican peso

If the parties stipulated to make payments other than Philippine currency that is
valid for as long as there is an express agreement in the obligation otherwise if
there is no express provision for payment of money other than legal tender or
currency
How about checks? Can you pay your obligation by means of a check? A check is
a commercial paper it has the value of cash if so accepted. Payment by means of
mercantile documents which for instance is a check does not extinguish and obligation.
It is not legal tender but if accepted by the creditor, it does not extinguish the obligation
until it is cashed. It needs to be deposited or be in cashed to extinguish the obligation or
they might have been impaired through the fault of the creditor. It is through his fault
that the mercantile document is impaired, it has the equivalent of payment already in a
sense that, it is not sufficient that the cash is the check for the purposes of payment.
Check is not a legal tender, you can validly refuse payment of the obligation by
means of a check, you cannot be compelled to accept payment of a check neither
can the creditor compel the debtor by a means of a check because that is not
legal tender under our law.

- If the parties agree to pay and accept payment by a means of a check then it has
the effect of payment and extinguishment of the obligation only when the check is
in cashed or deposited.

Article 1250. In case an extraordinary inflation or deflation of the currency stipulated

should supervene, the value of the currency at the time of the establishment of the
obligation shall be the basis of payment, unless there is an agreement to the contrary.
(399)

- Inflation and deflation

- Does inflation affect payment? In case of extraordinary inflation or deflation of
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,
- inflation is a sharp sudden increase of money or credit without the corresponding
increase in business transaction
- It actually results in the dropping of the value of money resulting in the rise of
prices and the purchasing power of the people are diminished
- It drops the value of money versus commodity
- There is actually inflation if there is an increase in the volume of money and
credit relative to the available goods resulting into a substantial and continuing
rise in general price level

Deflation is the opposite of inflation

- It is the reduction in volume and circulation of available money or credit resulting

in the decline of the general price level, it is the opposite of inflation there is no
purchasing power to circulate or to buy commodity
- This only affects currency because it affects the value of the peso, this only
affects your obligation if it is extraordinary
- It is extraordinary by finding it out with neda
 - If there is extraordinary inflation or deflation and the value of the currency is
affected because of such then the value at the time the obligation was made is
the determining value and not at the time of payment
- The factual basis is actually determined by proof and proof of which come from
competent authority to excuse you from payment of obligation at a particular
amount or currency and base it on the obligation at the time it was contracted
and it is determined by factual circumstances

Article 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 (403)

- Dictates where you should pay

- You should pay in the place designated in the obligation

SUBSECTION 1. Application of Payments

Article 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. (406)

- Applies when there is one debtor and one creditor and that one debtor has
several debts
- The debts must be of the same kind
- The debts to which payment made by the debtor has been applied must be due
and the payment must not be sufficient overall the debts
o As a debtor you cannot dictate as to where you will apply the
payment
- To avoid confusion; the debtor has the first choice, he must indicate at the
time of making payments and not afterwards which particular debt is he
going to pay
 o The consequence of his choice is to his detriment or advantage
o If in making use of his right of choice the debtor applied the payment
to debt, he cannot later claim that it should be applied to another one
o Once it is established at the time of payment, it is conclusive. He
cannot change his mind
o The right to make application once exercised is irrevocable unless the
creditor consent to a change
- He who has various debts of the same kind in favor of one of the same creditor
may declare at the time of making the payment to which the same must be
applied
- The general rule it is the debtor who chooses which obligation he is to make such
payment among several
- The rules on application of payment does not apply if you only have one
obligation
- It is applicable only when there are several debts, two or more
- If the creditor has not made the application or the application is not valid under
par 2, the debt which is most onerous to the debtor shall be deemed to have
been satisfied

Article 1253. If the debt produces interest, payment of the principal shall not be
deemed to have been made until the interests have been covered (411)

- Mandatory
- If you pay, it will be applied first in the interest, if it is stipulated to pay interest
- The principal will not be extinguished until the interest has been paid

Article 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.(412)

- In case of disagreement, the courts will apply the payment according to justice.
- There 3 articles are interrelated

1252 applies to debt of the same kind, same nature, if delivery should be delivery if
performance should be performance

DAY 3

SUBSECTION 2. Payment by Cession

Article 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.(416)

- Cession is another form of payment where the debtor cedes all his properties for
the purposes of the creditors applying the cession to the respective credits, the
losses
- It is another special form of payment and it consist the assignment of all the
properties 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, it
would seem that the debtor herein is unable to comply with his obligations and
there are two or more contending creditors who may ask him for payment of his
obligations
- The assignment takes effect and the creditors voluntarily and with agreement by
the debtor, it is as if that the debtor gives his entire estate to the creditors and the
creditors then settle among themselves how the estate will be liquidated, how the
properties will be sold, how it will be converted into cash, that is filed from the
proceeds
- This is now governed by Financial Rehabilitation and Insolvency Act (FRIA)
of 2010 RA 10142.
o The assignment of property under 1255 refers to voluntary or contractual
assignment which requires the consent of all of the creditors as
distinguished from a legal or judicial assignment which is governed FRIA
o This may refer to a voluntary or conventional assignment where the debtor
voluntary agrees to it with the creditor or it may refer to a involuntary or
legal cession where the creditors themselves petition to court to declare a
debtor insolvent and the petition shall enable or empower the creditors to
take hold of the assets of the debtor and cede among themselves in the
same manner
o 1255 actually cedes or transfers the entirety of the estate to the creditor, to
all creditors and ask from the insolvency court powers to liquidate the
properties of the debtor who is unable to pay the entire obligations
o If the debtor is capable to pay his entire obligations to his creditors then
there is no need for an assignment
o This article comes into play because the debtor is unable
o There are other modes of satisfying the obligation short of cession, he can
ask for extension of performing his obligations with other creditors
o this cession is one of those modes of payment, it may or may not be
availed of the parties since 1255 actually speaks of voluntary ceding
or cession of the entire properties of the debtor
o it is possible for them not to apply cession but it is an option
CESSION V DACION EN PAGO

SUBSECTION 3. Tender of Payment and Consignation

- here we have two concept;

o this is another kind of special payment
- tender of payment means that you offer to pay
- It is the act on the part of the debtor of offering to the creditor the thing or amount
due
 - The debtor must show that he has in his possession the thing or money to be
delivered at the time of the offer
- When you actually pay and the creditor accepts the money then that is
completed payment
- When you offer the payment and the creditor does not accept your
payment then you consign your payment to the proper judicial authorities

Consignation on the other hand is the act of depositing the thing or the amount due
with the proper court or judicial authorities when the creditor does not desire or refuses
to accept payment or cannot receive it after complying with the formalities required for
by law

- It is necessarily judicial and in generally requires a prior tender of payment which

is by its nature is extrajudicial
- Before consignation even happens there must be valid tender of payment unless
it is especially accepted by the law
- Unless accepted by the law consignation of the thing or the money in court with
the proper judicial authorities requires prior valid tender of payment
o There must firs be prior tender of payment and that payment was actually
either refused or in other circumstances.

