I.
EXTINGUISHMENT OF OBLIGATIONS
PAYMENT OR PERFORMANCE
ART 1232 – “Payment means not only the delivery of
money but also the performance, in any other manner of
an obligation”
• It is the fulfillment of the prestation due that
extinguishes the obligation by the realization of the
purposes for which it was constituted • It is a juridical act
which is voluntary, licit and made with the intent to
extinguish an obligation • Requisites:
a.) person who pays
b.) the person to whom payment is made
c.) the thing to be paid
d.) the manner, time and place of payment etc
• The paying as well as the one receiving should have the
requisite capacity • Kinds:
a.) normal –when the debtor voluntarily performs the
prestation
stipulated
b.)abnormal – when he is forced by means of a judicial
proceeding either to comply with prestation or to pay
indemnity
ART 1233 – “A debt shall not be understood to have
been paid unless the thing or service in which the
oligatoin consists has been completely delivered or
rendered, as the case may be”
• States 2 requisites of payment:
a.) identity of prestation - the very thing or service due
must
be delivered or released
b.) integrity – prestation must be fulfilled completely
• Time of payment – the payment or performance must
be on the date stipulated (may be made even on Sundays
or on any holiday, although some states like the
Negotiable Instruments Law states that payment in such
case may be made on the next succeeding business day) •
The burden of proving that the obligation has been
extinguished by payment devolves upon the debtor who
offers such a defense to the claim of the plaintiff creditor
• The issuance of a receipt is a consequence of usage and
good faith which must be observed (although our Code
has no provision on this) and the refusal of the creditor to
issue a receipt without just cause is a ground for
consignation under Art 1256 ( if a receipt has been issued
by payee, the testimony alone of payer would be
insufficient to prove alleged payments)
ART 1234 – “If the obligation has been substantially
performed in good faith, the obligor may recover as
though there had been a strict and complete fulfillment,
less damages suffered by the obligee”
• In order that there may be substantial performance of
an obligation, there must have been an attempt in good
faith to perform, without any willful or intentional
departure therefrom • The non-performance of a material
part of a contract will prevent the performance from
amounting to a substantial compliance • A party who
knowingly and willfully fails to perform his contract in
any respect, or omits to perform a material part of it
cannot be permitted under the protection of this rule to
compel the other party to perform; and the trend of the
more recent decisions is to hold that the percentage of
omitted or irregular performance may in and of itself be
sufficient to show that there has not been a substantial
performance • The party who has substantially
performed may enforce specific performance of the
obligation of the other party or may recover damages for
their breach upon an allegation of performance, without
proof of complete fulfillment.
• The other party, on the other hand, may by an
independent action before he is sued, or by a
counterclaim after commencement of a suit against him,
recover from the first party the damages which he has
sustained by the latter’s failure to completely fulfill his
obligation
ART 1235 – “When the oblige accepts the performance,
knowing its incompleteness or irregularity, and without
expressing any protest or objection, the obligation is
deemed fully complied with”
• A person entering into a contract has a right to insist on
its performance in all particulars, according to its
meaning and spirit. But if he chooses to waive any of the
terms introduced for his own benefit, he may do so. • But
he is not obliged to accept anything else in place of that
which he has contracted for and if he does not waive this
right, the other party cannot recover against him without
performing all the stipulations on is part • To constitute a
waiver, there must be an intentional relinquishment of a
known right. A waiver will not result from a mere failure
to assert a claim for defective performance/payment.
There must have been acceptance of the defective
performance with actual knowledge if the
incompleteness or defect, under circumstances that
would indicate an intention to consider the performance
as complete and renounce any claim arising from the
defect • A creditor cannot object because of defects in
performance resulting from his own acts or directions
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 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
• Reason for this article: whenever a third person pays
there is a modification of the prestation that is due. •
Generally, the 3rd person who paid another’s debt is
entitled to recover the full amount he paid. The law,
however limits his recovery to the amount by which the
debtor has been benefited, if the debtor has no
knowledge of, or has expressed his opposition to such
payment
• If the debt has been remitted, paid compensated or
prescribed, a payment by a third person would constitute
a payment of what is not due; his remedy would be
against the person who received the payment under such
conditions and not against the debtor who did not benefit
from the payment • payment against debtor’s will – even
if payment of the third party is against the will of the
debtor, upon payment by the third party, the obligation
between the debtor and creditor is already extinguished
ART 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
• This article gives to the third person who paid only a
simple personal action for reimbursement, without the
securities, guaranties and other rights recognized in the
creditor, which are extinguished by the payment
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 any case valid as to the creditor who
has accepted it
ART 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 valied, without
prejudice to the provisions of article 1427 under the Title
on “Natural Obligations”
• consignation will not be proper here. In case the
creditor accepts the payment, the payment will not be
valid except in the case provided in article 1427
ART 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
• the authority of a person to receive payment for the
creditor may be
a.) legal – conferred by law (e.g.,guardian of the
incapacitated, administrator of the estate of the deceased)
b.) conventional – when the authority has been given by
the creditor himself (e.g., agent who is appointed to
collect from the debtor
• payment made by the debtor to a wrong party does not
extinguish the obligation as to the creditor (void), if there
is no fault or negligence which can be imputed to the
latter (even when the debtor acted in utmost good faith,
or through error induced by the fraud of the 3rd person).
