OBLIGATIONS AND CONTRACTS Lim works in the business of supply scrap papers.

He delivered
MODULE 5: EXTINGUISHMENT OF OBLIGATIONS scrap papers worth P7,220,968.31 to Arco through its CEO and
President, Candida Santos. The parties allegedly agreed that Arco
would either pay Lim the value of the raw materials, or to deliver
ARTICLE 1231. Obligations are extinguished: him their finished products of equivalent value. Arco issued a
(1) By payment or performance; post-dated check as partial payment. Said check was dishonored
(2) By the loss of the thing due; for being drawn against a closed account. Arco and a certain Eric
(3) By the condonation or remission of the debt; Sy executed a MOA where Arco bound themselves to deliver
(4) By the confusion or merger of the rights of creditor and debtor; their finished products to Megapack Container Corporation
(5) By compensation; owned by Sy as evidenced by a MOA. Arco argued that its
(6) By novation. obligation to Lim was extinguished due to novation when he
signed the MOA with Sy. Was the obligation of Arco to Lim
Other causes of extinguishment of obligations, such as annulment, rescission, fulfillment extinguished by novation due to the MOA between Arco and Sy? No, the
of a resolutory condition, and prescription, are governed elsewhere in this Code. Supreme Court held that when Arco opted to deliver the
finished products to a third person, it did not novate the
A. Main Causes of Extinguishment of Obligation original obligation between the parties. Novation requires
that it be clear and unequivocal; it is never presumed. There is
ARTICLE 1231 nothing in the memorandum of agreement that states that with
MAIN CAUSES OF EXTINGUISHMENT OF OBLIGATIONS its execution, the obligation of Arco to Lim would be
Fulfillment of an obligation by the performance of the prestation; extinguished. It also does not state that Sy somehow substituted
Payment or Arco as Lim’s debtor.
it is not restricted to the delivery of money for the settlement of
Performance
a monetary obligation (Article 1232)
Loss of the Extinguishes the obligation because the delivery of the thing has B. Other Causes and Illustrative Cases
Thing Due become impossible (Article 1262 – 1269)
Merger or Obligation is extinguished because it makes the performance of ARTICLE 1231
Confusion of the obligation irrelevant as the debtor would be obliged to OTHER CAUSES
Rights perform the obligation to himself (Article 1275 – 1277) Annulment of voidable contracts are covered under Articles
Gratuitous abandonment by the creditor of his right— in effect, Annulment of the 1390 – 1402; Through a judicial process, an obligation is set
Remission or Obligation aside because of a vice of consent or some other defect which
the creditor voluntarily waives its performance; a form of
Condonation affects the capacity to act of one of the parties.
donation (Article 1270 – 1274)
Compensation or Performance of the several obligations would only be a circuitous Rescissible contracts are validly entered contracts. Under
Set-Off process (Article 1278 – 1290) Article 1380 in relation to Article 1381, contracts validly agreed
Creation of a new obligation is intended to extinguish and replace upon may be rescinded in the cases established by law.
Recission of
an old one (Article 1291 – 1304) Contract
The rescission is premised on the economic damage caused by
Illustrative Case: the contract to one of the contracting parties or to a third
Novation person.
Novation must be clear and unequivocal; it is never presumed. Fulfillment of As defined, a resolutory condition makes an obligation
Arco Pulp and Paper Co., Inc. et. al. vs. Lim Resolutory immediately demandable, but once the resolutory condition
G.R. No. 206806 (June 25, 2014) Condition happens, the obligation is extinguished (Article 1190)
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 There are two modes of prescription: acquisitive or extinctive.
Article 1231 refers to extinctive prescription.
Bear in mind Article 1425 on the voluntary performance of a
Prescription natural obligation: it authorizes retention of what has been
voluntarily performed or delivered.
Thus, an obligation is not really extinguished by prescription—
the civil obligation is converted to a natural one.
Death of the obligor extinguishes the obligation especially in
cases of personal prestation or in case of intransmissible
obligations.
Death of the Obligor
Death likewise extinguishes contracts of partnership (Article
1830, par. 5) and agency (Article 1919, par. 3)
While there is no statutory basis for this cause, Dr. Tolentino
posits that when a creditor loses his interest to enforce an
Creditor’s
obligation, the debtor should be released.
Loss of Interest to
Enforce the
Once extinctive prescription sets in, as in when the creditor
Obligation
takes no action to enforce his claim, the civil obligation is
converted to a natural one.
Similarly, the law does not include abandonment of the object
Abandonment of the
of the obligation as a cause for its extinguishment. Dr.
Object of the
Tolentino cites Article 662 as a case of abandonment of object
Obligation
which extinguishes an obligation.
If it takes the consent of the debtor and the creditor to create
the obligation, the same mutual consent should be sufficient to
extinguish it provided that it will not prejudice the rights of a
third person.
Illustrative Case:
Mutual Dissent Mutual disagreement by the parties can cause its extinguishment
Saura Import and Export Co., Inc., vs. Development
Bank of the Philippines
G.R. L-24968 (April 27, 1972)
Saura, Inc. applied for an industrial loan of P500,000.
Rehabilitation Finance Corp., now DBP, approved the loan
application to be secured by mortgage on the factory buildings,
the land site, and machinery and equipment to be installed.
However, it was cancelled to make way for the registration of a
mortgage contract over the same property in favor of
Prudential Bank and Trust Co. since it issued a letter of credit
for the release of the jute machinery. As security, Saura
executed a trust receipt in favor of the Prudential. For failure
of Saura to pay said obligation, Prudential sued Saura. After
almost 9 years, Saura Inc, commenced an action against RFC,
alleging failure on the latter to comply with its obligations to
release the loan applied for and approved, thereby preventing
the plaintiff from completing or paying contractual
commitments it had entered into, in connection with its jute
mill project. The trial court ruled in favor of Saura, ruling that
there was a perfected contract between the parties and that the
RFC was guilty of breach thereof. Was the action taken by the
parties in the nature of mutual desistance thereby extinguishing their
obligation? Yes, the action taken by the parties was in the
nature of mutual desistance. Manresa terms this as "mutuo
disenso" — which is a mode of extinguishing obligations. It is
a concept that derives from the principle that since mutual
agreement can create a contract, mutual disagreement by the
parties can cause its extinguishment. In this case, when RFC
turned down the request, the negotiations reached an impasse.
Saura, Inc. obviously was in no position to comply with RFC's
conditions. So instead of doing so and insisting that the loan be
released as agreed upon, Saura, Inc. asked that the mortgage be
cancelled. Therefore, said agreement had been extinguished by
mutual desistance.
In some contracts, either because the term is indefinite, or
because the nature of the prestation, the dissent of one of the
parties is sufficient to extinguish the obligation.
Illustrative Cases:
Unilateral Dissent Talampas, Jr. v. Moldex Realty, Inc.
G.R. 170134 (June 17, 2015)
Talampas entered into a contract with Moldex to develop a
residential subdivision known as the Metrogate Silang Estates.
He undertook to perform the work for the contract price of
P10,500,000, and an initial down payment of P500,000 was
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made by Moldex. On May 14, 1993, Metrogate's Project
Manager asked the petitioner to suspend construction work for
one week due to a change in the project's subdivision plan.
Eventually, the project was cut short since Moldex informed
Talampas that it is terminating the contract due to a business
decision. Talampas demanded payment of equipment rentals
during the period of suspension and opportunity cost lost due
to early termination of the contract, but Moldex did not heed
his demands, prompting him to file a complaint before the RTC
for breach of contract. The RTC ruled in his favor, but the CA
reversed it. Did Moldex fail to comply with its contractual stipulations
on the unilateral termination? Yes, Moldex failed to comply with
its contractual stipulations on the unilateral termination
when it terminated their contract due to the redesign of
the Metrogate Silang Estates' subdivision plan. Paragraph
8 of the contract limits the instances when Moldex or Talampas
may unlitaterally terminate the agreement. Moldex could have
not validly and unilaterally terminated the contract since
Talampas has not committed any of the stipulated acts of
default. Therefore, Moldex’s termination of the subject
contract violated the parties' agreement as the reason for the
termination, i.e., the redesign of the project's subdivision plan,
was not a stipulated cause for the unilateral termination under
Paragraph 8.1 of their contract.
GBMLT Manpower Services, Inc. v Malinao
G.R. No. 189262 (July 6, 2015)
Malinao applied to GBMLT Manpower Services for a teaching
job abroad. She signed a POEA-approved Contract of
Employment which covered a period of two academic years.
Upon her arrival in Ethiopia she was informed by the Vice
Minister of the Ministry of Education that her credentials
would have to be re-evaluated because it appeared that she did
not have a master’s degree. She unilaterally decided to
discontinue teaching the course for the reason was that
accounting was not her speciality. A memorandum was issued
that lowered the ranks of most of the Filipino teaching staff
and asking them to sign a new contract that reflected a change
in rank and salary. However, the respondent refused to sign the
contract. She together will fellow Filipino teachers went to
protest however the Vice President admonished them, telling
respondent that she is fired. Respondent requested for a notice
of termination in order to “alleviate her suffering”. Eventually
the notice of termination was issued. Respondent, however,
was offered a job at the Internal Audit Department. She
accepted the job however she stated in a letter that she changed
her mind. Was Malinao unilaterally terminated? No, Malinao was
not unilaterally terminated and by extension, she was not
illegally dismissed. Article X of the contract which stipulated
that: This contract may be terminated by either party, at any
time, and for no cause by giving three months’ notice to the
other party. The right to terminate the Contract of
Employment at will was also available to respondent, who
exercised that right when she signified her change of mind and
rejected the job at the Internal Audit Department. Ultimately,
it was she who terminated the Contract of Employment, and
cannot claim that she was illegally dismissed.
In an insolvency proceeding, the court has the authority to
release the insolvent from all his obligations after his assets
have been applied to the pro rata payment of his debts. In any
case, an obligation must be performed, unless there is a legal
basis for its extinguishment.
Illustrative Case:
Metro Concast Steel Corporation v. Allied Bank
Corporation
G.R. 177921 (December 4, 2013)
Judicial Declaration
of Insolvency Metro Concast (petitioner) obtained several loans from Allied
Bank through a promissory note and trust receipts. Petitioner
failed to settle the obligations under the same. Allied Bank
eventually filed a complaint to the RTC for collection.
Petitioner justified their indebtedness with economic
instability. They were forced to turn the equipment into scrap
metal because of poor sales in an attempt to settle their debts.
Peakstar Oil Corporation negotiated with petitioners with the
alleged conformity of Allied Bank through Atty. Peter Saw as
the latter’s in-house counsel to purchase the scrap mental. A
Memorandum of Agreement was executed between Metro
Concast and Peakstar in which Peakstar was obligated to
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purchase the scrap metal worth P34,000,000. Peakstar however
reneged the obligations therein. Were the loan obligations incurred
by Metro Concast extinguished through Peakstar’s failure to pay? No,
the obligations incurred by Metro Concast were still in
effect. Peakstar’s breach of obligations arising from the MOA
cannot be considered as force majeure under jurisprudence.
For it to be considered as such it must be: impossible to foresee
or avoid, independent of human will, must be such as to render
it impossible for the debtor to fulfil obligations in a normal
manner. In this case, although the breach was considered
unforeseeable, it is not considered impossible or independent
of human will. Here, neither is has been shown that said
occurrence rendered it impossible for petitioners to pay their
loan obligations to Allied, and thus negates the theory of force
majeur.
Heir of Spouses Natividad v. Natividad & Spouses Cruz
G.R. No. 198434 (February 29, 2016)
Leandro and Juliana alleged that Sergio Natividad obtained a
loan from DBP. As security for the loan, Sergio mortgaged two
parcels of land, one of which is co-owned and registered in his
name and that of his siblings namely, Leandro, Domingo, and
Adoracion. The other mortgaged parcel of land was registered
in the name of Sergio and Juana. Subsequently, Sergio died
without being able to pay his obligations with DBP. To prevent
foreclosure, Leandro paid for Sergio’s debt. The heirs of
Leandro are now asking from Sergio’s heirs for reimbursement
for the payment of the debt incurred by Sergio. Are Juan and
Jean, the heirs of Sergio, liable to reimburse the heirs of Leandro? YES.
Under Article 1236, Sergio’s heirs are still liable to
reimburse Leandro as the payment of the debt was
beneficial to Sergio. Juana and Jean, being the heirs of Sergio,
are now liable to settle his transmissible obligations, which
include the amount due to the heirs of Leandro, prior to the
distribution of the remainder of Sergio’s estate to them, in
accordance with Section 1, Rule 90 of the Rules of Court
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.
A. Concept of Payment
In its broadest sense, payment means the fulfillment of an obligation by the
performance of the prestation. It is not limited to the delivery of money for the
settlement of debt.
B. Four Requisites of Payment
1. By whom payment is made
2. To whom payment is made
3. What must be paid
4. How will payment be made
BY WHOM PAYMENT IS MADE
I. Must be made by debtor who must possess both the capacity to act and
capacity to dispose property (Article 1239)
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."
A. Capacity of the Debtor
A valid payment requires that the debtor possesses two essential qualifications:
1. Capacity to act, i.e., the power to do acts with legal effects (Article 37 in
relation to Article 38 on restrictions on capacity to act)
2. Capacity to dispose property, i.e., the power to dispose his property,
whether onerously or gratuitously
B. Effect of Debtor’s Absence of Capacity
Article 1239 states that the payment is defective, however it does not say whether
the payment is voidable or void. If payment is considered void, obligation is not
discharged because a void payment is deemed to be inexistent. If payment is merely
voidable at the instance of the debtor, payment is effective until it is judicially set
aside.
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 C. Exception to the Rule
The exception created by Article 1239 in relation to Article 1427 is moot and
academic. The Family Code provides that the age of majority is 18. A person
between the ages of 18 and 21 is no longer a minor for having attained full civil
capacity. (Article 234, Family Code)
II. Can be made by a person with authority to act on behalf of the debtor
III. Can be made by a third person who has no interest in the fulfillment of the
obligation, unless there is a stipulation to the contrary, or can be made by a
third person in who does not intend to be reimbursed (Articles 1236-1238)
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.
A. Reason for the Rule
This views a third-party payment as a modification of the obligation (a form of
novation) which the creditor is neither obliged to agree to nor to accept. Thus, a
creditor has the right to expect that the obligation shall be fulfilled by the debtor,
and not by anyone else, unless he consents to the same, or unless there is a
stipulation permitting third party.
B. Right of the Third Party Payor
If the creditor accepts payment from a third party payor, the latter is given the right
to collect reimbursement from the debtor, at least to the extent that the payment
inured to the benefit of the latter.
C. Effect of Debtor’s Defenses to the Payor’s Right to Reimbursement
REIMBURSEMENT RIGHTS OF THE THIRD PARTY PAYOR
If there’s a complete defense
If there’s a partial defense
(illegality of obligation, prescription,
(prior partial payment)
etc.)
Payment made by the third party Benefit to the debtor is LIMITED to the amount
payor COULD NOT HAVE owed to the creditor.
benefitted the debtor because in
any case, the creditor cannot compel
the debtor to perform the obligation.
D. Creditor’s Option to Accept Third Party Payment
As the creditor cannot be compelled to accept third payment, he is not in mora
accipiendi if he refuses the third payment. Needless to say, a creditor may, at
his sole discretion, accept the same if he so wishes.
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.
A. Consequence of Third Party Payment Without Consent of Debtor
Third party payment discharges the obligation, together with the mortgages,
guaranties or penalties which are accessories thereto. Therefore, there are no
mortgages, guarantees or penalties that the creditor could transfer to the third party
payor.
B. Art. 1237 is neither Conventional nor Legal Subrogation
Third party payment results in legal subrogation only if the original debtor gave his
express or tacit approval, and in conventional subrogation when all the parties
gave their respective consent. Under Art. 1237, none of the original debtor, original
creditor, or the third party payor have given their respective consent to
subrogation.
C. Art. 1237 is for the Benefit of the Debtor, Not Creditor
Due to the phrase “cannot compel the creditor to subrogate him in his rights, such
as those arising from a mortgage, guaranty or penalty”. an erroneous inference
could be deduced that the creditor may voluntarily agree but cannot be compelled
to agree to such subrogation.
However, Art. 1237 is NOT for the creditor to agree to the subrogation. It is
intended to benefit the debtor; it is not intended to give the creditor the right to
bargain the accessory benefit of subrogation to the third party payor.
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.
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 A. Nature of Donation under Article 1238
• Definition: Donation is an act of liberality whereby a person disposes
gratuitously of a thing or right in favor of another, who accepts it. (Article
725)
• If a third party payor who had no interest in the obligation, performed the
obligation of the debtor, and if such payor did not intend to be reimbursed,
the donation to the debtor is in the amount equivalent to the payment
he made to the creditor.
• Debtor who benefitted from the payment must accept the act of liberality
of the third party payor in order that the donation may be perfected. (Article
725)
B. Legal Issues with respect to donation under Art 1238
1. Article 725 requires the donee’s acceptance in order to perfect a donation. The
acceptance of the donation cannot be presumed if the third party payment
was made without his knowledge. However, the third party payment is valid
as to the creditor who accepted it, even if the debtor rejected the donation of
the third party payor.
2. Article 1238 does not seem to consider the formal requisites of a donation.
Formalities of a donation are governed by Articles 748 and 749. Donation is
a formal contract. Its validity is dependent on compliance with the prescribed
form.
3. Every donation attracts a donor’s tax at the prescribed rates. Under the NIRC,
a third party payor is liable to pay a donor’s tax on the amount he paid to the
creditor because he does not intend to be reimbursed by the debtor. The tax
authorities will most likely insist on collecting the donor’s tax even if the
debtor refused to accept the generosity of the third party payor. The absurd
result would be the imposition of the donor’s tax on a donation that was not
perfected.
TO WHOM PAYMENT IS MADE
I. Must be made to the creditor who must be capacitated administer his
property (Article 1241)
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.
A. Payment to an Incapacitated Creditor
Incapacitated person has no power to accept payment of a credit belonging to him.
Even if he received payment, he has no power to discharge the obligation because
his acts do not produce legal effects. (Article 37 in relation to Article 38)
B. Exceptions
1. If the incapacitated person kept the thing which was delivered to him by
the debtor in payment of the obligation. This applies to prestations to
give.
2. Incapacitated person benefitted from the payment made by the debtor.
If he kept the thing means two things:
a. Thing is still available to the legal representative of the incapacitated
creditor and can still be used for his benefit;
b. The thing delivered to the incapacitated person was not wasted.
C. Payment to a Third Party
General Rule: payment to a person other than the creditor (or a person designated
by the creditor) is void.
Exceptions:
1. After payment, the third person acquires the creditor’s rights
2. Creditor ratifies payment to third party
3. Creditor misled the debtor – based on the principle of estoppel.
II. Must 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 (Article 1240)
NOTE: Payment made to the wrong party will not discharge the obligation.
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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. E. Payment to the Heirs of a Deceased Creditor
Care must likewise be observed. Where administration proceedings have been
A. General Rule instituted, the debtor must pay only to the administrator of the decedent’s estate.
• Payment must be made to the creditor, or to a person designated by the Payment made directly to the heir(s) of the deceased may be challenged if the
creditor, whether such person is an agent or representative of the creditor, heir(s) who received the payment failed to turn it over to the administrator of the
or a virtual stranger. estate.
• Reason: debtor’s payment made to the wrong person will not discharge
the obligation unless the erroneous payment is attributable to the fault or ARTICLE 1242. Payment made in good faith to any person in possession of the credit
negligence of the creditor. Payment to the wrong person in good faith is shall release the debtor.
no defense.
A. Definition of Credit
B. Exceptions: A credit is a claim which the creditor may enforce against the debtor while the note
• Article 1626 – The creditor and the assignee both failed or omitted to or instrument represents credit.
notify the debtor, acting on the basis of ignorance of such fact, made
payment to the creditor who, in obvious bad faith, accepted payment and B. Possessor of Credit v. Possessor of the Evidence of the Credit
failed to remit the same to the assignee. The assignee has no claim against
the debtor, because the debtor’s payment in good faith to the creditor Possessor of the Credit Possessor of the Evidence of the Credit
discharged the obligation. Possessor of the credit in Art. 1242 is not Mere possession of evidence of the credit
• Article 1242 – Payment in good faith to any person in possession of the the creditor nor the person designated by does NOT make one necessarily the
credit shall release the debtor. the creditor to receive payment. It refers possessor of the credit.
to a person who appears to be the
C. Authority of the Agent creditor but is not. Necessary to consider:
Authority may be conferred either: contractually or legally— a. nature of the credit;
b. form of its transmission;
• Contractually: duly appointed attorney-in-fact c. manner of actual transmission;
• Legally: law gives a person the power of representation (e.g., parents as d. relation of the possessor of the credit
legal guardians of their unemancipated children, or a person who has to the obligation itself
been duly appointed as the administrator of an estate.)
• Transactions with an agent must be pursued with utmost care. Debtor C. Good Faith
must ascertain both the existence and the extent of the power conferred Essential element for the validity of payment—honest belief that the person
by the creditor to his agent. If the agent should act beyond the scope of collecting the credit, or the person to whom payment is tendered, is legally
his authority, the payment to him by the debtor would be void. (Articles entitled to receive such payment because he is the creditor. Good faith is
1887, 1898 & 1900). This exposes the debtor to the risk of making presumed; bad faith must be proved.
payment to the wrong party.
WHAT MUST BE PAID
D. Payment to the Spouse of the Creditor (IDENTITY OF PAYMENT)
This is risky. If the credit is part of the CPG or ACP of the creditor and his or her
spouse, then payment to the spouse would be valid. If the credit is a separate I. Payment must correspond to the prestation. (Article 1233)
property of the creditor, then payment to his or her spouse would be payment to
the wrong party.
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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.
II. The debtor 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. (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 prestation obliges debtor to give a sum of money to the creditor, debtor cannot
force the creditor to accept another thing;
• If debtor makes proposal to substitute money debt by another thing and creditor
accepts, obligation is extinguished through dation;
• If debtor makes proposal to substitute delivery of a specific thing by a different
thing and creditor accepts, obligation is extinguished through novation;
III. In an obligation give a generic thing, the creditor cannot demand a thing of
superior quality, nor can the debtor deliver a thing of inferior quality.
(Article 1244)
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.
A. Delivery of Generic or Indeterminate Thing
• When the object of an obligation calls for the delivery of a generic or
indeterminate thing, it is important to specify the quality and
circumstances of the thing.
B. Effects of Failure to Specify:
• The debtor cannot choose to deliver a thing of inferior quality;
• Nor can the creditor insist on the delivery of a thing of superior quality
• Creditor may waive this rule by accepting a thing of inferior quality
• Debtor may also waive by delivering a thing of superior quality
IV. Payment of Money (Articles 1249-1250)
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 abeyance.
A. General Rule: Monetary obligations are to be paid in the stipulated currency.
• Contracting parties are permitted to stipulate the terms and conditions of
their agreement, provided that such terms and conditions are not contrary
to law, morals, good customs, public order, or public policy. (Article
1306, Civil Code)
B. Exception: If the stipulated currency is NOT possible for the debtor to deliver,
the payment shall be made in legal tender.
• Legal Tender defined: All notes and coins issued by the Bangko Sentral
ng Pilipinas (BSP) are fully guaranteed by the Republic and shall be
known as legal tender in the Philippines for all debts, both public and
private.
• There is no longer any legal impediment to having obligations or
transactions paid in foreign currency as long as the parties have agreed to
such arrangement.
C. Negotiable Instruments as Substitute for Money
Paragraph 2 of Art. 1249 focuses on the instruments which are governed by the
Negotiable Instruments Law, specifically:
1) promissory notes payable to order;
2) bills exchange; or
3) other mercantile documents which are meant to be substitutes for
money.
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ARTICLE 1250. In case an extraordinary inflation or deflation of the currency stipulated A. General Rule: It is necessary that the prestation must be completely delivered or
should supervene, the value of the currency at the time of the establishment of the rendered, as the case may be.
obligation shall be the basis of payment, unless there is an agreement to the contrary.
B. Exceptions:
A. Reason for the Rule • Article 1234 (Doctrine of Substantial Performance)
With the purpose of avoiding the reoccurrence of the conversion problems during • Article 1235 (Doctrine of Waiver of Complete and Regular Performance
the Japanese occupation, the Commission included Art. 1250 in order to address • Article 1248 (By Stipulation of Parties)
cases of extraordinary inflation or deflation of the currency.
ARTICLE 1234. If the obligation has been substantially performed in good faith, the
B. Inflation of the Currency obligor may recover as though there had been a strict and complete fulfillment, less
• Art. 1250 may only be invoked when there is extraordinary inflation or damages suffered by the obligee.
deflation.
• Inflation happens when there is an increase in the volume of money and A. Concept of Substantial Performance v. Principle of Integrity of Payment
the credit relative to the availability of goods resulting in a substantial and
continuing rise in the general price level. PRINCIPLE OF
SUBSTANTIAL PERFORMANCE
• Meanwhile, deflation happens when there is a reduction in both volume INTEGRITY OF PAYMENT
and circulation of the available money or credit, resulting to the decline If the obligation has been substantially This requires full and complete performance of
of the general price level. performed in good faith, the obligation the obligation.
is discharged, BUT the debtor must
VALUE OF THE BORROWED MONEY indemnify the creditor for the damages
INCREASED before repayment DECLINED before repayment sustained as a consequence of the
The creditor who is paid back the The creditor who is paid back the nominal debtor’s incomplete or irregular
nominal amount of the debt would amount of the debt would not recover the performance.
recover more than the value of the true value of the money lent.
money lent. Doctrine of Substantial
Performance – premised on
C. Requisites of Extraordinary Fluctuation fundamental justice and supported by
a. There is an official declaration of extraordinary inflation or deflation from the proscription against unjust
the BSP; enrichment.
b. The obligation is contractual in nature; and
c. The parties expressly agreed to consider the effects of the extraordinary B. Requisites of Substantial Performance
inflation or deflation. 1. The debtor must have attempted in good faith to comply with his
obligation;
HOW WILL PAYMENT BE MADE 2. The deviation from the proper performance of the obligation must be
(INTEGRITY OF PAYMENT) slight;
3. The omission or defect is technical and unimportant;
ARTICLE 1233. A debt shall not be understood to have been paid unless the thing or 4. The omission or deviation must not pervade the whole or be so material
service in which the obligation consists has been completely delivered or rendered, as the that the object which the parties intended to accomplish in a particular
case may be. manner is not achieved.

