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IN MEMORY OF THE

OBLIGATION

PAYMENT OR
PERFORMANCE

1232
DEFINITION OF PAYMENT
Payment does not consist only of payment
through money.
Payment also refers to the delivery of money,
giving of a thing, doing of an act and not
doing of an act.

PAYMENT
OR
PERFORMANCE

Elements of Payment/Performance:
1. Persons/Parties
2. Object/Thing
3. Cause
4. Mode of Payment
5. Place and time that payment
should be made
6. Imputation of expenses
7. Other parts to modify the same

PAYMENT
OR
PERFORMANCE

BURDEN OF PROOF:
General rule: DEBTOR
Exception: Once the debtor introduces the
fact of extinguishment, it is shifted to the
CREDITOR

PAYMENT
OR
PERFORMANCE

1233
COMPLETENESS OF PAYMENT
Complete delivery is required to effect
payment/performance.
General rule: Delivery alone cannot effect
payment/performance.
Exception: Those provided by the this Code
(1234 and 1235)

PAYMENT
OR
PERFORMANCE

Things to be considered for an obligation


to be considered to be paid:
1. Identity of the prestation, which is the
complete fulfillment (contemplated in this
article), and;
2. Identity of prestation the very prestation
must be delivered or performed

PAYMENT
OR
PERFORMANCE

1234
SUBSTANTIAL PERFORMANCE IN GOOD FAITH
This is the first exception to Art. 1233.

Requisites:
1. There must be substantial performance (breach is
not compelling enough for creditor to rescind the
contract; the oblige has benefited)
2. Good faith of the obligor
The damages contemplated in this article are
compensation for the relative breach suffered by
the oblige.

PAYMENT
OR
PERFORMANCE

1235

ACCEPTANCE OF IRREGULARITY or INCOMPLETENESS


This is the second exception to Art. 1234.

Requisites:
1. K n o w l e d g e o f i n c o m p l e t e n e s s i n t h e
performance/payment
2. Acceptance of such without objection or protest
*no form/time for the protest

PAYMENT
OR
PERFORMANCE

1236
PAYMENT BY A THIRD PERSON
General rule: The creditor is not bound to accept
the payment of a third person
Exception: If it is stated in the agreement that he
can make payment
Persons from whom the creditor must accept
payment:
1. Debtor
2. Persons with interest in the obligation
3. Third persons, if allowed by stipulation, even
without interest

PAYMENT
OR
PERFORMANCE

1236
PAYMENT BY A THIRD PERSON
Second Paragraph

The third person who paid for the debt of the original
debtor can demand such debtor to pay him, except when
the debtor has no knowledge or against his will. The
presence of this condition would entitle the third person
the reimbursement only insofar to the payment that has
been beneficial to the debtor. If there is knowledge, the
third person shall have the rights of reimbursement and
subrogation.
There must be an existing creditor-debtor relationship
between the person on whose behalf the payment was
made and the payee.

PAYMENT
OR
PERFORMANCE

1237
NON-SUBROGATION OF RIGHTS
If paid without the knowledge or against the will of the
debtor, the third person is not entitled to subrogation and
therefore, cannot compel the creditor to subrogate him
his accessory rights of mortgage, guaranty or penalty,
even with the consent of the creditor.
If paid with knowledge, he is entitled to subrogation.
Subrogation can only take place with the consent of the
debtor.
There must be an existing creditor-debtor relationship
between the person on whose behalf the payment was
made and the payee.

PAYMENT
OR
PERFORMANCE

1238
PAYMENT MADE AS A DONATION
The payment of a third person who does not intend to be
reimbursed is considered as donation and shall require
the consent of the DEBTOR.
HOWEVER, such payment, even without the consent of
the DEBTOR, shall be valid as to the creditor who
received the payment and would extinguish the
obligation.

PAYMENT
OR
PERFORMANCE

1239
PAYMENT BY AN INCAPACITATED PERSON
General rule: Payments made by persons who do not have
(1) FREE DISPOSAL OF THE THING (must not have any
lien or encumbrance attached to it) and;
(2) CAPACITY TO ALIENATE (capacity to enter into
contracts) shall be invalid
Exception: Article 1427; the creditor cannot be compelled
to accept payment where the person paying has no
capacity to make it

PAYMENT
OR
PERFORMANCE

1240
TO WHOM PAYMENT MUST BE MADE
(a) To the person in whose favor the obligation has been
constituted (the creditor);
[NOTE: This refers to the creditors at the time of payment]

(b) To the successor-in-interest (Ex. the heirs);


(c) To any person authorized to receive it.

(NOTE: The authorization may be by agreement or by law.)


[NOTE: If the recipient was not authorized, the payment
generally is NOT valid]

PAYMENT
OR
PERFORMANCE

1241

EFFECT OF PAYMENT TO AN INCAPACITATED PERSON


General rule :
Payment made to a third person shall also be valid insofar
as it has redounded to the benefit of the creditor.
Exception: Such benefit to the creditor need not be
proved in the following cases:
1. If after the payment, the third person acquires the
creditors rights;
2. If the creditor ratifies the payment to the third person;
3. If by the creditors conduct, the debtor has been led to
believe that the third person had authority to receive
the payment.

PAYMENT
OR
PERFORMANCE

1241

EFFECT OF PAYMENT TO AN INCAPACITATED PERSON


First Paragraph Payment to an Incapacitated Person
Payment is valid to a person incapacitated to manage or
administer his property
1. If the incapacitated person has kept the thing
delivered; or
2. Insofar as the payment has been beneficial to him.

PAYMENT
OR
PERFORMANCE

1241

EFFECT OF PAYMENT TO AN INCAPACITATED PERSON


Second Paragraph Payment to a Third Party Not Duly
Authorized
Effect in general of payment to third party: The payment is
valid BUT only to the extent of benefit (financial, moral, or
intellectual) to the creditor. The payment must be proved
(Panganiban v. Cuevas, 7 Phil. 477), and is, therefore, not
presumed except in the three instances provided for in
the second paragraph of Art. 1241.

