MODES OF EXTINGUISHMENT OF OBLIGATIONS his car, maybe because that person isn’t good at repairing cars.
In NEW CIVIL
CLASS DISCUSSIONS
Illustrations:
1. All kinds of obligations as to prestations may be extinguished by payment? NOT
ALL.
2. Who are persons who pays, being called? PAYOR or PAYER because person who
pays is NOT ALWAYS the debtor.
3. A –debtor, B –creditor; if A is a minor and he paid B, may that amount be
recovered from B? YES, because one of the requisites is that there must be
capacity to pay and the minor being a minor doesn’t have the capacity to
alienate his property and cannot therefore be considered as a valid payment. A
is a minor – may a minor have a valid obligation? YES. What could be the source
of the obligation? Common is: in Quasi-delict or if there is a law which requires a
minor to pay a sum of money, say, to PAY TAX and also from Delict (12-14 years
old) = criminal liability.
4. What if A this time is under receivership and A paid B, may that amount paid to
B may be recovered from B? Yes, because aside from the requirement that the
payor should have the capacity to pay, he must also have the capacity to freely
dispose of his property. In what instance where a person doesn’t have the
freedom to dispose his property?
 Under receivership
 Civil interdiction
 Those ordered by the court to retain the property – by way of
attachment/ garnishment – Custodia Legis
5. X offered to pay B. He offered to pay the debt of A to B, A borrowed 1 year ago
from B for the amount of 100k, and this is secured by a guaranty executed by G,
may this obligation be extinguished upon the payment of X to B? When? It
DEPENDS if B would accept. Can B be compelled to accept payment by X?
General Rule: Creditor may not be compelled to accept payment from a third
person. EXCEPTIONS:
a. If there is a STIPULATION that a 3rd person would perform or pay the
obligation.
b. 3rd party has an interest in the fulfilment of the obligation.
6. DIFFERENCE between 3rd person who has INTEREST IN THE FULFILMENT
of the obligation vs. 3rd person who has interest IN THE EXTINGUISHMENT
of the obligation? Because payment or performance is just one mode or form of
extinguishment – law is very specific that it said performance as there are other
modes of extinguishment– this provision pertains to the right of the 3 rd person
to seek reimbursement from the principal debtor – if you think this is a
condonation, there is a right to seek reimbursement? No – that’s why the law is
very specific: he has an interest in the fulfilment of the obligation and not
extinguishment in general.
7. How come the law expressly provides as a rule that the creditor cannot be
compelled to accept payment? Because here if the creditor refuses to accept and
when compelled, there will be breach of consent due to the supposed
consideration to the personal qualification of the debtor. In the OLD CIVIL CODE
 the provision only pertains to obligations To Do – like let’s say to repair a
car, so why would the creditor accepts performance of the 3 rd person will repair
CODE  there is no more distinction as to what obligation – e.g. why would the
creditor not compelled to accept? These days money can easily be counterfeited.
That is why creditor may not want to accept payment from a 3 rd person.
8. Example of 3rd person who would have an interest in the fulfilment of the
obligation: Mortgagor, Pledgor, or a Guarantor. Guarantor vs. Surety – surety:
bonds but is just like guarantor, it is subsidiarily liable with the debtor.
Executor – he represents the estate, if it pertains to a Right owing to the estate,
the executor is? They are called CREDITORS but they are NOT creditors in
THEIR OWN RIGHT. Why are they called creditors? Because they have the power
to demand fulfilment but they are only representing somebody else.
9. If there are 5 debtors in an obligation, one of them has an interest in the
fulfilment of the obligation? It DEPENDS. If it is a JOINT or SOLIDARY Obligations
but regardless of whether the obligation is Joint or Solidary each of the debtors
has an interest in the fulfilment of the entire obligation. It is easy to understand
if the obligation is Solidary, because any one of them may be responsible or
liable for the entire obligation so each one would have an interest in the
fulfilment of the entire obligation. But if this is JOINT, BASIS:
a. If it is a divisible obligation like to pay a sum of money, he would not
have an interest. Each debtor has an interest in the fulfilment of the
entire obligation? YES. SC ruled that even if the obligation is joint then
4 of them cannot pay or refuse to pay, the 5th one will be affected by the
refusal or inability to pay – his credit standing and reputation would be
affected as the creditor can easily tell the whole world that this person
doesn’t know how to pay his debt and is a swindler in a way.
10. X paid B, like 100k, scenario: A borrowed from B a year ago 100k and this was
secured by a guaranty by G, and X today paid B 100k.
a. How much can X validly demand from A? You have to qualify. If A did
not give his consent to the payment, X would only have the right to
demand to the extent that A was benefited from the payment made. Is
it possible that A did give consent to the payment but still would have
the right to demand from X for reimbursement to the extent of 100k?
YES, as long as A has benefited thereto. If X paid B without A’s consent,
X can only demand to the extent that A was benefited from the
payment made, only if accepted by B.
b. If A refuses to pay the reimbursement to X, can X run after the
guarantor G? Whether or not X will have a right of action against the
guarantor will depend on whether it is subrogated in the rights of
the creditor. Does it matter if A gave consent to the payment? When X
paid B, the obligation of A to B was extinguish, does it matter if A
consented to the payment or not as to the extinguishment of the
obligation? The obligation is extinguished because there is payment,
and payment is a mode of extinguishment. The consent of A would
only matter as to the rights of the payor. In other words, if X paid with
the consent of A, first he would have the right to seek reimbursement
as to the entire amount and second, X will be subrogated in the rights
of the creditor, does it matter that the guaranty was not constituted in
favour of X? It doesn’t matter, by the word “subrogation” this person
who is subrogated will acquire all the rights of the creditor, could have
Amen | Compiled Notes
 exercised not only against the debtor but also against anyone who are
subsidiarily obliged, just like guarantors. Otherwise, if X paid B
without the knowledge or against the will of A, he will not be
subrogated. Following the rule, when he paid, the obligation was
extinguished, and this being a principal obligation and accessory is that
of the guaranty, the accessory was also extinguished due to the
principle of subrogation being applicable; hence, he cannot run after
the guarantor.
c. What if X and B had an agreement, that instead of A, X will be the one to
pay B, with the agreement thereafter X paid B and this is without the
knowledge of A, it was also agreed upon by X and B that upon payment
that X will be subrogated in the right of the creditor. X then paid B but
A failed to reimburse X. Can X run after the guarantor? As far as
extinguishment is concerned, A’s consent is NOT REQUIRED because as
long as there is payment there is extinguishment. In the facts, there
was nothing said that B was compelled. It was by agreement. Was B
subrogated by X by reason of the agreement between X and B? Article
appears not to be well formulated and that there is an implication that
if there is an agreement that the 3 rd person will be subrogated to the
rights of the creditor then he can be subrogated because he was not
compelled, therefore 3rd person can subrogate the creditor. THIS IS A
WRONG INTERPRETATION considering the fact that this provision is
intended to protect debtors. In other words, REGARDLESS of the
agreement between the creditor and the 3 rd person, as long as the
payment was without the knowledge or against the will of the debtor,
B will never be subrogated by X or 3rd person will never be subrogated
in the rights of the creditor. This will only be true if X doesn’t have an
interest in the fulfilment of the obligation.
11. If X is a guarantor and he paid B, will he be subrogated in the rights of B even if
the payment was made without the knowledge of A? YES. And the basis is under
Article 1302. Under certain circumstances there would be legal subrogation and
one of the three scenarios there is that when a person has an interest in the
fulfilment of the obligation pays with or without the consent of the debtor. This is
also true in guaranty, except?
a. General Rule: If he pays, he is subrogated.
b. EXCEPTION: Under the law on guaranty
12. If X paid B without the intention of seeking reimbursement from A, but 2 weeks
thereafter X demanded that B return the amount he paid for A, claiming that A
did not give consent to the payment. Can B be compelled to pay the amount or to
return the amount to X? What appears to be the argument of X? Why would he
have the right to demand the return in this scenario? What is his theory? NO
because the law expressly provides that the creditor has the right to retain even
if it was without the consent of the donee or even if the donee did not accept the
donation. So there was a valid payment. When X paid B, it was like a donation
to A, and therefore A is a donee known as indirect donation. Why the donor did
not give the money to the donee? Because the donor has no confidence or trust
in the donee because the donee may just spend the money and not pay his debts.
If this is a valid payment even without the consent of the donee, what is the
relevance of the acceptance by the donee? It is relevant because in donation,
acceptance is needed. And if the donation will accordingly be void, upon the
death of the donor, that amount may still be considered part of the estate.
13. The person to whom payment is made is known as ? PAYEE, again not
necessarily the creditor. For a payment to be a valid payment, to whom should it
be made? Who is the payee? Under Article 1240, the persons are enumerated
thereto.
14. What if the payment was made not to the person whom the obligation was
constituted in favour to does it mean that it was a payment to the wrong party?
