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OBLIGATIONS and CONTRACTS / Atty. A. F.

Gonzales Finals

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Art. 1219. The remission made by the
creditorofthesharewhichaffectsoneof
thesolidarydebtorsdoesnotreleasethe
latter from his responsibility towards the
co-debtors, in case the debt had been
totallypaidbyanyoneofthembeforethe
remissionwaseffected.(1146a)

Art. 1220. The remission of the whole


obligation, obtained by one of the
solidary debtors, does not entitle him to
reimbursementfromhisco-debtors.(n)

Art. 1221. If the thing has been lost or if


the prestation has become impossible
without the fault of the solidary debtors,
theobligationshallbeextinguished.
If there was fault on the part of any one
of them, all shall be responsible to the
creditor,forthepriceandthepaymentof
damages and interest, without prejudice
to their action against the guilty or
negligentdebtor.
If through a fortuitous event, the thing is
lost or the performance has become
impossible after one of the solidary
debtorshasincurredindelaythroughthe
judicial or extrajudicial demand upon
himby thecreditor, theprovisions of the
precedingparagraphshallapply.(1147a)

Art. 1222. A solidary debtor may, in


actionsfiledbythecreditor,availhimself
of all defenses which are derived from
the nature of the obligationand of those
which are personal to him, or pertain to
his own share. With respect to those
whichpersonallybelongtotheothers,he
mayavailhimselfthereofonlyasregards
that part of the debt for which the latter
are responsible. (1148a)

Section 5: Divisible and Indivisible


Obligations

Art. 1223.Thedivisibilityorindivisibilityof
the things that are the object of
obligations in which there is only one
debtor and only one creditor does not
alter or modify the provisions ofChapter
2ofthisTitle.(1149)

Art. 1224. A joint indivisible obligation


givesrisetoindemnityfordamagesfrom
the time anyone of thedebtorsdoes not
complywithhisundertaking.Thedebtors
who may have been ready to fulfill their
promises shall not contribute to the
indemnity beyond the corresponding
portion of theprice of the thing or of the
value of the service in which the
obligationconsists.(1150)

Art. 1225. For the purposes of the


preceding articles, obligations to give
definite things and those which are not
susceptible of partial performance shall
bedeemedtobeindivisible.
Whentheobligationhasforitsobjectthe
executionofacertainnumberofdaysof
work, the accomplishment of work by
metricalunits,oranalogousthingswhich
by their nature are susceptible of partial
performance,itshallbedivisible.
However, even though the object or
service may be physically divisible, an
obligation is indivisible if so provided by
laworintendedbytheparties.
In obligations not to do, divisibility or
indivisibility shall be determined by the
character of the prestation in each
particularcase.(1151a)

Section 6: Obligations with a Penal


Clause

Penal clause accessory


undertaking to assume greater
liabilityincaseofbreach
Is it the same as liquidated
damages?
o GENERALRULE:thereis
no difference; however,
the penalty in its
punitive aspect is
different from liquidated
damages (for more
information, see the
ever-wonderful Jurado
reviewer)
Purpose:
1. toensureperformanceofan
obligation
2. to substitute as indemnity
fordamagesorinterest
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3. to penalize the debtor (as
provided by the ever-
wonderful book of Atty.
Cahayon)
Characteristics:
1. Subsidiary
o GENERAL RULE only
penalty can be
demanded, principal
cannotbedemanded
o EXCEPTIONPenaltyis
jointorcumulative
2. Exclusive - takes place of
damage, damage can only
be demanded in the ff.
cases:
a. Stipulation granting
right
b. Refusaltopaypenalty
c. With dolo (not of
creditor)
Causesforreductionofpenalty:
a. If there is
partial/irregular
performance
b. ifthepenaltyprovidedis
iniquitous/unconsciona
ble

Art. 1226. In obligations with a penal


clause, the penalty shall substitute the
indemnityfordamagesandthepayment
of interests in case of noncompliance, if
there is no stipulation to the contrary.
Nevertheless, damages shall be paid if
the obligor refuses to pay the penalty or
is guilty of fraud in the fulfillment of the
obligation.
Thepenaltymaybeenforcedonlywhen
it is demandable inaccordance with the
provisionsofthisCode.(1152a)