PAYMENT
OR
PERFORMANCE

1241

EFFECT OF PAYMENT TO AN INCAPACITATED PERSON


Examples of when benefit to the creditor is presumed:
1. If after payment the third person acquires the creditors rights.
2. If the creditor ratifies the payment to the third per- son.
3. If by the creditors conduct, the debtor has been led to
make the payment.
4. Rule with reference to checks. The ruling in People v.
Yabut is of doubtful validity because as long as the
messenger was duly authorized by the payee, delivery to
the messenger [and agent] should be considered as
delivery to the payee.

PAYMENT
OR
PERFORMANCE

1242

PAYMENT OF THIRD PERSON IN POSSESSION OF CREDIT


a) Payment by payor must be made in good faith (this is
presumed) (but payee may be in good or bad faith).
b) The payee must be in possession of the credit itself
(not merely the document evidencing the credit).
(NOTE: When one possesses the credit, there is color of title to it.)

PAYMENT
OR
PERFORMANCE

1243
WHEN PAYMENT TO CREDITOR NOT VALID
Garnishment
The proceeding by which a debtors creditor is
subjected to the payment of his own debt to another.
Interpleader
Action in which a certain person in possession of certain
property wants claimants to litigate among themselves for
the same.
Injunction
It is a judicial process by virtue of which a person is
generally ordered to refrain from doing something.

PAYMENT
OR
PERFORMANCE

1244

VERY PRESTATION DUE MUST BE COMPLIED WITH


In obligations to do or not to do, an act or forbearance
cannot be substituted by another act or forbearance
against the obligees will.

PAYMENT
OR
PERFORMANCE

1244
VERY PRESTATION DUE MUST BE COMPLIED WITH
General rule : Debtor Cannot Compel Creditor to Accept
a Different Object
Exception: Instances When Art. 1244 Does Not Apply
(a) In case of facultative obligations;
(b) In case there is another agreement resulting in either:
1.
2.

Dation in payment (Art. 1245, Civil Code); or


Novation (Art. 1291, Civil Code); (c)
in case of waiver by
the creditor (expressly or impliedly).

(c) In case of waiver by the creditor (expressly or


impliedly).

PAYMENT
OR
PERFORMANCE

1245
SPECIAL FORMS OF PAYMENT
Dation in Payment
It is that mode of extinguishing an obligation whereby the
debtor alienates in favor of the creditor, property for the
satisfaction of monetary debt.
Dation in payment is governed by the law of sales
because it is a transfer of ownership.

PAYMENT
OR
PERFORMANCE

1245
SPECIAL FORMS OF PAYMENT
Conditions Under Which a Dation in Payment Would Be
Valid
(a) If the creditor consents
(b) If the dation in payment will not prejudice the other
creditors,
(c) If the debtor is not judicially declared insolvent

[NOTE: In dation, it is not always necessary that all the property of


the debtor will be given to satisfy the credit. (8 Manresa 232).]

PAYMENT
OR
PERFORMANCE

1246
RULE ON MEDIUM QUALITY
Obligation to Give Generic Things
This Article gives a principle of equity in that it applies
justice in a case where there is lack of precise declaration
in the obligation.
Waiver
If the contract does not specify the quality
(a) The creditor cannot demand a thing of superior
quality
(b) The debtor cannot deliver a thing of inferior quality

PAYMENT
OR
PERFORMANCE

1247
DEBTOR PAYS EXTRAJUDICIAL EXPENSES
General Rule:
The debtor has to pay for the extrajudicial expenses
incurred during the payment. Reason: By express
provision of law. Reason for the law: It is the debtor who
benefits primarily, since his obligation is thus
extinguished.
Exception: When there is a stipulation to the contrary.
Judicial Costs are determined by the discretion of the
court unless otherwise provided in the rules.
Generally No costs against the Government

PAYMENT
OR
PERFORMANCE

1247
DEBTOR PAYS EXTRAJUDICIAL EXPENSES
General Rule:
The debtor has to pay for the extrajudicial expenses
incurred during the payment. Reason: By express
provision of law. Reason for the law: It is the debtor who
benefits primarily, since his obligation is thus
extinguished.
Exception: When there is a stipulation to the contrary.
Judicial Costs are determined by the discretion of the
court unless otherwise provided in the rules.
Generally No costs against the Government

PAYMENT
OR
PERFORMANCE

1248

COMPLETE PERFORMANCE OF OBLIGATION NECESSARY


Provision contemplates obligations where there is only one
creditor and only one debtor.
General rule: Object of the obligation must be performed in
one act, not in parts.
Exception: Creditor may accept but he cannot be compelled to
accept partial payment or performance.

PAYMENT
OR
PERFORMANCE

1248

COMPLETE PERFORMANCE OF OBLIGATION NECESSARY


When partial performance of obligation allowed:
1. By express stipulation to that effect
2. Debt in in part liquidated and in part unliquidated
3. Prestation are subject to different terms or conditions
4.
Obligation reasonably cannot be expected to be
performed completely at one time
5. Abuse of right or if good faith requires acceptance

PAYMENT
OR
PERFORMANCE

1249
LEGAL TENDER
First Paragraph:
General rule: Payment of debts in money payable in Philippine
Currency
Exception: Express stipulation in the contract

Definition of Legal Tender

The currency which a debtor can legally compel a creditor to


accept in payment of a debt in money when tendered by the
debtor in the right amount.

PAYMENT
OR
PERFORMANCE

1249
LEGAL TENDER
Legal tender in the Philippines

All coins and notes issued by the Bangko Sentral ng Pilipinas


Sec. 52, R.A. No. 7653
P50 = Denominations P0.25 and above
P20 = Denominations P0.10 or less
BSP Circular No. 537
P1,000.00 = Denominations P1.00, P5.00, and P10.00 coins
P100.00 = Denominations of P0.01, P0.05, P0.10, and P0.25
coins

PAYMENT
OR
PERFORMANCE

1249 LEGAL TENDER - Payment by means of instruments of credits


1.

2.
3.