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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.
A. Requisites of a Waiver
1. Waiver presupposes intentional relinquishment or abandonment of
right.
2. The right that is the object of a waiver must exist as a fact.
3. The creditor must knowingly accept the debtor’s defective performance
of the obligation in order that the intention to waive the right to full and
proper performance may arise.
NOTE: Waiver requires a voluntary and informed choice made by the creditor.
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.
A. General Rule: An obligation must be performed in its entirety.
• A creditor cannot be compelled partially to receive the prestation in which the
obligation consists; neither can the debtor be required to make partial
payments.
B. Exceptions
1. When there is express stipulation allowing partial performance (Art. 1248,
par. 1)
2. When the debt is partly liquidated and partly unliquidated (Art. 1248, par. 2);
3. When the payment cannot be applied in accordance with the established
rules, or if the application of payment cannot be inferred (Art. 1254);
4. When a person should have against him several debts which are susceptible
of compensation (Article 1289);
5. When the obligation of several joint debtors whose respective shares of the
obligation are subject to different conditions; and
6. When the debt is not fully performed, but the defect is negligible.
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.
A. Rules on the Place of Performance
1. Place of payment should be in the place designated in the obligation.
2. If no stipulation, Domicile of the Debtor (Debtor’s Habitual Residence)
3. If debtor changes domicile in bad faith or after he is in delay, additional expenses
should be borne by him. (Travel expenses in particular)
4. If it is a money debt, Domicile of the Debtor or Place where he does business.
Exception: Stipulation to the contrary
5. If there is no express stipulation in the delivery of a determinate thing, payment at
the place wherever the thing might be at the moment the obligation was
constituted.
6. If there is no express stipulation in the delivery of a determinate thing delivery of
an indeterminate thing, deliver to the creditor.
THREE OTHER RELATED PRINCIPLES OF PAYMENT
1. Timeliness of Payment
• The performance of an obligations must be made on the date it falls due.
• Late payment or performance by the debtor = breach of obligation,
which is referred to as mora solvendi.
• The fact that the due date of an obligation falls on a Sunday or public
holiday does not authorize the payment or performance thereof on the
next following business day (Section 85, Negotiable Instruments Law).
2. Burden of Proving Payment
• If a 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 (Article 1272).
• In addition, 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 (Article 1271).
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 o mandated by good faith
B. Illustrative Case
ARTICLE 1243. Payment made to the creditor by the debtor after the latter has been
One who pleads payment has the burden of proving it: judicially ordered to retain the debt shall not be valid.
PCI Bank v. Franco
G.R. No. 180069 (March 5, 2014) A. Effect of Attachment
• Debtor must refrain from paying the creditor when he receives an order
Arturo P. Franco, the proprietor of Fair Marketing Freight Services entered into a trust from the court prohibiting him from making payment to the creditor
agreement with defendant PCIB for which the latter issued subject Trust Indenture • Disregard of order of the court would result to:
Certificates. Sometime in 1997, he tried to encash the trust indenture certificates only to be i. Be contemptuous and
given a run-around by the defendants. Because of his son’s illness (leukemia), he was forced ii. Potentially void as to the party that obtained the writ of
to go to defendants and try to encash his trust indenture certificates but was denied by the attachment
defendant bank. He was informed that the subject TICs are “null and void”. He was now in
debt and burdened with the fact that his lifetime savings just disappeared without a trace. B. Remedy of Debtor if the Credit is Attached
As such, Franco was constrained to file this case. Is Arturo Franco’s possession of the original copies
• In order to relieve himself of such responsibility, the debtor may:
of the subject TICs supports his claim that PCI Bank’s obligation to return the principal plus interest of the
i. Initiate an action for consignation, and
money placement has not been extinguished? Yes, the TICs in the hands of Franco is a proof of
ii. Deliver to the court the money or property which he owes the
indebtedness and a prima facie evidence that they have not been paid. The Supreme
creditor
Court ruled on the basis of jurisprudence which provides that “When the creditor is in
possession of the document of credit, he need not prove non-payment for it is presumed.
ARTICLE 1247. Unless it is otherwise stipulated, the extrajudicial expenses required by
The creditor's possession of the evidence of debt is proof that the debt has not been
the payment shall be for the account of the debtor. With regard to judicial costs, the Rules
discharged by payment.” In this case, PCI Bank could have easily presented documentary
of Court shall govern.
evidence to dispute the claim, but it did not. In its omission, it may be reasonably deduced
that no evidence to that effect really exist. Hence, PCI Bank’s obligation to return the
principal plus interest of the money placement has not been extinguished because it failed Types of Costs
to adduce evidence against Arturo Franco’s possession of the original copies of the subject The costs to be incurred which are
TICs. incidental to the performance of the
Extra-Judicial Cost obligation. Generally, for the account of
NOTE: This case illustrates that when the fulfillment of the obligation is not documented, the debtor, unless stipulation provides to
or when its existence is the issue, the burden of proof of proving that the debt has been paid the contrary
rests with the creditor. As noted by the Supreme Court, PCI Bank failed to present The costs which presuppose litigation
documentary evidence to dispute the claim. Hence, one who pleads payment has the burden between the debtor and the creditor. The
of proving it. Judicial Cost responsibility for the cost of performing
the obligation is a matter to be determined
3. Right of Debtor to Demand a Receipt of Payment by a court judgement.
• The Code does not contain a provision that explicitly gives the debtor the
right to demand that the creditor issues a receipt of payment.
• Some commentators believe that the duty of a creditor to issue a receipt
is inferred from the provision of Article 1315.
• NOTE: issuance of receipt of payment—
o consistent with commercial usage
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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.
A. Requisites
1. Debtor owes several debts of the same kind to the same creditor. If there
is only one debt to be paid, application of payment is irrelevant
2. All the debts are due, except if there is an agreement between the debtor
and the creditor that application of payment may include debts which are
not yet due.
3. The debtor is directly liable for the said debts.
Note: Right to make application of payment is principally given to the debtor.
B. Illustrative Case
Requisites of application of payment;
PACULDO v. REGALADO
G.R. No. 123855 (November 20, 2000)
Nereo J. Paculdo (Paculdo) entered into a contract of lease over a parcel of land with a wet
market building, leased eleven (11) other properties, and purchased eight (8) units of heavy
equipment and vehicles from respondent Bonifacio C. Regalado (Regalado). On account of
Paculdo’s failure to pay in rental, Regalado sent a demand letter to petitioner demanding
payment of the back rentals. Paculdo alleged that he had paid the amount of P11,478,121.85
for security deposit and rentals on the wet market building, but Regalado, without his
consent, applied portions of the payment to his other obligations. In a letter, Regalado
informed Paculdo that the payment was to be applied not only to accounts under both the
parcel of land with a wet market building and the Quirino lot but also to heavy equipment
bought by Paculdo. Paculdo’s signature did not contain in the letter. Was Paculdo’s failure to
object to the letter and its proposed application of payments amount to consent to such application? NO,
Paculdo’s silence is not tantamount to consent. The consent must be clear and definite.
According to Article 1252 of the New Civil Code, if the debtor did not declare at the time
he made the payment to which of his debts with the creditor the payment is to be applied,
no payment is to be made to a debt that is not yet due and the payment has to be applied
first to the debt most onerous to the debtor. The right to specify which among his various
obligations to the same creditor is to be satisfied first rests with the debtor. In this case,
Paculdo, at the time he made the payments, made it clear to Regalado that they were to be
applied to his rental obligations on the wet market property. The application made by
Regalado is contrary to the provisions of the law.
C. Rules on Application of Payment
• The debtor does not have sufficient resources to meet in full his payment
obligations to the creditor. Thus, he is given the opportunity to select
which debt shall be paid.
• The debtor owes two or more debts to the creditor and the respective
terms of these debts were constituted in favor of the debtor. Thus, the
debtor has the right to choose which debt he would prefer to pay ahead
of the others, assuming that he does not intend to pay all of them
simultaneously.
D. Limitations
• Debtor may not apply payment to debts which are not due, EXCEPT if
there is a stipulation to the contrary OR the creditor consents to such
application
• Debtor may not apply payment to debts whose terms were constituted
for the benefit of the creditor, EXCEPT if the creditor consents to such
application
• Debtor loses right to apply payment if he waives it in favor of the creditor
• Debtor may not make an application of payment which would result to
partial payment of the various debts to which payment were applied,
EXCEPT only in the case specified under Art. 1254 (2)
• Debtor may not choose to apply payment to the principal obligation,
ahead of the interest due (Art. 1253)
• Debtor may not apply payment to an unliquidated debt, EXCEPT if the
creditor consented thereto.
• Debtor may not make an application of payment if there is an agreement
between the debtor and the creditor on the order of payment of the
relevant debts.
• The right to make an application of payment MUST be exercised by the
debtor at the time of payment – not thereafter. If he FAILS to exercise
the right (and assuming the creditor did not make an application by
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 issuing a receipt) the application of payment is deemed to be as provided
by law. In this case, Art. 1254 provides that payment shall be applied to
the most onerous obligation, OR if equally onerous, then payment shall
be applied proportionately to all such obligations.
E. Effect of Creditor’s Unjust Refusal to Accept Application of Payment
There would be in MORA ACCIPENDI. Therefore, the creditor would suffer
the legal consequences thereof.
F. Creditor’s Application of Payment
Principally it should be the debtor who makes an application of payment. The only
time that the creditor may exercise this right is when:
a. Stipulation of the parties
b. If at time of payment, debtor FAILS to pay and the creditor issued a
receipt in which he applied the payment to a particular debt which the
debtor did not protest, debtor is deemed to have waived the right to the
creditor and such application of payment cannot be disputed UNLESS
there is a cause to invalidate the contract.
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.
A. Interest Earned Paid Ahead of Principal
• General Rule: pay interest FIRST then principal.
• Exception: Agreement by the parties.
• Note: There is a discrepancy between this provision and Art. 1176 (where
there is presumption of interest paid when receipt of the principal
payment by the creditor)
• In the case of Marquez v. Elisan Credit Corp., Justice Brion clarified that
both provisions can stand together. He said that Art. 1176 should be
viewed as a general presumption (Nature and Effects of an Obligation)
subject to a specific presumption as provided in Art. 1253 (Application
of Payments and Extinguishment of an Obligation)
B. Illustrative Case
Interest shall be paid first except in situation the fall under Art. 1176:
MARQUEZ v. ELISAN CREDIT CORPORATION
G.R. No. 194642 (April 6, 2015)
Nunelon Marquez (Marquez) obtained a second loan from Elisan Credit Corporation
(Elisan Credit) for P55,000 and signed a promissory note stating that it is payable in weekly
installments and subject to 26% annual interest. In case of non-payment, Marquez agreed to
pay a 10% monthly penalty based on the total amount unpaid and another 25% of such
amount for attorney’s fees. To further secure payment of the loan, Marquez executed a
chattel mortgage over a motor vehicle. When the second loan matured, Marquez had only
paid PHP 29,960.00. Due to liquidity problems, Marquez asked Elisan Credit if he could pay
in daily installments until the second loan is paid which was granted. Twenty-one (21)
months after the second loan’s maturity, Marquez had already paid a total of PHP 56,440.00,
an amount greater than the principal but despite this, Elisan Credit filed a judicial complaint
for judicial foreclosure of the chattel mortgage because the petitioner allegedly failed to settle
the balance of the second loan despite demand. Whether or not Marquez has fully paid his
obligation. NO, Marquez’s daily payments are credited against the interest instead of
the principal. Marquez did not only fail to pay the second loan upon maturity; the loan
was also subject to interest, penalty and attorney’s fees. The rule under Article 1253 that
payments shall first be applied to the interest and not to the principal shall govern if two
facts exist: (1) the debt produces interest (e.g., the payment of interest is expressly stipulated)
and (2) the principal remains unpaid. The exception is a situation covered under Article
1176, i.e., when the creditor waives payment of the interest despite the presence of (1) and
(2) above. In such case, the payments shall obviously be credited to the principal. However,
in this case, there was no waiver of interest on the part of Elisan Credit.
C. What Interest is Covered by Law and its Rules
• Interest for the forbearance of money
• Interest by way of damages
NOTE: According to Dr. Tolentino, Art. 1253 refers to both interest for the
forbearance of money and interest by way of damages
D. Illustrative Case
Failure to manifest preference:
SPOUSES CHUY TAN SUBSTITUTED BY JOEL TAN AND ERIC TAN V.
CHINA BANKING CORPORATION
G.R. No. 200299 (August 17, 2016)
Lorenze Realty, a real estate business, obtained several loans and credits from China Bank
amounting to 71,050,000. In order to secure such obligation, 11 parcels of land were
mortgaged. However, Lorenze incurred in default which led to their lands being sold at a
public auction which was sold to China Bank, for being the highest bidder on the amount
of 85,000,000.Is the obligation of Lorenze Realty fully settled when the real properties constituted as
securities for the loan were sold at a public auction for 85,000,000?No, nowhere in our statutes
and jurisprudence do they provide that the sale of the collaterals constituted as
security of the obligation results in the extinguishment of the obligation. Article 1252
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states that: 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.
However, in the case at bar, Lorenze Realty failed to manifest its preference as to which
among the obligations that were all due the proceeds of the sale should be applied. Its silence
can be construed as acquiescence to China Bank’s application of the payment first to the
interest and penalties and the remainder of the principal. Thus, the amount of their entire
liability should be computed based on the rate of interest imposed by the CA minus the
proceeds of the sale of the foreclosed properties in the public auction.
ARTICLE 1254. When the payment cannot be applied in accordance with the preceding
rules, or if application cannot 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.
A. Rules Pertaining to Application of Payment
• Onerous – a contract is onerous when it has responsibilities or
obligations which outweigh its advantages.
• If the debtor and creditor have agreed on the order in which debts would
be paid, that agreement shall be followed. In the absence of such, the
following rules will apply.
i. Application to most onerous debt or to all debts proportionately
– in case no application of payment has been made by the
debtor and the creditor, payment shall be applied to the most
onerous debt, and if the debts are of the same nature and
burden, to all of them proportionately.
ii. When a debt is more onerous than another – no fixed rule can
be laid down in determining which debt is more onerous to the
debtor since the condition of being more burdensome is a
question of relative appreciation.
iii. Where debts are subject to different burdens – payment is to be
applied to all, proportionately.
B. Illustrative case:
Rules pertaining to application of payment:
SPOUSES CHUY TAN SUBSTITUTED BY JOEL TAN AND ERIC TAN v.
CHINA BANKING CORPORATION
G.R. No. 200299 (August 17, 2016)
Spouses Danilo and Magdalena Manalastas executed a Real Estate Mortgage in favor of
China Bank over 2 real estate properties to obtain 700,000 which was a working capital in
their rice milling business. Spouses Manalastas issued several promissory notes and 2 of
which were signed by Spouses Sinambanan and Estanislao. Due to the Debtors being in
default, Chinabank instituted an extrajudicial foreclosure proceeding and being the highest
bidder obtained the lands under REM. However, regardless of the fact that the REM was
sold the debtors still had a lone deficiency of 1,758,427.87. Should Spouses Sinamban be given
the choice under Art. 1252 of the Civil Code to have the proceeds of the auction applied as payments to their
obligations under PN OACL 636-95 and PN CLF 5-93? No, Article 1252 of the Civil Code
does not apply, as urged by the petitioners, because in the said article the situation
contemplated is that of a debtor with several debtors due, whereas the reverse is true,
with each solidary debt imputable to several debtors. none of the 3 PNs is more
onerous than the others to justify applying the proceeds according to Art. 1254 of the Civil
Code, in relation to Article 1252 and Art. 1253. Since each loan, represented by each PN
was obtained under a single credit line extended by Chinabank for the working capital
requirements of the Spouses Manalastas’ rice milling business, which credit line was secured
also by a single REM over their properties, then each PN is simultaneously covered by the
same mortgage.
SUBSECTION 2
Special Forms of Payment: Dation in Payment, Payment by Cession, and Tender of
Payment and Consignation
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.
A. Concept of Dacion
Satisfaction of a money debt owed to a creditor by debtor’s delivery of some other
property.
B. Requisites of Dacion en Pago
1. There must be performance of the prestation in lieu of payment (animo solvendi)
which may consist in the delivery of a corporeal thing or a real right or a credit
against a third person;
2. There must be some difference between the prestation due and that which is
given in substitution (aluid pro alio);
3. There must be an agreement between the creditor and the debtor that the
obligation is immediately extinguished by reason of the performance of a
prestation different from that which is due.
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 C. Sale v. Dacion en Pago
SALE DACION EN PAGO
As to the existence of debt
There is no pre-existing credit. There is pre-existing credit.
As to effect
Obligations are created— Obligations are extinguished—
1. Buyer has to pay the price; 1. Creditor does not undertake any
2. Seller has to deliver the thing. obligation;
2. Debtor delivers payment
D. Illustrative Case
Concept of Dacion:
PHILIPPINE NATIONAL BANK v. DEE
G.R. NO. 182128 (February 19, 2014)
Teresita Tan Dee bought from Prime East Properties Inc. (PEPI) on an installment basis a
residential lot located in Binangonan, Rizal. Subsequently, PEPI assigned its rights over a
213,093-sq m property to AFP-RSBS, which included the property purchased by Dee. PEPI
then obtained a P 205 million loan from PNB secured by a mortgage over several properties,
including Dee’s property. Afterwards, PEPI and PNB executed a MOA that stipulated that
as partial settlement of PEPI’s obligation with the PNB, PEPI conveyed by way of “dacion
en pago” the properties listed therein which included the lot purchased by Dee. After Dee’s
full payment, a deed of sale was executed by PEPI and AFP-RSB. Dee sought from PNB
the delivery of the owner’s duplicate title over the property to no avail. Thus, she filed with
the HLURB a complaint for specific performance to compel delivery of the title which was
favorably ruled. Is the execution of the dation in payment effectively extinguished PEPI’s loan obligation
to PNB insofar as it covers the value of the property purchased by Dee? Yes, whatever claims PNB
has against PEPI and AFP-RSBS, monetary or otherwise, should not prejudice the
rights and interests of Dee over the property, which she has already fully paid for.
The order of cancellation/release of the mortgage is simply a consequence of Dee’s full
payment of the purchase price, as mandated by Section 25 of P.D. No. 957. PNB was well
aware that the properties mortgaged by PEPI were also the subject of existing contracts to
sell with other buyers. While it may be that the PNB is protected by Act No. 3135, as
amended, it cannot claim any superior right as against the installment buyers.
NOTE: This case illustrates the concept of dacion en pago where the satisfaction of a
money debt owed to a creditor by the debtor’s delivery of some other property. There can
be no dacion if the original debt is not a monetary obligation. In this case, the execution of
the dation in payment effectively extinguished PEPI’s loan obligation to PNB insofar as it
covers the value of the property purchased by Dee. This negates PNB’s claim that PEPI
must first redeem the property before it can cancel or release the mortgage.
E. Dacion en Pago as a Form of Objective Novation
• Considered in more progressive jurisdictions as a form of objective
novation—where the original object of an obligation is replaced or
substituted by another object, dacion is recognized.
F. Illustrative Case
Dacion is more appropriately a case of objective novation:
FILINVEST CREDIT CORPORATION v. PHILIPPINE ACETYLENE CO.,
INC.
G.R. No. L-50449 (January 30, 1982)
Phil. Acetylene bought a motor vehicle through a Deed of Sale from one Alexander Lim
(Lim) by installment basis and the former executed a promissory note in favor of Lim to
secure a chattel mortgage on the subject motor vehicle. With this, Lim assigned all his rights,
title and interests over the said promissory note and chattel mortgage to Filinvest Credit
Corporation. Upon Phil. Acetylene’s default of payment of the stipulated installments,
Filinvest demanded full payment of the obligation or the return of the mortgaged motor
vehicle. The former opted to deliver the motor vehicle to the latter together with a document
of "Voluntary Surrender with Special Power of Attorney to Sell." Unable to sell the motor
vehicle to another, Filinvest requested Phil. Acetylene to continue paying by installments
and the same vehicle shall be delivered to the latter. But Phil. Acetylene refused and
contended that its obligation to pay the balance of the purchase price has been extinguished
when it complied with the demand letter of Filinvest. Did the return of the mortgaged motor vehicle
to Filinvest by virtue of voluntary surrender by Phil. Acetylene constitute the extinguishment of the obligation?
NO. The Court held that mere return of the mortgaged motor vehicle by the
mortgagor, Phil. Acetylene, to the mortgagee, Filinvest, does not constitute dation
in payment or dacion en pago in the absence, express or implied, of the true intention
of the parties. Evidence on the records fail to show that Filinvest consented, or at least
intended, that the mere delivery to, and acceptance by him, of the mortgaged motor vehicle
be construed as actual payment, more specifically dacion en pago (dation in payment). The fact
that the mortgaged motor vehicle was delivered to the mortgagee does not necessarily mean
that ownership thereof, as juridically contemplated by dacion en pago, was transferred from
appellant to appellee.
G. Dacion en Pago v. Compensation
DACION EN PAGO COMPENSATION
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 A pre-existing money debt is repaid by The money debt of the debtor shall be debtor from responsibility for the net proceeds of the thing assigned. The agreements
debtor by the delivery of a specific thing to amortized by the proceeds of the sale of the which, on the effect of the cession, are made between the debtor and his creditors shall
the creditor. object by the debtor to the creditor. be governed by special laws.