Therefore will it not extinguish the obligation? NOT NECESSARILY. It could be
successor in interest. E.g. heir, assignee  but is he a creditor? YES at the TIME
of the FULFILMENT OF THE OBLIGATION. For payment to be valid he doesn’t
have to be the creditor at the time of the constitution. Finally if the payee is not
in whose favour the person authorizes to receive it nor a successor in interest,
then it is a payment made to a wrong person? NOT NECESSARILY. He may be a
proper party. The authority as to where it came from was not specified by the
law. So it may be from the law or from the creditor.
15. ARANAS CASE: Obligation involved is to pay cash dividends. ISSUE: whether the
payment by UTEX to Castaneda did extinguish the obligation to spouses Aranas?
The creditor here is Aranas and the basis of the claim that they are creditors:
Judgment of the court but still UTEX paid it to a 3 rd party. If you were the counsel
of UTEX, what would be your advice? Instead of paying to the 3rd person,
Castaneda, you should have availed of consignation which is to deposit the
money to the court until a party will be claimed as the rightful creditor. General
rule was applied in this case that payment made to a wrong party did not
extinguish obligation. Exception: when the payment redounded to the benefit
of the creditor even when it was paid to a wrong party.
16. When the payment redounded to the benefit of the creditor – who has the
burden of proof? PAYOR or DEBTOR. Will the payor always have the burden of
proof? NO. When would the payor not have the burden? Article 1241.
a. If after payment, 3rd person acquires the creditor’s rights. Why after? If
before it will be a payment to the right or proper party – successor in
interest.
b. If the creditor ratifies the payment to the 3 rd person. This raises a
conclusive presumption that it redounded to the benefit of the creditor.
c. If by the creditor’s conduct, the debtor has been led to believe that the 3 rd
person had authority to receive the payment also known as Estoppel in
pais.
d. When without notice of the assignment of the credit he pays to the
original debtor (Article 1626)
e. When in good faith he pays to one on possession of the credit (Article
1242)
17. A debtor of B, A borrowed 100k and it was evidenced by a PN which A executed
and delivered to B, but before obligation became due and demandable, PN was
already in the possession of X and premise here is that X doesn’t have the right to
credit. So when PN became due and demandable, X demanded for the payment,
then A paid X. Who is the creditor? B is the creditor. Because A paid X, A’s
obligation has already been extinguished? It DEPENDS. If X was in possession of
the credit and payment was made in good faith, then the obligation is
extinguished. When would X be considered in possession of the credit?
Amen | Compiled Notes
 a. If it is a bearer instrument. Possession of credit means that this
person only appears to have the right to the credit but in truth and in
fact he really doesn’t have the right.
b. Had this been, when would X be in not possession of the credit? If it
was said in the bearer instrument that it was payable to a certain
person and that person is not X. – not necessarily also. No if it is a
negotiable instrument. Yes if this is a non-negotiable instrument
because there is no endorsement.
c. For the payment to be considered made in Good Faith, it must be
required that? The debtor does not know or is not aware of any defect.
d. If X was in possession of the PN, why would there be a defect is it is in
the possession of X? If it may be stolen.
18. A debtor of B, then B assigned his credit to X, normally when would B assign the
right to 3rd person? Before. Why would assign to other? Maybe because the
creditor also has an outstanding debt to the 3 rd person or he owes to X. Say, in
Sale or donation or creditor needs money but such obligation is not yet due or
lastly, in checks – “rediscounting”.
19. If B assigned the credit to X but after assignment A paid B. Who is creditor here?
X is now the creditor because he is the successor in interest. If thereafter A paid
B, would that extinguish the obligation of B? If payment was made without the
knowledge of the assignment. This matters as to the time, because before he
may not have the knowledge but after the assignment, he may already have the
knowledge.
Illustrations:
1. Special forms of payment:
a. Dation
b. Application – Before the courts do not consider application as special form
of payment.
c. Tender of payment and consignation – Tender of payment is not a form
of payment consignation is a special form of payment.
d. Cession
2. Distinguish one from the other or the rest:
a. Consent: is consent of both parties required in this special form of
payment? There is no question that as to debtors consent is obviously
there because he is the one offering to pay, so if he is the one offering to pay
then there must be consent, but as to creditor?
i. Dation in payment – the creditor has to accept the delivery of a
thing instead of the other prestation for the satisfaction of the
debt, if there is no consent on the part of the creditor, there can be
no dation in payment. CASE: Filinvest v. Phil. Acetelyn
ii. Application of payment – As a rule the consent of the creditor is
not required, it is only under certain circumstances that the
consent of the creditor will be present.
iii. Payment by cession – Definitely the consent of the creditor is
required, if the creditor would not agree that the debtor would
abandon the properties for the creditors to sell, there can be no
payment by cession.
iv. Consignation – The consent of the creditor is not required even if
the creditor refuses to accept the thing delivered by the debtor to
the court by way of consignation, the court may declare the
consignation to be valid.
b. As to the effect of the delivery of the thing from the debtor to the
creditor or from the debtor to the court is there transfer of
ownership?
i. Dation in payment – yes there is transfer of ownership, because
that thing is being delivered and the ownership thereof is being
transferred in satisfaction of his debt.
ii. Application of payment – Yes there is transfer of ownership. If
money is delivered by the debtor to the creditor ownership passes
to the creditor. The only question here in this form of payment is
to which debt the payment will apply? This is the issue in this kind
of payment, but as to ownership it passes immediately to the
creditor.
iii. Cession - Ownership does not pass because the creditor upon
delivery because the creditors just accept the things or those
things to be sold and the proceeds thereof to be applied to the
indebtedness.
iv. Consignation – Upon the delivery of the thing to the court
ownership does not automatically pass to the creditors because
the consignation may be void, if it is void, then ownership does not
pass to the creditor. However, if the creditor will accept thereafter,
may be months or years thereafter, or maybe the court declares
the consignation valid, then the ownership passes, however, by
law the effect of acceptance or the declaration by the court
that the consignation is valid retroacts to the time of the
delivery of the court as if the creditor is already the owner of
the thing at the time of the delivery.
c. Extent of Extinguishment: May there be total extinguishment of the
debt?
i. Application of payment – No, there can never be total
extinguishment, precisely because there is a need to determine to
which debt the payment is to be applied. Because the amount paid
is not sufficient to cover all the debts, because you will no longer
have a problem is the amount is sufficient to cover all the debts
you just have to invoke the rules on application on payments.
Necessarily there is no total extinguishment of the debts under the
rules on application of payment.
ii. Cession – the extinguishment will only be to the extent of the net
profits of the sale, unless the parties agree that the abandonment
will result to the extinguishment of the entire debt. So here, the
net proceeds is the basis of the extent of the extinguishment of the
debt.
Amen | Compiled Notes
 iii. Consignation – Because this is a special form of payment it
follows the rule in payment, thus as a rule “partial performance is
non performance” therefore if the debtor delivers only a portion
of his debt, then the consignation is null and void. The exception
will only be if the creditor would agree to the delivery of
partial amount, then to that extent there will be partial
extinguishment.
iv. Dation in payment – There are authors who will take the position
that if there is Dation in payment then the obligation is totally
extinguished unless it is clear in the intention of the parties that it
will result only to partial extinguishment. But is this the better
rule? For example if A is the debtor of B in the amount of 1M and A
delivered to B a car stating that it is to be applied to the amount
that B owes A, the value of the car is 150K, if the creditor accepted
the car, does that mean that the entire obligation is extinguished?
This rule does not seem to be equitable, the BETTER RULE: As
a rule the extinguishment is only to the extent of the value of
the thing delivered unless it is clear from the agreement of
the parties that the delivery of a thing, no matter the value, is
equivalent to the amount of the obligation.
3. Specific Rules:
a. Dation in payment – Again in Dation a thing is delivered and ownership
thereof is delivered by the debtor to the creditor in satisfaction of his debt.
Dation apparently will only apply to the delivery of the thing. THIS IS NOT
TRUE. The SC has ruled that even rights can be the subject of Dation
for example: if hereditary right is already vested to the debtor, the
debtor can deliver his rights to his creditor for the satisfaction of his
debt. Also, in one case, a credit owing to the debtor may be delivered
by him to his creditor for the satisfaction of his debt. But just like the
other modes of payment, in order that there be Dation there has to be an
obligation to be extinguished (CASE: Citizen’s Surety v. CA: Perez was
claiming that with the execution of deed of assignment that practically
extinguishes his obligation under the indemnity agreement by way of
Dation, the scenario here was: a contract of sale was entered into, payable
by installment, the buyer is Pascual enterprises, to secure the fulfillment of
his obligation, a surety bond was executed in favor of the seller, not citizen’s
surety executed an indemnity agreement just in case it will be held liable
under the bond, Pascual Perez and his wife being the party thereto, Citizen’s
also had Perez execute a deed of assignment over certain stocks. The surety
obviously was held liable under the bond, the surety went after Perez under
the indemnity agreement. Perez claimed that the execution of deed of
assignment was a form of Dation, but the facts showed that at the time
the deed of assignment was executed there was no obligation under
the indemnity agreement nor under the surety bond. Why? Because
the contracts were all dated earlier than the time he was made liable,
therefore there was no obligation yet. So what is really the nature of
deed of assignment? It was a form of security arrangement. Other facts
relied upon by the SC in ruling that the deed of assignment was not
Dation in payment was that after the deed of assignment was
executed, Perez also executed a real estate mortgage, so why would he
execute a real estate mortgage if his obligation was already
extinguished by Dation. Also, in deed of assignment, there were partial
payments made, if there was Dation then he would not have made the
payments.)