Art. 1227. The debtor cannot exempt


himself from the performance of the
obligationby paying the penalty, save in
the case where this right has been
expressly reserved for him. Neither can
thecreditordemandthefulfillmentofthe
obligation and the satisfaction of the
penalty at the same time, unless this
right has been clearly granted him.
However,ifafterthecreditorhasdecided
torequirethefulfillmentoftheobligation,
theperformancethereofshouldbecome
impossible without his fault, the penalty
may be enforced. (1153a) (italics added
foremphasis)

As regards the debtor: right to


exempt oneself from
performance by paying the
penalty instead should be
expresslyreservedtohim
As regards the creditor: right to
demand both fulfillment and
satisfaction of penalty could be
implied,aslongasitisclearthat
therighthasbeengiventohim

Art. 1228. Proof of actual damages


suffered by the creditor is not necessary
in order that the penalty may be
demanded.(n)

Art. 1229. The judge shall equitably


reduce the penalty when the principal
obligation has been partly or irregularly
complied with by the debtor. Even if
there has been no performance, the
penalty may also be reduced by the
courts if it is iniquitous or
unconscionable.(1154a)

Art. 1230. The nullity of thepenal clause


doesnotcarrywithitthatoftheprincipal
obligation.
Thenullityoftheprincipalobligation
carrieswithitthatofthepenalclause.
(1155)

Chapter 4: Extinguishment of
Obligations

General Provisions

Art. 1231.Obligationsareextinguished:
(1) Bypaymentorperformance;
(2) Bythelossofthethingdue;
(3) By the condonation or remission of
thedebt;
(4) By the confusion or merger of the
rightsofcreditoranddebtor;
(5) Bycompensation;
(6) Bynovation.
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Other causes of extinguishment of
obligations, such as annulment,
rescission, fulfillment of a resolutory
condition,andprescription,aregoverned
elsewhereinthisCode.(1156a)

The enumeration in Art. 1231 is


by no means exhaustive as
there are other means of
extinguishing an obligation; a
fewofthemare:
o By death of the debtor
when obligation is
purelypersonal
o Waiver or renunciation
bythecreditor(Art.6)
o Happening of
fortuitous events (Art.
1174)

Section 1: Payment or Performance

The following are the requisites


forvalidpayment/performance:
A. Withrespecttoprestationitself:
a. identity
b. integrityorcompleteness
c. indivisibility
B. Withrespecttoparties-mustbe
made by proper party to proper
party
a. Payor
o Payor the one
performing, he can be
thedebtorhimselforhis
heirs or assigns or his
agent, or anyone
interested in the
fulfillment of the
obligation; can be
anyone as long as it is
with the creditor's
consent
o Third person
pays/performs only
the creditor'sconsent; if
performance is done
also with debtor's
consent, he takes the
place of the debtor;
there is subrogation
except if the 3rdperson
intended it to be a
donation
o Third person
pays/performs with
consent of creditor but
not with debtor's
consent the
repaymentisonlytothe
extent that the payment
has been beneficial to
debtor
b. Payee
o Payee creditor or
obligee or successor in
interest of transferee, or
agent
o Payeecanalso be third
person - if any of the ff.
concur:
It must have
redounded to the
obligee's benefit
and only to the
extent of such
benefit
It falls under Art.
1241, par. 1-3 - the
benefit is total so
performanceistotal
c. Anyone in possession of
the credit but will apply
only if debt has not been
previously garnished

Art. 1232. Payment means not only the


delivery of money but also the
performance,inanyothermanner,ofan
obligation.(n)

Art. 1233.Adebtshallnotbeunderstood
to have been paid unless the thing or
service in which the obligation consists
has been completely delivered or
rendered,asthecasemaybe.(1157)

Art. 1234. If the obligation has been


substantiallyperformedingoodfaith,the
obligormayrecoverasthoughtherehad
been a strict and complete fulfillment,
lessdamagessufferedbytheobligee.(n)

Art. 1235. When the obligee accepts the


performance, knowing its
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incompleteness or irregularity, and
without expressing any protest or
objection, the obligation is deemed fully
compliedwith.(n)

Art. 1236. The creditor is not bound to


accept payment or performance by a
third person who has no interest in the
fulfillment of the obligation, unless there
isastipulationtothecontrary.
Whoever pays for another may demand
fromthedebtorwhathehaspaid,except
that if he paid without the knowledge or
against the will of the debtor, he can
recover only insofaras the payment has
beenbeneficialtothedebtor.(1158a)