Tender of payment and consignation must be validly done in order to effect the
extinguishment of an obligation.

The forms of payment are modes or forms of or ways of extinguishing an obligation. The
rationale in studying these forms of payment is to determine when the obligation is
actually extinguished.

In this instance both tender of payment and consignation must be validly done and there
are certain legal requirements for it in order to effect the extinguishment of the
obligation.

Article 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:

(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.(419)

- These are the instances when there is no need for the tender of payment
- These are the exceptions that consignation requires prior tender of payment,
these will allow the debtor to consign in court at the first instance

Article 1257. In order that the 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. (425)

- Requisites for Consignation

a) Consignation is proper only when there is a valid debt which is due and
demandable. A creditor debtor relationship must exist between the parties other
wise, the legal effects thereof cannot be availed of
b) Valid prior tender of payment by the debtor and refusal without justifiable reason
for the creditor to accept it

e) made to the interested parties

there are two notices required 1) before actual consignation and 2) after consignation

- The absence of any of the requisites is enough ground to render

consignation ineffective.
- Compliance with these requirements is mandatory and necessary
otherwise there will be no consignation and the obligation is not
extinguished, it subsist

Tender of payment is the definite act of the debtor in offering to the creditor what is due.
There must be intent. Ability and capability to make good such offer. They must be
absolute to cover the amount due.
It is not sufficient to send fillers that you will pay like sending a text that you are going to
pay the full amount but you have not actually made the deposit of the entire amount to
the creditor but you only made an expression of your intention to pay via text is not a
valid tender.

How do you prove that there is actual tender of payment? The tender must be
proved by the debtor in the proper case, in other cases when tender is not required,
there is no need to prove that there is actual tender but in so far as the regular rules in
the tender of payment and consignation is concerned, you need to have proof in order
to substantiate into court that there is already cause of action for consignation. That is
proved by the presence of notice as in the third requirement which requires that before
consignation there must be notice for the persons interested in the fulfillment of the
obligation that there was a tender of payment and that tender of payment was refused
and that you are now consign or a file a case of consignation in court.

- The absence of prior notice to the persons interested in the fulfillment of the
obligation the consignation is improper
- The purpose of the notice is to give a creditor the last chance to change his
mind.
- And in case consignation will be charged against him, he shall bear the risk of
loss
- Such being the object of the previous notice, it stands to reason that the same
should not contain a mere warning that the deposited thing tendered to will be
made in court but should fix the date and hour of the consignation and the
name of the court meaning the notice effectively gives a notice to the creditor
that a consignation is duly forthcoming
- The notice is actually a preparatory to the consignation or demand to the
payment other wise you will go to court and file a necessary case for
consignation.
- If there is still refusal and no acceptance of the payment despite the notice
that you gave to the creditor that you are going to court for consignation and
despite that he did not accept the money or the consignation, then
consignation shall take place

Article 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. (431)

- Consignation is the act of depositing the thing or the sum due with the proper
judicial authority and proper judicial authority means our courts
- This necessary to invoke or involve the jurisdiction of the courts in the
consignation because they have the effect of extinguishing the obligations by
a judgment by the court.
How do you consign the thing or money in court? You actually file a case because
there is a docket fee. File a petition for consignation of money or obligation or thing in
court. You allege that you have a valid debt and your creditor, that your debt or the sum
due and demandable and that you offered to pay but tender of payment was refused
and you have already given notice of the previous consignation to other creditor or other
person interested for the payment and that you are consigning the thing in court
whether it is a sum or thing. And you file it in court and pay docket fees etc. The docket
fee will be charge as damages against the creditor as he refused the acceptance of
payment.

- You were compelled to litigate because of the refusal of the creditor to accept
payment
- Summons will be then issued and is considered as your second notice,
subsequent notice made to the interested parties that a consignation has
already been made and that you are being summoned to court for the
consignation case.

Once you have proved you case, then the court will issue an order or decision that you
have the right to consign a thing in court and that consignation has constitute as
payment and therefore you are released from that obligation. It is now under judicial
deposit

- The effect is that the property is now deposited in court, in its generic sense,
the money deposited in court or the thing deposited in court hidden
somewhere else. If it is in a garage then the expenses for its safekeeping
shall be for the expense of the creditor

Article 1259. The expenses of consignation, when properly made, shall be charged

against the creditor.

- The consignation was made necessary because of the fault or the unjust
refusal of the creditor to accept payment, that being the case is but just that
the expenses should be charged against him.
- The expenses is charged against the debtor if the consignation is not properly
made, the expenses will be charged against the debtor

Article 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. (432)

- once consignation has been duly made. The debtor may ask the judge to
order the cancellation of the obligation because tender of payment and
consignation has been duly proved.
 - 2nd: it is a right given to the debtor that before the court orders that there is a
consignation, he can withdraw sum deposited in consignation and allow the
obligation to remain in force. And wait for the creditor to ask for the payment.
- When consignation is deemed to have been properly made, the creditor then
accepted the amount or thing deposited without objection his payment of the
obligation. But the expenses will be charged against him even the damages
- If the creditor questions your process, requisites, right to consign in court, the
creditor can do that to oppose the consignation but the court has to hear
- Where all the requisites of a valid consignation have been complied
with, the loss of the thing or the amount consigned occurring that
without the fault of the debtor before the acceptance of thing by the
creditor is for the account of the creditor. – it is the risk of the creditor
but before the case the risk bear with the debtor.