What is the law governing Dation? Others would say that this is
governed by the law of sales. If you will read Article 1245, it would appear
that Dation is governed by law of sales, but reading it more closely; the law
on sales will only apply if the obligation is in money. For instance, A owes
B 20K, instead of paying cash, A offered his cell phone to B in satisfaction of
the obligation, there is here Dation and this will be governed by the law on
sales as provided for in Article 1245. Tolentino criticized this provision,
considering that the trend worldwide is to consider this as a form of
novation because practically there is a change in the object, from
money to a thing. REMEMBER! 1245 will not apply if the pre-existing
obligation is not in money. For example: A is obliged to deliver to B a
horse, so instead of delivering a horse he delivered a car to B. 1245 will not
apply here because the pre-existing obligation is not in money, but it is to
deliver a horse. So in this case Novation shall apply because there was a
changed in the object of the obligation, from horse to car. Again, going
back to Tolentino’s criticism, he said that regardless of pre-existing
obligation whether money or thing, still the law that will apply is the law of
novation. Atty. Uribe: I find wisdom in Article 1245 because, instead of
paying in cash, (refer to the cell phone example) the debtor paid by giving
his phone to the creditor, but is this not almost similar to the scenario
where the debtor paid in cash and the creditor used the cash to buy the cell
phone of the debtor. And therefore the law on sales will govern.
b. Application of payment – the only question relevant in this rule is “to
which debt will the payment be applied?” the premise of this question is
a debtor has two or more debts to one creditor but may the rules on
application of payments be invoked if the debtor has two or more
creditors? Yes. As long as to one creditor he has two or more debts. The
law does not require that the debtor should only have one creditor. For
example: A’s creditors are XYZ, for the rules to be invoked, he must have two
debts to one creditor. Let us say A owes X 100K, 50K, and 20K, now if A
delivers to X 30K, the question here is to which debt will the payment apply?
i. AS A RULE: The debt designated by the debtor, under the
law, the debtor has the right to designate to which debt the
payment will apply. So here, A can designate the 30K to apply to
100K or to 50K or to 20K or 30K. But having said that, if A
instructed the creditor to apply the 30K to 50K, can the creditor be
compelled to apply the payment to the 50K debt? AS A RULE THE
ANSWER IS NO because this is a special form of payment, the
rules of payment shall apply, the creditor cannot be compelled to
accept partial payment, nor the debtor be compelled to perform
partial payment. Therefore, unless there is a stipulation giving the
debtor a right to designate to a debt that will constitute partial
payment, he cannot designate payment to which the payment
Amen | Compiled Notes
 should be applied. What are the limitations on the right of the
debtor to designate the application for payment?
1. Partial Payment- In the first place why would he
designate it to the 50K? The 50K may be interest
bearing. THEREFORE, THE RIGHT OF THE DEBTOR
TO DESIGNATE TO WHICH PAYMENT SHALL APPLY IS
NOT ABSOLUTE, ONE OF THE EXCEPTIONS IS AS TO
PARTIAL PAYMENT.
2. Payment of Interest first- A delivered the 30K, he
designated it for the payment of the 30K debt, however,
the 30K debt is interest bearing, can he compel the
creditor to apply the payment to the principal first, then
he will just pay the interest later? NO BY EXPRESS
PROVISION OF THE LAW, PAYMENT SHOULD
ALWAYS BE APPLIED TO INTEREST FIRST, IF THERE
ARE EXCESS THEN THAT WILL BE THE AMOUNT
APPLIED TO THE PRINCIPAL.
3. Debts already due and demandable- A designated the
30K for the payment of the 30K debt, but the 30K debt is
not yet due. THE LAW REQUIRES THAT THE DEBT IS
ALREADY DUE IN ORDER THAT THE DEBTOR WOULD
HAVE THE RIGHT TO DESGINATE SUCH PAYMENT TO
THE DEBT. What is the meaning of due here? The period
must be fixed for the benefit of the creditor or for both of
them. If it is not yet due, but the period is fixed solely for
the benefit of the debtor it does not matter the debtor
can designate such debt because the period is for his
benefit. But also he cannot vary an agreement which
they had as to which debt the payment to be applied.
PROBLEM: What if A entrusted X to apply the 30K to 30K debt, but the debt is
secured by a mortgage, as instructed, X applied the payment, he issued a
receipt stating that the 30K is applied to the 30K debt, however, days
thereafter, A asked X to apply the amount to another debt, the 50K, though
the creditor cannot be compelled to accept, he may accept if he wants
to. So, if X agrees, and he applied the payment of the 50K debt instead of
the 30K, thereafter A was not able to pay X as to the 30K debt, can X
foreclose the mortgage? NOT ANYMORE! A already paid the 30K,
although it was revived (when he chose that the payment be applied to
50K instead) the mortgage was not revived (mortgage is not revived
without the consent of the mortgagor).
ii. SECOND RULE: What if the debtor did not designate the debt to
which the payment shall apply? The debt designated by the
creditor. He would have the right to designate to which debt the
payment shall apply. However, is the debtor’s consent required
in the designation made by the creditor? Yes! By express
provision of the law, if in the receipt the debtor sees that the
payment was applied to a particular debt, and the debtor does
not agree to such application, he may refuse to accept the
application.
iii. THIRD RULE: Neither the debtor nor the creditor made the
designation. Scenario: the debtor made payment; the creditor
accepted and issued a receipt without designating the particular
debt, so to which debt the payment shall apply? IT WILL
DEPEND ON WHETHER THE DEBT OF THE SAME NATURE AND
BURDEN OR WHETHER THE DEBT IS MOST ONEROUS OF
THEM ALL. If all the debts are of the same nature and burden,
the law requires proportional application. As regards to the
most onerous debt, apply the payment to the most onerous
obligation. TAKE NOTE! That you should only go into these rules
if the law would not guide you as to which debt the payment
should be applied, there are guides like partial payment, interest
bearing, and the circumstances which may show the intention of
the parties, if these guides are not present, then that is the
time you go into the rules considering the nature and burden
of the debts. IN DETERMINING WHICH DEBT IS THE MOST
ONEROUS: is there a particular rule? None. The SC held that there
is no hard and fast rule! This is because each debt has its own
features, for example, there are debts which consist of bigger
amount the other smaller amount but interest bearing, the other
one secured. For example one debt is secured by real estate
mortgage and another debt is secured by pledge, what is more
burdensome? The debt secured by a real estate mortgage.
However, real estate mortgage may be constituted by one real
estate, so consider if the real estate mortgage constitutes a small
lot and the pledge constitutes ships, which is more onerous?
Obviously the debt secured by pledge constituting ships. TAKE
NOTE THAT ALL FACTORS ARE CONSIDERED IN
DETERMINING WHICH IS MORE ONEROUS. If for instance in one
debt the debtor is merely the guarantor and other debt he is the
principal, apparently the debt in which he is the principal debtor
is more onerous, but the common reason given by few authors is
because in this debt where he is a guarantor, his liability is only
subsidiary, in fact inchoate, he may or may not be held liable
because the principal debtor should first be held in default then his
properties dissolved before the guarantor may be held liable, BUT
THIS IS A WRONG REASON WHY? If the rules on applications of
payment are to be invoked, it presupposes as to the two debts he
is already liable, his liability is not merely inchoate, and even if it is
only subsidiary, he is already liable, in other words in this scenario
for the rules to be applied, the principal debtor should have
defaulted and his properties exhausted that is why the guarantor
is liable, if he is not yet liable there is no reason to apply the rules
on application of payment because there is only one debt, which
is the debt to which he is the principal debtor. But even
considering that in the contract of guaranty the guarantor is
already liable, which is more onerous, Atty. Uribe: the debt more
onerous is the debt to which the debtor is a principal, because in
guaranty the guarantor may be able to recover what he paid to the
Amen | Compiled Notes
 creditor from the debtor, in the debt to which he is a principal, he
cannot recover anything by way of reimbursement. One author
would claim: bigger amount is more onerous than smaller
amount. Is there any basis for this claim? Atty. Uribe: I beg to
disagree to this claim, first, if the debt is one peso or two pesos or
even one thousand pesos bigger in amount, does that really matter
in this country? But if you go by the rules, if you follow this claim,
then what will happen to the rule that there are debts of the same
nature and burden because if the debts would have 1 peso
difference, then that debt is already more onerous, since the law
provides that proportional application to debts, presupposes
that the debts are of different amounts. Example this is 1M
the other debt is 10K, you think 1M is more onerous, not
necessarily, let’s say the debt is only 10K but it is interest
bearing, what should I pay first? Of course the 10K interest
bearing. Who cares about the 1M, after 2 years it is still 1M! Again
the amount is irrelevant. Another, OLDER DEBT IS MORE
ONEROUS. There is no basis to this claim. In fact, older debts may
be less onerous why? Because it is about to prescribe.
c. Payment by Cession or Assignment – Here the debtor would abandon or
assign all his properties to the creditor which properties will have to be sold
by the creditor the net proceeds shall be applied to the credit.
i. FIRST ISSUE: All the properties of the debtor shall be delivered?