Art. 1237.Whoeverpaysonbehalfofthe
debtorwithouttheknowledgeoragainst
the will of the latter, cannot compel the
creditor to subrogate him in his rights,
such as those arising from a mortgage,
guaranty,orpenalty.(1159a)

Art. 1238. Payment made by a third


person who does not intend to be
reimbursed by the debtor is deemed to
be a donation, which requires the
debtor's consent. But the payment is in
anycasevalidastothecreditorwhohas
acceptedit.(n)

Art. 1239.Inobligationstogive,payment
madebyonewhodoesnothavethefree
disposalofthethingdueandcapacityto
alienate it shall not be valid, without
prejudicetotheprovisionsofArticle1427
under the Title on "Natural Obligations."
(1160a)

Free disposal means that it is


not subjected to any claim, lien
orencumbrance.

Art. 1240. Payment shall be made to the


personinwhosefavortheobligationhas
been constituted, or his successor in
interest, or any person authorized to
receiveit.(1162a)

[BPI v. CA: Payment made to the wrong


party does not extinguish the obligation
as to the creditor who is without fault or
negligence, even if the debtor acted in
utmost good faith and by mistake as to
the person of the creditor or through
errorinducedbyfraudofathirdperson.]
[Culaba v. CA:Paymentshouldbemade
to the person in whose favor the
obligation has been constituted, or his
successor-in-interest, or any person
authorizedtoreceiveit.Apersondealing
with an agent is put upon inquiry and
mustdiscoveruponhisperiltheauthority
oftheagent(duediligence).]

Art. 1241. Payment to a person who is
incapacitated to administer his property
shall be valid if he has kept the thing
delivered, or insofaras the payment has
beenbeneficialtohim.

Articles in the Civil Code


regardingcapacity:
o Art. 38. Minority, insanity or
imbecility,thestateofbeing
adeaf-mute,prodigalityand
civil interdiction are mere
restrictions on capacity to
act, and do not exempt the
incapacitated person from
certainobligations,aswhen
the latter arise from hisacts
or from property relations,
suchaseasements.(32a)
o Art. 39. The following
circumstances, among
others, modify or limit
capacity to act: age,
insanity, imbecility, the state
of being a deaf-mute,
penalty, prodigality, family
relations,alienage,absence,
insolvency and trusteeship.
The consequences of these
circumstances are
governedinthisCode,other
codes, the Rules of Court,
and in special laws.
Capacitytoactisnotlimited
on account of religious
belieforpoliticalopinion.
A married woman, twenty-
one years of age or over, is
qualified for all acts of civil
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life, except in cases
specifiedbylaw.(n)

Payment made to a third person shall


alsobevalidinsofarasithasredounded
tothebenefitofthecreditor.Suchbenefit
tothecreditorneednotbeprovedinthe
followingcases:
(1) Ifafterthepayment,thethirdperson
acquiresthecreditor'srights;
(2) Ifthecreditorratifiesthepaymentto
thethirdperson;
(3) If by the creditor's conduct, the
debtor has been led to believe that
the third person had authority to
receivethepayment.(1163a)

Art. 1242.Paymentmadeingoodfaithto
any person in possession of the credit
shallreleasethedebtor.(1164)

Art. 1243. Payment made to the creditor


by the debtor after the latter has been
judicially ordered to retain the debt shall
notbevalid.(1165)

Art. 1244. The debtor of a thing cannot


compelthecreditortoreceiveadifferent
one, although the latter may be of the
same value as, or more valuable than
thatwhichisdue.
Inobligationstodoornottodo,anactor
forbearance cannot be substituted by
another act or forbearance against the
obligee'swill.(1166a)

4specialformsofpayment:
1. Dation in payment
2. Application of payment
3. Cession
4. Tender of payment and
consignation

Art. 1245. Dation in payment, whereby


property is alienated to the creditor in
satisfaction of a debt in money, shall be
governedbythelawofsales.(n)

Dation is governed by the law


onsales.
2impliedwarranties:
a. warranties against
hiddendefects
b. warranties against
eviction

[Caltex, Inc. v. IAC: GENERAL RULE


Dacionextinguishestheobligationtothe
extentofthevalueofthethingdelivered.
(Hence it does not necessarily mean
total extinguishment.) EXCEPTION:
Agreement of the parties (expressed or
implied or by their silence that it is for
total extinguishment)
contemporaneous and subsequent acts
shallbeprincipallyconsidered.]