Article 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.

SECTION 2
Loss of the Thing Due (435)

- Loss of the thing due can be a mode or goes out of commerce or disappears
in such a way that its existence is unknown

Article 1262. An obligation which consists in the delivery of a determinate thing shall be
extinguished if it should be lost or destroyed without the fault of the debtor, and before
he has incurred in delay.

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.
(437)

- It is understood that when the thing is lost, when it perishes goes out of
commerce or disappears in such a way that its existence is unknown or
cannot be recovered
- Loss a determinate thing is the equivalent of the impossibility of performance
and obligations to do
- But the lost of the thing due as used in 1231 par 1 in the above section
extends to both obligations to give and obligations to do in 1262

When does loss of the thing does not extinguish the obligation? There are
certain instances that even if there is the loss of the thing, the debtor is still liable
when the laws so provides as when the loss of a generic thing given by fortuitous
event.
 - When the stipulations so provides that the parties in the obligation agreed
between themselves that even if there is loss, there will still be liability for it
- Usually in insurance contract even if there is force majure, the insurer will stil
be liable for damage or total or partial loss

When the nature of the obligation requires the assumption of risk or when the obligation
to deliver a specific thing arises from a crime under 1268

Article 1263. In an obligation to deliver a generic thing, the loss or destruction of

anything of the same kind does not extinguish the obligation (439)

- Provides for an exception, when the thing is loss but there is still liability for
the thing or obligation despite it being lost
- The debtor is still compelled to deliver a thing because of the nature of it
being a generic thing

Article 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.(440)

- The partial loss of a specific thing

- A partial loss of a generic thing does not extinguish the obligation more so
total loss of a generic thing does not extinguish the obligation
- But total loss of a specific thing extinguishes the obligation
- However, a partial loss of a specific thing depends on the circumstances
- Partial loss when there is only a portion of the thing lost, destroyed or when it
suffers depreciation or deterioration and the partial loss does not equate to
impossibility of performance of the obligation
- In case of partial loss, the losses that the courts are given discretion
- In case of disagreement between the parties, the courts will have to decide
because of the disagreement of the parties, they will determine whether under
the circumstances, it is so important as to affect the entire relations of the
party, it is insignificant as to not affect the obligation to deliver, give or do
- If there is no disagreement, if the parties are in agreement as to the effect of
the partial loss, then there can be complete fulfillment at the reduction of the
obligation
- Courts will only intervene if there is the disagreement between the parties

Article 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 article 1165. This presumption does not apply in
case of earthquake, flood, storm, or other natural calamity. (441)

- This is a disputable presumption, there is a presumption but it can be

destroyed and that presumption is a presumption of fault. Whenever the thing
to be deliver is lost at the possession of the debtor, it is presumed that the
 debtor is responsible therefore unless it is prove in the contrary and without
prejudice to 1165
- The creditor has a right to rely on such presumption because it is the debtor
who has such custody or possession of the same, it is under his care without
prejudice to the effects of the 1165
- The creditor has no duty to show that the debtor is at fault, it is the debtor who
must prove that he was not at fault
- Under the 3rd paragraph of 1165, the obligor who is not at fault is liable if he is
guilty of delay or his promise to deliver the same thing to two different
persons who do not have the same interest in which case even if there is no
law, those factors will still make the debtor liable
- In case of natural calamities, there is no presumption of fault on the part of
the debtor.

Article 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 (441)

- This is equivalent to a loss because of the impossibility or the illegality of the

performance of the obligation or the obligation itself
- The article lays down the exception to the obligatory force of obligations or
contracts
- It refers to a case where despite the contract between the parties, despite the
obligation having the force of law between the parties that the thing or the
prestations has become impossible, it is extinguished

How does a thing become legally impossible? When the obligation cannot be
performed because it is rendered impossible by a provision of a law or although
physically it can be possible. It is incapable of performance.

If the law itself declares that performance of such kind of obligations becomes legally
impossible when there is the declaration of a law by the thing is against the law, it is
against morals, if it is declared illegal. There is legal impossibility

Physical impossibility takes place when for example the obligor dies or becomes
physically incapacitated to perform the obligation, the law does not really make a
distinction whether or not the obligation can still be performed by others. All that the law
says is that it is incapable of it being physically impossible to do the obligation without
the fault of the obligor or the debtor.

If it is due to the fault or negligence of the obligor, the debtor should be made liable for
the obligation or damages because in such case he will be in delay

Article 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.(443)
 - Difficulty of performance, this is different from legal or physical impossibility
- This refers to an instance occurrence or and event that makes it impossible
to perform the obligation by the debtor and the difficulty of the resulting
impossibility will be tempered whether it is in whole or in part, meaning there
is only reduction in the part of the party
- The general rule is that the impossibility of performance releases the
obligor, physical or legal impossibility
- It talks about prestation involving a service, it is usually termed as doctrine of
unforeseen events,
- in performance of a service becomes so difficult as to may be manifest in the
contemplation of the parties the court is authorized to release the obligor
either in whole or in part of the obligation
- It would be unfair to force the obligor to perform the obligation despite its
extreme difficulty, that that difficulty has not been envisioned by the parties in
the first place when they entered into a contract or in the obligation

The difficulty of the performance should be such that one party should be place at a
disadvantage by the unforeseen event

Financial difficulty cannot justify nonpayment of a loan

If you are contracted to do a wedding reception service, when there are covid 19
protocols preventing gatherings, the impossibility was not contemplated by the parties
from the time they entered into the obligation or when for instance you were contracted
to construct a road and the price of cement has gone way off the roof and it is
impossible for you to complete the contracted obligation with the amount paid to you
and you are not able to comply with the entire obligation then in such case there can be
a reduction in whole or in part of the obligation

- You may be allowed not to deliver the entire thing but deliver only a particular
portion of the thing or be exempted altogether but it depends on the courts
discretion to determine whether the impossibility is manifestly beyond the
contemplation of the parties
- Determination of manifest in public or the impossibility of the obligation to be
performed by the parties was never contemplated by the parties in the first
place, is a judicial question to be determined by the courts and the effects is
that the court may either reduce the obligation or extinguish it altogether
because that would be tantamount to a loss whether partial or total