H. Illustrative Case Concept of Cession

The process by which debtor cedes all his/her properties that are exempt from execution in
Dacion distinguished from compensation; irregularity where Compensation was ruled as Dacion in favor of creditors so that the latter may sell them and thus, apply the proceeds to their
Payment: credits; extinguish obligation to the extent of the amount of net proceeds (unless w/
TAN SHUY v. SPOUSES MAULAWIN contrary stipulation)
G.R. No. 190375 (February 8, 2012)
DACION EN PAGO PAYMENT BY
In July 1997, Tan Shuy extended a loan to Guillermo amounting to Php 420,000.00. With CESSION
this, Guillermo obligated himself to pay the loan and to likewise, sell copra to Tan Shuy. Tan Debtor cedes a specific property Debtor cedes all his/her
Shuy alleged that, despite repeated demands, Guillermo remitted only Php 23,000.00 in As to the Property
or properties to his/her creditor. properties (except those
August 1998, Php 5,500.00 in October 1998, or a total of Php 28,500.00; further stating that Ceded by the
(Not all properties) exempt from execution) to
there is still an outstanding balance of Php 391,500.00. Since no settlement was reached, Debtor
his/her creditor.
Tan Shuy filed a complaint before the RTC. Guillermo countered that he had already paid Delivery of the property is to a Frequently, there are
the subject loan in full. He continuously delivered and sold copra to Tan Shuy from April specific creditor, which is applied several creditors to whom
1998 to April 1999. Respondent said they had an oral arrangement that the net proceeds to the payment of a specific debt. the properties of the
thereof shall be applied as installment payments for the loan. He also alleged that his debtor are ceded
deliveries amounted to P420,537.68 worth of copra. Did the delivery of copra amount to payment collectively.
via installments for the loan obtained by the Maulawin? YES. The Court ruled that pursuant to As to the Creditors
Art. 1232 of the Civil Code, an obligation is extinguished by payment or performance. Involved
However, payment by
There is payment when there is delivery of money or the performance of an obligation. The cession may also be made
arrangement between Tan Shuy and Guillermo can be considered as one in the nature of a to a single creditor. Ceding
dation in payment. There was already a partial payment on the part of Guillermo amounting debtor delivers all his assets
to Php 28,500.00 and the rest was every time he delivered copra to Tan Shuy, the latter chose to the said creditor.
not to collect the net proceeds of his copra deliveries. Instead, the remaining amount to be Creditor acquires ownership of Creditor/s do not acquire
paid considered to be a collectible as installment payments for Guillermo’s loan was applied. the property ceded and the money ownership of the ceded
Therefore, Guillermo remains liable for the balance of Php 41,047.57 only. As to the Right/s debt is extinguished. Governed by property/properties. They
Acquired by the law on sales. only acquire the right to sell
I. Critique on Tan Shuy v. Sps. Guillermo Creditor the property and apply the
• The agreement in this case wherein the debtor would, from time to time, proceeds of the sale to their
sell copra to the creditor, but the debtor will not receive the purchase credits.
price which shall be off-set against his outstanding obligation to the GENERAL RULE: GENERAL RULE:
creditor. Delivery of the debtor’s property Delivery of all the debtor’s
• The nature of this transaction is clearly one of pre-agreed off-setting or Extent of to the creditor extinguishes the properties to the creditor/s
compensation Extinguishment of money debt. will extinguish the debts to
Debt the extent of the net
ARTICLE 1255. The debtor may cede or assign his property to his creditors in payment EXCEPTION: recovery of the creditors.
of his debts. This cession, unless there is stipulation to the contrary, shall only release the
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 Agreement that the effect of EXCEPTION:
dation is partial payment of the Agreement that the delivery
debt. of the properties will
extinguish all the debts in
full after applying the
proceeds of the sale.
A. Limitation
A debtor cannot be permitted to deprive him/herself and/or their dependents of
some means of survival. The debtor must reserve in full ownership or in usufruct,
sufficient property for basic support. Section 13 of Rule 39 of the Rules of Court
provides for the properties that are exempt from execution of judgment, which in
relation to Article 1255 are the properties that the debtor cannot be permitted to
cede/assign to the creditor.
B. Requisites of Valid Payment by Cession:
1. There be more than one debt.
2. There is more than one creditor.
3. There is total or partial insolvency of debtor.
4. Abandonment of all debtor’s property that are not exempt from
execution.
5. Acceptance or consent on the part of the creditors.
C. Remedy in Case Creditors Refuse Cession
File an action for Insolvency under the FRIA (Financial Rehabilitation and
Insolvency Act), and one may obtain a discharge from their liabilities regardless of
the result of the liquidation of the assets given in the proceeding.
D. Effects of Assignment in Cession
• Creditors do not become the owner; they are merely assignees with
authority to sell.
• Debtor is released up to the amount of the net proceeds of the sale, unless
there is a stipulation to the contrary.
• Creditors will collect credits in the order of preference agreed upon, or in
default of agreement, in the order ordinarily established by law.
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.
A. Tender of Payment and Consignation
Tender of Payment
• A voluntary act of the debtor in offering to pay the debt to the creditor.
• The antecedent of consignation, if unjustly rejected by the creditor.
• Generally, made extra-judicially.
• If rejected, followed by consignation that is validly made, produces the effect of
payment and extinguishes the obligation.
Requisites for Tender of Payment
1. The debt is due and liquidated.
2. The debtor’s offer to pay must be consistent with the prestation. The debtor’s offer
to perform the obligation must be identical to or consistent with the nature of the
prestation. Otherwise, the tender of payment may be lawfully rejected by the
creditor.
3. The debtor’s offer to pay must be for the entire prestation, not only a part thereof.
Payment or performance will not extinguish an obligation unless the thing or
service that is due is completely delivered or rendered. (Article 1233, NCC)
4. The debtor’s offer to pay must be unconditional.
5. The debtor who tenders payment must be fully capacitated.
• When a debtor makes a valid tender of payment, the creditor is duty-bound to
accept payment. If the creditor unjustly refuses to accept payment, he would be in
mora accipiendi and would be responsible for the consequences thereof. The
creditor’s default does not discharge the obligation.
• The debtor’s expression of willingness to pay the debt, does not amount to a valid
tender of payment.
Consignation
• The act of depositing the thing due with the court or judicial authorities whenever
the creditor cannot accept or unjustly refuses to accept payment.
• Generally, consignation requires a prior valid tender of payment. However, there
are exceptions in Article 1256.
• Essentially, a judicial process.
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 • A debtor may relieve himself of the obligation by consignation.
Requisites for a Valid Consignation
1. The debt must be due and liquidated.
2. The debtor must have made an actual and unconditional offer to pay.
3. The creditor unjustly refused to accept payment.
4. Upon refusal to accept payment, the debtor must notify the creditor (Article 1257)
(the first notice) that he will consign the thing to the court.
5. If the tender of payment is refused, the debtor must place the thing which is the
object of the obligation at the disposal of the court. (Article 1258)
6. The debtor must give a second notice to the creditor informing the latter of the
fact of judicial consignation.
B. Illustrative Cases
Distinction Between Tender of Payment and Consignation
Meat Packaging Corporation of the PH vs. Sandiganbayan
G.R. No. 103068 (June 22, 2001)
MPCP entered into a lease-purchase arrangement with PIMECO. The subject of the
contract is the 3 parcels of land including its meat processing and packing plant. The
payment is Php 1.3 M per year, payable over a period of 28 years, starting at the execution
of the contract. The total consideration was Php 38 M. In 1986, the PCGG sequestered all
the assets, properties, and records of PIMECO, which includes the meat packing plant and
the lease-purchase agreement. Later that year, PIMECO gave a notice of the rescission
because of the non-payment of rentals of more than Php 2 M for 1986. PIMECO filed a
case for Declaratory Relief in Sandiganbayan. PCGG tendered to MPCP two checks for the
total amount of Php 5 M, representing partial payment of accrued rentals on the meat
packing plant, which MPCP refused to accept on the theory that the lease-purchase
agreement had been rescinded. PCGG consigned the check to Sandiganbayan. PIMECO
stresses that since the contract is rescinded, there is no need for consignation. Was it proper
for the Sandiganbayan to accept the Consignation of the PCGG? YES. In the case at bar, there
was prior tender by PCGG of the amount of Php 5 M for payment of rentals in arrears,
and MPCP's refusal to accept the same, on the ground merely that its lease-purchase
agreement with PIMECO had been rescinded, was unjustified. As found by the
Sandiganbayan, PIMECO paid several amounts due under the lease-purchase agreement, in
total sum of Php 15.9 M. The acceptance by MPCP and GSIS of such payments for rentals
and amortizations negates any rescission of the lease-purchase agreement. Therefore, it
must be shown that PIMECO failed to pay the aggregate amount of at least Php 10 M before
the lease-purchase agreement can be deemed automatically cancelled. Thus, with
Sandiganbayan's approval of the consignment and directive for MPCP to accept the
tendered payment, the lease-purchase agreement could not be said to have been rescinded.
NOTES:
(1) Consignation is the act of depositing the thing due with the court or judicial
authorities whenever the creditor cannot accept or refuses to accept payment, and
it generally requires a prior tender of payment.
(2) Tender is the antecedent of consignation, that is, an act preparatory to the
consignation, which is the principal, and from which are derived the immediate
consequences which the debtor desires or seeks to obtain.
(3) Tender of payment may be extrajudicial, while consignation is necessarily
judicial, and the priority of the first is the attempt to make a private settlement
before proceeding to the solemnities of consignation.
(4) Tender and consignation, where validly made, produces the effect of payment,
and extinguishes the obligation.
Debtor’s willingness and readiness to pay the debt, but not accompanied by payment is not a valid tender of
payment.
Sps. Bonrostro vs. Sps. Luna
G.R. No. 172346 (July 24, 2013)
Sps. Luna, the buyer had a Contract to Sell with Bliss Corporation, for a residential lot in
Diliman, Quezon City. One year after, Sps. Luna, now as seller, entered into a Contract to
Sell with petitioners. The total purchase price is P 1.25 M. Immediately after the execution
of the said second contract, the petitioners took possession of the property. However,
except for the P200,000.00 down payment, they failed to pay any of the stipulated
subsequent amortization payments. Was there a valid tender of payment? NO. Here, the subject
letter merely states Lourdes’ willingness and readiness to pay but it was not
accompanied by payment. She claimed that she made numerous telephone calls to Atty.
Carbon to remind the latter to collect her payment, but neither said lawyer nor Constancia
came to collect the payment. Petitioners took no further steps to effect payment. They did
not resort to the consignment of the payment with the proper court despite the knowledge
that under the contract, non-payment of the installments on the agreed date would make
them liable for interest thereon. Petitioners erroneously assumed that their notice to pay
would excuse them from paying interest. Their claimed tender of payment did not produce
any effect whatsoever because it was not accompanied by actual payment or followed by
consignation. Hence, it did not suspend the running of interest. Petitioners are therefore
liable for interest in the subject installments from the date of default until full payment of
the sums due.
NOTES:
(1) When a tender of payment is made in such a form that the creditor could have
immediately realized payment if he had accepted the tender, followed by a prompt
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 attempt of the debtor to deposit the means of payment in court by way of
consignation, the accrual of interest on the obligation will be suspended from the
date of such tender.
(2) But, when the tender of payment is not accompanied by the means of payment,
and the debtor did not take any immediate step to make a consignation, then
interest is not suspended from the time of such tender.
Creditor unjustly refusing to accept a tender of payment is a requisite for Consignation.
Elizabeth Del Carmen vs. Sps. Sabordo
G.R. 181723 (August 11, 2014)
Spouses Toribio and Eufrocina Suico (Suico spouses), along with several business partners,
entered into a business venture by establishing a rice and corn mill. As part of their capital,
they obtained a loan from the Development Bank of the Philippines (DBP), and to secure
the said loan, four parcels of land owned by the Suico spouses, were mortgaged.
Subsequently, the Suico spouses and their business partners failed to pay their loan
obligations, forcing DBP to foreclose the mortgage. Years later, the subject property was
about to be reacquired by their heirs, but they allege that they cannot determine as to whom
such payment shall be made. They then proceeded to deposit the payment to the RTC of
San Carlos City as a form of consignation, but they never attempted to offer a tender of
payment first. Does consignation require a pre-requisite of a rejected tender of payment? Yes, as a rule
consignation requires a pre-requisite of a rejected tender of payment, since it is an
act of depositing the thing due with the court or judicial authorities whenever the
creditor cannot accept or refuses to accept payment. The only exceptions are those
found in Article 1256. Consignation is the act of depositing the thing due with the court or
judicial authorities whenever the creditor cannot accept or refuses to accept payment, and
generally requires a prior tender of payment. Tender is the antecedent of consignation, that
is, an act preparatory to the consignation, which is the principal, and from which are derived
the immediate consequences which the debtor desires or seeks to obtain. Therefore,
consignation requires a pre-requisite of tender of payment, except for situations found in
Article 1256.
C. Exceptions to the Rule Requiring Prior Tender of Payment
1. If the creditor is absent or his whereabouts unknown, it makes tender of
payment physically impossible;
i. Absence need not be judicially declared. It is sufficient that he
cannot be located.
ii. However, if the absent creditor has a legal representative,
immediate consignation is not appropriate.
2. If the creditor does not appear at the place of payment, there being no
notice to the debtor, a presumption arises that he is not inclined to accept
payment;
3. The creditor is incapacitated to receive payment when the debt is due;
4. Without just cause, the creditor refuses to issue a receipt;
5. Two or more persons claim the same right to collect payment;
6. The title of the obligation is lost; and
7. Consignation, without prior tender of payment, is also justified if the
debtor does not know whom to pay.
D. Illustrative Case
Consignation, without prior tender of payment, is also justified if the debtor does not know whom to pay
Sps. Cacayorin vs. Armed Forces and Police Mutual Benefit Association, Inc.
G.R. No. 171298 (April 15, 2013)
Oscar Cacayorin (Oscar) filed an application with Armed Forces and Police Mutual Benefit
Association, Inc (AFPMBAI) to purchase a piece of property in Puerto Princesa City
through a loan facility. In order to pay this loan, Oscar and his wife secured another loan
with Rural Bank; however Rural Bank closed and all its rights to claim credits were
transferred to Philippine Deposit Insurance Corporation (PDIC). AFPMBAI somehow was
able to take possession of petitioners' loan documents and are now claiming demands for
payment. Due to the confusion of who to pay, Sps. Cacayorin filed a Consignation without
attempting to pay first the tender of payment. AFPMBAI is now claiming that the
Consignation is defective due to no prior tender of payment was made by Sps, Cacayorin. Is
tender of payment required as a pre-requisite for all situations of consignation? No, tender of payment
is not a pre-requisite for all situations of consignation, the exemption of tender
payment is found under Art.1256. Following Art.1256(4), Consignation alone shall be
valid in cases where two or more persons claim the same right to collect. In this case, there
were 2 entities who are claiming the right to collect against Sps. Cacayorin, AFPMBAI and
PDIC on behalf of Rural Bank. Thus, tender of payment is not a pre-requisite for a valid
consignation following Art.1256(4) and the Consignation made is valid.
NOTE:
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.
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.
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The consignation shall be ineffectual if it is not made strictly in consonance with the
provisions which regulate payment.
A. First Notice
• First notice must be given by the debtor to the creditor. In the first notice,
the debtor must announce to the creditor that if he refuses to accept
payment, the debtor would consign the thing due to the court.
• Only one principal creditor – first notice given to such creditor
simultaneously with the tender of payment.
• Several joint creditors – notice must be given to all of them. Notice to
one is not a notice to the others.
• Several solidary creditors – notice to one is notice to all.
• If the obligation is owed by several debtors (whether joint or solidary)
and tender of payment was made by only one of them, the debtor that
offered to pay must also serve the first notice on the other debtors,
including parties secondarily liable to the creditor, if there are any.
B. Effect of Lack of First Notice
Consignation without first notice is not unlawful. However, if after consignment
the court found consignment to be improper, the debtor who instituted the
consignation proceedings will be liable for the expenses of consignation.
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.
A. Second Notice
• The law requires a second notice to parties who have an interest in the
obligations (creditor/s, co-debtor/s other than the debtor making the
consignation, parties secondarily liable to the creditor).
• The second notice is served for:
o The creditor to give him the chance to either:
Dispute the propriety of consignation; OR
Accept the thing consigned.
o The other debtors, if there are several,
to inform them that one of the debtors has attempted
to discharge the obligation and would eventually make
a claim for reimbursement from them.
o Parties secondarily liable to the creditor,
To give them an opportunity to prepare a defense that
could exonerate them from their liability to the
creditor.
B. Delivery of the Thing Being Consigned
• The debtor is required to physically deliver to the judicial authority that
thing which he offered to deliver to the creditor but which the latter
rejected.
• In any case, there can be no valid consignation without the physical
delivery of the thing due to the judicial authorities.
ARTICLE 1259. The expenses of consignation, when properly made, shall be charged
against the creditor.
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.
A. When Consignation is Properly Made
• If after the thing had been deposited in court, the creditor accepts the
consigned thing without objection or reservation of his right to contest
the consignation made.
• If the creditor objects to the consignation but the court in a final
judgment declares the same to have been properly instituted.
B. Expenses Chargeable to the Creditor
• The expenses incurred by the court in safekeeping the thing consigned;
• The expenses incurred by the debtor prior to the commencement of the
action for consignation; and
• The cost of suit.
C. Effect of Consignation when Properly Made
1. The debtor is released from the obligation as of the time of consignation,
as though he fulfilled the same.
2. If the obligation is an interest-bearing money debt, accrual of interest stops
at the time of delivery of the money to the court.
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 3. The debtor is released from responsibility for the loss of the thing due,
which risk is transferred to the creditor from the date of consignation.
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.
A. Loss of Preference
• The debtor gives the creditor the preferential right to the thing consigned.
This preferential right is confirmed by the court if the latter should make
a ruling that the consignation was properly made.
• A creditor who agrees to the withdrawal of the thing consigned, after the
court has ruled that the consignment was properly made, loses his
preferential right to the thing consigned, which effectively subjects that
thing to the competing claims of other creditors.
B. Release of Co-debtors, Guarantors and Sureties
• Had the creditor accepted the thing consigned, instead of agreeing to its
being withdrawn, the obligation would have been extinguished.
• The creditor cannot hold on to the liability of the guarantors and sureties
because of Article 2079.
o Art. 2079. – An extension granted to the debtor by the creditor without
the consent of the guarantor extinguishes the guaranty. There mere failure
on the part of the creditor to demand payment after the debt has become due
does not of itself constitute any extension of time referred to herein.
• By giving consent to the debtor’s withdrawal of the thing consigned, the
creditor technically extended the payment due date of the obligation,
without the consent of the guarantor.
• The co-debtors, guarantors and sureties CANNOT object to the
withdrawal of the thing by the debtor.
o Reason: until the creditor accepts the consignment, or until the
court rules that consignment was properly made, the consigning
debtor remains to be the owner of the thing thus consigned.
• The debtor who is permitted to withdraw the thing consigned remains
liable to the creditor who consented to such withdrawal. The obligation
is revived and the debtor who withdrew the thing consigned must
perform the obligation at some other time.
SECTION 2
Loss of the Thing Due
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.
A. Concept of Loss of the Thing Due under Article 1189, par. 2
• The concept of loss is not limited to the disappearance of a specific thing but
includes the physical destruction of the thing and legal and physical
impossibility of performing an obligation.
• The impossibility of performing the obligation, whether physical or legally,
encapsulates the concept of the loss of the thing due. (Art. 1266 Civil Code)
B. Requisites of Loss (SLLoB)
1. Specific/Determinate Thing
• The object due must be specific/determinate thing
2. Lack of Fault/Negligence
• The loss must occur without fault or negligence on the part of
the debtor.
3. Loss occurred prior to delay
• Loss of the thing due must occur before the debtor incurs in
delay.
4. Became impossible to perform
• The extinguishment of an obligation due to the loss of the thing
due must be occasioned by the impossibility of performance,
subsequent to the establishment of the obligation.
• Exception: If impossibility of performance existed at the time of
the establishment of the obligation, the contract which arose
from the obligation is void.
C. Exceptions (Ex-StA-GtT)
a. Expressly Provided
• If the law expressly provides that the debtor is not released from
liability despite the loss of the thing that is due. Consider the
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 following provisions: Article 1165, Article 1268, Article 1942,
Article 1979, Article 2147
b. Stipulated
• If the parties so stipulate that the loss of the thing will not
extinguish the obligation
• As long as it is NOT contrary to law, morals, good customs,
public order, or public policy. (Article 1306)
c. Assumption of Risk
• If the nature of the obligation requires the assumption of risk
(Art. 1174)
• Ex. Obligation of a debtor to delivery perishable goods – the
debtor takes the risk that a slightest delay may cause the
deterioration of the goods which the creditor may reject.
d. Generic Thing
• If the object of the obligation to deliver is a generic thing
e. Third Person
• If the specific thing to be delivered by the debtor to the creditor
belongs to a third person, (Art. 1462) the debtor cannot invoke
the loss of the thing if, on the stipulated delivery date, he was
unable to acquire the same from the owner.
f. Theft
• If the thing is lost through theft
• Owner is deemed negligent à failed to take care of the thing with
diligence of a good father of a family (Art. 1163)
• If the thing is lost through robbery – the loss MAY extinguish
the obligation.
D. Bilateral Effects of the Extinguishment of the Obligation
• The juridical tie between the creditor and debtor is broken upon the loss
of the thing due.
• The extinguishment of an obligation by reason of the loss of the thing
due gives rise to the obligation of mutual restitution between the parties.
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.
A. General Rule on the Loss of a Generic Thing
Genus nunquam peruit: A generic thing is replaceable anytime thus it cannot be
lost.
B. Exception
If the genus disappears or perishes (e.g., an obligation to deliver a type of mammal
which subsequently becomes extinct.)
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.
A. General Rule on the Effect of Partial Loss
• Partial loss is not necessarily a ground to extinguish the obligation.
• If the thing is partially damaged (ex. Due to force majeure) without fault
on the part of the debtor, the obligation is not extinguished.
o He must deliver the thing in its impaired or damaged condition.
B. Exception
• When the partial loss or destruction of the thing is of such importance
that it would be tantamount to a complete loss or destruction.
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.
A. General Rule if the Thing is in Debtor’s Possession
• If the thing is lost while in the possession of the debtor, it shall be presumed that
the loss was due to his fault, unless there is proof to the contrary and without
prejudice to the provisions of Art. 1165 of the Civil Code.
B. Exception
• No such presumption in case of earthquake, flood, storm, or other natural
calamity.
C. Presumption of Negligence
• If the object of the obligation is lost while in the possession of the debtor, a
disputable presumption is that the loss was due to his fault. (Art. 1163)
• Presumption of Negligence would NOT apply:
o General Rule: If the loss of the thing was due to a natural calamity, the
debtor shall NOT be presumed to be negligent.
o Exceptions:
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 The creditor can prove the debtor has been negligent and that such
negligence contributed to the loss of the thing that is due. B. Types of Impossibility
The debtor should NOT be guilty of delay (mora solvendi) at the time the • The law explicitly refers to legal and physical impossibility. They may be
fortuitous event occurred. further classified as:
o Objective Impossibility
C. Defenses Available to the Debtor (WA-T-F) o Subjective impossibility
1. Willful Act of a Third Person
If the thing was lost due to the Willful act of a third person without Objective Impossibility Subjective Impossibility
negligence on his part. CANNOT be performed by anyone. CAN be performed by a trained person but
2. Fortuitous event the physical attributes of an ordinary debtor
Loss due to Fortuitous event wherein the debtor is NOT in mora solvendi might not be able to do so.
nor guilty of contributory negligence. Example: A law that prohibits Example: While a trained gymnast can
a. Art. 1169 everyone from rendering a particular perform acrobatic tricks, an ordinary person
Those obliged to deliver or to do something incur in delay from the time the obligee service. may not be able to do so.
judicially or extra judicially demands from them the fulfillment of their obligation.
b. Art. 1170 C. Illustrative Case
Those who in the performance of their obligations are guilty of fraud, negligence or Implied impossible condition:
delay, and those who in any manner contravene the tenor thereof, are liable for Labayen v. Talisay Silay Milling Co., Inc
damages. G.R. No. 29298 (December 15, 1928)
D. Defense of force majeure would NOT apply in Art 1165. The plaintiff, along with another, possesses the hacienda known as Dos Hermanos of
Art. 1165. – If the obligor delays, or has promised to deliver the same thing to two or more Talisay, Occidental Negros while the defendant is a corporation dedicated to the milling of
persons who do not have the same interest, he shall be responsible for any fortuitous event until he sugar cane. They entered into a contract which is the basis of the plaintiff’s cause of action.
has effected the delivery. The contract included the construction of a railroad “whenever the contour of the land, the
• When there is a physical impossibility for the debtor to comply with his curves and elevations permit the same” for the efficient transport of sugar cane, sugar,
obligations to the several persons to whom he has promised to deliver fertilizer etc. It is admitted that the central was not able to continue its railroad through the
the thing, he would be in default, with or without intervention of force hacienda. A civil engineer testified that although it was possible to construct a railroad to
majeure. the hacienda, it would be very dangerous. Can the defendant be excused from performance on the
ground of its impossibility? YES. The contract in question will prove to be dangerous to
ARTICLE 1266. The debtor in obligations to do shall also be released when the life and property once the debtor is obligated to perform the acts agreed upon. The
prestation becomes legally or physically impossible without the fault of the obligor. contract was qualified since it had an implied condition, which if given practical effect, would
result in absolving central from its promise. Not to sanction an exception to the general rule
A. Subsequent Impossibility of Performance in Obligation To Do in Relation would counter to public policy and the law by forcing the performance of a contract, which
to Article 1348 is undesirable and harmful. The plaintiff cannot recover damages, however, the defendant
a. If the subsequent impossibility is NOT attributable to the debtor, the may recover on its cross-complaint.
obligation is extinguished. (Art. 1266)
b. If the impossibility of performance was existing AT THE TIME OF NOTES:
THE CONSTITUTION of the obligation, Art. 1348 would apply;
obligation is void. (Art. 1348) NCC 1184: The debtor shall also be relieved from obligations which consist in the
performance of an act if the fulfillment of the undertaking becomes legally or physically
Art. 1348, NCC: Impossible things or services cannot be the object of contracts. impossible.
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 o The supervening even made the performance of the obligation
NCC 1272: Impossible things or services cannot be the subject- matter of contracts. extremely difficult, but not impossible. The increased burden is
beyond the contemplation of the parties.
D. Effect of Partial Impossibility v. Temporary Impossibility 3. Not due to the parties.
o The supervening event is not due to the act of either party to
Partial Impossibility Temporary Impossibility the contract.
May arise if, after commencing the Does not extinguish the obligation but 4. Future Performance
performance of the obligation, its merely suspends the performance of the o The contract is for a future performance.
continuance has to be stopped due to same and thus justifies a delay.
subsequent illegality. C. Concept of Rebus Sic Santibus
Example: A contractor was engaged to Example: A moratorium law affecting the • The parties stipulate in the light of certain prevailing conditions and once
construct a deep well and after having built payments of certain monetary obligations. these conditions cease to exist, the contract also ceases to exist.
50% of the works, a law was passed
banning the construction of deep wells in D. Conflict with Articles 1159, 1305, and 1308
private lands. The project owner must Art. 1267 is an extraordinary provision of law since it conflicts with fundamental principles
compensate the contractor for the amount pertaining to the binding effect of contracts as well as the obligatory force thereof.
of work that he has done while the
contractor must reimburse to the project Art. 1159: Obligations arising from contracts have the force of law between the contracting parties
owner any amount received in excess of the and should be complied with in good faith.
value of work which has been completed.
Art. 1305: A contract is a meeting of minds between two persons whereby one binds himself, with
ARTICLE 1267. When the service has become so difficult as to be manifestly beyond respect to the other, to give something or to render some service.
the contemplation of the parties, the obligor may also be released therefrom, in whole or
in part. Art 1308: The contract must bind both contracting parties; its validity or compliance cannot be
left to the will of one of them.
A. Doctrine of Unforeseen Events / Doctrine of Frustration of Enterprise
• The intention of the parties is the governing law of the contract. • General Rule: contracting parties are presumed to have assumed the risk
• Said doctrine makes it inequitable to enforce a contract if the prevailing of unfavorable changes in circumstances.
conditions at the time of its perfection have ceased to exist. • Exception: Art. 1267, may only be invoked in exceptional circumstances
• Relief is given to the DEBTOR by releasing him from the obligation, which, for equitable reasons, demands assistance to the debtor whose
however, even if the court is authorized to release the debtor from the performance of an obligation would result in the unintended economic
obligation, it DOES NOT HAVE authority to change the contract. and/or personal ruin.