No, there are properties which are exempt from execution.
But can the debtor deliver to the creditor properties which are
exempt from execution? Yes! Because that is a right which the
debtor can waive, though he cannot be compelled he may abandon
those properties to the creditor. However, there are certain
properties which cannot be the subject of the claim of the
creditor even with the consent of the debtor LIKE THE
FAMILY HOME, of course there are beneficiaries of the family
home who can object to the sale thereof.
ii. What if the debtor is willing to abandon all his properties
and the creditors would refuse, what is the remedy of the
debtor? Authors would say that the best remedy of the debtor is
to file an action for insolvency. In a way insolvency proceeding has
its advantages, however, here in the Philippines businessmen are
really not keen on filing an insolvency proceedings.
iii. What if the creditors did agree for this kind of payment but
they failed to agree as to how they will partition/distribution
the proceeds? Atty. Uribe agrees that the rules on concurrence
and preference of credits because in these rules there are
preferred debts and those debts which are not preferred they
shall be paid proportionately.
iv. Alleged requirement of few authors that in this form of
payment, the debtor is insolvent. In other words, there can be
no cession if the debtor is not insolvent. Atty. Uribe CANNOT
AGREE TO THIS REQUIREMENT because if you read Article 1265
there is no requirement that the debtor must be insolvent for
payment of cession to take place. Another important reason is the
fact that this is by agreement of parties, there can only be payment
of cession because the creditor agreed, as long as the debtor is
willing to abandon the properties and the creditors agree and the
proceeds shall be applied to the debt, there is cession.
v. Other authors claim that the debtor should be partially
insolvent, is there any basis to this? NONE! Once a debtor failed
to comply with his obligations, he is in delay, is likewise insolvent.
There is no such thing as partial insolvent. The statement of
Professor Sta. Maria is a better statement “this mode of
extinguishing obligation would normally be resorted to by debtors
who are in a financially difficult position.”
d. Tender of payment and consignation – Fist, let us go to the claim of Prof.
Jurado, as a rule tender of payment is necessary for consignation to be
valid, correct? Reading Article 1256, there are how many grounds or
causes for consignation wherein the law expressly provides that tender of
payment is not required. In 1256 there are about 5 grounds, where the law
provides that in those grounds tender of payment is not required, obvious
because in those grounds the creditor is not present. So in those causes,
there is no tender of payment but the consignation is valid. What are the
grounds or causes for consignation where tender of payment is
necessary under the law? Where the creditor refuses to accept without
just cause. Therefore going back to the statement tender of payment is
required for consignation to be valid, it seems wrong. AS A RULE
TENDER OF PAYMENT IS NOT REQUIRED, THE ONLY EXCEPTION TO
THAT RULE IS WHEN THE GROUND FOR CONSIGNATION IS THAT THE
CREDITOR REFUSES TO ACCEPT WITHOUT JUST CAUSE.
i. On the other hand, Jurado is very much correct in his
statement that “tender of payment by its very nature is
extrajudicial” as you have read in the case of Soco v. Milintante,
tender of payment is made during the pendency of the action, that
consignation is void. Tender of payment should be made prior to
consignation not during the pendency of the action. SO IT IS BY
ITS VERY NATURE EXTRAJUDICIAL IN CHARACTER.
ii. Now, if the ground for consignation requires tender of
payment and the debtor sent probably three letters to the
creditor informing the creditor that “I am willing to pay my
debt xxx” is this a valid tender of payment? NO! In order for
tender of payment to be a valid tender of payment, you have to
actually offer the amount to the creditor; IT IS THE ACT OF
OFFERING THE AMOUNT WHICH CONSTITUTES A VALID
TENDER OF PAYMENT.
iii. Into the requisites of a valid consignation:
1. There must be a debt to be extinguished – a sum of
money is delivered not to extinguish a debt but to
exercise a right, like the right of redemption, if the other
party refuses to accept the money, then the person who
has the right is not required to deliver to the court the
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 amount by way of consignation because he is not
intending to extinguish an obligation. Example: A had
the right to redeem, he offered to redeem, the other
party refused to accept, when the action was filed the
defendant claimed that the action should be
dismissed because the redemptioner was not sincere
in redeeming the property because if the
redemptioner was sincere, when I refused to accept
the money he should have deliver the money to the
court by way of consignation. The SC: the claim is
erroneous, because the redemptioner is exercising a
right, and in the exercise thereof there was refusal
without just cause, there is no need for consignation.
But if the intention is to extinguish an obligation and
the money was refused, that is when the debtor has
to go to the court and deliver the money by way of
consignation.
2. The consignation must be based on a ground
provided by law – Is the enumeration under 1256 an
exclusive enumeration? Atty. Uribe agrees with the
position that the enumeration does not have to be
exclusive because as long as it would be more
burdensome to the debtor if he will not be allowed to
deliver the thing or the money to the court, consignation
should be allowed. Some of the grounds are:
a. When without just cause the creditor
refuses to issue a receipt – is the issuance of
the receipt the operative fact which
extinguishes the obligation? NO! In our
jurisdiction PAYMENT IS THE MODE OF
EXTINGUISHMENT, THE RECEIPT IS MERELY
AN EVIDENCE. But if the creditor refuses to
issue a receipt or does not want to issue a
receipt, it is better that the debtor does not give
the payment to him, because he can easily deny
that the debtor did not pay. Actually, in other
jurisdiction, it is the issuance of the receipt that
extinguishes the obligation, this rule seems to
have an advantage because it would minimize
the litigation involving issues as to payment.
b. When two or more persons claim the same
right to collect – A good example is an
obligation to deliver a carabao, in this
obligations three creditors are claiming from
the debtor, because three persons are
claiming to the carabao that will give the
person a right to deliver the carabao to the
court by way of consignation? Not
necessarily. The SC held that the debtor
should determine for himself the person
who has the right over the thing or the
money.
3. Notices required for consignation to be valid: AT
LEAST TWO: Why? Because if the obligation pertain to
an obligation to pay on a monthly basis, like rental, the
SC as rule in the case of SOCO, THERE MUST BE AT
LEAST TWO NOTICES FOR EACH AMOUNT WHICH
BECAME DUE (so every month that the payment is not
accepted sent notice prior the consignation). But if there
is only one debt, there should be two notices required, is
it required that both notices should come from the
debtor? NO! But the first notice should come from the
debtor prior the consignation and the second notice may
come into the form of summons. Is notice really an
essential requisite for the validity? TOLENTINO DOES
NOT AGREE WITH THIS VIEW, he thinks that even
without such notice the consignation may still be
considered as valid. But it can be the basis of holding the
debtor liable, this rule is better but THIS IS NOT THE
RULE LAID DOWN BY THE SUPREME COURT. SECOND:
if the payment is monthly and the creditor already
refused to accept the payment in the first month the
defendant will question the necessity of second notices,
since the creditor already knows that the debtor will
again deliver to the court the payment by way of
consignation RATIONALE: THIS IS TO GIVE THE
CREDITOR THE OPPORTUNITY TO CHANGE HIS
MIND. Which is very true, the bigger the amount the
more difficult to refuse.
iv. There are only two questions in consignation: After the delivery
of the money or the thing with the court, what if thereafter
the money was withdrawn from the court, thereafter the
debtor failed to pay the creditor, can the creditor still go after
those who are subsidiarily liable for the debt (like the
mortgagor)? PREMISE HERE IS: A is indebted to B, A delivered
a sum of money to the court by way of consignation however,
A withdrew the money, the debt is secured by a mortgage,
thereafter A failed to pay the creditor, can the creditor
foreclose the mortgage? It depend on the manner how A was
able to withdraw the money from the court.
1. IF A WITHDREW THE MONEY AS A MATTER OF
RIGHT (when even the court cannot refuse the
withdrawal, and this can happen if the creditor has
not yet accepted and the court has not yet declared
the consignation to be valid, in this scenario, the
debtor can still withdraw the money as a matter of
right at anytime), THUS, NO DEBT HAS BEEN
EXTINGUISHED, BECAUSE IN CONSIGNATION THE DEBT
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 WILL ONLY BE EXTINGUISHED EITHER BECAUSE THE
CREDITOR HAS ALREADY ACCEPTED OR THE COURT
HAS ALREADY DECLARED THAT THE CONSIGNATION IS
VALID, ABSENCE OF THE TWO NO OBLIGATION IS
EXTINGUISHED, THEREFORE NO OBLIGATION IS
REVIVED, THEREFORE IF THE DEBTOR WITHDREW
UNDER THIS SCENARIO AND FAILED TO PAY, THE
CREDITOR MAY STILL FORECLOSE THE MORTGAGE,
BECAUSE THE OBLIGATION WAS NEVER
EXTINGUISHED.