It does not prejudice the creditor and the accrual of
interest is not suspended by it
Art. 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. (1163a)
• payment shall be considered as having benefited the
incapacitated person if he made an intelligent and
reasonable use thereof, for purposes necessary or useful
to him, such as that which his legal representative would
have or could have done under similar circumstances,
even if at the time of the complaint the effect of such use
no longer exists (e.g., taxes on creditor’s property,
money to extinguish a mortgage on creditor’s property) •
the debtor is not released from liability by a payment to
one who is not the creditor nor one authorized to receive
the payment, even if the debtor believed in good faith
that he is the creditor, except to the extent that the
payment inured to the benefit of the creditor • in addition
to those mentioned above, payment to a third person
releases the debtor:
a.) when, without notice of the assignment of credit, he
pays to the original creditor
b.) when in good faith he pays to one in possession of the
credit
• even when the creditor receives no benefit from the
payment to a third person, he cannot demand payment
anew, if the mistake of the debtor was due to the fault of
the creditor
Art. 1242. Payment made in good faith to any person in
possession of the credit shall release the debtor. (1164)
• the person in possession of the credit is neither the
creditor nor one authorized by him to receive payment,
but appears under the circumstances of the case, to be the
creditor. He appears to be the owner of the credit,
although in reality, he may not be the owner (e.g., an heir
who enters upon the hereditary estate and collects the
credits thereof, but who is later deprived of the
inheritance because of incapacity to succeed) • it is
necessary not only that the possession of the credit be
legal, but also that the payment be in good faith
Art. 1243. Payment made to the creditor by the debtor
after the latter has been judicially ordered to retain the
debt shall not be valid. (1165)
• the payment to the creditor after the credit has been
attached or garnished is void as to the party who
obtained the attachment or garnishment, to the extent of
the amount of the judgment in his favor. • The debtor
upon whom garnishment order is served can always
deposit the money in court by way of consignation and
thus relieve himself from further liability
Art. 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. (1166a)
• Upon agreement of consent of the creditor, the debtor
may deliver a different thing or perform a different
prestation in
lieu of that stipulated. In this case there may be dation in
payment or novation • The defects of the thing delivered
may be waived by the creditor, if he expressly so
declares or if, with knowledge thereof, he accepts the
thing without protest or disposes of it or consumes it
Art. 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. (n)
• This is the delivery and transmission of ownership of a
thing by the debtor to the creditor as an accepted
equivalent of the performance of the obligation. • jurisdiction can be used for the payment of debts, public
The property given may consist not only of a thing but
also of a real right (such as a usufruct)
• Considered as a novation by change of the object
• Where the debt is money, the law on sale shall govern;
in this case, the act is deemed to be a sale with the
amount of the obligation to the extent that it is
extinguished being considered as price
Art. 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. (1167a)
• If there is disagreement between the debtor and the
creditor as to the quality of the thing delivered, the court
should decide whether it complies with the obligation,
taking into consideration the purpose and other
circumstances of the obligation • Both the creditor and
the debtor may waive the benefit of this article
Art. 1247. Unless it is otherwise stipulated, the
extrajudicial expenses required by the payment shall be
for the account of the debtor. With regard to judicial
costs, the Rules of Court shall govern. (1168a)
• This is because the payment is the debtor’s duty and it
inures to his benefit in that he is discharged from the
burden of the obligation
• 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 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. (1169a)
• The creditor who refuses to accept partial prestations
does not incur delay except when there is abuse of right
or if good faith requires acceptance
• This article does not apply to obligations where there
are several subjects or where the various parties are
bound under different terms and conditions
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. The delivery of promissory
notes payable to order, or bills of exchange or other
mercantile documents shall produce the effect of
payment only when they have been cashed, or when
through the fault of the creditor they have been impaired.
In the meantime, the action derived from the original
obligation shall be held in the abeyance. (1170)
• legal tender means such currency which in a given
and private, and which cannot be refused by the creditor
• so long as the notes were legal tender at the time they
were paid or delivered, the person accepting them must
suffer the loss if thereafter they became valueless
• the provisions of the present article have been modified
by RA No. 529 which states that payments of all
monetary obligations should now be made in currency
which is legal tender in the Phils. A stipulation providing
payment in a foreign currency is null and void but it does
not invalidate the entire contract
• A check, whether a manager’s check or an ordinary
check is not legal tender and an offer of the check in
payment of debt is not a valid tender of payment
Art. 1250. In case an extraordinary inflation or deflation
of the currency stipulated should supervene, the value of
the currency at the time of the establishment of the
obligation
shall be the basis of payment, unless there is an
agreement to the contrary. (n)
• Applies only where a contract or agreement is
involved. It does not apply where the obligation to pay
arises from law, independent of contracts • Extraordinary
inflation of deflation may be said to be that which is
unusual or beyond the common fluctuations in the value
of the currency, which parties could not have reasonably
foreseen or which was manifestly beyond their
contemplation at the time when the obligation was
constituted
Art. 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.(1171a)
• Since the law fixes the place of payment at the domicile
of the debtor, it is the duty of the creditor to go there and
receive payment; he should bear the expenses in this case
because the debtor cannot be made to shoulder the
expenses which the creditor incurs in performing a duty
imposed by law and which is for his benefit.
• But if the debtor changes his domicile in bad faith or
after he has incurred in delay, then the additional
expenses shall be borne by him
• When the debtor has been required to remit money to
the creditor, the latter bears the risks and the expenses of
the transmission. In cases however where the debtor
chooses this means of payment, he bears the risk of loss.
APPLICATION OF PAYMENTS
Art. 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. (1172a)
• It is necessary that the obligations must all be due. It is
only in case of mutual agreement of the parties or upon
the consent of the party in whose favor the term was
established that payments may be applied to obligations
which have not yet matured
• It is also necessary that all the debts be for the same
kind, generally of a monetary character. This includes
obligations which were not originally of a monetary
character, but at the time of application of payment, had
been converted into an obligation to pay damages by
reason of breach or nonperformance.
• If the debtor makes a proper application of payment but
the creditor refuses to accept it because he wants to apply
it to another debt, such creditor will incur in delay
• If at the time of payment, the debtor does not exercise
his right to apply it to any of his debts, the application
shall be understood as provided by law, unless the
creditor makes the application and his decision is
accepted by the debtor. This application of payment can
be made by the creditor only in the receipt issued at the
time of payment (although the application made by
creditor may be contested by the debtor if the latter’s
assent to such application was vitiated by such causes as
mistake, violence, intimidation, fraud, etc) • The debtor
and the creditor by agreement, can validly change the
application of payment already made without prejudice
to the rights of third persons acquired before such
agreement
Art. 1253. If the debt produces interest, payment of the
principal shall not be deemed to have been made until
the interests have been covered. (1173)
• Applies both to compensatory interest (that stipulated
as earnings of the amount due under the obligation) and
to interest due because of delay or mora on the part of
the debtor
Art. 1254. When the payment cannot be applied in
accordance with the preceding rules, or if application can
not be inferred from other circumstances, the debt which
is most onerous to the debtor, among those due, shall be
deemed to have been satisfied. If the debts due are of the
same nature and burden, the payment shall be applied to
all of them proportionately. (1174a)
• As to which of 2 debts is more onerous is
fundamentally a question of fact, which courts must
determine on the basis of the circumstances of each case
• Example:
PAYMENT BY CESSION
Art. 1255. The debtor may cede or assign his property to
his creditors in payment of his debts. This cession, unless
there is stipulation to the contrary, shall only release the
debtor from responsibility for the net proceeds of the
thing assigned. The agreements which, on the effect of
the cession, are made between the debtor and his
creditors shall be governed by special laws. (1175a)
• Consists of the abandonment of the universality of the
property of the debtor for the benefit of his creditors in
order that such property may be applied to the payment
of the credits
• Must be initiated by debtors
• Such assignment does not have the effect of making the
creditors the owners of the property of the debtor unless
there is an agreement to that effect
TENDER OF PAYMENT AND CONSIGNATION
Art. 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. (1176a)
• Tender of payment : manifestation made by the debtor
to the creditor of his desire to comply with his
obligation, with the offer of immediate performance;
preparatory act which precedes consignation
• Consignation : the deposit of the object of the
obligation in a competent court in accordance with the
rules prescribed by law, after the tender of payment has
been refused or because of circumstances which render
direct payment to creditor impossible or inadvisable;
constitutes payment; must follow, supplement or
complete the tender of payment in order to discharge the
obligation
• Tender of payment by certified check is valid; a mere
check would also be valid for tender of payment if the
creditor makes no prompt objection, but this does not
stop the latter from later demanding payment in cash
• 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 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. 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 the interest is not suspended from the time of such
tender.