B. Requisites E. Scope of Application and Limitations

1. Event must occur.
o An event must occur which changed the circumstances under
which a contract was entered into by the parties, which event
was not foreseen at the time the contract was entered.
2. Extremely difficult but not impossible
a. Art. 1267 DOES NOT apply to contracts which are to be immediately
fulfilled.
• The parties would have already known the circumstances under
which they entered into the contract.
b. DOES NOT apply to aleatory contracts which essentially require one or
both parties to take risks (e.g., gambling contracts, insurance contracts)

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 or contracts which are purely speculative (trading in currency and
commodities).
c. APPLIES ONLY to obligations to do/render service.
• Has no application to other prestations; ESPECIALLY, to the
obligation to give.
F. Illustrative Case
Unrecoverable shares:
Osmena III v. SSS
G.R. No. 165272
SSS wanted to liquify their assets, which led to them selling their shares in EPCIB.
Respondent, BDO Capital, was the one who signed a letter-agreement with SSS for the sale
of aforementioned shares and the parties agreed on the final draft version of the Share
Purchase Agreement that they mutually agreed that BDO Capital will purchase the shares
sold by SSS which was submitted to the DOJ. Months later, Res. No. 428 was passed which
approved the sale of the EPCIB share through the Swiss Challenge method as well as Res.
no. 485. SSS then advertised an invitation to bid for the said shares provided that the result
of the bidding is subject to the right of BDO Capital to match the highest bid. Petitioners
assailed the legality of the Swiss Challenge however, while it was pending, BDO and EPCIB
had a merger where all EPCIB shares were transferred to BDO. Can the petitioners still recover
the shares and subject it to a “proper” bidding process? NO, the petitioners may no longer recover
the said shares. The said shares in question has already been transferred to BDO and
converted into BDO common shares therefore, the EPCIB shares are no longer equity
security issuances of the now defunct EPCIB but that of BDO-EPCI which is a totally
separate and distinct entity. The merger between BDO and EPCIB and the cancellation of
the latter’s shares and replacement of completely new shares rendered them
“unrecoverable.” Therefore, the aforementioned EPCIB shares are no longer existent since
the Court has also taken judicial notice of its disappearance from the local bourse listing.
When the service has become so difficult as to be manifestly beyond the contemplation of
the parties, total or partial release from a prestation and from counter-prestation is allowed
G. “Service” refers to prestation
• The term “service” should be understood as referring to the performance of
an obligation or prestation (Sps. Poon v. Prime Savings Bank, G.R. 183794).
H. Unforeseen event
• If the change in the circumstance exceeds the risks that are normally associated
with the service, the court may appreciate the unforeseen evet as a case falling
within the ambit of Art. 1267.
• HOWEVER, the resulting change in circumstance must be greatly beyond
that which the parties could have reasonably foreseen at the time of the
establishment of the obligation.
I. When there is Difficulty of Performance
• Difficulty in the performance DOES NOT automatically relieve the debtor
under Art. 1267.
• In order to justify its application, the difficulty must be such as to result in a
manifest disequilibrium between the service that the debtor must render,
compared to the compensation that he will receive in consideration therefor.
J. Illustrative Cases
Mere inconveniences would not grant the application of Art. 1267
Tagaytay Realty Co., Inc. v. Gacutan
G.R. No. 160033
Gacutan entered into a contract to sell with petitioner for the purchase on installment of a
residential lot. Tagaytay Realty Co., Inc. executed an undertaking, stating that it should
complete the development of, among others, all the amenities in the said subdivision within
a period of 2 years from 15 July 1976, failure to do so shall give the respondent the option
to suspend the payments of the monthly amortization on the lot he purchased until
completion of such development without incurring penalty interest. On November 12, 1979,
respondent notified the petitioner that he was suspending his amortizations because the
amenities had not been constructed in accordance with the undertaking, but instead, the
petitioner demanded the balance of the price, plus interest and penalty but the respondent
refused to pay both interest and penalty. Petitioner argued that to insist on the performance
would have resulted in its economic ruin which were the following: (1) wastage of the
amenities as this would be exposed to the elements, because none of the lot buyers had
constructed any house therein; and (2) they had been suffering from extreme economic
hardships during the political. Was the petitioner released from its obligation to construct the amenities
in the Foggy Heights Subdivision? NO, because the reasons provided by the petitioner
which were mere inconvenience, unexpected impediments, or increased expenses
did not suffice to relieve the debtor-petitioner from a bad bargain. For Art. 1267 to
apply the following conditions must concur: (a) event of change in circumstances could not
have been foreseen at the time of the execution of the contract; (b) such event makes the
performance of the contract extremely difficult but not impossible; (c) it must not be due to
the act of any of the parties; and (d) contract is for future prestation. For the difficulty of
performance to be considered excused pursuant to this article, it should be such that one
party would be placed in a disadvantage by the unforeseen event. In this case, these were
not satisfied.
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 Difficulty in the performance of the obligation should grant the Application of Art.1267 but due to
public/essential needs the obligation subsisted.
Naga Telephone Co., Inc. v. Court of Appeals and Camarines Sur II Electric
Cooperative, Inc.
G.R. No. 107112
NATELCO entered into a contract with CASURECO II for the use of the petitioner in its
operation of the private respondent’s electric light posts in Naga City. In return, the
petitioners agreed to install, free of charge, 10 telephone connections for the use by
CASURECO II. CASURECO II filed a case against the petitioner for the reformation of
the contract with damages because it had become too one-sided in favor of the petitioner;
that after 11 years and due to the increasing number of subscribers of the petitioner, the
cable wires had been heavy and numerous which necessitates the boring of holes in the
posts, thus, contributed to their destruction. The trial court ruled to reform the contract and
this was affirmed by the CA but ruled on the basis of Art. 1267 and not on the reformation
of contract. Is Art. 1267 applicable to the contract entered into by NATELCO and CASURECO
II? YES, Art. 1267 is applicable to the contract because the obligation of the private
respondent was to allow petitioners to use its posts in Naga which was considered
as service contemplated in the said article. Art. 1267 speaks of service which should be
understood as to refer to the “performance” of the obligation. Also, this article does not
require that the contract be for future service with future unusual change. Here, the contract
had gone far beyond the contemplation and had become highly iniquitous and
disadvantageous to the private respondent throughout the years due to the expansion of the
petitioner’s business and the increase in volume of its subscribers. Therefore, the parties
must be released from their respective obligations.
NOTES:
• However, the parties could not just be released from their obligation because if the
telephone cables were removed, it would result to the disruption of the petitioner’s
essential service to the public. Also, if the private respondent returned the
telephone units to the petitioner, it would cause prejudice to the former’s business.
Therefore, the Court ruled that the petitioner should pay the private respondent
for the use of its posts inside and outside of Naga City for the sum of P10.00/post,
per month, beginning on January 1989 (the time when the right of action on the
part of the private respondent accrues which was also the time when the complaint
was filed), and the private respondent should likewise pay the petitioner for their
use of their telephone services at the same rate being paid by the public beginning
January, 1989.
• The disposition of the Court’s ruling did not mean that the Court created a new
contract for the parties; it was just necessary to do so to avoid the disruption
of the basic and essential needs of the public and to avoid unjust enrichment
by the petitioner at the expense of the private respondent.
Art. 1266 & 1267 only applies in prestation to do; Art.1267 does not apply to poor financial conditions
brought by post EDSA Revolution:
Philippine National Construction Corporation v. Court of Appeals
G.R. No. 116896
PNCC executed a Lease Agreement with private respondents, stipulating to pay rent for the
use of land as a site for a rock crushing plant, at the monthly rate of P20,000 payable yearly
in advance with the first annual rent being in the amount of P240,000 for a period of five
years, commencing on the date of issuance of the industrial clearance by the Ministry of
Human Settlements to the petitioner. PNCC obtained a Temporary Use Permit from the
Ministry of Human Settlements for the proposed rock crushing project. Thereafter, private
respondents wrote to PNCC asking for the first annual rental. In response, PNCC argues
that the contract must commence on the date of issuance by the Ministry of Human
Settlements of an industrial clearance in their favor. Petitioner also failed to fulfill its
obligation and expressed its intention to terminate the contract due to “financial as well as
technical difficulties.” Whether or not PNCC should be released from its contract with respondents due
to unforeseen events and causes beyond its control? The Court ruled in the negative, stating that
PNCC is bound to the general principle that the motive or particular purpose of a party in
entering into a contract does not affect the validity nor existence of the contract. PNCC
cannot take refuge in the said article, since it is applicable only to obligations "to
do," and not to obligations "to give.". The obligation to pay rentals or deliver the thing
in a contract of lease falls within the prestation "to give"; hence, it is not covered within the
scope of Article 1266. At any rate, the unforeseen event and causes mentioned by
PNCC are not the legal or physical impossibilities contemplated in the said article.
Motive of a Party entering into a contract and their failure to realize their plans would not affect the
validity of the contract nor would it lead to the application of Art. 1267:
So v. Food Fest Land, Inc.
G.R. No. 183628
Food Fest Land, Inc. entered into a lease contract with Daniel T. So over a commercial space
in Makati City intended to operate a KFC carry out branch for a period of three years. While
Food Fest was able to secure the necessary licenses and permits for the first year (1999), it
failed to commence business operations. Food Fest’s application for renewal of barangay
business clearance was held in abeyance and communicated its intent to terminate the lease
contract to So who, however, did not accede and instead offered to help Food Fest secure
authorization from the barangay. In August 2000, Food Fest, for the second time,
purportedly informed So of its intent to terminate the lease, and stopped paying rent. So
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demanded payment of rentals from Food Fest from September 2000 to March 2001; Food
Fest denied any liability, however, and started to remove its fixtures and equipment from the
premises. On April 2, 2001, So sent Food Fest a Final Notice of Termination with demand
to pay and to vacate. The RTC ruled that Food Fest’s obligation to pay rent was not
extinguished upon its failure to secure permits to operate. Is the acquisition of subsequent business
permits etc. a suspensive condition to the lease contract making the obligation not binding to the parties upon
not acquiring such documents? No, acquisition of subsequent business permits etc. is not a
suspensive condition to the lease contract— it is evident that the condition set forth in
the preliminary agreement pertains to the initial application of Food Fest for the permits,
licenses and authority to operate; hence, it should not be construed to apply to Food Fest’s
subsequent applications. A party's motive or particular purpose in entering into a contract
does not affect the validity or existence of the contract; an exception is when the realization
of such motive or particular purpose has been made a condition upon which the contract is
made to depend. The exception does not apply here. It should not be construed to apply to
Food Fest's subsequent applications. Food Fest was able to secure the permits, licenses and
authority to operate when the lease contract was executed. Its failure to renew these permits,
licenses and authority for the succeeding year, does not, however, suffice to declare the lease
functus officio, nor can it be construed as an unforeseen event to warrant the application of
Article 1267.
Art. 1266 & 1267 only applies in prestation to do; Financial problems brought by the Asian
Financial Crisis would not grant the application of Art. 1267:
Comglasco Corporation v. Santos Car Check Center Corporation
GR No. 202989
Santos, owner of a showroom located in Iloilo City, leased out the said space to Comglasco
Corporation, an entity engaged in the sale, replacement and repair of automobile
windshields, for a period of 5 years. Comglasco advised Santos through a letter that it was
pre- terminating their lease contract effective December 1, 2001. Santos refused to accede
to the pre-termination, reminding Comglasco that their contract was for 5 years. On January
15, 2002, Comglasco vacated the leased premises and stopped paying any further rentals.
Santos sent several demand letters which were all completely ignored by the latter. On
October 20, 2003, Santos filed suit for breach of contract. Citing business reverses which it
ascribed to the 1997 Asian financial crisis, Comglasco insists that under Article 1267 of the
Civil Code it is exempted from its obligation under the contract, because its business setback
is the "cause" contemplated in their lease which authorized it to pre-terminate the same. Was
Comglasco exempt from its obligation based on Article 1267 of the Civil Code? NO. The Asian
currency crisis befell the region from July 1997 and for some time thereafter, but Comglasco
cannot be permitted to blame its difficulties on the said regional economic phenomenon
because it entered into the subject lease only on August 16, 2000, more than three years after
it began, and by then Comglasco had known what business risks it assumed when it opened
a new shop in Iloilo City. As held in PNCC v. CA, the Court ruled that the payment of lease
rentals does not involve a prestation "to do" envisaged in Articles 1266 and 1267 which has
been rendered legally or physically impossible without the fault of the obligor-lessor. Article
1267 speaks of a prestation involving service which has been rendered so difficult by
unforeseen subsequent events as to be manifestly beyond the contemplation of the parties.
The obligation to pay rentals or deliver the thing in a contract of lease falls within the
prestation "to give”.
Art. 1266 & 1267 only applies in prestation to do; Financial problems brought by the Asian Financial
Crisis would not grant the application of Art. 1267:
Iloilo Jar Corporation v. Comglasco Corporation/Aguila Glass
GR No. 219509
Petitioner as lessor, and respondent, as lessee, entered into a lease contract over a portion
of a warehouse building, located on a parcel of land at Iloilo City. The term of the lease was
for a period of 3 years or until August 15, 2003. On December 1, 2001, Comglasco requested
for the pre-termination of the lease effective on the same date. Iloilo Jar, however, rejected
the request on the ground that the pre-termination of the lease contract was not stipulated
therein. Despite the denial of the request for pre-termination, Comglasco still removed all
its stock, merchandise and equipment from the leased premises on January 15, 2002. From
the time of the withdrawal of the equipment, and notwithstanding several demand letters,
Comglasco no longer paid all rentals accruing from the said date. Iloilo Jar sent Comglasco
several demand letters which were all ignored by the latter. Iloilo Jar then filed a civil action
for breach of contract and damages before the RTC on October 10, 2003. To evade
responsibility, Comglasco argued that by virtue of Art. 1267 of the Civil Code, it was released
from the lease contract. It cited the existing global and regional economic crisis for its
inability to comply with its obligation explaining that the consideration thereof had become
so difficult due to the global and regional economic crisis that had plagued the economy.
Was Comglasco justified in treating the lease contract terminated due to the economic circumstances then
prevalent? NO. Considering that Comglasco's obligation of paying rent is not an
obligation to do but rather “to give”, it could not rightfully invoke Article 1267 of the
Civil Code. Financial struggles due to an economic crisis is not enough reason for
the courts to grant reprieve from contractual obligations. Citing
COMGLASCO/Aguila Glass v. Santos, the Court ruled that the economic crisis which
may have caused therein petitioner's financial problems is not an absolute exceptional
change of circumstances that equity demands assistance for the debtor. It is noteworthy that
Comglasco was also the petitioner in the above-mentioned case, where it also involved
Article 1267 to pre-terminate the lease contract.
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 K. Principle of Subjective Impossibility A. Effect of Extinguishment by Loss or Impossibility
When there is no physical or legal loss, but the object of the obligation belongs to The obligation having been extinguished by the loss of the thing, the creditor shall