2. HOWEVER, IF THE WITHDRAWAL IS NOT AS A
MATTER OF RIGHT, THEREFORE HE WAS ONLY ABLE
TO WITHDRAW WITH THE CONSENT OF THE
CREDITOR (this may happen either when the
withdrawal was made after the acceptance or the
withdrawal was made after the declaration by the
court that the consignation was valid.) IN THIS CASE,
THE CREDITOR CONSENTED TO THE WITHDRAWAL.
WHAT HAPPENS TO THE OBLIGATION, UPON THE
ACCEPTANCE BY THE CREDITOR OR DECLARATION BY
THE COURT THAT THE CONSIGNATION IS VALID, THE
OBLIGATION IS EXTINGUISHED, AND THEREFORE,
WHEN THE AMOUNT WAS WITHDREW BY THE DEBTOR
THE OBLIGAITON WAS REVIVED, UPON REVIVAL THE
DEBTOR FAILED TO PAY, THE CREDITOR CAN NO
LONGER FORECLOSE THE MORTGAGE, WITH THE
EXTINGUISHMENT OF PRINCIPAL OBLIGAITON THE
ACCESSORY CONTRACTS ARE ALSO EXTINGUISHED.
v. Liability to pay interest: Let us assume these material dates and
events to have occurred:
1 |2002 (Due) 2 |2003 (Tender of Payment) 3 |2006 (Consignation) 4 |2008 (Decision)
QUESTION: Can the debtor be held liable from period 3 to
period 4?
1. If the court declared the consignation to be VOID, there is no
question that the debtor is liable to pay interests, on the
premise that there was demand and that demand was necessary
for the debtor to incur in delay.
2. However, what if the court declared the consignation to be
valid, he is not liable from period 3 to 4 because the effect of the
declaration retroact to the time of the delivery of the amount to
the court as if the obligation was extinguished at the time the
consignation was made, therefore there will be no obligation to
pay the interest.
Question: Can he be liable from period 1 to 2?
1. Obviously he is liable because he made the tender of payment
only period number two and the obligation has long been due
and demandable.
Question: The problem is in period of tender of payment to the
consignation, can he be made liable for payment of interest?
1. Juridically speaking, there is basis to the SC ruling that the
debtor is still liable because the effect of consignation will only
be from the time the thing is delivered to the court, so until the
obligation is extinguished the debtor should still be held liable
for interest. However, in the recent cases of the SC, it was
held that from the time tender of payment was made the
debtor is no longer required to pay interest, here, the law
requires that if the creditor refuses acceptance, the debtor
should immediately go to court, otherwise the debtor will
have no reason to go to the court because he no longer has
liability for interest. However, in the recent ruling of the SC,
it held that BY REASON OF JUSTICE AND EQUITY, why?
Because here as the consignation is valid it means that the
creditor refused to accept without just cause, if the creditor
accepted it would there be liability on the part of the debtor
to pay interest? None! So, under the principle of justice and
equity the debtor should no longer be held liable to pay
interest from the time tender of payment was made up to
the time of consignation even if the consignation was made
years after. ATTY. URIBE: This is quite inconsistent with
consignation, there is a much better basis than justice and
equity, if you remember our discussion in period, in periods
two to three the debtor is liable for interest, but when the
creditor refused to accept without just cause, is it not that
he is also in delay which is known as compensation morae
if both parties are already in delay, following the ruling of
the SC in Agcaoili v. GSIS, in contemplation of law, no one is
in delay and if no one is in delay could there be liability to
pay interest? None. Without invoking justice and equity,
this decision seems to be more correct.
4. LOSS OF THE THING DUE – Can this mode of extinguishment be invoked in all kinds
of obligations meaning obligations to do? It does not seem like it because it says loss
of the thing. If you will read the provisions under this mode, loss of the thing due,
there are provisions pertaining to obligation to do, thus, authors would consider a
better name for this mode, instead of loss of the thing due a better name would be
Impossibility of Performance. In impossibility of performance it would already
include even obligations to give or to deliver, in case of obligations to give it will be
impossible to perform because the thing to be delivered is lost.
a. May this mode apply to obligations to deliver generic thing? YES. If you
remember the doctrine genus non quam peruit this applies to a scenario
where the loss or destruction of anything of the same kind does not
extinguish the obligation. EXAMPLE: there is an obligation to deliver a
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 brand new 2009 Toyota camry, just because the brand new Toyota
camry was lost does not mean that the obligation is extinguished
under this doctrine. GOING BACK TO THE ORIGINAL QUESTION: May an
obligation to deliver a generic thing be extinguished because the obligation
became impossible to perform? YES! As the law would define loss it is a
scenario where the thing goes out of commerce, so if the thing went out of
commerce there is nothing to deliver. Another scenario, is when it became
legally impossible to perform, impossibility of performance may either be
physical impossibility or legal impossibility. Pesigan v. Angeles Delivery of
carabao from one province to another, along the way the carabaos were
confiscated because a law became effective during the pendency of the
obligation, therefore the obligation was considered legally impossible to
perform. TAKE NOTE THAT when the law became effective, there must
already be an obligation which will become impossible to perform
because if the law became effective before the obligation was
instituted in the first place the obligation is void and there is nothing
to be extinguished.
b. Obligations to deliver a determinate thing: if the thing to be delivered
was lost or destroyed, is the obligation extinguished? If you will read
Article 1262 literally, it will depend on the cause of the loss.
a. If the cause of the loss was due to the fault of the debtor then the
obligation is not extinguished 1263 provides that if the thing is
lost or destroyed without the fault of the debtor, the obligation is
extinguished, therefore, if the loss is caused by the debtor the
obligations is not extinguished. However, Prof. Tolentino opines
even if the loss is due to the fault of the debtor, what will be
delivered? None, so here, there is physical impossibility, and
therefore the obligation should be deemed to be extinguished
without prejudice to his liability to pay damages because the
loss is due to his fault. Nonetheless if you want stick with the
opinion of Tolentino you can always cite 1262 as the basis but
this does not seem to be correct. BUT ULTIMATELY IN CASES
DECIDED BY THE SUPREME COURT: As to the thing to be
delivered is lost or destroyed, what is the issue that is always
mentioned in the case, is it “WON the obligation was
extinguished?” No, the ISSUE IS WHETHER THE DEBTOR CAN
BE HELD FOR DAMAGES in other words it does not matter
whether the obligation was extinguished or not, what matters is
the debtor liable for the damages caused by the loss of the thing. If
the loss was due to his fault he is liable for damages,
otherwise he cannot be held liable for damages. In fact Sta.
Maria also take this position, Sta. Maria will not state whether the
obligation is extinguished or not, the issue that will be posted is
that whether or not the obligation to deliver a thing is
converted to an obligation to pay a sum of money. However, if
this is your position, you actually take the position that there was
extinguishment. If you remember in prescription, prescription is a
mode of extinguishing an obligation because it converts the civil
obligation to natural obligation, there is a change in the obligation
therefore there is extinguishment, in the same manner if the
obligation to deliver is converted to a monetary obligation then
there is an extinguishment of an obligation.
c. Who has the burden of proving as to the cause of the loss?
a. The creditor or the one claiming that it was the debtor’s fault who
caused the loss. Reasonable, because this follows the rule that
whoever alleges the fact must prove the fact.
b. However, in certain circumstances, the creditor or the plaintiff
may not have the burden, because the law provides for a
presumption that the cause of the loss was due to the debtor,
when will this happen? If at the time of the loss the thing is in
the possession of the debtor. But take note that the
presumption is not an absolute presumption because the
debtor can always post a defense that even if the thing was in
his possession the loss was due to the fault of somebody else.
c. However, even if a thing is lost while in his possession is it
possible that there is no presumption that it was due to his fault?
Yes if the loss happened during a calamity or on the occasion
of a calamity. Because even if the thing was lost even if in the
possession of the debtor but it was during a calamity, more often
than not, the calamity is the cause of the loss and not the fault of
the debtor, therefore the burden again will be shifted to the
creditor or plaintiff if he would claim that the loss was caused by
the debtor.
d. We have already discussed that even if the loss was caused during
fortuitous event that will not necessarily exempt the debtor from liability.