Right of the creditor to refuse or accept

Promissory notes, checks, bills of exchange, and other commercial documents are not legal
tender.

Creditor cannot be compelled to accept them.

Creditor may accept them, without the acceptance producing the effect of payment.

The creditor must cash the instrument.

Payment for the purpose of redemption

Right to redeem is not an obligation but the exercise of a right; nor is it intended to discharge a
pre-existing debt.

Effect on obligation

General rule: Payment by means of mercantile document does not extinguish the obligation.
Exception:
i.
Until they have been cashed
ii.
Unless they have been impaired through the fault of the creditor.

1250
MEANING OF INFLATION AND DEFLATION
Inflation

The sharp and sudden increase of money or credit or both


without a corresponding increase in business transactions.
Inflation causes a drop in the value of money, resulting in rise of
the general price level.

Deflation

The reduction and circulation of the available money or credit


in a decline of the general price level; it is the opposite of
inflation.

PAYMENT
OR
PERFORMANCE

1250
MEANING OF INFLATION AND DEFLATION
Requisites:

1. Official declaration from the Banko Sentral ng Pilipinas


2. The obligation is contractual in nature; and
3. Parties expressly agreed to consider the effects of the
extraordinary inflation or deflation.

PAYMENT
OR
PERFORMANCE

1250
Devaluation and Depreciation distinguished
Devaluation

Involves an official reduction in the value of one currency


from an officially fized level imposed by monetary
authorities.

Depreciation

Downward change in the value of one currency in terms of


the currencies of other nations.
Note: Any lowering of the value of the peso as a result of foreign exchange
market is a depreciation and not a devaluation.

PAYMENT
OR
PERFORMANCE

1251
PLACE WHERE OBLIGATION SHALL BE PAID
1. If there is a stipulation, payment shall be made in the place
designated.
2. If there is no stipulation and the thing to be delivered is
specific, payment shall be made at the place where the thing
was, at the perfection of the contract.
3. If there is no stipulation and the thing to be delivered is
generic, the place of payment shall be the domicile of the debtor.
Creditor bears the expenses.

PAYMENT
OR
PERFORMANCE

1252

MEANING OF APPLICATION OF PAYMENT


The designation od the debt to which should be applied
the payment made by the debtor who has various debts
of the same kind in favor of one and the same creditor.

PAYMENT
OR
PERFORMANCE
SUBSECTION 1. -
Application of
Payment

1252

REQUISITES:
1. One debtor and one creditor
2. Two or more debts
3. Debts must be of the same kind
4. Debts to which payment made by the debtor has
been applies must be due
5. Payment must not be sufficient to cover all the
debts

PAYMENT
OR
PERFORMANCE
SUBSECTION 1. -
Application of
Payment

1252

Application as to debts not yet due:


General rule: Payment to debts not yet due cannot
be made.
Exception:

1. There is a stipulation that the debtor may so apply


2. It is made by the debtor or creditor, as the case may
be, for whose benefit the period has been constituted.

PAYMENT
OR
PERFORMANCE
SUBSECTION 1. -
Application of
Payment

Rules on application of payments:


1.
Debtor has the first, he must indicate at the tome of making payment, and not
afterwards, which particular debt is being paid.
2.
The right to make the application once exercised is irrevocable unless the creditor
consents to change.
3. Creditor has not also made the application, or if the application is not valid, the debt,
which is most onerous to the debtor among those due, shall be deemed to have been
satisfied.
4.
Debts due are of the same nature and burden,, the payment shall be applied to all of
them proportionately
5.
If neither party has exercised its options and there is disagreement as to debts to
which payment must be applied, the court will apply the payment according to the justice
and equity of the case.

1253
INTEREST ERNED PAID AHEAD OF PRINCIPAL
Debtor cannot choose to credit his payment to the
principal before the interest is paid.
Payment must be first applied first to the interest
and whatever balance is left, must be credited to
the principal.

PAYMENT
OR
PERFORMANCE
SUBSECTION 1. -
Application of
Payment

1254

APPLICATIONS WHERE PRECEEDING RULES


CANNOT BE APPLIED OR INFERRED
1. Application to mot onerous debt or to all debts
proportionately
If there is no application of payment made, the 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

2.

When a debt more onerous than the other

A debt is more onerous than the other when it is more


burdensome

PAYMENT
OR
PERFORMANCE
SUBSECTION 1. -
Application of
Payment

1254

APPLICATIONS WHERE PRECEEDING RULES


CANNOT BE APPLIED OR INFERRED
3.

4.

Instances

An interest-bearing debt is more onerous


A debt as a sole debtor is more onerous than as a solidary
debtor
All things being equal, older debts are more onerous
Debts secured by a mortgage or pledge is more onerous
than unsecured debts.

Where debts are subject to different burdens

Payment shall be applied proportionately

PAYMENT
OR
PERFORMANCE
SUBSECTION 1. -
Application of
Payment

1255
MEANING OF PAYMENT BY CESSION
It is another special form of payment.
It is the assignment or abandonment of all the
properties of the debtor for the benefit of his
creditors in order that the latter may sell the same
and apply the proceeds as payment.

PAYMENT
OR
PERFORMANCE
SUBSECTION 2.
Payment by Cession

1255
MEANING OF PAYMENT BY CESSION
Requisites:
1.
2.
3.
4.

There must be two or more creditors


The debtor must be (partially) insolvent
The assignment must involve all the properties of the debtor
Cessation must be accepted by the creditors

Effect of payment by Cession

Assignment does not make the creditors the owners of the


property of the debtor and the debtor is released from his
obligation only up to the net proceeds. Hence, debtor is still
liable if there is a balance.

PAYMENT
OR
PERFORMANCE
SUBSECTION 2.
Payment by Cession

Dation in payment and cession distinguished


Dacion'en'pago!
Only'one'creditor'
Does' not' presuppose' the' insolvency' of'
the'debtor''
Does' not' involve' all' the' property' of' the'
debtor'
Creditor' becomes' the' owner' of' the' thing'
given'by'the'debtor'
Act'of'novation'
!