another, the performance by the debtor of the obligation undoubtedly becomes have all the rights of action which the debtor may have against the third persons
impossible. Failure of performance is imputable to the debtor. Thus, the debtor by reason of the loss.
must indemnify the creditor for the damages suffered by the latter.
B. Right of the Creditor against Third Person
L. Two Views on the Effect of Loss in Reciprocal Obligations While a creditor is given the right to proceed against the person who caused the
loss of the thing that is due, the creditor must be able to establish that he suffered
Res Perit Domino (1st view) Res Perit Creditori (2nd view) the loss.
If an obligation is extinguished by the loss The loss or impossibility of performance
of the thing or impossibility of must be due to the fault of the debtor. In SECTION 3
performance through fortuitous events, the this case, the injured party may ask for Condonation or Remission of the Debt
counter-prestation is as also extinguished. rescission under Art. 1191 plus damages. If
The debtor is released from liability BUT the loss or impossibility was due to a
ARTICLE 1270. Condonation or remission is essentially gratuitous, and requires the
he cannot demand the prestation which has fortuitous event, the other party is still
acceptance by the obligor. It may be made expressly or impliedly.
been stipulated for his benefit. obliged to give the prestation due to the
other.
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.
• Better view is Res Perit Creditori except when the law requires Res Perit A. Definition of Condonation
Domino. Condonation is an act of the creditor in forgiving a debt, or an act where the
creditor gratuitously renounces the enforcement of an obligation. If the creditor
ARTICLE 1268. When the debt of a thing certain and determinate proceeds from a receives anything of value in consideration for condition, the extinguishment
criminal offense, the debtor shall not be exempted from the payment of its price, would not be by debt-forgiveness. It could be a case of dation in payment, a
whatever may be the cause for the loss, unless the thing having been offered by him to compromise or a subjective novation.
the person who should receive it, the latter refused without justification to accept it.
B. Requisites of Condonation (GADCIF)
A. General Rule if the Obligation Arises from Criminal Offense 1. It must be gratuitous
The debtor shall not be exempted from the payment of the price whatever may be 2. It must be accepted by the obligor (bilateral act)
the cause for the loss. 3. The obligation must be demandable
Note: Applicable not only to the persons who are principally liable but also to those who are 4. Parties must have the capacity
subsidiarily liable. 5. Not inofficious
6. Must comply with the forms of donation should it be express
B. Exception
When the thing having been offered by the debtor to the person who should C. Kinds of Condonation
receive it, the latter refused without justification. • As to form:
o Express: when it is made in accordance with the formalities
ARTICLE 1269. The obligation having been extinguished by the loss of the thing, the prescribed by law for donations
creditor shall have all the rights of action which the debtor may have against third persons o Implied: when, although it is not made in accordance with the
by reason of the loss. formalities prescribed by law for donations, it can be deduced
from the acts of the obligee or creditor
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• As to extent
o Total: when the entire obligation is extinguished.
o Partial: when it refers only to the principal or to the accessory
obligation or to an aspect thereof which affects the debtor.
• As to constitution
o Inter vivos: when it is constituted by agreement of the oblige
and the obligor
o Mortis causa: when it is constituted by last will and testament
D. Remission is a Form of Donation
• Whether express or implied, the extent of remission or condonation shall
be governed by the rules regarding inofficious donation.
• It is an essential characteristic of remission that it be gratuitous – there is
no equivalent received for the benefit given because from the moment it
exists, the nature of the act is changed and becomes some other form of
extinguishment such as:
o Dation in payment (Art. 1245)
o Cession (Art. 1255)
o Novation (Art. 1291)
o Compromise (Art. 2028)
E. Illustrative Cases on Kinds of Condonation
Express condonation must comply with the forms of donation:
Victor Yam and Yek Sun Lent v. Court of Appeals
G.R. No. 104726 (11 February 1999)
Petitioner Yam and Respondent Manphil entered into a Loan Agreement called Industrial
Guarantee and Loan Fund (IGLF): the first IGLF loan involved P500,000.00 and the second
IGLF loan involved P300,000.00. Petitioner Yam was able to pay the first IGLF loan,
however, the conflict arose as to the payment of the second IGLF loan. Following the
proposal of Petitioner Yam to settle its obligation, Respondent Manphil made a counter-
offer to reduce the penalty charges up to P140,000.00, provided petitioners can pay their
obligation on or before July 30, 1986. Out of the total liability amounting to P727,001.35,
the petitioners were able to pay P410,854.47. Respondent Manphil now seeks to collect the
balance of P266,146.88. Did the oral agreement of the parties operate to condone the payment of the
balance of P266,146.88 thereby making petitioners not liable for the payment of the penalties and service
charges? No, the oral agreement of the parties did not operate to condone the payment
of the balance of P266,146.88— the petitioners are liable for the payment of the
penalties and service charges in the said amount. Article 1270, par. 2 of the Civil Code
provides that express condonation must comply with the forms of donation. In relation to
this, Article 748, par. 3 provides that the donation and acceptance of a movable, the value
of which exceeds P5,000.00, must be made in writing, otherwise the same shall be void.
Here, the alleged agreement to condone P266,146.88 of the second IGLF loan was not
reduced in writing. Therefore, the petitioners are liable for the payment of the penalties and
service charges because the oral agreement of the parties did not operate to condone the
payment of the balance of P266,146.88.
Article 1271 raises a presumption, not of payment, but of renunciation of credit
Bognot v. RRI Lending Corporation
G.R. No. 180144 (24 September 2014)
As evidenced by a promissory note and secured by a post-dated check dated November 30,
1996, Bognot brothers applied for and obtained a loan of P500,000.00 from RRI Lending
Corporation. The loan several times on a monthly basis. Rolando's wife, Julieta Bognot,
applied for another renewal of the loan several days before the loan's maturity. She asked
the clerk to release to her the promissory note, the disclosure statement, and the check dated
July 30, 1997 under the pretext that she will have those documents signed by the Bognot
brothers. She, however, never returned these documents nor issued a new post-dated check.
As the demand letters fell on deaf ears, RRI Lending Corporation filed a complaint for sum
of money against the Bognot brothers. Can Petitioner Leonardo Bognot’s possession of the post-dated
check, which was stamped “CANCELLED”, be considered as proof that his obligation had already been
extinguished by payment pursuant to the legal presumption raised in Article 1271 of the Civil Code? No,
Petitioner Leonardo Bognot’s possession of the post-dated check, which was
stamped “CANCELLED”, cannot be considered as proof that his obligation had
already been extinguished by payment because the cancellation and return of the
check dated April 1, 1997, simply established his renewal of the loan — not the fact
of payment. Article 1271 of the Civil Code provides for a prima facie legal presumption of
renunciation of action— it merely raises a presumption, not of payment, but of the
renunciation of the credit where more convincing evidence would be required than what
normally would be called for to prove payment. Here, the petitioner failed to present any
evidence that the respondent had in fact encashed his check and applied the proceeds to the
payment of the loan. Thus, Bognot’s reliance on the legal presumption to prove payment is
misplaced.
F. Application of Formalities and Rules of Donations
Condonation or remission is essentially a donation and credit to the debtor. It must
be subject to the rule on donations with respect to acceptance.
G. Principles on Express Condonation
1. Express condonation inter vivos must comply with the form of a donation.
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 i. If the object is movable property which debtor is required to
deliver à Art. 748 applies
ii. If the object is an immovable property, Art. 749 applies
2. If the object of the condonation is movable property, no need for the
creditor to deliver the thing to the debtor because the thing is presumably
in the debtor’s possession.
3. If such is evidence by a public instrument, a notarized deed of
condonation is not required. Compliance with Art. 748 is sufficient.
H. Required Quantum of Proof of Condonation
Debt condonation, particularly if implied, must be proved by clear and convincing
evidence.
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.
A. Principle of Implied Condonation
When the creditor surrenders the evidence of the debtor’s credit to the latter, the
presumption arises that the creditor condones the obligation. This is because the
private document evidencing a credit will support the creditor if ever s/he would
wish to file an action for specific performance. Such documentary evidence would
allow the creditor to have a legitimate claim against the debtor.
B. Nature of Presumption
The delivery of documentary evidence is disputable or not conclusive. As such, it
could be alleged and proved by the creditor that such was delivered by mistake or
for purposes other than to condone the obligation.
C. The contents of the 2nd paragraph:
• In the first clause of the 2nd paragraph, it shows that certain persons may
allege and prove that the delivery of the debt instrument to the debtor
which amounts to an implied condonation is inofficious when it impairs
the legitime of the creditor’s compulsory heirs.
• In the 2nd clause of the 2nd paragraph, it gives the debtor the authority to
escape his/her legal obligations to the creditor by asserting that the
delivery of the debt instrument to the debtor was in virtue of payment of
debt if it should be alleged by the creditor that the condonation is
inofficious.
D. Requisites of Implied Condonation
• For the presumption in Art. 1271 to apply, the following must be
observed:
1. The debt instrument must be a private document.
The presumption is not applicable to public
documents because there is always a copy in the
archives, which can be used to prove the credit.
2. The delivery of such debt instrument by the creditor to the
debtor must be voluntary.
The creditor’s consent to deliver such document
should not be vitiated by mistake, fraud, undue
influence, or intimidation.
• Note: The presumption of condonation also arises when the creditor
voluntarily cancels the private document evidencing a credit provided
that such intention is demonstrable.
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.
A. Consequence of Presumption in Article 1272 in Relation to Article 1271
If the private debt instrument appears to be found in possession of the debtor, the
presumption in Art. 1271 will apply i.e., the creditor implicitly condoned the
debtor.
B. Joint or Solidary
1. Creditor delivers the private debt instrument to one of the joint debtors
– Presumption of condonation shall be limited to the share of the
receiving debtor.
2. Intention of creditor is to condone the entire debt – The private debt
instrument must be delivered to both joint debtors.
3. Creditor delivers the private debt instrument to one of the solidary
debtors – The entire debt is discharged.
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.
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Rules when Accessory Obligations are Involved
Art. 1273 applies the principle of accession. If the debt has been condoned, the interest,
penalties, mortgage, pledge, guaranty or surety are likewise condoned. This implies that the
condonation of the accessory obligations cannot condone the debt.
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.
Note: The contract of pledge is now governed by RA 11057 or the Personal Property
Security Act.
SECTION 4
Confusion or Merger of Rights
ARTICLE 1275. The obligation is extinguished from the time the characters of creditor
and debtor are merged in the same person.
A. Definition of Merger
Merger is a mode of extinguishing the obligation through the combination of the
debtor and the creditor in one person.
B. Requisites of Merger
1. The merger must take place between the creditor and the principal
debtor, i.e., the one who is primarily obliged to pay the obligation, not
those who are contingently liable to the creditor. In Case of Joint or Solidary Obligations
2. The merger must refer to the same obligation. It may be for 2 or more
separate obligations provided that the merger applies separately to each
of the obligations.
3. The merger must be complete or total because the merger in these articles
do not contemplate a partial extinguishment, except in the case
envisioned in Art. 1277.
C. Effects of Confusion or Merger
• In general: The obligation is extinguished from the time the characters
of the debtor and creditor are merged in the same person.
• Note: Real rights (e.g., usufruct, mortgage, pledge, right of repurchase,
lease record, etc.) may be extinguished by merger or confusion when any
of such rights is merged with ownership, which is the most
comprehensive real right.
D. May Merger be Susceptible of Termination or Revocation?
• For Tolentino, the merger may be susceptible of revocation or
termination.
• If the act which resulted in merger is susceptible of termination or
revocation, the merger would likewise be terminated and revoked. As a
result, the obligation is recreated in the same condition when the merger
took place.
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.
• It is founded on the law of accession wherein the accessory follows the principal,
but not the other way around.
• As the principal obligation is extinguished in a merger or confusion, so must the
accessory obligations of the guarantors, sureties and third-party mortgagors.
• Note: Confusion or merger which takes place in the person of the principal debtor
or creditor benefits the guarantors. However, if the merger takes place in the
person of any of the guarantors, this does not extinguish the obligation.
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.
Confusion in Joint Obligation Confusion in Solidary Obligation
Extinguishes the share of the person in Extinguishes the entire obligation, but the
whom the two characters concur. debtors may be liable for reimbursement if
the payment was made prior to remission.
SECTION 5
Compensation
ARTICLE 1278. Compensation shall take place when two persons, in their own right,
are creditors and debtors of each other.
ARTICLE 1279. In order that compensation may be proper, it is necessary:
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 There are two persons who are mutually There is only one person whom the
(1) That each one of the obligors be bound principally, and that he be at the same time a debtors and creditors of each other in two characters are of either the creditor and
principal creditor of the other; separate obligations, each arising from the debtor.
(2) That both debts consist in a sum of money, or if the things due are consumable, they same cause.
be of the same kind, and also of the same quality if the latter has been stated;
(3) That the two debts be due; F. Compensation v. Payment
(4) That they be liquidated and demandable;
(5) That over neither of them there be any retention or controversy, commenced by third COMPENSATION PAYMENT
persons and communicated in due time to the debtor. Capacity to dispose and receive the thing is Requires capacity to dispose of the thing
unnecessary since compensation operates paid and capacity to receive.
A. Concept of Compensation by law.
It is the process by which two or more obligations reciprocally owing by two May be partial. Must be total performance.
persons to each other are extinguished to the extent of their concurring amount.
G. Types of Compensation
B. Advantages of compensation:
• It simplifies the process of performing the concurring obligation. Takes place by operation of law.
• It assures the performance of concurring obligations by eliminating the risk
Legal
of default. It occurs automatically, and requires no action on the parties,
• Unlike payment, compensation may take place automatically by operation of so as long as all the elements enumerated under Art. 1279 are
law and does not require the parties to possess capacity to act and free disposal met with.
of property. Takes place only by agreement of the parties.

C. Partial Compensation as an Exception to the Rule of Integrity of Payment Does not require the concurrence of the elements referred to
Partial compensation is an exception to the rule of integrity of payment because in Art. 1279.
the extinguishment of the obligation is only to the extend of the concurring amount Conventional
of the obligations, it is possible that the compensation may result in partial Requires only two elements:
extinguishment of one or both obligations. Both parties should have the capacity to dispose their
respective credits; and
D. Legal Compensation v. Counterclaim They agree to compensate these two obligations.
Compensation is considered total if it extinguishes the
LEGAL COMPENSATION COUNTERCLAIM obligation in their entirety.
Takes place automatically and by operation If not pleaded, will not be recognized and
of law. will not affect the plaintiff’s claim. Occurs when the obligation amounts to equal amounts.
Total
However, nothing prevents the parties from agreeing on the
E. Compensation v. Confusion
total compensation even if the amounts of the compensation
are not the same.
COMPENSATION CONFUSION
Compensation is partial if it extinguishes only a part of either
There must always be two obligations. Involves only one obligation.
Partial or both obligations and there remains an outstanding balance.