Art. 1246. When the obligation consists


in the delivery of an indeterminate or
generic thing, whose quality and
circumstanceshavenotbeenstated,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.(1167a)

Art. 1247. Unless it is otherwise


stipulated, the extrajudicial expenses
required by thepayment shall befor the
account of the debtor. With regard to
judicial costs, the Rules of Court shall
govern.(1168a)

Art. 1248. Unless there is an express


stipulation to that effect, the creditor
cannot be compelled partially to receive
the prestations in which the obligation
consists. Neither may the debtor be
requiredtomakepartialpayments.
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.(1169a)

Art. 1249. The payment of debts in


money shall be made in the currency
stipulated, and if it is not possible to
deliver such currency, then in the
currency which is legal tender in the
Philippines.

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Legal tender such currency
that which may be used for the
payment of all debts, whether
publicorprivate
Coins are considered as legal
tender:
o uptoP1000forP1coins
above that is, P1, P5,
P10
o up to P100 for coins
below P1 that is, 1c,
5c,10c,25c(asperBSP
CircularNo.537)

Thedeliveryofpromissorynotespayable
to order, or bills of exchange or other
mercantiledocuments shallproduce the
effect of payment only when they have
been cashed, or when through the fault
ofthecreditortheyhavebeenimpaired.
Inthemeantime,theactionderivedfrom
theoriginalobligationshallbeheldinthe
abeyance.(1170)

[Tibajia v. CA:Sec.3ofRA265checks
are not legal tender; Sec. 1 of RA 529
obligations x x x shall be discharged
upon payment of any coin or currency
(considered as legal tender for public
andprivatepurposes).]
[Papa v. Valencia & Co., Inc. & Padilla v.
Paredes:Checksareconsideredonlyas
payment only when they have been
cashedorthroughthecreditor'sfaulthas
been impaired. A check is not legal
tender; acceptance of check implies an
undertaking of due diligence in
presenting it for payment, and if he for
whomitisreceivedsustainslossbywant
of such diligence, it will be held to
operate as actual payment of debt for
which the check was given (in the first
case, the creditor did not encash the
checkfor10years,presumptionisthatit
wasencashed).
AsregardsthePadillacase:RA8183all
monetary obligations shall be settled in
thePhilippinecurrencywhichisthelegal
tender in the Philippines. However, the
parties may agree that the obligation or
transaction shall be settled in any other
currencyatthetimeofpayment.]
[Hydro Resources v. NIA: In the past,
foreign currency was not deemed as
legal tender even if such was stipulated,
except if there are foreign bodies
involved.]

Art. 1250. In case an extraordinary


inflation or deflation of the currency
stipulatedshouldsupervene,thevalueof
the currency at the time of the
establishment of the obligation shall be
the basis of payment, unless there is an
agreementtothecontrary.(n)

NOTE: Art. 1250 applies only to


contractualobligations.

[Filipino Pipe and Foundry Corporation


v. Nawasa & Almeda v Bathala
Marketing: Extraordinary inflation is
defined as the decrease of increase in
the purchasing power of Philippine
currency which is unusual or beyond
common fluctuation in the value of said
currencyand such increase ordecrease
could not have been reasonably
foreseen or manifestly beyond the
contemplation of the parties at the time
of the establishment of the obligation.
What is considered normal (universal
trend and worldwide occurrence) is not
anextraordinaryinflation/deflation.]

Art. 1251.Payment shallbe made in the


placedesignatedintheobligation.
Therebeingnoexpressstipulationandif
the undertaking is to deliver a
determinate thing, the payment shall be
madewhereverthethingmightbeatthe
momenttheobligationwasconstituted.
In any other case the place of payment
shallbethedomicileofthedebtor.
Ifthedebtorchangeshisdomicileinbad
faithorafterhehasincurredindelay,the
additional expenses shall be borne by
him.
Theseprovisionsarewithoutprejudiceto
venue under theRules ofCourt. (1171a)

Subsection 1: Application of Payments

Art. 1252. He who has various debts of


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the same kind in favor of one and the
samecreditor,maydeclareatthetimeof
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
beenconstituted,applicationshallnotbe
madeastodebtswhicharenotyetdue.
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.
(1172a)

Art. 1253. If the debt produces interest,


payment of the principal shall not be
deemed to have been made until the
interestshavebeencovered.(1173)