• Requisites of consignation:
1.) There was a debt due
2.) The consignation of the obligation was made because
of
some legal cause provided in the present article
3.) That previous notice of the consignation has been
given to
persons interested in the performance of the obligation
4.) The amount or thing due was placed at the disposal of
the
court
5.) After the consignation had been made the persons
interested
were not notified thereof
• If the reason for consignation is the unjust refusal of the
creditor to accept payment, it must be shown:
1.) That there was previous tender of payment, without
which the
consignation is ineffective
2.) That the tender of payment was of the very thing due,
or in
case of money obligations that legal tender currency was
offered
3.) That the tender of payment was unconditional and
4.) That the creditor refused to accept payment without
just
cause
Art. 1257. In order that the consignation of the thing due
may release the obligor, it must first be announced to the
persons interested in the fulfillment of the obligation.
The consignation shall be ineffectual if it is not made
strictly in consonance with the provisions which regulate
payment. (1177)
• The lack of notice does not invalidate the consignation
but simply makes the debtor liable for the expenses
• The tender of payment and the notice of consignation
sent to the creditor may be made in the same act. In case
of absent or unknown creditors, the notice may be made
by publication
Art. 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. (1178)
Art. 1259. The expenses of consignation, when properly
made, shall be charged against the creditor. (1179)
• The consignation is properly made when:
1.) after the thing has been deposited in court, the
creditor accepts the consignation without objection and
without any reservation of his right to contest it because
of failure to comply with any of the requisites for
consignation and
2.) when the creditor objects to the consignation but the
court, after proper hearing, declares that the consignation
has been validly made *in these cases, the creditor bears
the expenses of the consignation
Art. 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. (1180)
• Consignation has a retroactive effect and the payment
is deemed to have been made at the time of the deposit
of the thing in court or when it was placed at the disposal
of the judicial authority
• The effects of consignation are: 1.) the debtor is
released in the same manner as if he had performed the
obligation at the time of the consignation because this
produces the same effect as a valid payment,
2.) the accrual of interest on the obligation is suspended
from the moment of consignation,
3.) the deteriorations or loss of the thing or amount
consigned occurring without fault of the debtor must be
borne by the creditor, because the risks of the thing are
transferred to the creditor from the moment of
deposit
4.) any increment or increase in value of the thing after
the consignation inures to the benefit of the creditor. •
When the amount consigned does not cover the entire
obligation, the creditor may accept it, reserving his right
to the balance. If no reservations are made, the
acceptance by the creditor of the amount consigned may
be regarded as a waiver of further claims under the
contract
Art. 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. (1181a)
• When the consignation has already been made and the
creditor has accepted it or it has been judicially declared
as proper, the debtor cannot withdraw the thing or
amount deposited unless the creditor consents thereto. If
the creditor authorizes the debtor to withdraw the same,
there is a revival of the obligation, which has already
been extinguished by the consignation, and the
relationship of debtor and creditor is restored to the
condition in which it was before the consignation. But
third persons, solidary co-debtors, guarantors and
sureties who are benefited by the consignation are not
prejudiced by the revival of the obligation between the
debtor and the creditor
CASES
ARRIETA v NATIONAL RICE AND CORN CORP
(NARIC)
Plaintiff participated in a public bidding called by
NARIC for the supply of 20k metric tons of Burmese
rice and was awarded the contract. Subsequently,
plaintiff and NARIC entered into a Contract of Sale of
Rice (in which the defendant in turn would commit itself
to pay by means of a letter of credit in US currency in
favor of the plaintiff and/or supplier in Burma. Despite
its commitment to pay immediately, the defendant took
the first step to open the letter of credit one month after
the execution of the contract (July 30 1952). It was stated
in the application (for the LOC) that they do not have a
sufficient deposit with PNB to cover the amount required
as a condition for the opening of LOC and they were
asking to be treated as a special case in consideration to
the fact that its supplier has a deadline to meet which is
on August 4, 1952.
On August 4 1952, PNB informed appellant NARIC that
its application for LOC has been approved with the
condition that 50% marginal cash deposit be paid and
that drafts are to be paid upon presentment. However,
NARIC is not in any financial position to meet the
condition. Consequently, the credit instrument applied
for was opened only on September 8 1952 (more than 2
mos from the execution of the contract – after the 15 day
grace period). As a result of the delay, the allocation of
appllee’s supplier in Rangoon was cancelled and the 5%
deposit or P200K was forfeited.
ISSUE: WON NARIC is liable to pay plaintiff damages
HELD:
What singularly delayed the opening the stipulated LOC
which in turn, caused the cancellation of the allocation in
Burma (and the forfeiture of the 5% deposit) was the
inability of the appellant corporation to meet the
condition imposed by the Bank for granting the same.
Also, its culpability arises from its willful and deliberate
assumption of contractual obligations even as it was well
aware of its financial incapacity to undertake the
prestation (manifested in its letter of application with
PNB) Article 1170 provides that those who in the
performance of their obligations are guilty of fraud,
negligence, or delay and those who in any manner
contravene the tenor thereof are liable for damages.
*In view of RA 527 which specifically requires the
discharge of obligations only “in any coun or currency
which at the time of payment is legal tender for public
and private debt”, the award of damages in US dollars
made by the lower court is modified by converting it into
Philippine pesos at the rate of exchange prevailing at the
time the obligation was incurred or when the contract in
question was executed.
KALALO v LUZ
On November 17 1959, plaintiff-appellee Octavio
Kalalo, a licensed civil engineer entered into an
agreement with defendant-appellant Alfredo Luz, a
licensed architect whereby the former was to render
engineering design services to the latter for fees, as
stipulated in the agreement, Kalalo sent to Luz a
statement of account to which was attached an itemized
statement of architect’s account according to which the
total engineering fee asked by engineer amounted to
P116,565 from which sum was to be deducted the
previous payments made in the amount of P57K. Luz
then sent a resume of fees to Kalalo (May 18 1962). Said
fees, according to appellant amounted to P10,861.08
instead of the amount claimed
by appellee. On June 14 1962, appellant sent appellee a
check for said amount which appellee refused to accept
as full payment of the balance of the fees due him.