That may be the general rule under 1174 but there are EXCEPTIONS
APPLICABLE TO OBLIGAITONS TO DELIVER A DETERMINATE THING:
stipulation of the party that the debtor will be liable whatever may be
the cause of the loss, or may be the law provides for liability even if the
loss was caused by a fortuitous event.
e. Effect of Difficulty of Performance- Occenia v. Jobson when the
performance has become so difficult as to be manifestly beyond the
contemplation of the parties, the obligor may also be released in whole or in
part. THE LAW GRANTS THE COURT THE POWER TO RELEASE THE
DEBTOR IN WHOLE OR IN PART BUT IT DID NOT VEST THE COURT
THE POWER TO CHANGE THE TERMS AND CONDITIONS AGREED UPON
BY THE PARTIES. Requirements:
i. The performance of the obligation has become so difficult.
This should not be confused with impossible; if the obligation has
become impossible to perform then Article 1267 will not apply in
fact as a rule the obligation will be considered extinguished.
ii. The difficulty to perform must be due to a fortuitous event or
beyond the contemplation of the parties.
f. Effect of partial loss. A scenario could be an obligation to deliver a cell
phone with housing, what if the cell phone was lost but the housing is still
available, is the obligation totally extinguished, can the debtor still be
compelled to deliver the housing? The answer depends on the intention
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 of the parties as to really what was the principal motivation in
entering the transaction. But is it possible that the housing is more
valuable than the cell phone? Yes it is possible for instance it has
diamonds. So if the delivery of the housing was the intention, apparently
the buyer cannot be compelled to accept the cell phone.
5. Condonation or Remission of the debt or a.k.a donation of credit – As to the
kinds of condonation:
a. Extent of extinguishment whether total or partial: Condonation may be
partial. PARTIAL: the principal amount may not even be reduced and the
creditor will only condone the interest or the principal amount nor the
interest will not be condoned but the accessory obligations will be
condoned and therefore it will result to partial condonation.
b. Whether Condonation is express or implied: if the condonation is
EXPRESS you should consider the rules as to formalities of donation.
i. BAR QUESTION: The son is indebted to his father 500K, the son
paid 300K through a check, thereafter the father died, the
executor demanded for the payment of the balance 200K, the son
claimed that the 200K was condoned by his father as can be seen
from the writing at the back of the check stating that the check is
for the full payment of the debt, was there extinguishment by
condonation? U.P. LAW CENTER: the effect of the writing on the
check will depend on who wrote the same, if the son is the one
who wrote the writing the obligation was not totally extinguished,
if the father was the one who wrote was there a valid
condonation? Yes because this is a form of implied condonation
and therefore the law does not require a particular form nor
acceptance is required, Do you agree to this? ATTY URIBE: I do
not agree to this answer, I agree more to the alternative answer
that as can be seen from the facts, what could be more express
than that? How express can this be? And therefore if this is an
express condonation this has to comply to the formalities of
law as to donation, this is a donation of credit and therefore
under the law, if the credit is more than 5K, the condonation
must be in writing and that there must be acceptance in
writing, so there was a condonation in writing, but there was
no acceptance in writing, hence, there was no valid
condonation.
ii. IMPLIED CONDONATION, WHEN WILL THIS HAPPEN? If the
debt is evidenced by a promissory note, and the promissory
note after having been delivered to the creditor was found in
the possession of the debtor was the obligation extinguished?
At best there was only a presumption, a presumption that the
promissory note was voluntarily returned to the debtor. If it
is voluntarily returned the effect is that the obligation is
extinguished. Then when would the presumption arise that
the delivery was a voluntary delivery? It will only arise if the
document is a private document, but if it is a public instrument,
there is no such presumption because a public document has
several copies in custody of several people. At any rate, the
presumption here is only a disputable presumption. But
ultimately if it was voluntarily returned to the debtor, how
was the obligation extinguished? DE LEON: Not by
condonation but by payment. Thus, it was voluntarily
returned because there was payment, however, if the debtor
cannot prove that payment, like for instance he does not have
a receipt, maybe he can invoke the presumption of the law
that there was a condonation, but again, the presumption is
disputable.
iii. LAST RULE: A debtor of B, a ring was delivered to B as a
security, ordinarily this will be a pledge, now, after the
perfection of the pledge, the thing again was found in the
possession of A the debtor, is the obligation of A to B
extinguished? NO! Is there a presumption that this obligation is
extinguished if there is a presumption under the law it will pertain
to the pledge. If the thing to be delivered by way of pledge is
thereafter found in the possession of the debtor there may arise a
presumption that it was voluntarily delivered and therefore the
pledge was extinguished. “PRESUMPTION MAY ARISE” because
the presumption may not arise, why? The law requires that after
the perfection of the pledge, the thing must be found in the
possession of the owner of the thing pledged. Is the debtor
necessarily the owner of the thing pledged? No because pledge
may be constituted by a third person, so if it was found in the
possession of the debtor, then no presumption will arise, the
presumption of voluntarily returned if thereafter it is found in
the possession of the owner of the thing pledged. Again, this
presumption is disputable presumption, because there are
hundred and one reasons why the debtor would return the thing
to the owner, one of the reasons may be for safe keeping. So again
it is a DISPUTABLE PRESUMPTION.
6. CONFUSION OR MERGER OF RIGHTS – this mode can easily be understood by just
imagining the merger of banks in the past few years. Now, it is common that before
the merger, one of the banks is indebted to the other banks and therefore instead of
xxx the creditor may agree to just buy the debtor bank. Obviously this is by
agreement of the parties.
a. Can there be confusion by operation of law? Yes if the creditor for
example died and the only heir is the debtor, of course the heir will
inherit the credit, the heir now who is the debtor will now become the
creditor, therefore there will be a meeting in one person of the
character of the debtor and creditor and therefore the obligation will
be extinguished.
b. What if the decedent is the debtor and the heir is the creditor, will the
obligation be extinguished? It seems like it will not be extinguished
because the heir will not accept the obligation. So the creditor will normally
demand from the executor payment.
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 c. Can a guarantor invoke a merger or confusion? YES! But he may invoke
merger and confusion as to the character of debtor and creditor because if
the principal obligation is extinguished then the guaranty will also be
extinguished, the guarantors will benefit with the confusion of the character
of the principal debtor and the creditor, but if the confusion was between
the guarantor and the debtor will the principal obligation be extinguished?
NO! What will happen here is that there will no longer be security
because the debtor and the guarantor will be one.
d. CAN THERE BE A PARTIAL EXTINGUISHMENT IN CONFUSION OR
MERGER? YES! By express provision of law, in joint obligations and
there was a confusion pertaining to one of the joint debtors in the
person of the creditor, the extinguishment will only be to the extent of
the debt of the joint debtor. This is different of course if the obligation
is solidary, if there is confusion between the creditor and one of the
solidary creditor the obligation is totally extinguished. But there is NO
partial confusion.
c. BAR EXAM QUESTION: A opened a savings account with Y bank in the
1 |1999 (Due) 2 |2005 (Merger) 3 |2009 (Rescission) 4 |2012 (Action filed for Collection)
e. PROBLEM: In the above illustration, the obligation of A to B was for the
amount of 1 Million. In rescission the effect is restitution, the parties will be
reverted back to their status prior to the merger, so as if A owes B 1M, so B
files an action today against A to recover the 1M The defense of the debtor
was that the action will no longer prosper because it has already
prescribed. Will the action prosper during 2012 filed by B? YES SC HELD
THAT IT YES IT WILL PROSPER, BECAUSE THE TIME OF THE MERGER
TO THE TIME OF RESCISSION SHOULD NOT BE INCLUDED IN THE
COMPUTATION OF THE PRESCRIPTIVE PERIOD. During those times,
the creditor will not file a case because it will be absurd given that he
is also the creditor of himself. This a very good decision because
creditor and the debtor are one at that time. Therefore only 9 years has
lapsed so the action has not yet prescribed.
Kinds of Compensation
7. COMPENSATION – By express provision of law, compensation may be total or
partial.
a. According to law, with partial compensation may there be two or ten
debts extinguished as partial compensation? Yes, there can be two or
100 debts extinguished by compensation but it is still partial compensation
why? As long as the debts of one are not equal to the debts of the other the
compensation will only be to the concurrent amount and there will be no
total extinguishment.
b. Total extinguishment will only take place when the debts are totally
equal for instance if the debt is 1M and the other is 1M. Scenario:
i. A owes B 100K, but B has several debts to A 20K, 10K, 50K but if
you add it all up it is only 80K, with compensation, all the debts
will be totally extinguished, because the extinguishment is for the
concurrent amount, the 80K will be totally extinguished, but A
would still owe B 20K, why is this so important? This is
important as to the liability to pay interest or as to whether or not
there can be valid foreclosure
ii. EXAMPLE: A has obligation to B, B has obligation to A, A’s
obligation is interest bearing, after compensation can B still
collect interest can A be held liable for interest? It will depend
on the amount involved, if B’s debt is smaller may be 50K, A’s debt
is 100K, can be collect interest? Not anymore because the debt will
be totally extinguished, the 100K will be reduced by 50K to the
concurrent amount.
iii. On the other hand what if the 100K is secured by a mortgage
after compensation may A foreclose the mortgage? Yes!