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 Occurs when the compensating obligations are not of the same
amount.
Compensation is judicial if it is decreed by the court.
Judicial
Such as in the case of a duly proved counterclaim asserted by
the defendant against the plaintiff.
Compensation is facultative if it can be claimed only by one of
Facultative the parties, or one of the parties has a right to object to
compensation proposed by the other.
H. Five Requisites of Compensation and their Illustrative Cases
REQUISITES ILLUSTRATIVE CASE
1. Each debtor is Award of attorney’s fees may be the subject of legal compensation:
principally bound to Gan Tion v. Court of Appeals
the other— they G.R. No. L-22490 (May 21, 1969)
have to be reciprocal
debtors and In a decision, the Court of First Instance dismissed the
creditors to each one ejectment complaint against Ong Wan Sieng and ordered
as principal parties. the Gan Tion to pay Ong Wan Sieng the sum of P500 as
attorney's fees. Ong Wan Sieng was able to obtain a writ of
NOTE: execution of the judgment for attorney's fees in his favor.
Gan Tion challenged the same in a certiorai to the Court of
If one of the parties is Appeals pleading legal compensation and claiming that Ong
NOT a principal debtor, Wan Sieng was indebted to him in the sum of P4,320 for
legal compensation cannot unpaid rents. In its decision, the Court of Appeals it ruled
take place. that although respondent Ong is indebted to the petitioner
for unpaid rentals in an amount of more than P4,000.00,
There must be direct the sum of P500 could not be the subject of legal
privity of relationship to compensation, it being a "trust fund for the benefit of the
satisfy the first requisite. lawyer, which would have to be turned over by the client to
his counsel." May the award of attorney’s fees to the prevailing party
be offset against the monetary obligation of the winning party to the
losing party? Yes, the award of attorney’s fees to the
prevailing party may be offset against the monetary
obligation of the winning party to the losing party.
Attorney's fees is that it is an award made in favor of the
litigant, not of his counsel— it is the litigant, not his
counsel, who is the judgment creditor and who may enforce
the judgment by execution. Such credit, therefore, may
properly be the subject of legal compensation.
Element of mutuality of parties lacking; no legal compensation
California Manufacturing Co., Inc. v. Advanced
Technology System
G.R. No. 202454 (April 25, 2017)
ATSI alleged that CMCI was consistently paying the rents
until June 2003 when the latter defaulted on its obligation
without just cause. CMCI moved for the dismissal of the
complaint on the ground of extinguishment of obligation
through legal compensation. CMCI averred that ATSI was
one and the same with Processing Partners and Packaging
Corporation (PPPC), which was a toll packer of CMCI
products. Felicisima proposed to set off PPPC's obligation
to pay the mobilization fund with the rentals for the
Prodopak machine. CMCI argued that the proposal was
binding on both PPPC and ATSI because Felicisima was an
officer and a majority stockholder of the two corporations.
Was the legal obligation of CMCI to ATSI extinguished through
legal compensation? No, the legal obligation was not
extinguished through legal compensation because
ATSI is distinct and separate from PPPC, or from the
Spouses Celones. In affirming the ruling of the CA, the
Supreme Court ruled that legal compensation had not set in
because the element of mutuality of parties is lacking. Here,
assuming arguendo that Felicisima was sufficiently clothed
with authority to propose the offsetting of obligations, her
proposal cannot bind ATSI because at that time the latter
had no transaction yet with CMCI. Thus, the legal
obligation was not extinguished through legal
compensation.
2. Both debts must consist in sum of money, or if the things due are consumable,
they must be of the same kind or quality.
Consumable things – those that cannot be used in an appropriate manner without being
consumed.
Fungible things – things of the same kind and quality which can be substituted for each
other.
NOTE: the law erroneously used the word “consumable”
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3. Both debts must be
due.
If the parties so agree,
compensation may still
take place even if this
requisite is not fulfilled. It
would be a case of
conventional
compensation.
If debts are not due, liquidated, and demandable, then no legal
compensation cannot apply.
Union Bank of the Philippines v. Development Bank
of the Philippines
G.R. 191555 (January 20, 2014)
Foodmasters, Inc. (FI) had outstanding loan obligations to
both DBP and petitioner Union Bank’s predecessor-in-
interest, Bancom. In order to satisfy its debts, FI entered
into a deed of cession of property in favor of DBP. DBP
agreed to extinguish FI’s obligation to itself, and to assume
FI’s obligation to Bancom. The assumption of this
obligation was predicated upon the payment of rentals over
a certain processing plant that FI had transferred to DBP in
the deed of cession. The agreement stipulated that DBP
would pay Bancom 30% of the rentals it would receive from
FI. It further stipulated that DBP would pay Bancom the
remaining balance of FI’s obligations after the expiration of
the period of lease. When Bancom transferred its rights to
Union Bank, the latter filed a collection case against DBP.
The RTC ruled in favor of Union Bank, but the CA and SC
ruled that DBP’s obligation is contingent upon FI’s
payments of rent. In the absence thereof, DBP’s obligation
to Union Bank would not be due or demandable. After the
expiration of the lease agreement, Union Bank filed a
motion for the execution of DBP’s obligation. The RTC
ruled in favor of Union Bank, and issued a notice of
garnishment against DPB. The CA reversed the RTC’s
decision and ordered Union Bank to return the amounts it
had received from DBP. The instant case is based on Union
Bank’s motion to apply legal compensation upon its
judgement debt and DBP’s assumed obligation. Can legal
compensation be applied upon the two parties’ debts? No, the Court
held that legal compensation cannot be applied in the
instant case. Article 1279 of the Civil Code provides for
the requisites of legal compensation. The 3rd and 4th
enumerations thereof provide that the two debts must be
due, liquidated, and demandable in order for legal
compensation to apply. Since DBP’s assumed obligation to
Union Bank is contingent on the prior payment by FW
(formerly FI) to DBP, the latter’s obligation to Union Bank
cannot be considered to be liquidated, due, or demandable.
As such, the petition for affirmation of legal compensation
must be denied.
Requirements in Articles 1278 and 1279 must be present
Montemayor v. Millora
G.R. No. 168251 (July 27, 2011)
Atty. Vicente Millora (respondent) obtained a loan of
P400k from Dr. Jesus Montemayor (petitioner).
Motemayor subsequently filed a complaint against Millora
because the latter failed to settle his obligation. Millora then
filed a counter claimagainst Montemayor claiming the
payment of attorney’s fees which Montemayor should pay
Millora. The RTC held that Millora’s attorney’s fees is
equivalent to the amount of Millora’s liability, which shall
be set-off with the amount Millora is adjudged to pay
Montemayor. Can legal compensation be applied in the present case.
Yes, legal compensation can be applied and any
amount due in favor of Montemayor against Millora is
set off by an equivalent amount in the form of Millora’s
atty’s fees for past legal services rendered for
Montemayor. For legal compensation to take place, the
requirements set forth in Articles 1278 and 1279 of the Civil
Code must be present. In the present case, both obligations
are liquidated. Millora has the obligation to pay his debt to
Montemayor and Montemayor has the obligation to pay
atty’s fees. Legal compensation or set-off takes place
between Millora and Montemayor and both parties are on
even terms such that there is actually nothing left to execute
and satisfy in favor of either party.
Compensation takes effect by operation of law when all the requisites
in Article 1279 are present
First United Construction Corporation v. Bayanihan
Automotive Corporation
G.R. No. 164985 (January 15, 2014)
First United Constructors Corp. and Blue Star
Construction Corp (petitioners) ordered six dump trucks,
one Hino Prime Mover, and one Isuzu Transit Mixer from
Bayanihan Automotive Corp. In their purchases, the
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 petitioners paid in cash and the balance through post-dated
checks; however, First United ordered stop payment for the
balance. The petitioners informed Bayanihan that they were
withholding the payment of the checks due to the defects
of one of the dump trucks they had earlier purchased. Since
the petitioners refused to pay, Bayanihan sought for
recollection. Can the petitioners avail legal compensation? Yes,
legal compensation was permissible. Article 1290 of the
Civil Code provides that when all the requisites mentioned
in Article 1279 of the Civil Code are present, compensation
takes effect by operation of law, and extinguishes both
debts to the concurrent amount. With petitioners' expenses
for the repair of the dump truck being already established
and determined with certainty by the lower courts, it
follows that legal compensation could take place because all
the requirements were present. Hence, the amount of
P71,350.00 should be set off against petitioners' unpaid
obligation of P735,000.00, leaving a balance of
P663,650.00, the amount petitioners still owed to
respondent.
4. That they be liquidated and demandable
Liquidated debts – those amounts which may be determined by a simple arithmetic
operation.
5. That neither of the debts should be involved in any controversy.
If the debts sought to be collected is the subject matter of a law suit where a 3 rd party
asserts to be the creditor thereof, compensation shall be deferred until the case is
terminated.
If the 3rd party is adjudged to be the debtor, compensation shall not take place; otherwise,
compensation shall take place upon the dismissal of the third party claim.
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.
A. Right of the Guarantor to Set-up Compensation
The guarantor is given a right to set up compensation if the obligation of the debtor
is already extinguished by compensation, the guarantor will be released. This is
because a guarantor is guarantor is contingently liable for the payment of that debt.
B. Article 1280 as an Exception to the Rule
However, the guarantor may also set up compensation as regards what the creditor
may owe the principal debtor. This means the guarantor may invoke any available
compensation between the principals, and thus benefit from the extinguishment
of the principal obligation which results from such compensation.
C. Illustrative Case
Compensation as a defense by the guarantor
Philippine Trust Company v. Sps. Ramos
G.R. 171897 (October 14, 2015)
Spouses Ramos had obtained a loan from Philippine Trust Company, the payment and terms
of which were, at the time of this decision, under dispute before the CA. There, the PTC
claimed that the spouses still owed it ₱3,053,738.50. While that case was pending before the
CA, the spouses had won a separate suit against PTC for its breach of a contract between
the two parties. The trial court ordered that PTC pay the spouses ₱500,000 and the CA
affirmed this decision, which became final and executory. PTC then opposed the issuance
of the writ of execution for its judgment debt and raised for the first time the argument for
legal compensation between the spouses’ loan obligation and its own judgment debt. The
issue now is whether PTC can claim legal compensation between the two obligations. The Court held
that PTC may not claim legal compensation. The argument of legal compensation
should have been raised at the trial stage and not at the execution stage. In failing to raise
such argument during the trial phase, PTC is deemed to have waived their right to the same.
Moreover, the obligations in this case do not satisfy the requisites of legal compensation as
provided by Article 1279 of the Civil Code. Since the loan obligation of the spouses is still
subject to dispute in a case pending before the CA, it cannot be considered to already be
liquidated and demandable as required by the aforementioned article. As such, legal
compensation may not be used by PTC in order to extinguish its judgment debt to the
spouses Roxas.
ARTICLE 1281. Compensation may be total or partial. When the two debts are of the
same amount, there is a total compensation.
ARTICLE 1282. The parties may agree upon the compensation of debts which are not
yet due.
Requisites of Conventional or Voluntary Compensation
Conventional compensation is a contract, therefore, both parties should:
1. have the capacity to act on the free disposal of properties/credits; and
2. they agree to compensate the obligations.
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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.
A. Judicial Compensation and the Two Types of Counterclaims
• Judicial compensation takes place when a defendant in an action over an
obligation has a counterclaim against the plaintiff. A counterclaim refers to
any claim which is defending party may have against an opposing party. The
two types of counterclaims are:
Compulsory counterclaim – it arises or is connected with the
transaction or occurrence constituting the subject matter of the opposing
party claim, which does not require the presence of 3 rd parties of whom
the court cannot acquire jurisdiction for adjudication. It must be within
the jurisdiction of the court both as to the amount and the nature thereof,
except in an original action before the RTC, it may be considered
compulsory regardless of the amount.
Permissive counterclaim - any other counterclaim.
• Under this article, in an action for specific performance, a defendant may
set up both types of counterclaims against the plaintiff. The ultimate
liability of the defendant shall be deducted with the amount of the
counterclaim when a claim is upheld but the counterclaim is proven.
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.
A. Compensation of Rescissible or Voidable Debts
• Rescissible and voidable debts may be compensated prior to the judicial decree
of rescission since it still considered a valid obligation.
• There are two views regarding such situation:
1. when one or both of the obligations are subsequently rescinded or
annulled, the compensation that has set in must be unwound since the
effect of either rescission or annulment retroacts to the date of the
constitution of the obligations.
2. after compensation has set in, no action can be maintained for the
rescission or annulment of these obligations since compensation would
have extinguish the obligations either partially or fully. (This opinion is
much preferred.)
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.
A. Effects of Assignment of Rights
Among the generally transmissible rights acquired by virtue of an obligation is a
credit, or the creditor’s claim against the debtor. In the assignment of credit, unless
otherwise stipulated, the debtor’s consent is not necessary.
B. There are two distinct possibilities in an assignment of credit:
1. The debtor was fully aware of the assignment, either:
• If the debtor gave his consent thereto - the death or shall not be
permitted to set up against the third-party assignee the compensation
that would have otherwise pertain to him in respect of the assigned
credit.
• If the debtor withheld his consent - the debtor is entitled to offset
all his existing claims against the creditor as of the date of the
assignment of credit to the third-party assignee; and the debtor’s
obligation to pay the assigned credit to the third-party assignee
would be limited to the net amount outstanding, after taking into
account the effects of the compensation.
2. The debtor was unaware of the assignment:
In view of the uninformed debtor, his obligation is to pay the creditor.
However, the debtor’s obligation may be offset by what the creditor may owe
him in turn. With this, the debtor my invoke compensation with respect to all
of his claims against the creditor, including all claims which might have
accrued after the assignment of credit to the third-party assignee, up to and
until the debtor becomes aware of the assignment of credit.
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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.
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.
ARTICLE 1288. Neither shall there be compensation if one of the debts consists in civil
liability arising from a penal offense.
A. Debts which Cannot be Compensated
1. A debt that arose from a contract of depositum or commodatum
2. A debt arising from liability to provide support gratuitously
3. A debt which arose from the civil liability for a criminal offense
4. Debts owing to the government (e.g. taxes, duties, fees, and other forced
contributions)
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.
A. Guidelines on Compensation involving Several Debts
1. Partial payment of debts should be avoided, if possible;
2. Compensation shall apply to accrued interest, before the principal;
3. Compensation shall apply first to the more onerous obligations;
4. If debts are of equal burden, compensation shall be proportionately applied
to all debts.
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.
SECTION 6
Novation
A. Concept: Novation is a mode of extinguishing a first obligation by substituting it
with a new one.
B. Requisites
1. There must be a valid and existing first obligation.
2. All the parties must agree on the second obligation which will replace the
first.
3. The second obligation must extinguish the first.
4. The second obligation must be valid.
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.
• The fact that the contracting parties executed a written document evidencing an
existing verbal agreement does not constitute a novation of the verbal agreement
(Ace Foods Inc. v. Micropacific Technologies Co.).
Concept of Novation
ACE Foods Inc vs. Micropacific Technologies Co.
G.R. 200602 (December 11, 2013)
ACE Foods, entered into a contract of sale with Micro Pacific (MTCL). In the contract,
MCTL would deliver and install the computer hardware products to the premises of ACE
Foods, while the latter is bound to pay Php 646,464.00 for the subject products. In the
Invoice Receipt issued after delivery of MTCL, it was stated that the “title to the sold
property is reserved to MTCL until full compliance of the terms and conditions
above and payment of the price.” After delivery, ACE Foods failed to pay the purchase
price despite demands from the respondent MTCL. Did the stipulation in the invoice receipt novate
the contract into a contract to sell? No, the contract was a contract of sale, and that the
stipulation in the Invoice Receipt DID NOT novate the contract into a contract to
sell. Novation is never presumed, and the animus novandi, whether totally or partially, must
appear by express agreement of the parties, or by their acts that are too clear and unequivocal
to be mistaken. In this case, the stipulation reflected in the Invoice Receipt did not change
the complexion of the transaction between the parties. Absent in the records are any
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showing that the said stipulation novated the contract of sale between the parties which
already existed at the precise moment ACE accepted MTCL’s proposal to enter into such
contract. Animus novandi was not expressly proved since no evidence is present that either
party authorized the novation of the original agreement, and that the signature by the
representative of ACE FOODS to the Invoice Receipt only proves that such delivery of
products were made by MTCL.
AMENDMENT OF AN
NOVATION
OBLIGATION
There is an extinguishment of the first There are changes introduced to an
obligation by the creation of a new one existing obligation, but such changes do
which replaces it. not extinguish and replace the already
existing obligation.
TYPES OF NOVATION
AS TO NATURE
Change in the contracting parties, either in the person of the creditor or in