Effect of fortuitous event where the obligation precedes from a criminal offense, this is
another instance when fortuitous event do exempt a party form complying the obligation
when a fortuitous event does not exempt a debtor from liability in this case the
obligation subsist

Article 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.
(445)

Article 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 (446)

- The creditor is given the right to proceed against third persons responsible for
the loss, there is no need for assignment by the debtor
- The right of the debtors are transferred to the creditor whom the moment the
obligation was extinguished by operation of law, to protect the interest of the
latter by interest of the loss.
- This is usually common in insurance contract where there is the right of
subrogation

SECTION 3
Condonation or Remission of the Debt

- is gratuitous renunciation by the creditor of his right against the debtor

resulting in the extinguishment of the latter obligation in its entirety or in part.
- As the same is a form of donation

Article 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. (447)

- It is similar to a donation and if it is expressly done, it should be in a form of

donation because you have waived the obligation
- It must be gratuitous, it is accepted by the obligor, and not forced or
compelled to accept the generosity of another, if the creditors says that it is
yours and you can reject it as you do want to owe someone debt of gratitude.
- Because it is gratuitous undertaking, it must be accepted by the obligor, the
parties must have capacity and it must not be inofficious
- That liberality does not come at a price meaning it should not affect the
creditor
- An inofficious donation is an invalid donation, a donation must come with a
caveat that donor has left something sufficient for his own subsistence, if the
donation has come with a price that he would become a pauper then that is
an inofficious donation
- The reason that there must somehow proof of the condonation or order
remission
If condonation of the debt is done completely or partially, completely if the entire
obligation is condoned or remitted or partial if the portion of the obligation thereof has
been condone or remitted

As to its form it must be expressed when it is made verbally or in writing or implied if

inferred from conduct of the parties

Article 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. (451)

- It raises the presumption that there is a remission or a condonation

- There is a private document evidencing the credit, there is a promissory note
which is in the possession of the creditor
- If the debt is not yet paid, the creditor holds on to the promissory note, that is
the proof that a person has a debt from you. It is the proof of the obligation
- The logical inference is he is renouncing his right
- There is a disputable presumption that the debtor has waived his obligation,
that can be disputed by contrary evidence by the creditor
- Admissible show that it was not done voluntarily

Why does it refer to private document? If it was notarized and sworn to in the notary
public, it becomes a public document. It is converted from a private document, and
agreement between the parties versus a public document that is sworn to and
acknowledge before a notary public and the notary public’s seal, and authority to
administer oath converts it to a public document

Why is this presumption only applicable to private documents? Because the public
document is available for everyone to see, you can get public document from the notary
public and certify it.

It applies only to private document because the possibility of it being delivered

voluntarily is remote

Article 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. (453)

- 1271 and 1272 goes hand in hand there is a standing presumption that it is so
delivered voluntarily
Article 1273. The renunciation of the principal debt shall extinguish the accessory
obligations; but the waiver of the latter shall leave the former in force. (454)

- When principal obligation is renounced by means of condonation or

remission, accessory obligation is also released
- Accessory obligation follows its principal
- If there is a mortgage or security in the guarantee, the loan is condone by the
creditor, its guarantee which is the accessory obligation that secures the loan
will also be condone
- It cannot stand on its own

Article 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. (455)

- The pledge is a special form of contract

- It is necessary that the thing pledged be laced in the possession of the
creditor, the pledge for it to be valid requires the delivery of the thing
- Personal property to be delivered to the pledgee in exchange of money
- The very basis of the contract of pledge is the delivery of the thing and to
have it in the possession of the pledgee in order for it to be effective
- Otherwise if the thing was not delivered to the pledgee there is no pledge of
contract.

If the thing is found in the possession of the debtor, there is the presumption that the
obligation is actually remitted or condone. It is a presumption that is disputable by
contrary evidence.

DAY 4

SECTION 4
Confusion or Merger of Rights

- Fusion of rights of debtors and creditors, the meeting of one person in the
quality of one debtor and one creditor, in one person he becomes the debtor
of his own credit
- The creditor issues a negotiable instrument
o The debtor owes creditor P10000 for which the debtor executed a
negotiable instrument, a check in favor of creditor, payable to the
creditor P10000.
o The creditor indorsed the note to X, a third person. Who in turn
indorsed the same check to Y and Y bought goods from the store
of the debtor and instead of paying for cash, he indorsed the
same check to the debtor. So the debtor’s check returned to him.
The original debtor has become his own creditor because when
then check was indorsed to him
  Upon indorsement. In negotiable instrument, checks are
negotiable by indorsement you can transfer your right into that
check by means of negotiating it by indorsement to a third
person.
- Because of the confusion of such personality or the fusion of such personality
between debtor and creditor, to avoid a situation where the debtor has to deal
with himself the law considers the debt as already extinguished

What is the reason or basis of confusion? Why does this extinguish the debt or
the obligation? the reason or the purpose of confusion is that the law treats confusion
or merger as a mode of extinguishing obligations because if the debtor is his own
creditor, enforcement of the obligation becomes absurd, it would be useless for the
debtor to enforce the debt or the amount issue in the check to himself. Rather to pay the
amount on the check to himself because the check circled back to him. It becomes
absurd because a person cannot claim payment to himself

Furthermore if there is a confusion of rights, the purposes for which the obligation may
have been created are deemed realized. For a valid confusion or merger to take place,
it is necessary that it must take place between the principal debtor and creditor and
must be complete and definite.

It is necessary that the obligation must be between principal debtor and principal
creditor, there can be no confusion of obligation with respect to an obligation that is
accessory with that of the principal creditor.