Art. 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
deemedtohavebeensatisfied.
If the debts due are of the same nature
and burden, the payment shall be
applied to all of them proportionately.
(1174a)

Subsection 2: Payment by Cession

Art. 1255.Thedebtormaycedeorassign
his property to his creditors in payment
ofhisdebts.Thiscession,unlessthereis
stipulation to the contrary, shall only
release the debtorfrom responsibilityfor
the net proceeds of the thing assigned.
The agreements which, on the effect of
the cession, are made between the
debtor and his creditors shall be
governedbyspeciallaws.(1175a)

Cession/Assignment in favor of
creditorstheprocessbywhich
debtor transferall the properties
not subject to execution infavor
ofcreditorsisthatthelattermay
sell them and thus, apply the
proceeds to their credits;
extinguish up to amount of net
proceeds (unless with contrary
stipulation)
Kinds:
1. Legal governed by the
insolvencylaw
2. Voluntary agreement of
creditors
Requisites for voluntary
assignment:
a. Morethan1debt
b. Morethan1creditor
c. Complete or partial
insolvencyofdebtor
d. Abandonmentofalldebtors
property not exempt from
execution
e. Acceptance or consent on
thepartofthecreditors
Effects:
a. Creditors do not become
the owner; they are merely
assignees with authority to
sell
b. Debtor is released up to the
amount of the netproceeds
ofthesale,unlessthereisa
stipulationtothecontrary
c. Creditors will collect credits
in the order of preference
agreedupon,orindefaultof
agreement, in the order
ordinarily established by
law
Ifdebtorisonlyinsolventinfact,
creditors may not accept
payment by cession from him.
His remedy is to have himself
declared as insolvent according
to our insolvency law, and after
that he may enforce cession
already.
If he also was able to get a
certificate of discharge, his debt
maybetotallyextinguished.

Subsection 3: Tender of Payment and


Consignation

Art. 1256. If the creditor to whom tender


of payment has been made refuses
withoutjustcausetoacceptit,thedebtor
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shall be released from responsibility by
theconsignationofthethingorsumdue.
Consignation alone shall produce the
sameeffectinthefollowingcases:
(1) When the creditor is absent or
unknown, or does not appear at the
placeofpayment;
(2) When he is incapacitated to receive
thepaymentatthetimeitisdue;
(3) When,withoutjustcause,herefuses
togiveareceipt;
(4) When two or more persons claim
thesamerighttocollect;
(5) When the title of the obligation has
beenlost.(1176a)

[Roman Catholic Archbishop of


Malolos v IAC: Tender of payment
involvesapositiveandunconditionalact
by the obligor of offering legal tender
currency as payment to the obligee for
the former's obligation and demanding
the latter to accept the same; tender of
payment presupposes that the obligor is
not only able, ready, and willing but
moreso in the act of performing his
obligation. When tender of payment is
not valid the subsequent consignation
did not operate to discharge the former
fromhisobligationtothelatter.]
[Rayos v. Reyes:Therequisitesofavalid
consignationarethefollowing:
1)Existenceofvaliddebt
2) Consignation was made because of
somelegalcausepreviousvalidtender
was unjustly refused or circumstances
makingprevioustenderexempt
3) Prior notice ofconsignation hadbeen
given to the person interested in
performanceofobligation(1stnotice)
4) Actual deposit/consignation with
properjudicialauthorities
5) Subsequent notice of consignation
(2ndnotice)
Theapprovalofthecourtortheobligee's
acceptance is not necessary where the
obligorhasperformedallactsnecessary
toavalidconsignation.]
[PAL v. CA: In this case, PAL issued a
check to the absconding deputy sheriff
Emilio Reyes. PAL issued it in Reyes'
name. The court held that this is a bad
practice.
The proper persons to whom payment
mustbemadeare:
1)Creditor/obligee/activesubject
2) agent having authority (assigned by
thecreditor)
3)thoseauthorizedbylaw
In this case, the sheriff got the payment
in check issued to him in his name and
absconded (it was argued that it should
have been payment in cash because
checks are not legal tender, but it was
said in the dissent that had it been in
cash or in check in the name of the
absconding sheriff, it would have been
the same, because the sheriff
abscondedeitherway).
In this case, they ruled that the correct
and prudent thing to do is to issue it in
thecreditor'sname.]