Subjective
the person of the debtor
Change in the prestation, or in the principal conditions of the first
Objective
obligation
Change both in the person of the debtor or creditor, concurrently with a
Mixed change in the prestation or in the principal conditions of the first
obligation
Subjective Novation
Starbright Sales Enterprise vs. PH Realty Corporation
G.R. No. 177936 (January 18, 2012)
Licup wrote a letter to Cirilos, offering to buy the land owned by co-respondents for Php
1,240 per square meter. In their negotiations, Licup accepted the responsibility of
removing the informal settlers in the lot and enclosed a check worth Php100,000 to “close
the transaction” between him and Cirilos. Licup would then pay the balance upon
presentation of the title for transfer and the property being cleared of the settlers. Licup
requested that the titles of the land be transferred to petitioner Starbright Sales
Enterprises (SSE) instead, upon a perfection of a contract. As the negotiations for a
purchase price between SSE and Cirilos were becoming bleak, the latter sold the lot to
Tropicana. SSE files for the annulment of sale claiming that Licup and Cirilos already
perfected a contract between them. Did a subjective novation take place during the negotiations
between Licup and Cirilos, when Licup ordered the stop-payment on his deposit and that the property be
transferred to SSE instead? Yes, there was a subjective novation on the person of the
debtor that took place when Licup ordered for the stop-payment and proposal to
transfer property to SSE. The agreement between Cirilos and Licup was only a meeting
of the minds as to the OBJECT and CONSIDERATION of the contract, thus it has not
yet been perfected as it was still in the negotiation stages. In this case, while the person
of the debtor was substituted to SSE, there was no agreement between Cirilos and SSE
regarding the terms of the sale of the subject land. The proposed substitution of Licup
by SSE opened the negotiation stage for a new contract of sale as between SSE and the
respondents. The “updated proposals” sent by SSE to Cirilos evidenced the fact that the
negotiations to the terms were still unfinished and was deemed as a pending transaction
between the parties.
Novation of a final judgment by a compromise agreement
Magbanua v. Uy
G.R. No. 161003 (May 6, 2005)
Rizalino Uy filed a Manifestation requesting that the cases be terminated and closed,
stating that the judgment award as computed had been complied with to the satisfaction
of petitioners. Said Manifestation was also signed by the eight (8) petitioners. Petitioners
also moved to close the cases, but the Labor Arbiter denied it. NLRC reversed it holding
that a final and executory judgment can no longer be altered, and that quitclaims and
releases are normally frowned upon as contrary to public policy. Could the final and executory
judgment of the Supreme Court be subject to compromise settlement? Yes, the first paragraph of
Article 2040 refers to a scenario in which either or both of the parties are unaware of a
court’s final judgment at the time they agree on a compromise. In this case, the law allows
either of them to rescind the compromise agreement. Both parties were aware of the
final decision. The principle of novation supports the validity of a compromise
after final judgment. Novation, a mode of extinguishing an obligation is done by
changing the object or principal condition of an obligation, substituting the person of the
debtor, or surrogating a third person in the exercise of the rights of the creditor.
AS TO FORM
Contracting parties expressly declare the extinguishment of the first
Express
obligation by the creation of the second obligation (Art. 1292)
New obligation is completely incompatible and irreconcilable with the first
Implied obligation such that these two obligations cannot be given effect
simultaneously (Art. 1292)
Novation must be declared in unequivocal terms, or completely incompatible and irreconcilable
Philippine Charter v. Petroleum Distributors
G.R. No. 180898 (April 18, 2012)
PDSC entered into a building contract with FCC. They agreed that the project should be
turned over by October 21, 1999. FCC’s officers signed as surety for FCC. PDSC and
FCC extended the bond up to March 2, 2000. FCC also procured a bond from PCIC to
secure performance. FCC failed to accomplish it within the said period wherein PDSC
terminated their contract and demanded for damages. PCIC averred that as a surety, it
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was not liable as principal obligor, that its liability under the bond was conditional and
subsidiary. PCIC also alleged that its obligation under the performance bond was
terminated when it expired on October 15, 1999 and the extension of the performance
bond until March 2, 2000 was not binding as it was made without its knowledge and
consent. Was there a novation? No, in order that an obligation may be extinguished by
another which substitutes the same, it is imperative that it be so declared in
unequivocal terms, or that the old and new obligation be in every point
incompatible with each other. In this case, however, no new contract was concluded
and perfected between PDSC and FCC. There lies no incompatibility between the two
contracts as their principal object and conditions remained the same. While there is really
no hard and fast rule to determine what might constitute to be a sufficient change that
can bring about novation, the touchtone for contrariety, however, would be an
irreconcilable incompatibility between the old and the new obligations.
No novation in case of slight modifications
Heirs of Servando Franco v. Sps. Gonzales
G.R. No. 159709 (June 27, 2012)
Servando Franco and Leticia Mendel obtained loans from Veronica Gonzales for the
latter was engaged in the business of financing under the company Gonzales Credit
Enterprises. There were three loans which the Servando and Leticia secured with the
respondent, which was not paid on maturity. The third loan was secured by a property
owned by one Leticia Makalintal YaptinTay, who issued a special power of attorney in
favor of Leticia Medel, authorizing her to execute the mortgage. The fourth loan was
engaged with Dr. Rafael Mendel, the husband of Leticia Mendel of P 60,000 by executing
a promissory note which consolidates the other previous loans which totals to P 500,000.
Upon maturity of the new promissory note, the defendants failed to pay their obligation.
So, the plaintiffs filed a complaint for the collection of the full amount of the loan, plus
interests and other charges. Servando contended that he did not obtain any loan from the
respondents, he was not benefited from its proceeds and he signed the promissory note
as a witness. Is there a novation between the judgments rendered by the courts? No, there is no
novation when there is no irreconcilable incompatibility between the old and the
new obligations. There is no novation in case of only slight modifications; hence,
the old obligation prevails. Extinguishment of the old obligation is a necessary element
for novation and the new one will arise from such. Novation is not presumed by the
parties, there should be an expressed agreement that would abrogate the old one in favor
of the new one. In the absence of the express agreement, the old and the new obligation
should be incompatible on every point. The incompatibility of the obligation is that the
two obligations cannot stand together, each one having independence from each other.
AS TO EFFECT
Total If the second obligation completely supersedes the first
If the second obligation doesn’t completely extinguish the first, but only
Partial
partially
ARTICLE 1292. In order that an obligation may be extinguished by another which
substitutes the same, it is imperative that it be so declared in unequivocal terms, or that
the old and the new obligations be on every point incompatible with each other.
Test of Incompatibility
• The test is whether or not the two obligations can be enforced simultaneously, with
each obligation having an independent existence from the other.
• Incompatibility requires an “essential change” in the old obligation. Change must
refer to the object, and the cause, or the principal condition of the old obligation.
• An “accidental change” is a change on the secondary agreements between the
parties, and not on the object or principal conditions.
• Distinction between “essential” and “accidental” is subjective and largely
dependent on the effect of such change based on the appreciation of its
importance. Most important question that needs to be answered is whether the
changes must result in the extinguishment of the old obligation such that a new
one is created as modified by the changes.
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.
A. Types of Debtor Change
EXPROMISION DELEGACION
Change of debtor is made at the initiative Change of the debtor is made at the
of the creditor, or some other person other initiative of the original debtor
than the debtor himself
Can be made even without the knowledge Requires consent of the creditor
or against the will of the original debtor
Whether expromision or delegacion, the necessary consequence is the release of the original
debtor following the extinguishment of the first obligation by the second. The new debtor
assumes full responsibility to the creditor under the second obligation.
Mere substitution of debtors will not result in novation
S.C. Megaworld Construction and Development Corporation v. Parada
G.R. 183804 (September 11, 2013)
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Megaworld bought electrical lighting materials from Gentile Industries, a sole proprietorship
owned by Engineer Parada. Megaworld was unable to pay on the due date and blamed it on
the failure to collect from Enviro Kleen. Eventually, it was able to persuade Enviro Kleen
to agree to settle the above purchase. But after paying Parada P250,000.00 once, Enviro
Kleen stopped making further payments, leaving an outstanding balance of P816,627.00. It
also ignored the various demands of the Parada, who then filed a suit to collect from
Megaworld the said balance, plus damages, costs, and expenses. Megaworld denied liability
by saying that it was released from its indebtedness to the Parada allegedly due to the
novation of their contract, when Parada accepted the partial payment of Enviro Kleen in
Megaworld’s behalf, and thereby acquiesced to the substitution of Enviro Kleen as the new
debtor. Was there a novation of the contract because of the substitution of the debtor to Enviro Kleen and
acceptance of payment from the same? No, the mere substitution of debtors will not result in
novation, and the fact that the creditor accepts payments from a third person, who
has assumed the obligation will merely result in the addition of the debtors and not
novation. Settled is the rule is that novation is never presumed but must be clearly and
equivocally shown. For a new agreement to supersede the old one, the parties to a contract
must expressly agree that they are abrogating their old contract in favor of a new one. The
creditors may enforce the obligation against both debtors. If there is no agreement as to
solidarity, the first and new debtors are considered jointly.
B. Necessity and Form of Creditor’s Consent
NECESSITY OF CREDITOR’S CONSENT
Whether novation is in the form of expromision or delegacion, creditor’s consent is
indispensable. A contrary rule would violate the fundamental right of a creditor to assess
his credit risk.
FORM OF CREDITOR’S CONSENT
The law doesn’t specify the form of creditor’s consent. Hence, such consent may be given
expressly or implicitly.
While consent to the novation cannot be inferred from the mere fact that the creditor
accepted payment from a third person, such consent may be inferred if the creditor
subsequently files a collection suit against the third person.
Novation requires creditor’s consent, either expressed or implied
Arco Pulp and Paper Co., Inc. & Santos vs. Lim
G.R. 206806 (June 25, 2014)
Lim delivered scrap papers to the Arco. Arco then issued a post-dated check as partial
payment, but the check was subsequently dishonored on April 18, 2007 for being drawn
against a closed account. On the same day, Arco and a certain Eric Sy executed a MOA
where Arco bound themselves to deliver their finished products to Sy. Lim filed a
complaint for collection of sum of money, arguing that novation did not take place since
the MOA was an exclusive and private agreement between Arco and Eric Sy and that his
conformity was indispensable. Does the execution of the MOA constitute a novation of the contract
between the parties? No, novation must be stated in clear and unequivocal terms to
extinguish an obligation. It cannot be presumed and may be implied only if the
old and new contracts are incompatible on every point. If the MOA was intended to
novate the original agreement between the parties, Lim must have first agreed to the
substitution of Eric Sy as his new debtor. The MOA must also state in clear and
unequivocal terms that it has replaced the original obligation of Arco to Lim. Neither of
these circumstances is present in this case. Arco’s act of tendering partial payment to Lim
also conflicts with their alleged intent to pass on their obligation to Eric Sy. Since there
was no novation, Arco’s obligation remains valid and existing.
Creditor’s consent may be given express or impliedly
Bank of the Phil. Islands v. Domingo
G.R. No. 169407 (March 25, 2015)
Spouses Domingo executed a PN in favor of Makati Auto Center, Inc. (or BPI) in the
sum of ₱629,856.00, payable in 48 successive monthly installments and a Deed of Chattel
Mortgage over a 1993 Mazda to secure the payment of their PN. The spouses, however,
defaulted when they failed to pay 21 monthly installments. Failing to comply with their
demands, BPI filed a Complaint for Replevin and Damages against the spouses. The
spouses later alleged that the car was sold to a Carmelita Gonzales with BPI’s conformity
and the buyer subsequently assumed payment of the balance of the mortgaged loan.
Therefore, they were already released from their obligation. Had there been a novation of the
loan obligation with chattel mortgage of the spouses Domingo to BPI so that the spouses were released
from said obligation and Carmelita was substituted as debtor? No, there had been no novation
since there was no express consent of BPI to the substitution of debtors. Firstly,
that BPI had a copy of the Deed of Sale and Assumption of Mortgage executed between
Mercy and Carmelita in its file does not mean that it had consented to the same. The
Court notes that the documents of BPI concerning the car loan and chattel mortgage are
still in the name of the spouses Domingo. No new promissory note or chattel mortgage
had been executed between BPI and Carmelita. Even the account itself is still in the
names of the spouses Domingo. Secondly, BPI’s consent to the substitution of debtors
cannot be deduced from its acceptance of payments from Carmelita, absent proof of its
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 clear and unmistakable consent to release the spouses Domingo from their obligation.
The acceptance by a creditor of payments from a third person, who has assumed the
obligation, will result merely to the addition of debtors and not novation.
C. Debtor’s Consent
DEBTOR’S CONSENT
As to the original debtor In delegacion, the original debtor’s consent is apparent
because it is he who proposed the substitution.
In expromision, the original debtor’s consent is not
necessary.
As regards the new debtor The consent of the new debtor is absolutely essential
as he is a total stranger to the transaction.
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 obligation shall not give rise
to any liability on the part of the original debtor.
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.
Effects of Insolvency of the New Debtor
• Expromision in Article 294
o If the new debtor is insolvent at the time of substitution, or becomes
insolvent subsequently, the creditor cannot hold the original debtor
responsible for the debt which the new debtor cannot pay. This is because
the original debtor had no participation in the substitution.
o Even if the original debtor consented to such substitution, or had
knowledge thereof, insolvency of the new debtor would still not revive
the creditor’s claim against the original debtor. This is because the
initiative for substation originated from the creditor or the new debtor
himself.
• Delegacion in Article 1295
o This creates an exception to the general rule that the original debtor is
released from liability. Creditor’s claim against the original debtor is
revived in two specific circumstances:
1. When the insolvency of the new debtor was existing and of
public knowledge at the time of the substitution;
2. The insolvency of the new debtor was known to the original
debtor was known to the original debtor when the substitution
was made.
o However, if the insolvency of the new debtor occurred after the fact of
substitution, the creditor’s claim against the original debtor is not revived.
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.
A. General Rule on the Principle of Accession
• The extinguishment of the principal obligation necessarily results in the
extinguishment of the accessory obligation(s).
• Because novation extinguishes the first obligation, the accessories that are
attached must, as a rule, be discharged.
B. Exception
• If the obligation that was novated conferred a benefit (e.g., a stipulation pour
atrui) to a third party, and the third-party beneficiary did not consent to the
novation, the accessory obligation will not be extinguished.
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.
A. Effect if New Obligation is Void
• General Rule: Extinguishment of the original obligation is contingent on the
validity of the new. If the new obligation Is void (i.e., inexistent), then there
would be no second obligation that will replace the first.
• Exception: The parties to a novation that does not materialize may stipulate
in any case that the original obligation should be extinguished.
B. Effects if New/Original Obligation is Voidable
• If New Obligation is Voidable
o A voidable contract is binding until judicially annulled. Hence, a
voidable new obligation may novate a prior valid obligation.
o If the voidable new obligation was judicially annulled, then it would
retroact to the date of its constitution as if there was no new
obligation which extinguished the original.
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 o If the new obligation is voidable, the novation of the original is at
best conditional. If not assailed within the proper period or if the
judicial challenge fails, it would become permanent.
o The action to annul a voidable contract prescribes in four (4) years.
If it has prescribed, the defect of the contract is cured by default.
• If Original Obligation is Voidable
o The voidable first obligation may be novated prior to its annulment.
But if it is novated by a second valid obligation, it can no longer be
assailed because it has been extinguished by novation.
C. Effect if the New Obligation is Conditional
• If a new obligation that is intended to novate the original obligation is
conditional, then the net effect of the new conditional obligation is to put to
a temporary state of suspense the novation of the original obligation.
• Art. 1299 does not apply if it is the intention of the parties, or if they so
stipulate, that the new obligation shall not be subject to the condition of the
original obligation. This is justified under the principle of freedom to contract.
ARTICLE 1300. Subrogation of a third person in the rights of the creditor is either legal
or conventional. The former is not presumed, except in cases expressly mentioned in this
Code; the latter must be clearly established in order that it may take effect.
Types of Subrogation
a. Legal – takes place by operation of law without the intervention of the parties. It
is never presumed as it takes place only in the specific instances mentioned in the
law.
b. Conventional – takes place by agreement of the parties. It requires the consent of
the original creditor, new creditor, and the debtor. It cannot be presumed and must
be clearly proved.