Luz contends that some of Kalalo’s services were not in
accordance with the agreement and his claims were not
justified by the services actually rendered. Luz also
claims that the statement of account given to him by
Kalalo barred the latter from asserting any claim contrary
to what was stated therein. On the other hand, Kalalo
asserts that when he prepared the said statement of
account, he was laboring an innocent mistake. Second,
Luz was aware of the services actually rendered by
Kalalo and the fees due to the latter under the original
agreement and third, appellant did not rely on the data
appearing in the said statement of account
ISSUES:
1.) WON Kalalo is barred from soliciting a fee different
than that indicated in the statement of account by means
of estoppel (no)
2.) WON the lower court erred in holding that the
balance from LUZ on the IRRI project should be paid on
the basis of the rate of exchange of the US dollar to the
Phil peso at the time of payment of the judgment (no)
HELD: Court affirmed decision of the lower court
stating that the amount due to Kalalo was $28k as his fee
in IRRI Institute Project (to be converted into Phil peso
on the basis of the current rate of exchange at the time of
the payment of the judgment
RATIO:
1.) Estoppel did not rise in this case because the act of
the party sought to be estopped is due to ignorance
founded on innocent mistake. Also, none of the elements
in relation to party claiming estoppel are present
(elements: 1.) lack of knowledge to the facts in question,
2.) reliance in good faith upon the conduct or statements
of the party to be estopped 3.) action or inaction based
thereon
2.) RA 529 (requiring payment in foreign currency must
be discharged in Phil currency) does not provide for the
rate of exchange for the payment of obligation incurred
after the enactment of said Act. The logical conclusion is
that the rate of exchange should be that prevailing at the
time of payment for such contracts.
NEW PACIFIC TIMBER & SUPPLY CO INC v
SENERIS
Petitioner is the defendant in a complaint for collection
of money filed by the private respondent. Subsequently,
a compromise judgment was rendered in accordance
with an amicable settlement entered into by the parties.
However, petitioner failed to comply with his obligation.
Because of this, the respondent judge, upon motion of
private respondent, issued an order for the issuance of a
writ of execution for the amount of P63,130. Pursuant to
that, personal properties of petitioner were also levied
upon and set for auction sale. Prior to the day of the
auction sale, petitioner deposited with the Clerk of Court
the sum of P63,130 consisting of P50k in Cashier’s
check and P13,130 in cash. Respondent judge declined
petitioner’s motion for issuance of certificate of
satisfaction of judgment, relying on Sec 63 of the Central
Bank Act stating that checks representing deposit money
do not have legal tender power
ISSUE: WON petitioner’s check payment was a valid
tender so as to extinguish his obligation with the private
respondent
HELD: SC ordered private respondent to accept the sum
of P63,130 under deposit as payment of the judgment
obligation in his favor
RATIO: Since the check deposited had been certified by
the drawee bank, by the certification, the funds
represented by the check are transferred from the credit
of the maker to that of the payee (the latter becomes the
depositor of the drawee bank with rights and duties of
one in such situation). The object of certifying a check,
as regards both parties is to enable the holder to use it as
money.
MCLAUGHLIN v CA
Petitioner Mclaughlin and respondent Flores entered into
a contract of conditional sale of real property. The
contract fixed the total price of the property to P140K
payable as follows: a.) 26,550 upon execution of the
deed and b.) 113,450 due not later than May 31 1977. for
failure of private respondent to pay the balance due on
May 31, 1977, petitioner filed a complaint for the
rescission of the deed of conditional sale. Subsequently,
the parties entered a compromise agreement stating that
the indebtedness of private respondent to petitioner
amounts to P119,050.71 payable as follows: a.) 50k upon
the signing of agreement and b.) 69k+ in 2 equal
installments (one on June and one on December). As
agreed upon, private respondent paid P50k upon signing
the agreement Pursuant to the compromise agreement
also, private respondent
agreed to pay P1k monthly rental beginning December 5
1979 until the obligation is duly paid. The compromise
agreement also stipulates that in the event the private
respondent fails to comply with his obligation, plaintiff
will be entitled to rescission of the contract.
Petitioner filed a motion for rescission alleging that
private respondent failed to pay the installment due on
June 1980 and since June 1980 he had failed to pay a
monthly rental of P1k.TC granted the motion. On Nov
1980, private respondent filed a motion for
reconsideration tendering at the same time a Pacific
banking Corp certified manager’s check worth
P76,059.71. CA nullified orders of the TC
ISSUES:
WON private respondent’s default in payment
constitutes a substantial breach of the contract so as to
warrant its rescission (no)
WON private responden’ts offer of payment by certified
check is a valid tender (yes)
HELD: decision of CA was affirmed. However, since
private respondent did not deposit said amount with the
court, his obligation was not paid and he is liable in
addition for the payment of the monthly rental of P1k
from Jan 1,1981 until said obligation is duly paid
RATIO: Since private respondent as purchaser by
installment has already paid a substantial portion of the
purchase price, it would be inequitable to have the
amount paid forfeited as liquidated damages (as
stipulated in the contract), particularly if tender of
payment was made. Also, private respondent’s tender of
payment of the amount of P76,059.71 was within the 30-
day period granted by law (RA 6552 – a lot installment
buyer is given a grace period to pay installments in
arrears)
Also, the offer of payment by certified check is a valid
tender of payment.
TIBAJIA JR v CA
A suit for collection of a sum of money was filed by
Eden Tan against the Tibajia spouses. A writ of
attachment was issued by the trial court on the deposit
made by the Tibajia spouses in
another case in RTC Caloocan amounting to P442,750
had been garnished. The RTC rendered its decision in
favor of plaintiff Tan ordering the Tibajia spouses to pay
her P300K. Eden Tan filed the correspondeing motion
for execution and the garnished funds at RTC were
levied upon. The Tibajia spouses then delivered to the
deputy sheriff the total money judgment in the ff form:
P262k+ in cashier’s check and P135k+ in cash. Private
respondent Tan refused to accept the payment made by
the Tibajia spouses and instead insisted that the
garnished funds at RTC be withdrawn to satisfy the
judgment obligation.
ISSUE: WON the BPI cashier’s check (P262k+)
tendered by petitioners for payment of the judgment debt
is legal tender
HELD: Pursuant to RA 529, a check is not legal tender
and a creditor may validly refuse payment by check
whether it be a manager’s cashier’s or personal check.