Article 1275. The obligation is extinguished from the time the characters of creditor and
debtor are merged in the same person. (456)

Article 1276. Merger which takes place in the person of the principal debtor or creditor
benefits the guarantors. Confusion which takes place in the person of any of the latter
does not extinguish the obligation. (458)

- Any accessory obligation of guarantee is also extinguished in accordance

with the principal
- As an effect of the confusion and the merger of rights of debtors and creditors
- In the previous example if the debt of D is guaranteed by another person G
who guarantee by contract of guarantee, the payment of the obligation by D
and because of the merger or confusion of the obligation of D to himself, that
subsidiary, that accessory obligation of guarantee of G, guaranteeing or
securing the obligation oof the debtor is also extinguished
- The merger which takes place in the person of C benefits the guarantor
because the extinction of the principal obligation carries with it that of the
accessory obligation guarantee
- However, the extinguishment of the accessory obligation does not carry with it
that of the principal obligation. if the accessory obligation is extinguished then
the principal obligation subsist
 - Consequently if there is a merger that takes place in the person of the
guarantor while it extinguishes the guarantee, leaves the principal obligation
in force
- If there is a merger in the obligation between the guarantor and the creditor
there is no extinguishment of the obligation since the debtors obligation
subsist, the guarantors obligation is the one extinguished

Article 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. (459)

- This is a necessary consequence of the fact that the principal in joint

obligations, each obligation of a joint debtor is separate and distinct from that
of the other co debtors and in that case if there is a merger in so far as the
amount of the debt of the debtor in the joint obligation with the creditor then
the confusion or merger of rights extinguishes his own obligation leaving the
other obligations of the joint debtors subsisting
- If for instance the joint obligation is P10K each D1, D2. P20K and then they
are joint debtors, if both of them issued checks in the amount of P10K each.
o For D1 the creditor, indorse to X, Y and to D1 himself, the obligation is
extinguished in so far is D1 is concerned only but not with respect to
D2 who is also a joint debtor and the obligation to the creditor still
subsists
o So the obligation of the co debtor is separable in a joint obligation and
subsist or remains to be an obligation that he is liable for even with the
confusion or merger of the obligation of the other joint co debtor with
the creditor
- In a solidary obligation, if there is a merger in one of the solidary debtors in
the obligation with the creditor, it shall extinguish therefore, the entire
obligation because the necessary effect of a solidary obligation is that if it
benefits the others then it extinguishes the obligation. it has the same effect
with solidary obligation
o In solidary obligation, the obligation of one is the obligation of all,

SECTION 5
Compensation

- It takes place when two persons in their own right are creditors and debtors of
each other. You compensate each other
- Is the extinguishment to the concurrent amount of the debts or obligations of
two persons who in their own right are reciprocally or mutually principal
debtors and creditors of each other
- It involves the simultaneous balancing of two obligation in order to totally
extinguish them if they are of the same among or to the extent where the
amount of one is covered by that of the other, if of different amounts
- To the point where they meet in the amount of their obligation
Ex. A owes B the amount of P1000, B has the debt of P700 to and both debts are due
and payable today, is there compensation?

- Yes there is compensation but it takes place partially, there is compensation

to the concurrent amount of P700, that is where their obligations met.
- A should be liable to B for only P300
- And if the two debts are of the same amount for instance P1000 for both, then
there is total compensation as stated in 1281
- After the concurrent amount the obligation is extinguished, there is no need to
transfer P700 to each other.

The objective of compensation there is to prevent unnecessary payments and mutual

extinction of the debts

- It is more convenient to apply compensation than to enforce the obligation to

each other
- It is abbreviated payment, it facilitates payment because it avoids litigation,
error
- Compensation supposes a more convenient and less expensive realization of
two payments meriting a simplified payment scheme by which it is often told
- It is ever ore increasing in application because of the extension and
importance of credit and the rapid circulation of credit document that make
normal and frequent situations for two persons become reciprocally creditors
and debtors
- In this sense the economic utility of compensation gives advantages for credit
and for saving the use of money in transaction, simplifying accounting as
such that they are induced the creation of a special establishment carrying its
name

There are different kinds of compensation

1) Legal - 1278
2) Conventional - absence of the legal requisites best exemplified by 1282
3) Judicial compensation – takes place from an order from a court in a litigation
1283, merely a form of legal compensation when declared by the courts by virtue
of an action by one of the parties who refuses to admit it and by the defense of
the other who invokes it
4) Facultative – can be set up only by one of the parties as in 1287 par 1 and 1288

Article 1278. Compensation shall take place when two persons, in their own
right, are creditors and debtors of each other. (459)

- the law presumes that compensation has taken place, ipso jure (by operation
of law) without the acknowledgment of the parties and without the parties
even knowing that compensation has already taken place

Article 1279. In order that compensation may be proper, it is necessary:

(1) That each one of the obligors be bound principally, and that he be at the
same time a principal creditor of the 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. (465)
 REQUISITES FOR COMPENSATION

1) both of the parties are bound in their principal capacity not as accessories and
that they be principal creditors of the other in the principal obligation

2) consist of a sum of money, things due are consumable may be of the same
kind or quality of the later has been stated

- If you have a debt of one bunch of orange and the other has one bunch of
mangoes, can it be compensated?
o No because it is not of the same kind
3) It must be due
4) Liquidated and demandable
5) Not subject to any attachment or execution which can affect the free disposal by
the other party
- This article further explains 1278

While compensation requires the confluence in the parties of the characters of mutual
debtors and creditors, their tights as such creditors and their obligations as debtors
need not spring from the same contract or transaction.

- They can be debtors and creditors from separate or distant transactions and
they may be unaware of such compensation to have taken place

For legal compensation to take place, it must clearly appear under the evidence that the
parties in their own right are creditors and debtors of each other

CASE MAVEST USA Inc v Sampaguita Government Corporation 470 scra 440
2005

Concededly, the Civil Code lists compensation as one of the modes of extinguishing the
obligations of persons who, in their own right, are creditors and debtors of each
other.3 Compensation may be legal or conventional. Legal compensation takes
place ipso jure when all the requisites of law are present, 4 as opposed to conventional
or voluntary compensation which occurs when the parties agree to the mutual
extinguishment of their credits or to compensate their mutual obligations even in the
absence of some of the legal requisites.5

For compensation to validly take place, the governing Civil Code provisions6 require the
concurrence of well-defined conditions. At its minimum, compensation presupposes two
persons who, in their own right and as principals, are mutually indebted to each other
respecting equally demandable and liquidated obligations over any of which no
retention or controversy commenced and communicated in due time to the debtor
exists. But while compensation, be it legal or conventional, requires the confluence in
the parties of the characters of mutual debtors and creditors, their rights as such
creditors, or their obligations as such debtors, need not spring from one and the same
contract or transaction.7

With the view we take of this controversy, legal compensation could not have occurred
in this case. The appellate court delved on the reason why legal compensation does not
obtain herein. It pointed to the fact that petitioners, on one hand, and respondent, on the
other, are not mutually bound as creditors and debtors. As correctly found by the Court
of Appeals, it was only the petitioners’ debt to the respondent that had been rightfully
established.