Cession!
Several!creditors!
The! debtor! is! insolvent! at! the! time! of!
assignment!
Extends! to! all! the! property! of! the! debtor!
subject!to!execution!
Creditors!only!require!the!right!to!sell!the!
thing! and! apply! the! proceeds! to! their!
credits!
Not!an!act!of!novation!

1256

Definition of Tender of Payment and Consignation


Tender of payment:
Manifestation made by debtor to creditor of his desire
to comply with his obligation, with offer of immediate
performance
Preparatory act to consignation
Extrajudicial in character

PAYMENT
OR
PERFORMANCE
SUBSECTION 3. Tender of Payment
and Consignation

1256

5 valid consignation without previous tender of payment


1.
2.
3.
4.
5.

Creditor is absent/unknown.
Creditor is incapacitate to receive at time it is due.
Creditor refused give a receipt, w/o just cause.
2 or more persons claim the right to collect.
Title of obligation lost.

PAYMENT
OR
PERFORMANCE
SUBSECTION 3. Tender of Payment
and Consignation

1257
Prior notice to persons interested required
Absence of prior notice to the person interested in the
fulfillment of the obligation, the consignation shall be
void.
The purpose of notice is to give the creditor a chance to
reflect on his previous refusal to accept payment
considering that the expenses of consignation shall be
charged against him,
To amount to a valid payment, consignation must also
comply with the provisions which regulate payment.

PAYMENT
OR
PERFORMANCE
SUBSECTION 3. Tender of Payment
and Consignation

1258

Consignation must be with proper judicial authority


Consignation, by depositing the thing or sum due with the
proper judicial authority, is necessary to effect payment.
General Rule: It cannot be made elsewhere
Exception: Unless otherwise prescribed by special law.

PAYMENT
OR
PERFORMANCE
SUBSECTION 3. Tender of Payment
and Consignation

1259

Liability of creditor for expenses of consignation


Expenses of consignation shall be charged against the
creditor only when consignation have been properly made
1. When the creditor accepts the thing or amount
deposited;
2. When the court decided that consignation have been
properly made or cancels the obligation at the
instance of the debtor in accordance with Art. 1260
par. 1

PAYMENT
OR
PERFORMANCE
SUBSECTION 3. Tender of Payment
and Consignation

1259

When consignation deemed properly made


1. Creditor accepts the thin or sum deposited, without
objection, as payment;
2. Creditor declares that it has been properly made;
3. Creditor neither accepts nor questions the validity of
consignation, and the court after hearing, orders the
cancelation of the obligation.

PAYMENT
OR
PERFORMANCE
SUBSECTION 3. Tender of Payment
and Consignation

1260

Withdrawal by debtor of thing or sum deposited


Withdrawal as matter of right
The debtor may withdraw the thing or sum deposited:
a) Before the creditor has accepted the consignation; or
b) Before a judicial declaration
If withdrawal is with the consent of the creditor, Article
1261 applies.

PAYMENT
OR
PERFORMANCE
SUBSECTION 3. Tender of Payment
and Consignation

1261

Effect of withdrawal with authority of creditor


1. Before approval of the court Obligation remains in
force.
2. After approval of the court or acceptance by the
creditor, with the consent of the latter - Obligation
remains in force, but guarantors and co-debtors are
liberated. Preference of the creditor over the thing is
lost.
3. After approval of the court or acceptance by the
creditor, and without creditors consent - Obligation
subsists, without change in the liability of guarantors
and co-debtors, or the creditors right of preference.

PAYMENT
OR
PERFORMANCE
SUBSECTION 3. Tender of Payment
and Consignation

Loss of the
Thing Due

1262

WHEN A THING IS CONSIDERED LOST


A thing is lost when it perishes, or goes out of commerce
or disappears in such way that is existence is unknown

Loss of DETERMINATE THING without fault of debtor and NO DELAY


Obligation is extinguished
Requisites
1. Loss or destroyed without the fault of the debtor
2. Before the debtor incurs delay
3. After the obligation is constituted
Impossibility is also equivalent to loss

Loss of the
Thing Due

1262

WHEN LOSS OF THING WILL NOT EXTINGUIS LIABILITY


1.
2.
3.
4.

When the law so provides;


When the stipulation so provides;
Nature of obligation requires assumption of risk
In case the object arises from a crime (1268)

Loss of the
Thing Due

1263

EFFECT OF LOSS OF A GENERIC THING


Loss or destruction of GENERIC THING = obligation is not
extinguished
Genus nunquam perit The genus never perishes
Debtor can still be compelled to deliver a thing of the same kind.
The creditor however cannot demand a thing of superior quality
and neither can the debtor deliver a thing of inferior quality.

Loss of the
Thing Due

1264

EFFECT OF PARTIAL LOSS OF A SPECIFIC THING


PARTIAL LOSS = court discretion to extinguish or not.
Depends whether the obligation is so important as to
extinguish the obligation.
Provided that partial loss is not imputable to the fault or
negligence of the debtor but to fortuitous events or
circumstances.
Partial loss: only a portion of the thing is lost or destroyed
or when it suffers depreciation or deterioration.

Loss of the
Thing Due

1265

PRESUMPTION OF FAULT IN CASE LOSS OF THING IN


POSSESION OF THE DEBTOR
Loss + Possession of debtor = debtor presumed liable
Exception
1. Fortuitous events
Burden of proof of explaining the loss of the thing in the
possession of the debtor rests upon him.

Loss of the
Thing Due

1266

EFFECT OF IMPOSSIBILITY OF PERFORMANCE IN


OBLIGATIONS TO DO
Personal obligations + legal/physical impossibility + debtor no
fault = Extinguishment
Refers to SUBSEQUENT IMPOSSIBILITY Arises after the
obligation has been constituted. If existing before, the obligation
constituted is under void contracts.

Requisites:

1. Obligation used to be possible at the construction of obligation


2. Subsequent impossibility
3. Without fault of the debtor

Loss of the
Thing Due

1266
Two kinds of impossibility
1.
Physical impossibility Personal qualifications of debtor are
involved.
a. Example Death, physical incapacity
2.
a.