ESGUERRA v VILLANUEVA
Petitioner Esguerra and respondent de Guzman entered
into a contract whereby Esguerra leased to de Guzman a
portion of his building for a term of 10 years beginning
from July 12 1961 for a monthly rental of P300 up to
July 11 1962 and P400 thereafter. De Guzman failed to
pay the rental from February to August 1962 aggregating
P1800, in addition to the sum of P300 (purchase price of
equipment bought by him from the Esguerras. Because
of this, respondent’s mother, Segunda de Guzman
executed in favor of the esguerras a promissory note for
P2,100 (P1000 due on August 12 1962 and P1100 not
later than Augus 31 1962, upon default of the first
installment, the entire value becomes due and
demandable). De Guzman failed to pay both
installmnents so the Esguerras commenced a civil case
against Mrs. De Guzman. They also instituted a civil
case against de Guzman and writs of attachment were
issued. Thereafter, the parties reached a compromise
agreement wherein defendants admit their indebtedness
worth P2,260 . This sum was not paid to the Esguerras
on or before November 26 1962 as stipulated in the
compromise agreement. De Guzman however alleges
that he had delivered to Esguerra through his counsel
P800 on December 1962 and P1460 on January 5 1963
so he filed a motion for the release of the properties
seized. De Guzman maintain and the lower court held
that the receipt of said sums P800 and P1400 by the
Esguerras constituted “acceptance” of the incomplete
and irregular performance of their obligation, having
been made without any protest or objection.
ISSUE: WON Esguerra’s issuance of receipt constituted
acceptance so as to release de Guzman from completing
his obligation (no)
HELD: decision of lower court was reversed
RATIO: The day immediately following the first
payment of P800, the Esguerras asked Judge Villanueva
to issue the corresponding writs of execution in the 2
cases. Thus, the Esguerras patently manifested their
dissatisfaction with – which necessarily implied an
objection or protest to- said partial payment
*the law does not require the protest or objection of the
creditor to be made in a particular manner or at a
particular time. So long as the acts of the creditor at the
time of the incomplete or irregular payment by the
debtor, or within a reasonable time thereafter, evince that
the former is not satisfied with or agreeable to said
payment or performance, the obligation shall not be
deemed fully extinguished.
TOLENTINO v CA
Ceferino dela Cruz died and left his heirs a parcel of
land. The dela Cruzes sold the homestead land to the
Tolentino spouses. The Tolentino spouses constituted a
mortgage over the land together with 2 other parcels of
land in favor of BPI for a loan of P40k. Another
mortgage was constituted over the said properties in
favor of BPI. The Tolentinos failed to pay their mortgage
indebtedness to BPI upon maturity. So a judicial
foreclosure sale was held wherein BPI was the highest
bidder. Meanwhile, on February 4, 1967, the dela Cruzes
filed an action against the Tolentinos for the repurchase
of the homestead land on the ground that they tried to
repurchase said land extrajudicially but the Tolentinos
would not heed their request. The lower court rendered a
decision allowing the dela Cruzes to repurchase the land
and the possession thereof was delivered to the dela
Cruzes upon payment. When Tolentino went to BPI to
redeem the homestead property, she was informed that
she can no longer do so because the property was already
conveyed to the dela Cruzes. The branch manager of BPI
sent a letter to Tolentino stating that they can stil redeem
the 2 other properties before the expiration of the
redemption period upon payment of the balance
remaining (P75,995.07). However, instead of complyinh
with BPI’s advice Tolentino consigned with the Office of
the City Sheriff a crozzed PNB check for P91,995.07.
However, she then issued a stop payment order against
the said crossed check to protect her rights and prevent
BPI from cashing said check without returning all her
properties. Simultaneously with the consignation of the
crossed check, she also filed a complaint
(redemption case) against BPI) for refusing to allow
them to redeem all 3 lots and praying that BPI be ordered
to allow the Tolentinos to redeem their properties and to
accept the payment consigned by them. Upon appeal, CA
stated that the manner of the tender of payment made by
them through consignation by crossed check does not
satisfy the requirement that payment of debts in money
should be made in the currency stipulated
ISSUE: WON BPI was legally justified in refusing the
Tolentinos’ demand to be allowed to redeem the lands in
question
HELD: The right of redemption is not an obligation but
an absolute privilege. A bona fide tender of the
redemption price and formal offer to redeem is not
essential where the redemption is being exercised by way
of judicial action. A redemption is not rendered invalid
by the fact that the sheriff accepted check rather than
cash. The exercise of this right being optional no
importance can be attached to the fact that a stop
payment order was issued against the check.
FILINVEST CREDIT CORP v PHIL ACETYLENE CO
INC
Philippine Acetylene Co. Inc purchased from Alexander
Lim a motor vehicle. As security for the payment, the
appellant executed a chattel mortgage over the same
motor vehicle in favor of Lim Subsequently, Lim
assigned to Filinvest all his rights, title and interest in the
promissory note and chattel mortgage. Appellant failed
to comply with the terms and conditions set forth in the
promissory note since it had defaulted in the payment of
9 successive installments. Appelee sent a demand letter
demanding that appellant either remit the aforesaid
amount in full or return the mortgaged property.
Replying thereto, appellant wrote back advising appellee
of its decision to return the mortgaged property.
Accordingly, the mortgaged vehicle was returned.
Appellee informed appellant that the former cannot sell
the vehicle as there were unpaid taxes so he offered to
deliver back the motor to the appellant but the latter
refused to accept it. CFI and CA adjudged that the
appellant (Phil Acetylene) should accept back the motor
vehicle.
ISSUE: WON the mere return of the motor vehicle by
appellant extinguished his obligation for the unpaid price
HELD: Judgment of CA was affirmed
RATIO: Mere delivery of mortgaged motor vehicle by
mortgagor does not mean transfer of ownership to
mortgagee without his
consent under the principle of dacion en pago. What is
transferred is merely possession of the property. The
evidence on record fails to show that the mortgagee, the
herein appellee, 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 dation in payment. In the
absence of clear consent of appellee to the proferred
special mode of payment, there can be mo transfer of
ownership of the mortgaged motor vehicle from
appellant to appellee.
LEGASPI v CA
(father vs. son-in-law)
Nature: Action for reconveyance of properties pursuant
to a sale with pacto de retro
Facts:
Bernardo B. Legaspi is the registered owner of two
parcels of land which he sold to his son-in-law, Leonardo
B. Salcedo on October 15, 1965 for the sum of
Php25,000 with the right to repurchase the same within 5
years from the execution of the deed of sale. Before the
expiry date of the repurchase period Legaspi offered and
tendered to Salcedo the amount of Php25,000 for the
repurchase of the two parcels of land; that the tender of
payment was refused by Salcedo on the ground that the
repurchase price should have been Php42,250 due to
extraordinary inflation. Salcedo, furthermore; refused to
convey the property to Legaspi. As a result of his refusal,
Legaspi consigned with the CFI of Cavite the amount of
Php25,000.