Art. 1257. In order that the consignation


ofthethingduemayreleasetheobligor,
itmustfirstbeannouncedtothepersons
interested in the fulfillment of the
obligation.
Theconsignation shallbe ineffectual if it
is not made strictly in consonance with
the provisions which regulate payment.
(1177)

Art. 1258.Consignationshallbemadeby
depositingthethingsdueatthedisposal
of judicial authority, before whom the
tender of payment shall be proved, in a
proper case, and the announcement of
theconsignationinothercases.
Theconsignationhavingbeenmade,the
interested parties shall also be notified
thereof.(1178)

Art. 1259.Theexpensesofconsignation,
when properly made, shall be charged
againstthecreditor.(1178)

Art. 1260. Once the consignation has


beendulymade,thedebtormayaskthe
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
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withdrawthethingorthesumdeposited,
allowing the obligation to remain in
force.(1180)

Art. 1261. If, the consignation having


beenmade,thecreditorshouldauthorize
the debtor to withdraw the same, he
shall lose every preference which he
mayhaveoverthething.Theco-debtors,
guarantors and sureties shall be
released. (1181a)

Section 2: Loss of the Thing Due

Art. 1262.Anobligationwhichconsistsin
the delivery of a determinate thing shall
be extinguished if it should be lost or
destroyedwithoutthefaultofthedebtor,
andbeforehehasincurredindelay.
Whenbylaworstipulation,theobligoris
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
requirestheassumptionofrisk.(1182a)

Art. 1263. In an obligation to deliver a


generic thing, the loss or destruction of
anything of the same kind does not
extinguishtheobligation.(n)
GENERAL RULE Genus
nunquam perit genus never
perishes
EXCEPTIONDelimitedGeneric
(if the thing has already been
segregated), monetary
obligation

Art. 1264. The courts shall determine


whether, under the circumstances, the
partiallossoftheobjectoftheobligation
is so important as to extinguish the
obligation.(n)

Art. 1265. Whenever the thing is lost in


the possession of the debtor, it shall be
presumed that the loss was due to his
fault,unlessthereisprooftothecontrary,
and without prejudice to the provisions
of article 1165. This presumption does
not apply in case of earthquake, flood,
storm,orothernaturalcalamity.(1183a)

Art. 1266.Thedebtorinobligationstodo
shall also be released when the
prestation becomes legally or physically
impossible without the fault of the
obligor.(1184a)

Art. 1267. Whentheservicehasbecome


so difficult as to be manifestly beyond
the contemplation of the parties, the
obligor may also be released therefrom,
inwholeorinpart.(n)

Rebus sic stantibus doctrine


in international law allowing for
treaties to become inapplicable
because of a fundamental
change of circumstances; this
doctrine is applied to a certain
pointasregardsArt.1267
Thisdoctrinecannotbeapplied
absolutely in contractual
relations. To do so, will
undermine the stability of
contracts because when the
conditions wouldcease to exist,
thecontractsmustalsocease.It
is only in extremely unusual
changethatequityshallcometo
thesuccorofthedebtor.Itmust
be noted that the parties have
assumed the risk of unfavorable
developments. Consequently,
they must be vigilant to protect
themselves against that risk.
(Pineda, Obligations and
Contracts,2000edition,p.264)
Rule:Obligormaybereleasedin
wholeorinpart
Requisites:
o The event or change could
not have been foreseen at
the time of the execution of
thecontract
o The performance is
extremely difficult, but not
impossible (because if it is
impossible,itisextinguished
byimpossibility)
o The event was not due to
theactofanyoftheparties
o The contract is for a future
prestation
OBLIGATIONS and CONTRACTS / Atty. A. F. Gonzales Finals

10 Cessy Ciar -1AA 20112-2012

Art. 1268. When the debt of a thing


certainanddeterminateproceedsfroma
criminal offense, the debtor shall not be
exempted from the payment of its price,
whatever maybe the cause for the loss,
unless the thing having been offered by
him to thepersonwho should receive it,
the latter refused without justification to
acceptit.(1185)

Art. 1269. The obligation having been


extinguishedbythelossofthething,the
creditorshallhavealltherightsofaction
whichthedebtormayhaveagainstthird
persons by reason of the loss. (1186)

Section 3: Condonation or Remission of


the Debt

Donation,rulesastoform:
o Written (public
instrument) if
concernsrealproperty
o Written (private
document) movable
property whose value
exceedsP5000
o Oral if movable and
with value less than
P5000
o Theconsiderationisthe
liberalityofthecreditor

Art. 1270. Condonation or remission is


essentially gratuitous, and requires the
acceptance by the obligor. It may be
madeexpresslyorimpliedly.
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.(1187)

Art. 1271. The delivery of a private


document evidencing a credit, made
voluntarily by the creditor to the debtor,
implies the renunciation of the action
whichtheformerhadagainstthelatter.