Because there will still be a balance of 50K, a mortgage is an
indivisible contract, until the obligation is not extinguished the
mortgage will remain in force. And therefore if B failed to pay A
the fifty thousand, A can still foreclose the mortgage.
amount of 1M, thereafter A borrowed money from the same bank 800K,
then A wanted to withdraw the 1M, the bank said no you cannot withdraw
the 1M because your obligation to pay the 800K is already due we are
invoking compensation, you can only withdraw 200K less the charges, A
claimed you cannot do that because under Article 1287 there can be no
compensation when one of the debts arises from a deposit. WHO IS
CORRECT? The bank was correct because a savings account deposit is not a
deposit it is a contract of loan, that is why 1287 (compensation will not be
proper if one of the obligations arises from depositum) will not apply. So if
both are simple loan there can be compensation. Article 1287 provides that
there can be no compensation when 1 of the obligations is arises from a
deposit, this is known as, as some authors would name it, a facultative
compensation. However, other authors does not see this as independent
obligation, this is just treated as a modification of the other kinds of
compensation recognized by law which is a voluntary or conventional
compensation the third one is judicial compensation the first
obviously is legal compensation.
i. Legal compensation is considered as the true kind of
compensation. Hence, if the examiner does not mention any kind
of compensation he is referring to LEGAL COMPENSATION.
ii. Voluntary/ Conventional compensation: the consent of both
parties is required.
1. In facultative: it is only the consent of one of the parties
which is required.
iii. Judicial: this would normally happen when a case is filed for a
sum of money but what would normally happen in cases, the
defendant will have counterclaim, usually the counterclaim is
bigger, so in the end the plaintiff becomes liable on the premise
that the claim of plaintiff is valid and was granted and the court
also granted the counterclaim it is compensated up to the
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 concurrent amount. The obligations which are not yet liquidated
at the time of the filing of the action, they can be liquidated during
the proceedings. In compensation it is also called as set off or
counterclaim but it seems that this word is proper in judicial
compensation because counterclaim is usually used in the
court.
d. VOLUNTARY COMPENSATION – this is by agreement of the parties, even if
not all of the requirements for legal compensation are present, it does not
matter because the obligations will be extinguished by agreement of the
parties. For example: the debts are not yet due and they want to
compensate, what can we do? The parties already agreed. Also, probably
one of the debts pertain to a carabao and the other to a car, we cannot do
anything about it. In fact in lay man’s term we call this “quits”.
e. FACULTATIVE COMPENSATION it occurs in depositum, commodatum,
gratuitous support, and civil liability arising from crime-
i. This will arise if one of the debts arises from a depositum, in a
depositum a thing is delivered to the depositary for safekeeping,
this can happen even also with a bank. If a person for example
would deliver 1M pesos to the bank only for safekeeping, this will
be a DEPOSITUM What if A deposited 1M not as a savings account
but in the safety deposit box, and A borrowed 800K, now if A
would want to withdraw the 1M from the safety deposit box can
the bank invoke compensation? The depositary cannot invoke
compensation but the DEPOSITOR CAN!
ii. Aside from depositum, mentioned COMMODATUM when one of
the debts arises from commodatum. In this obligation the thing
has to be returned upon demand however here, the bailor can
invoke consignation but not the bailee.
iii. SUPPORT should be gratuitous support and not contractual
support. Why? Because if this is legal support, a person needs this
to survive thus, it cannot be subject to compensation. But if it is
support in arrears compensation may take place.
iv. CIVIL LIABILITY ARISING FROM CRIME – probably the scenario
here is A is indebted to B 100K when B tried to collect A cannot be
so he stabbed A, so B was held criminally liable, then there was a
monetary award, what if the award to A is 120K, if A demands for
100K from B can B invoke compensation? NO! The convict cannot
invoke compensation but the aggrieved party can invoke
compensation.
f. LEGAL COMPENSATION, THIS IS BY OPERATION BY LAW – From the
moment all the essential requisites are present compensation takes place
even without the knowledge of the parties, even before they invoke
compensation.
i. SCENARIO: A owes B due 1992, B owes A due in 1999, possible
that it’s both 1M based on different transaction, A filed an action
against B the defense of B is compensation, however, A may claim
that no, you cannot invoke compensation because your credit has
already prescribed since my debt has become due in 1992. Is A
correct? NO!!! In 1999 even without their knowledge when the
debts become due and demandable compensation took place.
REQUIREMENTS OF LEGAL COMPENSATION:
1. THEY MUST BE MUTUAL CREDITORS AND DEBTORS -
but if you have read one case and a few authors would
consider this instead of mutual they would use
reciprocal creditors ATTY. URIBE: I would not
encourage you to use reciprocal creditors, if
reciprocal debtors and creditors it will imply reciprocal
obligations, if it is reciprocal obligations then this
obligations arose from the same transactions if this is the
case one of the requisites for legal compensation to take
place will never be complied with. Here, debtors and
creditors must be principally bound to each other. In
a case, A is indebted to B secured with a guaranty of G. G
paid to B; hence B is indebted to G. Can B invoke legal
compensation? If the debtor is already in default, G will
now be liable; thus, legal compensation take place.
a. CASE: X as the owner of shares authorize Y to
sell shares of stock, Z bought it from Y, but the
latter fail to remit to X, hence, he was filed
Estafa. Y is also liable to Z. The trial court
convicted Y. Z argued that Y is also liable to him
invoking compensation. SC ruled that even if
Y is indebted to Z, Z is not indebted to Y, the
latter being an agent to X. Hence, parties are
not mutually indebted to each other.
b. CASE: Francia vs. IAC, was there legal
compensation? NONE because in the case
Francia was indebted to the city government of
pasay because of the expropriation of the
former’s property xxx however, Francia was
invoking legal compensation because he was
the creditor of an expropriation proceedings, it
just so happen that the city government did not
expropriate his property the national
government did. Since the requirement no. 1 is
not present there is no legal compensation.
c. CASE: PNB v. ACERO: PNB was debtor of
Isabela, this is simple loan, so PNB owed
Isabela, however ACERO was the judgment
debtor of Isabela who wants to have the
savings of Isabela garnished, however PNB
claimed that they invoked compensation
because Isabela was also their debtor, who is
correct? No claim is correct, although PNB is
the debtor of Isabela, there was no proof that
Isabela is the debtor of PNB.
2. BOTH DEBTS MUST BE IN SUMS OF MONEY OR IF
THEY PERTAIN TO GOODS THEY MUST BE OF THE
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 SAME KIND AND QUALITY – in other words may the
obligations be both in sums of money if they are
reciprocal obligations? It cannot happen. In reciprocal
obligations there are different prestations one is
delivery and the other monetary, it can never be
both sums of money. Reading several cases it might
appear that this compensation may occur only when the
obligation arises from contracts, is this correct, will
there be legal compensation only if the debt in
money arose from contract? NOT TRUE! Even if the
obligation arose from other sources there can be
compensation.
a. In fact if you read the CASES: Mindanao
Portland xxx in these two cases the amounts
which are the subject of compensation were
attorney’s fees, these fees did not arise from
contract. Mindanao Portland is unlikely,
company A filed a case against company B, one
of them won and the court awarded attorney’s
fees, in another case the other company won
and attorney’s fees were also awarded, so the
award is of the same amount, the obligation
is of the same nature, COMPENSATION
TOOK PLACE. Ultimately the QUESTION HERE
IS: Does it mean that all monetary
obligations may be the subject of legal
compensation? No! If you have read the case
of Francia v. IAC certain monetary obligations
cannot be subject of legal compensation like
payment of taxes, customs duties, tariff etc.
3. BOTH PARTIES MUST BE PRINCIPALLY BOUND –
Principally bound because in a scenario where A is
indebted to B and this obligation is secured by a
guarantor G on the other hand B is the debtor of G in this
obligation, if G demands payment from G, Can he claim
that G is also indebted to him because he is a
guarantor in B’s obligation to A? In its face NO,
because the guarantor is not principally bound but
take note the moment A defaults and his properties
are already exhausted, the GUARANTOR WILL NOW
BE LIABLE TO B AND FROM THEN ON
COMPENSATION WILL TAKE PLACE.
4. THEY MUST BE CREDITORS AND DEBTORS OF EACH
OTHER IN THEIR OWN RIGHT: SYCIP v. CA: the owner
of the shares of stocks authorized Lapuz to sell the
shares of stock, lapuz on then authorized Sycip to sell the
shares of stock, the latter was able to sell the shares of
stock (5K), however, despite the demand to Sycip to
remit the proceeds of the sale he refused to do so. A
complaint for estafa was filed against Sycip, he was
convicted in the lower court, on appeal Sycip claimed
that Lapuz owed him (5K) so compensation took place,
therefore he cannot be liable for estafa, is Sycip’s
contention correct? NO, even assuming that Lapuz is
indebted to Sycip, the latter is really not indebted to
Lapuz in his own right. The real creditor of Lapuz is
the buyer of the shares.