Issue: WON the prior offer and tender of payment of the
amount of Php25,000 is valid as to warrant reconveyance
of the parcels of land
Held: YES. Legaspi offered and tendered the amount to
Salcedo within the five year period that he is allowed to
repurchase the property. The court held that the argument
of Salcedo in refusing the payment of Legaspi within the
period allowed for him to repurchase the property is
untenable. The case involves the exercise of the right to
repurchase and a showing that petitioner made a valid
tender of payment is sufficient. It is enough that a sincere
or genuine tender of payment and not a mock and
deceptive one was made. The fact that he deposited the
amount to the clerk of court is merely a security for the
petitioner is was not an essential act that had to be
performed after the tender of
payment was refused although it may serve to indicate
the veracity of the desire to comply with the obligation.
Doctrine:
In a sale with pacto de retro a showing that a valid tender
of payment was made within the period allowed for
repurchase is sufficient consignation after the tender was
refused is not necessary.
HAHN v CA
(Diamonds are a girl’s bestfriend)
Nature: Action for recovery of two diamond rings or
their value.
Facts:
Santos received two diamond rings with a total value of
Php47,000 in 1966 from the petitioner. The rings were
delivered to her for sale on commission and that they
would be returned upon demand if unsold. The rings
were not sold nor were they returned when demanded by
Hahn.
Issue: WON an offer of payment on installment made by
Santos can be validly rejected?
Held: Yes. Petitioner can validly reject he offer to pay for
the rings on installment because Hahn was entitled to
payment in full. If such payment could not be made she
is obligated to return the rings. According to Article 1233
of the Civil Code, “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.”
As for the private respondent’s offer to return the
solitaire ring, which was also refused, the pertinent rule
is Article 1244, providing that “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.” More so in this case
where the ring offered ws less valuable than that which is
due.
BARITUA v CA
(Estranged wife benefits from dead hubby)
Nature: Complaint for damages.
Facts:
Bienvinido Nacario, tricycle driver, was driving along
the national Highway in Camarines Sur when he met an
accident with a bus driven by petitioner Bitancor and
owned and operated by petitioner Jose Baritua. Nacario
and his passenger died and the tricycle was damaged. No
criminal case arising from the incident was ever
instituted.
Subsequently, as a consequence of the extra-judicial
settlement of the matter negotiated by the petitioners and
the bus insurer Phlippine First Insurance Company
(PFICI)—Bienvinido Nacario’s widow, Alicia received
P18500. In consideration of the amount she executed a
“Release of Claim” in favor of the petitioners and PFICI
releasing and forever discharging them from all actions,
claims, and demands arising from the accident. She
likewise executed an affidavit of desistance in which she
formally manifested her lack of interest in instituting any
case, either civil or criminal against petitioners.
A year and ten months after the accident the parents of
Nacario, filed a complaint for damages against the
petitioners. They alleged that petitioners failed to fulfill
their promise that as extra-judicial settlement, they shall
be indemnified for the death of their son and for the
damage to the tricycle the purchase price of which they
only loaned to the victim.
Issue: WON, the parents of the victim can sue for
damages notwithstanding the release of claim and
affidavit of desistance executed by the victim’s wife.
Held: NO. Obligations are extinguished by various
modes among them by payment. There is no denying that
the petitioner had paid their obligation arising from the
accident. The only question now is whether or not Alicia,
the surviving spouse and the one who received the
petitioner’s payment is entitled to it. Article 1240 of the
civil code enumerates the persons to whom payment to
extinguish an obligation should be made. The
enumeration in Article 1240 includes a successor in
interest as the person authorized to receive payment. It is
patently clear from a reading of Articles 1240 and 884
that the parents of the deceased succeed only when the
latter dies without a legitimate descendant. Petitioner
therefore acted correctly in settling their
obligation with Alicia as the widow of Bienvinido and as
the natural guardian of their lone child.
Neither can respondents seek relief and compensation
from the petitioners as creditors of Bienvinido. The said
purchase price of the tricycle and the funeral expenses
are but money claims against the estate of their son.
Doctrine: Mere estrangement is not a legal ground for
the disqualification of a surviving spouse as an heir of
the deceased spouse.
AQUINO v CA
Nature: Criminal Case for Illegal Recruitment
Facts:
Rodrigo Nicolas, Braulio Sapitula, Aurelio Costales and
Benito Vertudez filed the instanct case against Aurora
Aquino for illegal recruitment.
Rodrigo Nicolasa laborer applied at Aquino’s travel
agency for the position of carpenter. As part of his
application he paid the amount of Php1500, of which
Php1000 was refunded directly to him by defendant and
the balance of Php500 was included in0 0an alleged
“group refund check” for Php5720 which could not be
cashed for lack of funds.
Braulio Sapitula on the other hand is also a farmer who
likewise applied for the position of carpenter. He also
paid the amount of Php1500 for his application.
Aurelio Costales likewise applied for a job in Guam and
also paid Php1500. Diappointed for not being able to go
to Guam he asked for a refund. He as paid Php700 and
the remaining balance was part of the alleged “group
refund check” for Php5270 issued by appellant.
Benito Vertudez also applied for a job in Guam. He was
able to advance the amount of Php1070 the refund of
which was also part of the alleged group refund check.
Issue: WON the obligation of Aquino was discharged
through the “group refund check”
Held: NO. The charges for illegal recruitment filed
against Aquino was dismissed and therefore what
remains to be discussed is whether or not her liability to
refund the amounts paid to her by the petitioners was
likewise discharged.
The petitioner issued a check to reimburse the
complainants for the sums of money paid by the latter by
virtue of the “failed” overseas contract. The controversy
arose when the check was dishonored by the drawee
bank due to lack of funds. The petitioner claims full
satisfaction of the sum owed by her since she already
issued a check in favor of complainants. Her position is
untenable. The issuing of a check is not payment until
the check has been encashed. Although a check, as a
negotiable instrument, is regarded as a substitute or
money, it is not money. Hence, its mere delivery does
not, by itself, operate as payment. It was therefore, de
rigueur for the petitioner to have presented the check she
issued to the complainants which had been honored by
the drawee bank in order to show that the amount
covered by the check has been received evidencing,
therefore, full satisfaction of the sums of money owed to
the complainants. The honored check was never
presented.
Doctrine: The issuing of a check is not payment until the
check has been encashed.
To be considered as payment, the check which was
subsequently honored by the drawee bank should be
presented as evidence.
RIESENBACK v CA
Nature: Complaint for consignation and damages.