Legal impossibility Rendered impossible by provision of law.


Example When a law makes something unlawful

Loss of the
Thing Due

1267
EFFEECT OF DIFFICULTY OF PERFORMANCE
Service becomes difficult (as to be manifestly beyond contemplation of
parties) = obligor may be released therefrom in whole or in part.
Doctrine of unforeseen events

Requisites:

1.
Event or change in circumstances could not have been foreseen
at the time of the execution of the contract
2.
Makes the performance of the contract extremely difficult but
not impossible
3.
Event must not be due to the act of any of the parties
4.
Contract is for a future prestation

Loss of the
Thing Due

1267
EFFEECT OF DIFFICULTY OF PERFORMANCE
Service = performance of an obligation
Modification of contract not covered court shall either release or not
release the obligor from a contract and CANNOT MODIFY the terms

Loss of the
Thing Due

1268

EFFEECT OF FORTUITOUS EVENT WHERE OBLIGATION


PROCEEDS FROM A CRIMINAL OFFENSE
If the thing due proceeds from criminal offense; loss of thing, even if
due to fortuitous event = debtor still liable
Exception:
1.
creditor refuses to accept the thing without justification after
tendered. Creditor is in mora accipiendi.
Debtor, however must still exercise due diligence.

Loss of the
Thing Due

1269

RIGHT OF THE CREDITOR TO PROCEED AGAINST THIRD PERSONS


Extinguished obligation by loss = creditor has rights of action
which debtor may have against third person responsible for
loss

Loss of the
Thing Due

Condonation or
Remission of Debt

CONDONATION OR REMISSION
1270
is essential GRATUITOUS,
and requires the ACCEPTANCE BY THE OBLIGOR.
It may be made EXPRESSLY or IMPLIEDLY.
One and the other kinds shall be subject to the RULES
WHICH GOVERN INOFFICIOUS DONATIONS.
Express condonations shall, furthermore comply with the
FORMS OF DONATIONS

Condonation or
Remission
Of Debt

RULES ON DONATION APPLIES TO


CONDONATION OR REMISSION

VICTOR YAM & YEK SUN LENT vs. CA


HELD: Express condonation follows rules on donation
and donation of movables (i.e. in this case a credit)
amounting to more than P5000 must be in writing
[Article 784, par. 3]. IN this case, the condonation was
not reduced in writing.

Condonation or
Remission
Of Debt

RULES ON DONATION APPLIES TO


CONDONATION OR REMISSION

VICTOR YAM & YEK SUN LENT vs. CA


NOTE: The appointment of a receiver operates to
suspend the authority of a corporation and of its
directors and officers over its property and effects,
such authority being reposed in the receiver.

Condonation or
Remission
Of Debt

Kinds of Condonation or Remission


As to extent:
Total when it covers the entire obligation
Partial when it does not cover the entire obligation; may
refer only to the accessory obligation

Condonation or
Remission
Of Debt

Kinds of Condonation or Remission


As to date of effectivity:
This must have the formalities of a will and the will must be
probated
Inter vivos (during life)
Mortis causa (after death)

Condonation or
Remission
Of Debt

Kinds of Condonation or Remission


As to form: Article 1270, par.1

Express when it is made either verbally or in writing; if inter vivos, shall comply with
the forms of donation [1271] and of a will or codicil, if mortis causa

Implied or tacit; requires no formality; conduct is sufficient (ex. Destruction by the


creditor of the instrument)

REQUISITES
1.
2.
3.
4.
5.

It must be gratuitous;
It must be accepted by the obligor;
The parties must have capacity;
It must not be inofficious; and
If made expressly, it must comply with the forms of
donation

1271

PRESUMPTION IN CASE DOCUMENT OF INDEBTEDNESS


VOLUNTARILY DELIVERED BY CREDITOR
A voluntary delivery of a PRIVATE DOCUMENT
Remission is Rebuttable
The renunciation of the debt may be nullified by showing that
the waiver is inofficious.
Remedy: Must prove the delivery of the private
documents was made in virtue of payment of the debt
and not remission.

Condonation or
Remission
Of Debt

1272

PRESUMPTION IN CASE DOCUMENT FOUND IN POSSESION


OF THE DEBTOR
The presumption is voluntary delivery
Must be a private document
Presumption is rebuttable
Type of Obliga.on

Eect on the Debt

Joint Obliga,on

Only the Debtor who has the private document

Solidary Obliga,on

The obliga,on has been remi<ed

Condonation or
Remission
Of Debt

1273

EFFECT OF RENUNCIATION OF PRINCIPAL DEBT ON


ACESSORY OBLIGATION
EXTINGUISHED

EFFECT

Principal Obliga,on

Accessory also Ex,nguished

Accessory Obliga,on

Principal NOT Necessarily


Ex,nguished.

Condonation or
Remission
Of Debt

1274

PRESUMPTION IN CASE THING PLEDGE FOUND IN POSSESSION


OF DEBTOR
Only the accessory obligation is presumed to be remitted, the
principal obligation REMANS in force.
For the presumption to arise:
In the possession of the debtor
The third person MUST OWN the thing

Condonation or
Remission
Of Debt

Confusion or
Merger of Rights

CONFUSION/MERGER AS A MODE OF EXTINGUISHMENT


Requisites:
1) It MUST take place between the principal debtor and the
creditor.
2) Merger must be clear and definite.
3) The obligation must the same or incidental.
(Testate Estate of Mota v. Serra)

Confusion or
Merger of
Rights

Illustration
A

Debtor

IN GENERAL

OWES 3,000

Confusion or
Merger of
Rights

Creditor

Z
3rd person

Confusion or
Merger of
Rights

Illustration





Debtor

AA

IN GENERAL

OWES 3,000






Creditor

Illustration




Debtor

IN GENERAL

OWES 3,000

Confusion or
Merger of
Rights





Creditor
3rd person

A X

Illustration
IN CASE OF JOINT OBLIGATIONS (Article 1277)
A, B, C JOINTLY owes 3,000 to X.
X endorses the promissory note to Y
Y endorse the promissory note to A
Held:
As shares is extinguished, but B and Cs shares remains.
Thus, because the credit merges in A, B and C now owes A
(1,000 pesos each).