For instance A owes B P10000 and B owes A P10000, now compensation will take
place because A and B are principal debtors and creditors of each other. A owes B
P10000 with C a guarantor, B the creditor owes C the guarantor P10000, will there be
compensation? There will be no compensation between B and C. Because while B
is principally liable to C, C is mere subsidiarily liable to B because of the
obligation of B to the guarantor only and not A

- The obligors must be principally bound and that he at the same time a
principal creditor of the other.

A owes B

B, C, D and E are members of a partnership entity

A owes B, C, D, E as a partnership P10000, BCDE partnership company owes A

P10000, can there be compensation?

- There can be no compensation because A owes the amount of money to the

persons in the their personal capacity, BCDE, P10000
- Is the obligation of the partnership BCDE partnership company to A P10000?
- They are not principal creditors and debtors of each other because while A’s
creditor is a partner, the partnership is the debtor of A and not the partners
- There is separate personality same as the corporation, the corporation and
the partnership are separate in personality from the persons comprising it,
they are artificial persons, the obligation is different
- The partners obligation are different from the partnerships obligation subject
to certain rules

Compensation is between A and stockholder, A owes the stockholder, and the

corporation owes money to A, there is no compensation because the stockholder
is different from the corporation in terms of personality, there can be no principal
debtors. The obligations must refer to the fact that both obligations when it
consist of sum of money both shall consist of sum of money for instance:

If A owes B P10K and B owes a laptop computer, can there be compensation?

No there cannot be a compensation because they are not of the same kind and
both are not sums of money. If one is money the obligation of the creditor to the
debtor should be money to

If both are fruits but that are of different kinds then there is no compensation

There must be identity as to kind and quality

The two debts must also be due and demandable at the same time, the
performance can be enforce in court.

So if one has term, it is not yet due on a particular day, there can be no
compensation there and both debts must be liquidated

- debt is liquidated if the amount thereof is known by definite figures

- we only know the amount that is principal, how much is the interest
- We know what the terms and conditions are by simple computation only and
therefore, there is a determination of the full amount of the obligation

No retention of controversy has been commenced by a third person and this is a

negative requisite meaning that there must be no law or order or court order or
any writ of attachment or execution that prevents the credit from being liquidated
and from being paid to another, there is no legal obstacle in demanding for such
debt

Can there be compensation against the government? you are a contractor of the
government, the government owes you P1M for the construction of a fly over and you
come April 15 for income taxes, can you say that since the government owes you P1M
for your contract, you will not pay the taxes and compensate it to the debt of the
government to you? No it is not possible. There can be no compensation against
the government. Debts due to the government are actually demandable at any
time, it is not subject to compensation because taxation is the life blood of the
government.

- it is the means of the government to continue its life by people’s payment of

taxes, there it cannot be subject to any contract in such case otherwise it will
dilute the nature of taxes as the life blood of the government
- you and the government are not debtors and creditors of each other in so far
as taxes is concerned. it is your obligation as citizen to pay your taxes

In claims for refund for erroneously or illegally collected taxes

- the Sc has allowed the determination of a tax payers liability in a refund case
thereby allowing offsetting or compensation of taxes because the
determination of the taxpayers liability is intertwined with the resolution of the
claim for tax refund of erroneously or illegally collected taxes under Section
229 of the national internal revenue code
 - there is a remedy when there is overpayment of taxes or erroneous payment
of taxes, you can claim for a refund from the government or those overpaid or
illegally collected or erroneously collected taxes
- when the time comes for you to pay your annual income tax, you are the one
who has to pay the government
o there are certain instances when those claims for refund has not yet
become liquidated as of the time of payment of taxes may be set off for
the tax liability of a particular tax payer in which case a compensation
actually takes place
o you have the obligation to pay tax on a particular taxable year but you
also claim for refund

CIR v Toledo Power Corporation

Article 1280. Notwithstanding the provisions of the preceding article, the

guarantor may set up compensation as regards what the creditor may owe the
principal debtor. (470)

- it is not possible that the guarantor will compensate the obligation of

the principal debtor and the creditor. There is no compensation in so far as
the accessory obligation is concerned with the principal obligation
- This is an exception to the rule that only the principal debtor can set up
against the creditor what the latter owes him and although the guarantor
is only subsidiarily liable in such case, he is given the right to set up
compensation.
o the reason is that the extinguishment of the principal obligation as a
consequence carries with it the extinguishment of the accessory
obligation
o It is more of a conventional or voluntary compensation rather than a
legal compensation because it is of the will of the guarantor that the
compensation actually takes place

Article 1281. Compensation may be total or partial. When the two debts are of
the same amount, there is a total compensation. (471)

- Voluntary compensation is mentioned

Article 1282. The parties may agree upon the compensation of debts which are
not yet due. (n)

- Exception to the general rule that only debts which are due and demandable
can be compensated
- Voluntary or conventional compensation includes any compensation which
takes place by agreement of the parties even if all requisites for legal
compensation are not present
 - This kind of compensation has no special requisite, it is sufficient that the
contract of the parties which declares the compensation is valid. Thus the
absence of mutual creditor debtor relation cannot negate the conventional
compensation

A owes B one bunch of mangoes and B owes A one bunch of oranges so there is no
legal compensation because if it is not of the same kind and quality parties can enter
into a contract where they say that I owe you one bunch of mangoes and you me one
bunch of oranges and therefore we consider such debts to each other as fully
compensated with our mutual obligations and therefore, there is no need for the
enforcement for such obligation against each and consider the same as fully
compensated. Even if they are not of the same kind if the parties agree to a
compensation voluntarily, knowingly, legally agree that there is such, then there is
compensation – conventional compensation, by agreement of the parties