ARTICLE 1298. The novation is void if the original obligation was void, except when ARTICLE 1301. Conventional subrogation of a third person requires the consent of the
annulment may be claimed only by the debtor, or when ratification validates acts which original parties and of the third person.
are voidable.
• Consent of the old creditor because his right is extinguished
• Art. 1298 is erroneous because it refers to an original obligation which is void. • Consent of the debtor old is extinguished and he becomes liable to a new
If so, it cannot be novated because one of the essential requisites of novation obligation
is a valid first obligation. • Consent of the third person new creditor becomes party to the new relation
• It must have been intended to refer to a voidable original obligation, which
may be novated. CONVENTIONAL
ASSIGNMENT OF CREDITS
SUBROGATION
ARTICLE 1299. If the original obligation was subject to a suspensive or resolutory Debtor’s consent is necessary Debtor’s consent not required
condition, the new obligation shall be under the same condition, unless it is otherwise Extinguishes the old obligation and gives Refers to the same right which passes from
stipulated. rise to a new one one person to another
The nullity of an old obligation may be Nullity of an obligation is not remedied by
A. General Rule on Novation of Conditional Obligations cured by subrogation such that the new the assignment of the creditor’s right to
• An original obligation that is subject to a suspensive condition may be obligation will be perfectly valid. another.
novated. However, the new obligation shall also be subject to the same
suspensive condition of the original obligation. ARTICLE 1302. It is presumed that there is legal subrogation:
• An original obligation that is subject to a resolutory condition may likewise be (1) When a creditor pays another creditor who is preferred, even without the debtor's
novated. However, the new obligation is also subject to the same resolutory knowledge;
condition. (2) When a third person, not interested in the obligation, pays with the express or tacit
approval of the debtor;
B. Exception (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.
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 o In the meantime, the 3rd party who made the partial payment can
A. General Rule: Legal subrogation is not presumed. likewise demand from the debtor what he has paid to the creditor.
o In the event that the creditor & the 3rd party demands from the
B. Exceptions: debtor at the same time the payment of what is due them, the
1. When a creditor pays another creditor who is preferred, without the debtor’s creditor will be preferred. He will be paid first as the law states that
knowledge; he is preferred (Art. 1304).
2. When a third person, not interested in the obligation, pays with the express or
tacit approval of the debtor;
3. When even without knowledge of the debtor, a person interested in the
fulfillment of the obligation pays, without prejudice to the effects of confusion
as to the latter’s share.

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

A. Effects of Subrogation (Article 1303)

• Generally, subrogation transfers the credit to the new creditor, including the
ff.:
o All rights which the original creditor had against the debtor; and
o All rights which the original creditor had against third persons (e.g.,
guarantors or possessors of mortgages).
• However, in conventional subrogation, the parties may stipulate the nature,
limits, extent & scope of the subrogation provided these are not contrary to
law, morals, good customs, public order, or public policy.

B. Partial Subrogation and Preferred Creditor (Article 1304)

• Art. 1304 contemplates a situation where a debt has been partially paid by a
3rd person, with the consent of the debtor.
o If there is no consent of the debtor, the only right of the third party
who made the payment is to be reimbursed of the amount he has
partially paid pursuant to Art. 1236.
• In the event partial payment is made by a 3rd person which extinguishes the
debtor’s obligation to pay the creditor up to the extent of said partial payment,
the creditor can still demand from the debtor the balance of the obligation
(Art. 1304).

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