Confusion or
Merger of
Rights

Illustration
IN CASE OF SOLIDARY OBLIGATIONS (Article 1215;
par. 2 of 1217)
A, B, C SOLIDARILY owes 3,000 to X.
X endorse the promissory note to Y
Y endorse the promissory note to A
Held:
Notice that A, who is a debtor becomes a creditor.
There is merger or confusion of rights; hence, being a solidary
obligation, it is extinguished, but A may claim reimbursement from B
and C.

Confusion or
Merger of
Rights

1276
Confusion in principal or accessory obligation
Accessory follows the principal (the guaranty being
considered the accessory obligation); hence, if
there is merger with respect to the principal debt,
the guaranty is extinguished
Note: Confusion which takes place in the person of
any of the latter does not extinguish the
obligation.

Confusion or
Merger of
Rights

Illustra,on





Debtor

AA






Guarantor

OWES 3,000






Creditor

Z
Merger of Principal Debtor or Creditor

Illustra,on





Debtor





Guarantor

OWES 3,000






Creditor
3rd person

A X

Merger of Principal Debtor or Creditor

Illustra,on




Debtor





Guarantor

OWES 3,000






Creditor

Z
Merger of Principal Debtor or Creditor

Illustra,on




Debtor





Guarantor

OWES 3,000





Creditor
3rd person

GX

Merger of Principal Debtor or Creditor

Extinguishment of an accessory obligation


The confusion of the creditor with the person of the guarantor
does not extinguish the principal obligation.
A owes 3,000 to X with a guaranty of LOT A.
LOT A was foreclosed and X bought in a public auction.
Thus, the guaranty is extinguished, but the principal
obligation of paying 3,000 is not.

Confusion or
Merger of
Rights

Sameness of the obligation

A and B jointly owns LOT A.


A set ups improvement to LOT A worth 100,000.
Both A and B sells LOT A to C.

Held:
Both A and B do not have any more right to the property,
but A may claim reimbursement for the improvements he
introduced. (Testate Estate of Mota v. Serra)

Confusion or
Merger of
Rights

Compensation

WHAT IS COMPENSATION+ EFFECT OF COMPENSATION?


Meaning of Compensation

It is the extinguishment to the concurrent amount of


the debtors or obligations of two persons who, in their
own right, are reciprocally principal debtors and creditors
of each other.

Effect of compensation

Involves simultaneous balancing of two obligations


(cum ponder - to weigh together) in order to totally
extinguish them if they are of the same amount or to the
extent in which the amount of one is covered by that of
the other, if different amount.

Compensation

WHY COMPENSATION?
Prevention of unnecessary suits and payments thru mutual
extinction by operation of law of concurring debts (Nadela
vs Engineering and Construction Corporation)
1.
Compensation as a specie of abbreviated payment
(facility of
2. payment and guaranty for the effectiveness of credit);
3.
As a more convenient and less expensive realization
of two payments (simplified payment)
4.
Economic utility for credit and for saving the use of
money in transactions, simplifying accounting
5. Guaranty against fraud

Compensation

HOW WILL COMPENSATION TAKE PLACE?


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

According to cause or origin

Legal this takes place by opera,on of law, and need not be pleaded (1279, 1290).
Voluntary or conven,onal this is due to the agreement of the par,es EVEN IN THE ABSENCE
OF SOME REQUIREMENTS (as stated in Art.1279) (Art. 1282)

According to its extent or effect

Total if both obliga,ons are completely ex,nguished because they are of the same or equal
amounts (1281).
Par,al when a balance remains (hence, there is a par,al compensa,on in the larger of the
two debts)

Compensation

REQUISITES OF LEGAL COMPENSATION:


(1) That each one of the obligors be bound principally, and that
he be at the same time a principal creditor of the other;
(2) That both debts consist in a sum of money, or if the things
due are consumable, they be of the same kind, and also of the
same quality if the latter has been stated;
(3) That the two debts be due;
(4) That they be liquidated and demandable;
(5) That over neither of them there be any retention or
controversy, commenced by third persons and communicated in
due time to the debtor (Art. 1279).

Compensation

FIRST REQUISITE:
That each of the obligors be bound principally, and that he be at
the same time a principal creditor of the other.
(1) That there must be a relationship of debtor and creditor
(2) There must be two debts and two credits
(3) They must be generally be bound as principals (not in their
representative capacity)
Example: G, as guardian for W, is a creditor of D. D in turn is a
creditor of G who owes him a personal debt. There can be NO
compensation because it is W who is the real creditor, not G
(Escano v. Heirs of Escano) (PARAS 467)

Compensation

SECOND REQUISITE:
That both debts consist in a SUM OF MONEY, or if the things
due are CONSUMABLE (FUNGIBLE), they be of the same kind,
and also of the same quality if the latter has been stated.

Consumable or Fungible

T h e w o rd c o n s u m a b l e m u s t b e t a k e n t o m e a n
fungible (susceptible of substitution, if such be the intention)
(PARAS 468). A thing may be fungible (can be substituted) but
not consumable.
Example: A owes B a fountain pen (generic) and B owes A also a fountain
pen (generic). Here, compensation may happen since both items are
fungible (although not consumable). Had the fountain pen of A be a
specific thing, there can be no compensation. Similarly, 10 sacks of rice is
not the same as 10 sacks of corn.

Compensation

THIRD REQUISITE:
That both debts are due
Statutory Construction
Due means that the period has arrived, or the condition has
been fulfilled. On the other hand, demandable may refer to
the fact that neither of the debts has prescribed, or that the
obligation is not invalid or illegal. Natural obligations are not
legally demandable
A debt that has prescribed is no longer demandable and
consequently cannot be compensated (Montilla v. Augustinian
Corp.)