5. BOTH DEBTS MUST ALREADY BE DUE AND
DEMANDABLE – The MOST COMMON MISTAKE WHEN
ASKED WHY IS THERE NO LEGAL COMPENSATION IS
BECAUSE THE OBLIGAITON HAS NOT YET BECOME DUE
AT THE SAME TIME. REMEMBER: The requirement of
the law is that both debts are due and it is not
required that the debts are due at the same time. But
if one debt became due 3 years ago and the other debt
became due today, compensation will only take place
today, but there can be compensation. ANOTHER
COMMON MISTAKE: EXAMPLE: A borrowed money,
the other one bought on credit, so they are debtors
and creditors of each other, however, they say that
there can be no legal compensation because the
obligations do not pertain to sums of money, one is
money the other one car. HERE THE OBLIGATION OF
THE BUYER IS TO PAY THE PRICE SO IT IS ALSO
MONETARY LEGAL COMPENSATION WILL TAKE
PLACE.
6. THE DEBTS MUST BE LIQUIDATED AND
DEMANDABLE – In other words there should be no
claim by a third person over this right or credit, because
if the claim is subject of legal proceeding, there can be no
legal compensation.
a. Example: International Corporate Bank v.
IAC: Fajardo borrowed money from ICB 50M
the bank released only 20M to secure this
obligation, Fajardo mortgaged properties
amounting to 110M, thereafter she also
delivered 1M to the bank for money market
investment, so just like any other investments it
matured, so she demanded for the return of the
1M, the bank claimed that she has nothing to
recover from the bank because as to her loan
which she failed to pay, when the foreclosed
the mortgage she still has deficiency of 6M, so
compensation took place, however Fajardo
questioned the mortgage the SC HELD: there
can be no legal compensation because one
of the claims is still being litigated.
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 7. ONE OF THE DEBTS MUST NOT ARISE FROM Article WITH THE KNOWLEDGE OF
1287 AND Article 1288 because in such cases legal X, THE DEBT IN March 1 IS
compensation will not take place since in depositum the ALREADY DUE, AS TO
depositor or the bailor must invoke legal compensation. DEBTS OWING TO Y WHICH
ARE ALREADY DUE, HE CAN
INVOKE COMPENSATION
X is indebted to Y for 1 Million--------- Y assigned this credit to Z- (May 1, 2012)-------- Z demanded OR AT LEAST RESERVE
payment from X COMPENSAITON BECAUSE
COMPENSATION WILL
Y is also indebted to X
TAKE PLACE ONLY June 30,
1. 50K (Due on March 1, 2012) SO AS TO 20K AND 10K B
2. 20K (Due on May 15, 2012) CANNOT INVOKE
3. 10K (Due on July 31, 2012)
COMPENSATION, AT THE
June 30, 2012------- Z demanded payment from X TIME OF ASSIGNMENT June
30, THE CREDITS ARE NOT
YET DUE TO HIM.
2. NO RESERVATION HOW
g. EFFECT OF ASSIGNMENT OF A CREDIT AS TO THE RIGHT TO INVOKE MUCH CAN Z DEMAND
COMPENSATION – FROM X? 100K BECAUSE
i. Can X validly claim compensation for these 3 debts? BY AGREEING WITHOUT
1. X cannot be compelled to pay Z if the obligation has not RESERVATION HE WAIVED
yet due and demandable. If the assignment was made HIS RIGHT TO
before debts became due, and you demand on that date, COMPENSATION, Z’S
the person to whom payment should be made cannot yet REMEDY HERE IS TO
be compelled. DEMAND THE PAYMENT OF
2. Hence, the first thing to look at is the DATE OF THE DEBTS FROM X.
ASSIGNMENT! b. WITHOUT KNOWLEDGE: Z demanded from X
3. To answer the question raised above, the first factor in June 30, how much can X be compelled to
you have to consider: WHETHER THE ASSIGNMENT pay? Only 10K because he can invoke
WAS WITH THE KNOWLEDGE OF X OR WITHOUT compensation to those debts which became due
KNOWLEDGE: if the assignment is without his knowledge,
a. IF WITH KNOWLEDGE, YOU HAVE TO 70K.
DETERMINE WHETHER OR NOT THERE WAS
CONSENT TO THE ASSIGMENT OR NONE: 8. NOVATION- it is a peculiar mode of extinguishment because it creates an obligation.
i. IF CONSENT IS GIVEN, YOU HAVE This is somewhat the same as that of prescription, which the latter can extinguish
TO DETERMINE WHETHER OR NOT civil obligations but can be converted into natural obligation.
HE MADE A RESERVATION OR NO a. What is the relevance of determining whether there is novation or not?
RESERVATION: Because if there will be novation, it consequently required a new set of
1. (so the scenario here is Y requirements to be complied with since a new obligation arises.
and Z advised X that Y is b. Will change of person amounts to novation? No, say in a case wherein A
assigning the credit to Z, X executed a PN dated 1996 to secure payment of loan to B. In 2001, A died.
consented but he reserved Heirs of A filed in 2007. The defense of A is prescription since it already lapsed
his right to invoke as far as time is concerned. B argued that there is novation. There is NO
compensation) IF X novation here. Hence, not all change of person leads to novation since
RESERVED, HOW MUCH here the same obligation, hence, prescriptive period was not tolled.
CAN Z COLLECT FROM X? c. In a case wherein A had a contract with B which was voidable, B thereafter
ONLY 50K BECAUSE AS OF assigned his right to C. Can A invoke vitiation of consent? No, because there
THE DATE OF THE was the creation of new obligation between B and C, hence A cannot raise the
ASSIGNMENT WHICH WAS defense he had against B. But if the assignment was done without
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 knowledge of A, can A invoke vitiation against C? Yes, because this involved
the same obligation; hence, A can raise his defense against C.
d. In Fua case, these are subjected to agreement of parties, (1) Reduction of
amount, (2) Payment in installment; (3) Secured with Real Estate Mortgage;
(4) With order of payment of attorney’s fees. But despite those agreement,
debtor still failed to pay. Hence, the creditor continued with execution sale.
Debtor questioned the execution sale arguing that there WAS NOVATION.
Hence, if there was, the sheriff must comply anew with the requirements,
because such will give rise to a new obligation. SC ruled that there was
indeed novation. The Dissenting opinion of this case made
classification of Novation as follows:
i. Subjective Novation/personal- pertaining to parties.
1. Active subjective- Subrogation in the rights of creditor
a. The change of creditor may not necessarily
extinguish the obligation because third person
might subrogate. When? It could be express,
that is with an agreement, or implied under
Article 1302, as an operation of a right.
2. Passive subjective- Substitution of the person of the
debtor
a. In a scenario, A is indebted to B, X offers to pay
B. Will X subrogate in the rights of B? Not yet,
because B did not accept such offer.
b. In the scenario above, X demanded from A, is A
bound to reimburse X? Yes, insofar as A has
been benefited under Article 1236. If A fails to
reimburse, can X run after the guarantor, if
any? And if B demanded payment from X, since
X offered to pay him, but later on X became
insolvent, can he recover from A? You have to
qualify if this is a case of EXPROMISSION OR
DELEGACION.
i. Expromission- if there is substitution
of debtor without or against the
original debtor’s will. If it is this kind,
X cannot run after the guarantor
because it is not subrogated in the
rights of B. Here, if payment to B was
with consent of A, X is subrogated in
the rights of B, hence, Article 1302
applies. In case of insolvency, A here
will never be liable because the
substitution was without his consent.
ii. Delegacion- the original debtor gave
consent. If in this kind, X can run after
the guarantor. B cannot demand from
A because the obligation has already
been extinguished by novation.
However, if A is in bad faith, HE
CAN BE HELD LIABLE TO B. If
insolvent after substitution, there is
NO BAD FAITH. And if A and B are
aware of the insolvency of X but
still allows substitution, B cannot
held A liable because both are in BAD
FAITH.
ii. Objective Novation/real- pertaining to subject-matter.
1. Change in the object- easiest kind
a. In a case wherein A is the lessee and B is the
lessor, when A surreptitiously left the premises,
he left along with him the arrears in payment of
telephone bills. Then, the telephone company
sued B for the unpaid bills. The latter however
argued that it should be A who will be held
liable. Whether or not there is substitution in
the person of debtor here? No, because
substitution was without the consent of the
creditor.
b. The case of Japan Airlines.
2. Change in the principal conditions- most difficult.
a. There is no hard and fast rule. In Fua case
which was followed by a recent case in
Millare vs. CA, the SC found that there was no
NOVATION, by reason set forth.
iii. Mixed- combination of the above two.
e. If the original obligation is void, parties had an agreement which was
also void, what will be the result? THERE IS NO NOVATION because there is
nothing to extinguish. Can new agreement be enforced? No, because the
consideration is void.
f. If original obligation is void, and new agreement valid, will there be
novation? No.
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