As to private documents only;


public documents ordinarily
havecopies

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.
(1188)

Art. 1272. Whenever the private


document in which the debt appears is
found in the possession of the debtor, it
shall be presumed that the creditor
delivered it voluntarily, unless the
contraryisproved.(1189)

Art. 1273. The renunciation of the


principal debt shall extinguish the
accessory obligations; but the waiver of
the latter shall leave the former in force.
(1190)

Art. 1274. It is presumed that the


accessoryobligationofpledgehasbeen
remittedwhenthethingpledged,afterits
delivery to the creditor, is found in the
possession of the debtor, or of a third
personwhoownsthething.(1191a)

Only the accessory obligation is


extinguished (the reason being
that in a pledge, it is required
that you deliver the property
unlike in mortgage where it is
notrequired)
Accessory follows the principal
and not the other way around

Section 4: Confusion or Merger of


Rights

Art. 1275. The obligation is extinguished


from the time the characters of creditor
and debtor are merged in the same
person.(1192a)

Art. 1276. Merger which takes place in


the person of the principal debtor or
creditor benefits the guarantors.
Confusion which takes place in the
person of any of the latter does not
extinguishtheobligation.(1193)

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11 Cessy Ciar -1AA 20112-2012

Art. 1277. Confusiondoes not extinguish
a joint obligation except as regards the
share corresponding to the creditor or
debtor in whom the two characters
concur.(1194)

REQUISITES:
o It must take place between
principal debtor & principal
creditoronly
o Merger must be clear &
definite
o The obligation involved
must be same & identical
oneobligationonly
o Revocable, if reason for
confusion ceases, the
obligation is revived

Section 5: Compensation

Art. 1278. Compensationshalltakeplace


whentwopersons,intheirownright,are
creditors and debtors of each other.
(1195)

Kindsofcompensation:
a. Legal compensation by
operation of law; as long as
the 5 requisites in Art. 1279
concurevenifunknownto
parties & if payable in diff
places; indemnity for
expenseofexchanges;even
if not equal debts only up
toconcurringamount
b. Conventional
compensationagreement
of parties is enough, forget
other requirement as long
asbothconsented
c. Facultative compensation
one party has choice of
claiming/opposing one
who has benefit of period
maychoosetocompensate
o notallrequisitesare
present
o depositum;
commodatum;
criminal offense;
claim for future
support;taxes
d. Judicial compensation
set off; upon order of the
court; needs pleading &
proof;allrequirementsmust
concurexceptliquidation
e. Total compensation
when 2 debts are of the
sameamount
f. Partial compensation
when 2debtsare not of the
sameamount

Art. 1279. In order that compensation


maybeproper,itisnecessary:
(1) That each one of the obligors be
bound principally, and that he be at
thesametimeaprincipalcreditorof
theother;
(2) That both debts consist in a sum of
money, or if the things due are
consumable, they be of the same
kind, and also of the same quality if
thelatterhasbeenstated;
(3) Thatthetwodebtsbedue;
(4) That they be liquidated and
demandable;
(5) That over neither of them there be
any retention or controversy,
commenced by third persons and
communicated in due time to the
debtor.(1196)

[International Corp Bank v IAC & Silahis


Marketing Corp v IAC:Iftherequisitesof
legal compensation as enumerated in
Art. 1279 are present, compensation by
operation of law takes effect even
without the parties' consent.
Compensation is not proper when the
claim of the person asserting the set-off
against the other is not clear nor
liquidated; compensation cannot extend
to unliquidated, disputed claim arising
frombreachofcontract.]
[Francia v IAC: Rules tax cannot be
subject to set-off or compensation, the
mainreasonbeingthatitisaduty.Other
reasons in the case mentioned are that
the collection of tax cannot await the
results of a lawsuit against the
government,andthatthetaxwasdueto
thecitygovernmentbuttheexpropriation
wasaffectedbythenationalgovernment
OBLIGATIONS and CONTRACTS / Atty. A. F. Gonzales Finals

12 Cessy Ciar -1AA 20112-2012

(notprincipaldebtorandcreditorofeach
other).]