Facts:
On July 27, 1988 petitioner consigned and deposited
with the Clerk of Court of RTC Cebu the sum of
Php113,750. Respondent subsequently filed a
manifestation Accepting Consignation and Motion to
Dismiss on August 1, 1988. In the manifestation he
stated, inter alia, that”without necessarily admitting the
correctness of obligation of plaintiff to defendant, the
latter hereby manifests to accept the said amount of
Php113750 which is consigned by plaintiff, provided that
the present complaint be dismissed outright with costs
against plaintiff.
Issue: WON the acceptance with reservation made by
plaintiff in his manifestation of the consignation is valid?
Held: YES. Private respondent’s acceptance of the
amount consigned by the petitioner-debtor with a
reservation or qualification as to the correctness of the
petitioner’s obligation is legally permissible. Citing
Tolentino (cited 3Llerena 263), the court said that before
a consignation can be judicially declared proper, the
creditor may prevent the withdrawal of the amount
consigned by the debtor, by accepting the consignation,
even with reservations.
A creditor could accept a valid consignation even with
reservation as to his right to damages and other claims
(Sing Juco v. Cuaycong, 46 Phil. 81 ).
On the contrary, when the creditor’s acceptance of the
money consigned is conditional and with reservations, he
is not deemed to have waived he claims he reserved
against his debtor. Thus, when the amount consigned
does not cover the entire obligation, the creditor may
accept it, reserving his right to the balance.
Doctrine: Acceptance of consignation with reservation to
other claims arising from the obligation is valid.
Acceptance of money consigned unconditionally and
without reservation stands as a waiver of the creditor’s
other claims under the contract.
CALTEX v IAC
Nature: Action for the collection of sum of money.
Facts:
On January 12, 1978, private respondent Asia Pacific
Airways Inc. entered into an agreement with petitioner
Caltex whereby the latter agreed to supply private
respondent’s aviation fuel requirements for two years
from January 1, 1978 until December 31, 1979. Pursuant
thereto, Caltex supplied respondent’s fuel requirements.
As of June 30, 1980 Asia Pacific had a balance of
Php4,072,682.13 representing the unpaid price of the
fuel supplied. To settle this obligation respondent
executed a Deed of Assignment on June 30, 1980
wherein it assigned to Caltex its receivables or refunds of
Special Fund Import Payments from the National
Treasury of the Philippines to be applied as payment for
its balance with Caltex. On February 12, 1981, pursuant
to the Deed of Assignment a treasury warrant in the
amount of Php5,475,24 was issued to Caltex. Four days
later, respondent having learned that the amount covered
by the Deed of
Assignment exceeded the amount of his obligation with
Caltex asked for a refund of the excess. Caltex made a
refund pf Php900,000 plus in favor of private
respondent. The latter believing itself to be entitled to a
larger amount by way of refund demanded the refund of
the remaining amount which petitioner explained in its
letter response that the remaining amount not returned
Php510,550.63 represented interest and service charges
at the rate of 18% per annum on the unpaid and overdue
account of respondent from June 1, 1980 to July 31,
1981.
Issue: WON the deed of assignment is in fact a dation in
payment which totally extinguished the obligation of
Asia Pacific and therefore Caltex will no longer have any
right to interests accruing after the assignment?
Held: NO. The deed of assignment executed by the
parties on July 31, 1980 is not a dation in payment which
totally extinguished respondent’s obligations as stated
therein.
Dation in payment does not necessarily mean total
extinguishment of the obligation. The obligation is
totally extinguished only when the parties, by agreement
express of implied, or by their silence, consider the thing
as equivalent to the obligation.
In the Deed of Assignment three obligation were
contemplated— (1) the outstanding obligation; (2) the
applicable interest charges on overdue accounts; and (3)
the other avturbo fuel lifting and deliveries that assignor
may from time to time receive from assignee.
Furthermore, charges for interest were made ever month
and not once did respondent question such. Thus, a
reading of the deed of assignment and the subsequent
acts of the parties clearly show that they did not intend
for the assignment to have the effect of totally
extinguishing the obligations of private respondent
without payment of the applicable interest charges on the
overdue account.
Doctrine:
Dation in payment does not necessarily mean total
extinguishment of the obligation.
SANGRADOR v VALDERRAMA
(Spouses gone broke by a loan broker)
Nature: Action for collection of a sum of money.
Facts:
On April 11, 1983 defendant spouses Valderrama
obtained a P500k loan from Manuel Asencio payable on
or before April 12, 1984 secured by a real estate
mortgage. Foreseeing that they would not be able to
redeem their property upon maturity of the loan they
scouted for money lenders. Through the help of a loan
broker who was able to refer them to his aunt plaintiff
Teresita Sangrador. The sps. Valderama were able to
obtain a P1M loan putting up the previously mortgaged
property to Asencio as security. The loan is evidenced by
a promissory note providing for the payment of P1.4M.
Furthermore, the promissory note also includes a
stipulation that should an extraordinary inflation should
supervene the value of the peso at the time of the
establishment of the obligation shall be the basis for
payment.
Issue: WON the stipulation providing for the payment of
P1.4M is valid anent evidence showing that the Sps
Valderrama received only P1M?
Held: NO. The disputed amount was a hidden interest
that the petitioners had required the respondents to pay at
the maturity of the loan As can be gleaned from the
evidence, the said amount was not received or delivered
to the respondents. This conclusion is strengthened by
the fact that the promissory note and the deed of real
estate mortgage did not have any stipulation as to the
rate of interest.
The rate of interest for loans or forbearance of money, in
the absence of express contract as to such rate of interest
shall be at 12% per annum. Thus, since no express
stipulation as to the rate of interest the Court fixed the
amount at 12% (of P1M) per annum.
As regards the stipulation providing for a case when an
extraordinary inflation should supervene in the instant
case no showing that such inflation occurred. Petitioners
failed to prove the supervening extraordinary inflation,
as contemplated in Article 1250 of the Civil Code,
between April 6, 1984 and December 7, 1984
LOSS OF THE THING DUE
Arts 1262-1269
Art 1262 CC: 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.
Art 1263 CC: In an obligation to deliver a generic thing,
the loss or destruction of anything of the same kind does
not extinguish the obligation. (n)
Art. 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.
(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, 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. (1183a)
Art. 1266. The debtor in obligations to do shall also be
released when the prestation becomes legally or
physically impossible without the fault of the obligor.