- The only thing that you need to do is that to take care and take note that
these parties are able to dispose of these things completely and they agree to
it voluntarily
- There should be no vitiation of consent, you are not allowed to complain later
on
- There must be a valid a contract in compensation; consent consideration and
object

Article 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. (n)

- Judicial compensation or commonly a set off

- It takes place when it is so for declared by final judgment of a court in a case
so it is by virtue of a decision issued by court of law
- A party may set off his claim for damages against his obligation to the other
party by proving his right to said damages and the amount thereof
- Both parties must prove in this case their respective claims
- The plaintiff sues the defendant under a cause of action as an example for a
collection of sum of money
- If the defendant set up a counterclaim for damages against the plaintiff and
the defendant is able to prove such counterclaim then there can be a judicial
set off because if the plaintiff wins then he is to collect from the defendant and
if the defendant is able to prove his damages in the counterclaim then he is to
collect also from the plaintiff
o There is a compensation that happens and that is by a virtue of a
judicial order
- Both parties must prove their respective claims in the court of law, in the
absence from both parties on their claims of setting is improper
o It is not possible to off set something outside of the courts litigation
there must be a case
 o The right to offset might exist but the question of how much it will offset
is a judicial question
- A set off or counterclaim is different from legal compensation
- Judicial compensation must be pleaded in court while legal compensation is
not even required that the parties know that the compensation has taken
place

Article 1284. When one or both debts are rescissible or voidable, they may be
compensated against each other before they are judicially rescinded or avoided.
(473)

- this is in consonance with the principle that a contract if considered

rescissible or considered voidable is valid until the court declares that it is
void or rescinded
- it maintains its validity until declared otherwise by the court and therefore if it
is valid and there is no judicial declaration of its recission or annulment then it
can be set off
- if the contract is rescinded or annulled there must be a restitution

Article 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. (1198a)

- compensation has taken place before the assignment

- when there is an assignment, when compensation has taken effect by
operation of law, the parties are not even aware that the compensation is
taking place
- If it is by operation of law we say that compensation affects automatically to
the concurrent amount and the debt is extinguish
- If subsequently the extinguished debt is assigned by the creditor to a third
person, the debtor can raise the defense of compensation, it is well settled
that the right of the assignee are not any greater than the rights of the
assignor meaning what is assigned by the creditor is what is assigned to the
assignee so if the credit of the creditor is compensated and he assigned it the
effect is that it will be included to the credit assigned since the assignee is the
substitute in the place of the assignor as the assignee only gets the kind of
 credit that the creditor has he cannot be greater or lower than the assigned
credit itself
o The remedy of the assignee for instance that there is a valuable
consideration that is given to the creditor and why he gave his
credit to the assignor, he cannot get anything from the debtor but
he can go after the creditor, the assignor
o The compensation by the debtor to apply the effects of legal
compensation subsist in such case

Three cases covered: which takes place after assignment of right of the creditor

A) a owes b 3k due on nov 15. B in turn owes A P1k due on nov 15 subsequently b
assigned on nov 1 with the consent of A his 3k to C. on nov 15, A cannot set up
against C the assignee the compensation which would pertain to him against B,
assignor. In other words, A is liable to C for 3K but he can still collect P1k debt of
B.
a. However if A while consenting to the assignment reserves his right to
compensation, he would be liable only for P2k to C as in par 1, the debtor
who consented to the assignment of rights made by creditor in favor of a
third person cannot set up against the assignee the compensation which
would pertain to him which is P1k against the assignor unless the assignor
was notified by the debtor at the time he gave his consent that he reserve
his right to the compensation
B) You knew about it but you stayed silent about it. This is the same as
possession of tolerance. You own a lot of property and you know that there is
a squatter who lives there. You have knowledge of their possession but actually
you do not have consent.
a. A owes B P1k due on nov 1 then b owes A P2k due on nov 10
b. A owes b another credit P1k was due on nov 15
c. A assigned his right to C on nov 12 then you notified B but the latter did
not communicate his consent to the assignment
d. How much can the assignee C collect from B?
 e. in such case B can set up the compensation of debts on nov 10 which was
before nov 12 which is the date of the assignment, there being a partial
compensation, the assignment is valid only up to the amount P1k but B
cannot raise the defense of compensation with regards to the debt of A
due on nov 15 which has not yet matured
f. So on nov 12 B is liable to C for P1k and come nov 15 A will liable for his
debt of P1k to B
C) If the assignment is made without the knowledge of the debtor, he may set
up the compensation of all credit prior to the same and also later ones until
he have knowledge of the assignment
a. In the previous example, if the assignment was made without the
knowledge of B who learned of the assignment only after the
obligation have become D. B can set up a compensation of credits
before and after the assignment
b. If the knowledge come after all the obligations has become due and
if the knowledge of the assignment was on the date after all the
obligation has become due then the debtor can set up all the other
compensation that may take place under the situation

Article 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 payment. (477)

- Debts payable at different places, there can be compensation by

operation of law

Article 1287. Compensation shall not be proper when one of the debts 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 paragraph 2
of article 301. (1200a)

- If one of the obligation arises from a deposit or a commodatum, there can be

no compensation because a deposit and a commodatum requires delivery, it
is not possible to compensate things which are subject to delivery
- When the obligation is on the basis of right or obligation to support, there can
be no compensation

Article 1288. Neither shall there be compensation if one of the debts consists in

civil liability arising from a penal offense. (480)

- You cannot compensate, your civil obligation arising from penal liability or the
amount due you a civil liability because of crime against you
 o If you complained and won a case for reckless imprudence resulting in
physical injuries and the court adjudged you with civil liability to be paid
by the accuse or operator which cause the injury, the amount which is
due to the liability cannot be compensated with any other obligation
that you have as against the accuse or the operator.
o It is because it is a liability imposed by the court

Article 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. (481)

- If a owes several obligation to B and B owes A only one obligation, the

rules on application of payment shall be applicable
- If the debtor has various debts which are susceptible for compensation,
he must inform the creditor which he wants to compensate and if he
fails to do so, compensation shall be applied to the obligation which is
considered most onerous as stated and applicable also in cases of
application of payments
- If there is no declaration as to where the payment should be made, it is
to be applied to the obligation which is most onerous

Article 1290. When all the requisites mentioned in article 1279 are present,
compensation takes effect by operation of law, and extinguishes both debts to
the concurrent amount, even though the creditors and debtors are not aware of
the compensation.