Art. 1280.Notwithstandingtheprovisions
of the preceding article, the guarantor
may set up compensation as regards
what the creditor may owe the principal
debtor.(1197)

This is because a guarantor is


subsidiarily liable whereby he
may be compelled to pay only
whenthedebtorcannotpay.
This is as opposed to a surety
who is solidarily liable with the
debtor.

Art. 1281.Compensationmaybetotalor
partial. When the two debts are of the
same amount, there is a total
compensation.(n)

Art. 1282. The parties may agree upon


thecompensationofdebtswhicharenot
yetdue.(n)

Art. 1283. If one of the parties to a suit


over an obligation has a claim for
damages against the other, the former
may set it off by proving his right to said
damagesandtheamountthereof.(n)

Art. 1284. When one or both debts are


rescissible or voidable, they may be
compensated against each other before
they are judicially rescinded or avoided.
(n)

Art. 1285.Thedebtorwhohasconsented
to the assignment of rights made by a
creditorinfavorofathirdperson,cannot
set up against the assignee the
compensation which would pertain to
him against the assignor, unless the
assignorwasnotifiedbythedebtoratthe
time he gave his consent, that he
reservedhisrighttothecompensation.

With [knowledge and] consent:


o GENERAL RULE no
compensation (with
respecttohisdebtsand
credits with the
PrincipalCreditor)
o EXCEPTION when the
debtor expressly
reserved his right to
compensation.

Ifthecreditorcommunicatedthecession
to him but the debtor did not consent
thereto, the latter may set up the
compensation of debts previous to the
cession,butnotofsubsequentones.

With knowledge but without


consent:
o Debtor may set up
compensation but only
to those credits that
becameduepriortothe
assignment.

If the assignment is made without the


knowledge of the debtor, he may set up
the compensation of all credits prior to
the same and also later ones until he
had knowledge of the assignment.
(1198a)

Without knowledge and


consent:
o Debtor may set up
compensation to those
credits that became
due prior to his
knowledge and also
those made later until
he had knowledge of
suchassignment.

Art. 1286. Compensation takes place by


operation of law, even though the debts
may be payable at different places, but
thereshallbeanindemnityforexpenses
of exchange or transportation to the
placeofpayment.(1199a)

Art. 1287. Compensation shall not be


proper when one of the debts arises
fromadepositumorfromtheobligations
of a depositary or of a bailee in
commodatum.
Neither can compensation be set up
against a creditor who has a claim for
OBLIGATIONS and CONTRACTS / Atty. A. F. Gonzales Finals

13 Cessy Ciar -1AA 20112-2012

support due by gratuitous title, without
prejudice to the provisions of paragraph
2ofArticle301.(1200a)

Art. 1288. Neither shall there be


compensation if one of the debts
consists in civil liability arising from a
penaloffense.(n)

Art. 1289. If a person should have


against him several debts which are
susceptible of compensation, the rules
on the application of payments shall
apply to the order of the compensation.
(1201)

Art. 1290. When all the requisites


mentioned in Article 1279 are present,
compensation takes effect by operation
of law, and extinguishes both debts to
theconcurrentamount,eventhoughthe
creditors and debtors are not aware of
thecompensation.(1202a)

Facultative compensation:
when only one of the parties
have the right to set up
compensation.
o In case of deposit, the
depositor (owner of the
thing deposited) may
setupcompensation.
o In case of
commodatum, the
owner of the thing
(he/she who lent said
thingtoanotherperson)
may set up
compensation
o Incasesofsupport,the
one entitled to support
may set up
compensation.
o In case of obligations
arising from penal
offense, only the
offended party may set
upcompensation

EXAMPLE: Sarahwasrapedbyaperson
(hereinafter the offender) whom she
owes P50000, and subsequently, she
wontherapecaseagainstsaidoffender,
awardingherP50000indamages.

If you were Sarah, and the offender


would say, Lets just compensate,
would you agree? The makers of this
reviewer think that not agreeing with
suchanarrangementisthebetterand
expectedopinion.

Of course, if Sarah was exceedingly


annoyed with the offender to the point
where shed rather die than see hisface
everagain,shecansetupcompensation
(on the grounds of her aversion to the
notionofseeinghimeveragain).