Compensation

FOURTH REQUISITE:
That they be LIQUIDATED and DEMANDABLE

Liquidated

These are debts where the exact amount has already been
determined, though not necessarily in figures since capacity of
being arrived at by simple arithmetical processes would be
enough.
If damages are asked for, and the amount is disputed, the debt
cannot be said to be already a liquidated one.
Once
liquidated by a judgment, however, a set-off asked for in a
counterclaim would be proper
Damages cannot be recovered if ones claim is still subject to
litigation (Salinap v. Judge del Rosario) (PARAS 469)

Compensation

FIFTH REQUISITE:
That over neither of them there be any retention or controversy,
commenced by third persons and communicated in due time to
the debtor.

RULE ON TAXES:
GENERAL RULE - taxes, being obligations of public interest, and
governed by special laws, are not subject to set-off or
compensation. The government and the tax payer are not
creditors and debtors of each other. Debts are due to the
government in its corporate capacity while taxes are due to its
sovereign capacity.
EXCEPTION where both the claims of the government and the
taxpayer against each other have already become due and
demandable as well as fully liquidated .

Compensation

FIFTH REQUISITE:
That over neither of them there be any retention or controversy,
commenced by third persons and communicated in due time to
the debtor.

RULE ON TAXES:
GENERAL RULE - taxes, being obligations of public interest, and
governed by special laws, are not subject to set-off or
compensation. The government and the tax payer are not
creditors and debtors of each other. Debts are due to the
government in its corporate capacity while taxes are due to its
sovereign capacity.
EXCEPTION where both the claims of the government and the
taxpayer against each other have already become due and
demandable as well as fully liquidated .

Compensation

NEGATIVE REQUISITES:
(1)
Neither of the debts must there be any retention or controversy commenced by
third persons and communicated in due time to the debtor. Thus, there can be no
legal compensation when ones claim against another is still the subject of court
litigation.
(2)
There must have been NO waiver of the compensation. Although this does not
mean that a waiver is precluded since this would not be contrary to public policy.
(3)
The compensation of the debts must not have been prohibited by law. The
compensation of the following are prohibited:
a. debts arising from a depositum (except bank deposits, which are by law
considered as loans to the bank) (Art. 1287)
b. debts arising from the obligations of a depository (Art. 1287)
c. debts arising from the obligations of a bailee in commodatum (like the
borrower of a bicycle wherein the borrowing is without compensation) (Art. 1287)d.
debts arising from a claim for future support due by gratuitous title (Art. 1287)
e. debts consisting in civil liability arising from a penal offense (Art. 1287)

Compensation

Rules regarding actions and liabilities of


creditor, debtor and other interested parties
First Rule:

The guarantor may set up compensation as regards what the


creditor may owe the principal debtor (Article 1280)

This is actually an exception to the general rule that only the


principal debtor can set up against his creditor what the latter
owes him.

Compensation

Rules regarding actions and liabilities of


creditor, debtor and other interested parties
Second Rule:

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 (1283)

Judicial compensation (compensation when so declared by


final judgment of a court in a suit).

It requires:

Both parties must prove their respective claims

All requisites under Art. 1279 must be present, except that


at the time of the pleading, the need not yet be liquidated. The
liquidation must take place during the proceedings. (Paras)

Compensation

Rules regarding actions and liabilities of


creditor, debtor and other interested parties
Third Rule:

Prior to rescission or annulment, debts may be compensated


against each other (1284)
1. Rules on the three cases of compensation which take place
after an assignment of rights made by the creditor (1285)
a. Assignment with the consent of debtor
Debtor cannot set up against the assignee the
compensation which would pertain to him against the assignor
Unless assignor was notified by the debtor at the time he
gave his consent, that he reserved his right to the compensation

Compensation

Rules regarding actions and liabilities of


creditor, debtor and other interested parties
Third Rule:

Prior to rescission or annulment, debts may be compensated


against each other (1284)
1. Rules on the three cases of compensation which take place
after an assignment of rights made by the creditor (1285)
b. Assignment with the knowledge but without the consent of
debtor
Debtor may set up the compensation to debts previous to
the cession (assignment), but not of subsequent ones

Compensation

Rules regarding actions and liabilities of


creditor, debtor and other interested parties
Third Rule:

Prior to rescission or annulment, debts may be compensated


against each other (1284)
1. Rules on the three cases of compensation which take place
after an assignment of rights made by the creditor (1285)
c.

Assignment without the knowledge of the debtor


Debtor may set up the compensation of all credits prior to
the same and also later ones until he had knowledge of the
assignment.

Compensation

WHEN COMPENSATION CANNOT TAKE PLACE


FIRST:

When one of the debts arises from a depositum or from the obligations of
a depositary or of a bailee in a commodatum (1287, par 1)

Depositum: when a person receives a thing belonging to another


with the obligation of safely keeping it and of returning the same (Art.
1962)

Commodatum:

a gratuitous contract whereby one of the parties


delivers to another something not consumable so that the latter may use
the same for a certain time and return it. (Art. 1933)
The purpose of the rule is to prevent breach of trust and confidence (in all
cases: depositum, obligations of a depository or of a bailee in a
commodatum)
However, according to Paras, the depositor is allowed to claim
compensation. This is a case of facultative compensation.

Compensation

WHEN COMPENSATION CANNOT TAKE PLACE


SECOND:
Claim for support due by gratuitous title without prejudice to paragraph 2
of Article 301 (1287, par 2)
- The right to receive support cannot be compensated because it is
essential to the life of the recipient.
- Exception to this rule: support in arrears may be compensated because
the support in arrears is no longer needed as the recipient was able to
exist even without the support of the provider.

Compensation

WHEN COMPENSATION CANNOT TAKE PLACE


THIRD:
When debt consists in civil liability arising from a penal offense
Compensation would be improper and inadvisable because the
satisfaction of such obligation is imperative. (Report of the Code
Commission; Metropolitan Bank & Trust Company vs. Tonda, 338 SCRA
254 [2000].)