- 1278, 1279, 1290 are interrelated, they refer to legal compensation

- If requisites in 1279 are present compensation takes place by operation
of law even though the parties are not aware of the concurrent
obligations that they owe each other

SECTION 6
Novation (488)

- We novate an obligation because we change the obligation

- Any change brought about in a change in the conditions of the obligation, the
debtor changes or the creditor changes affects the obligation
- It may either continue or extinguish the obligation altogether
- A new obligation substitutes an older one or a new obligation completely
extinguishes the old one
- Total or partial extinction of an obligation through a creation of a new one
which substitutes it.
- The extinction of the old obligation, may result to a birth of another obligation
but nonetheless there is extinction
 - It usually refers to the substitution or change of obligation of another which
extinguishes or modifies the first by either 1291
- novation is a contract, it contains two stipulations:
o to extinguish or modify the old
o to substitute the new one in its place
- it completely overrules, extinguishes the obligation
- It can be extinctive in a sense that the old obligation is extinguished and
terminated by the creation of a new one
- Merely modificatory; the new agreement will not have the old obligation
but only modifies the provision

The effect of whether it is total, partial or modificatory is dependent on the nature

and intention of the parties, it is the nature of the change in the obligation and the
intention of the parties that will depend in determining whether the extinction is
either extinctive or modificatory

Article 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. (1203)

1) change in the person of the debtor and there subrogation or change on the person of
the creditor

Kinds of novation
Requisites for novation

Article 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 the new obligations be on every point incompatible with each other. (494)

- In novation there are four essential requisites:

o Existence of previous valid obligation
 o The intention or agreement and capacity of the parties to extinguish or
modify the obligation
o The extinguishment or modification of the obligation
o The creation or birth of a valid new obligation
- There must be in effect two contracts in existence:
o Old one
o New one which extinguishes the other
- Modification introduced before a bargain becomes obligatory can in no sense
constitute novation in law

The issue of whether there is novation is question of fact as it necessarily retains

of the requisite of novation

No forms or words are necessary and unmistakably establish by express

agreement or by the acts of the parties as novation is never presumed.

As much as possible we avoid concluding that novation is by presumption or

implication of law it must be either expressly agree by the parties or adjudged by
the parties that a novation has taken place

Which indicate the presence of novation and thereby produce the effect of
extinguishing an obligation of another which substitutes the same; there can be
novation in either of two instances

1) by the express agreement of the parties of equal or

equivalent import (agreement of the parties saying contract
novates entirely the first contract; expressly stating; the acts of the
parties clearly and unequivocally that there is novation of the first
or prior contract))
2) by a irreconcilable incompatibility of the two obligations
which incompatibility refers to every material respect
(irreconciled incompatibility of the two obligation with each other
in every material respect; both contracts are so different that is
difficult to reconcile one with the other there is a novation of the
previous contract)

Valenzuela v Calaayaan development and industrial corporation

There is no novation without such release; the third person who assumed the
debtors obligation;

If the novatory contract says that the obligation is extinguished and novated by
the new contract it is expressly said
The question of interpretation may exist only if the novation takes place because
material incompatibility that is where you assert or maintain that there is no
novation

What is the test of incompatibility?

Changes in principal conditions is only modificatory and is insufficient to extinguish the

original obligation

Relio v CA; a compromise agreement which merely clarified the total sum owed by the
would be buyer to the would be seller with the view that the former would find it easier to
comply with his obligation under the contract to sell does not novate the contract to sell
in fine the compromise agreement can stand together with the contract to sell

A change which consist only in the time or place of payment of the obligation or mode or
manner of payment of the obligation without really affecting substitution of any of the
principal condition is not a novatory contract it merely supplements the old one

The second contract merely says that the seller and buyer in the contract to sell
provides for a different schedule and manner of payment so that it could settle it
insolvency is not novation or by monthly payment, not novatory it only modified.

Slight modification of the original obligation which has no effect to the principal
conditions of the old obligation are mere modification and variations of the contract and
do not affect the entirety of the old obligation. – construction contracts

If the modification is more onerous than that of the original, the original shall subsist.
Same goes will less onerous

Extinguish or incompatible

Article 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 articles 1236 and 1237. (505)

- personal novation
Requisite for Expromision

Delegacion
Parties in Delegacion

Requisites for Delegacion

Article 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 obligations shall not give
rise to any liability on the part of the original debtor. (n)

Article 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. (1206a)

Article 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. (1207)

Article 1297. If the new obligation is void, the original one shall subsist, unless the
parties intended that the former relation should be extinguished in any event. (n)
Article 1298. The novation is void if the original obligation was void, except when
annulment may be claimed only by the debtor or when ratification validates acts which
are voidable. (1208a)

Article 1299. If the original obligation was subject to a suspensive or resolutory

condition, the new obligation shall be under the same condition, unless it is otherwise
stipulated. (n)

Article 1300. Subrogation of a third person in the rights of the creditor is either legal or
conventional. The former is not presumed, except in cases expressly mentioned in this
Code; the latter must be clearly established in order that it may take effect. (1209a)

Article 1301. Conventional subrogation of a third person requires the consent of the

original parties and of the third person. (n)

Article 1302. It is presumed that there is legal subrogation:

(1) When a creditor pays another creditor who is preferred, even without the
debtor's knowledge;

(2) When a third person, not interested in the obligation, pays with the express or
tacit approval of the debtor;

(3) When, even without the knowledge of the debtor, a person interested in the
fulfillment of the obligation pays, without prejudice to the effects of confusion as
to the latter's share. (1210a)

Article 1303. Subrogation transfers to the persons subrogated the credit with all the
rights thereto appertaining, either against the debtor or against third person, be they
guarantors or possessors of mortgages, subject to stipulation in a conventional
subrogation. (1212a)

Article 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