Compensation

WHEN COMPENSATION CANNOT TAKE PLACE


FOURTH:
Damages suffered by a partnership thru the fault of a partner cannot be
compensated with profits and benefits which he may have earned for the
partnership by his industry. (Art. 1794).
Here, the partner has the DUTY to obtain benefits for the firm, and a duty
not to be at fault, there can be NO COMPENSATION BECAUSE BOTH
ARE DUTIES, and the partner is the debtor in both instances.

Compensation

Novation

DEFINITION
It is the total or partial extinction of an obligation by the
creation of a new obligation which substitutes it.
What sets it apart from other forms of extinguishment:
juridical act with dual function
Remember: Novation is NEVER presumed.

Novation

Art. 1292 - It only takes effect if:


1.

Expressly declared

Ex. This agreement will supersede the previous


arrangements

2. Implied due to incompatibility of the old


and new obligations on every point
- Test of incompatibility: The two contracts cannot
stand together.
- incompatibility exists in the juridical tie, object or
principal conditions, or subjects of the obligation

Novation

Requisites: [VIEN]
1. Previous valid obligation
2. Intent to novate (debtor must be released
from the previous obligation)
3. Extinguishment of the old obligation
4. Validity of the new obligation

Novation

RULES concerning the validity of the old or new obligation:


1.

2.

3.
4.

5.

If the original obligation was VOID,

GR: new obligation is ALSO VOID.

Exception:

when annulment may be claimed by the debtor, OR

when ratification validates acts which are voidable (Art 1298)


If original obligation was VOIDABLE, two possible scenarios:

if the old obligation was RATIFIED BEFORE NOVATION, then the NEW obligation is VALID

If the old obligation was VOIDABLE and there was novation, the NEW obligation is VALID even if NOT
RATIFIED, but VOIDABLE at the instance of the debtor.
If new obligation is VOID,

GR: then original obligation SUBSISTS.

Exception: Unless parties intended the extinguishment of the old obligation in any event (Art 1297)
If new obligation is VOIDABLE,

GR: the new obligation is STILL VALID

Exception: But if new obligation is ANNULLED and set aside, then the original obligation SUBSIST (Ratio:
valid until annulled)
If the original obligation is subject to a SUSPENSIVE or RESOLUTORY condition

GR: new obligation will also be subject to the SAME suspensive or resolutory condition

Exception: UNLESS otherwise stipulated (Art 1299)

Modes of Novation: Art. 1291


1. Changing the OBJECT or PRINCIPAL Conditions
2. Substituting the person of the DEBTOR
3. Subrogating a third person to the rights of the
CREDITOR

Novation

Novation

Changing the OBJECT or


PRINCIPAL Conditions

Substituting the person of the DEBTOR


Novation

Expromision

i. Initiated by a Third Person to replace the debtor


ii. Consent of creditor
iii. Old debtor is released from obligation

Delegacion

i. Initiated by original Debtor


ii. Consent of creditor
iii. Consent of new debtor

Can the creditor go still go after the old debtor in certain cases?
a.

If the old debtor did not initiate the novation - Art. 1294 - applies to Expromision
i.
Rule is the creditor CANNOT go after the old debtor in case of insolvency or non-fulfillment of
the new debtor if the substitution is without the knowledge or against the will of the debtor
ii.
If it was with the knowledge, the creditor still cannot be held liable for the insolvency or nonfulfillment of the new debtor since he would be placed in a worse position than in delegacion
(where the ground for his liability is only for insolvency of the new debtor).

b.

If the old debtor initiatied the novation - Art. 1295 - applies to Delegacion
i.
GR: Creditor cannot hold the old debtor liable in case of insolvency of new debtor
ii.
Exception: If creditor can prove either:
i.
Insolvency was already existing and of public knowledge at the time of the substitution;
OR
ii.
Insolvency was already existing and known to the debtor at the time of the substitution

Subrogating a third person in the


rights of the CREDITOR
> vs. Assignment of credit = transfer of right of
assignor to an assignee who would have the right to
proceed against the debtor.
difference from subrogation: consent of debtor is not
necessary and assignment takes effect upon the
knowledge of the debtor. (Licaros vs. Gatmaitan)

Novation

Subrogating a third person in the


rights of the CREDITOR
A. Conventional/voluntary by agreement of all the
parties
i. Consent of old creditor
ii. Consent of debtor
iii. Consent of new creditor

Novation

Subrogating a third person in the


rights of the CREDITOR
B. Legal takes place by operation of law
i. GR: Not presumed
ii. Exception: Art. 1302

1. Creditor pays another preferred creditor without


debtors knowledge
2. Third person not interested in the obligation
pays with the approval of the debtor
3. Third person interested pays without knowledge
of the debtor (without prejudice to the effects of
confusion as to the latters share)

Novation

General Effects:
1. Extinguishment of old obligation and creation of a new one
2. Extinguishment of accessory obligations,

GR: Accessory follows the principal


Exception: Art 1296 ...accessory obligations may subsist
only insofar as they may benefit third persons who did not
give their consent.

3. As to new debtor, he has a right to beneficial reimbursement


from old debtor if made without the knowledge or against the
will of the old debtor (Art. 1236) or reimbursement and
subrogation if made with the consent of the old debtor (Art.
1237).

Novation

Jurisprudence:
> Situations that RESULT to novation according to cases assigned:
Compromise agreements after a final and executory
judgment of trial court (Dormitorio vs Fernandez)

Novation

Jurisprudence:
> Situations that DO NOT result to novation according to cases
assigned:

Acceptance of surety bond = change only in the terms of payment


(Magdalena Estate vs Rodriguez)
Acceptance of partial payment without agreement to release the original
debtor from responsibility (Quinto vs People)
Change in the manner of payment
Payment by an accommodation party = accommodated party is still the
sole debtor (Garcia vs Llamas)
If it is specifically stated as a temporary agreement (Broadway Centrum
Condo vs Tropical Hut)
Restructuring agreements = change only the schedule of payments
(California Bus Line vs State Investment)
If there was no consent from the creditor for the change in the person of
the debtor (Sime Darby Philippines vs Good Year)

Novation