Art. 1267. When the service has become so difficult as to
be manifestly beyond the contemplation of the parties,
the obligor may also be released therefrom, in whole or
in part. (n)
Art. 1268. When the debt of a thing certain and
determinate proceeds from a criminal offense, the debtor
shall not be exempted from the payment of its price,
whatever may be the cause for the loss, unless the thing
having been offered by him to the person who should
receive it, the latter refused without justification to
accept it. (1185)
Art. 1269. The obligation having been extinguished by
the loss of the thing, the creditor shall have all the rights
of action which the debtor may have against third
persons by reason of the loss. (1186)
NOTE:
* There is no such thing as loss of a generic thing
OCCENA v JABSON
October 29, 1976
Tropical Homes Inc. agreed to develop a subdivision on
the land owned by Jesus and Efigenia Occeña, wherein
Tropical Homes would be paid only 40% of the sale of
the subdivision lots.
Tropical Homes seeks revision of the contract on the
Basis of Art 1267 of the Civil Code (CC). They are
asking for modification of the terms and conditions of
the subdivision contract, due to increase in costs.
Art. 1267 CC: When the service has become so difficult
as to be manifestly beyond the contemplation of the
parties, the obligor may also be released therefrom, in
whole or in part.
Held:
The CC authorizes the release of an obligor when the
service has become so difficult as to be manifestly
beyond the contemplation of the parties but does not
authorize the Courts to modify or revise the subdivision
contract between the parties or to fix a different sharing
ratio from that contractually stipulated with the force of
law.
Tropical Homes complaint for modification of the
contract has no basis in law and must be dismissed.
PNCC v CA
May 5, 1997
Philippine National Construction Corporation (PNCC)
signed a lease contract on the land owned by the
Raymundos for a 5 year term, to commence when PNCC
gets the necessary industrial clearance to operate the rock
crushing business PNCC intends to put up.
The contract stipulates that PNCC should pay the rental
annually (in advance) at the rate of P20,000 per month
on the first year plus 5% every year after (i.e. P21k 2nd
yr, P22k 3rd yr).
It was also stipulated the the termination of the lease
would only be by “mutual agreement of the parties”
On January 1986, PNCC got a Temporary Use Permit,
and so the Raymundos wrote a letter demanding for the
first annual rent which since the clearance has arrived,
commenced the lease contract.
PNCC requested to cancel the lease and discontinue the
project “due to financial, as well as technical
difficulties.”
The Raymundos filed a complaint for specific
performance, and the lower court granted them P492,000
rental for 2 years, which CA affirmed.
PNCC thus filed this petition for certiorari. This time,
PNCC invokes Art. 1266 of the CC and the principle of
rebus sic stantibus to be released from the obligatory
force of the contract of lease.
Ar. 1266 CC: The debtor in obligations to do shall also
be released when the prestation becomes legally or
physically impossible without the fault of the obligor.
Rebus sic stantibus – a tacit condition, said to attach to
all treaties, that they shall cease to be obligatory as soon
as the state of facts and conditions upon which they were
founded has substantially changed. (said to be the basis
of Art 1267 of CC)
Held:
PNCC cannot take refuge in the article, since it is
applicable only to obligations “to do”, and not
obligations “to give”.
An obligation “to do” includes all kinds of work or
service; while an obligation “to give” is a prestation
which consists in the delivery of a movable or an
immovable thing in order to create a real right, or for the
use of the recipient, or for its simple possession, or in
order to return it to its owner.
Rebus sic stantibus also does not apply because the
assassination of Ninoy in 1983 and the announcement of
Pres. Marcos of the snap elections to be held in Feb 1986
which already caused political turmoil in the country
preceded the contract. (i.e. PNCC signed the contract
knowing fully well these antecedent events)
At any rate, the unforeseen event and causes mentioned
by the petitioner are not the legal or physical
impossibilities contemplated by said article.
Disposition: Petition denied. CA affirmed.
CONDONATION OR REMISSION
Arts 1270-1274
Art. 1270. Condonation or remission is essentially
gratuitous, and requires the acceptance by the obligor. It
may be made expressly or impliedly.
One and the other kind shall be subject to the rules which
govern inofficious donations. Express condonation shall,
furthermore, comply with the forms of donation. (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 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. (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 contrary is proved. (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 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.
(1191a)
Trans-Pacific v CA
August 19, 1994
Trans- Pacific Industrial Supplies Inc. borrowed P1.3M
from the Associated Bank, with promissory notes, a
chattel mortgage and land mortgaged as security.
The mortgaged lands were sold, and the proceeds
amounting to P1,386,614.20 was applied to the re-
structured loan; and so the bank returned the duplicate
original copies of the promissory notes with the word
“PAID.”
However, the bank demanded from Trans-Pacific
payment of P492,100 representing accrued interest, did
not release the mortgage over 2 parcels of land and
claimed that the release of the promissory notes were
erroneous.
Initially Trans-Pacific expressed its willingness to pay,
but later refused and instituted an action for specific
performance against the bank to deliver the mortgaged
land. Trial Court ruled in favor of Trans Pacific. CA
reversed.
Art 1271 CC: 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. (1188)
Issue: WON Trans-Pacific’s obligation is fully paid?
Held:
The presumption is art 1271 is not conclusive but merely
prima facie. Trans-Pacific failed to prove that it fully
discharged its obligation. There is sufficient evidence to
overthrow the presumption of payment generated by the
delivery of the documents such as Trans-Pacific’s
admission in their earlier letter.
CONFUSION OR MERGER
Art. 1275. The obligation is extinguished from the time
the characters of creditor and debtor are merged in the
same person. (1192a)
• Merger or confusion is the meeting in one person of the
qualities of creator and debtor with respect to the same
obligation. It erases the plurality of subjects of the
obligation. Further, the purposes for which the obligation
may have been created are considered as fully realized
by the merger of the qualities of debtor and creditor in
the same person.
• Requisites of merger or confusion are: (1) It must take
place between the creditor and the principal debtor, (2)
the very same obligation must be involved, for if the
debtor acquires rights from the creditor, but not the
particular obligation in question in question there will be
no merger, (3) the confusion must be total or as regards
the entire obligation.
• The effect of merger is to extinguish the obligation.
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 extinguish the obligation. (1193)
• The extinguishment of the principal obligation through
confusion releases the guarantor’s because the obligation
of the latter is merely accessory. When the merger takes
place in the person of a guarantor, the obligation is not
extinguished.
Art. 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.
(1194)
COMPENSATION
Art. 1278. Compensation shall take place when two
persons, in their own right, are creditors and debtors of
each other. (1195)
• Compensation is a mode of extinguishing to the
concurrent amount, the obligations of those persons who
in their own right are reciprocally debtors and creditors
of each other. It is the offsetting of two obligations which
are reciprocally extinguished if they are of equal value.
Or extinguished to the concurrent amount if of different
values.
• Kinds of Compensation:
• As to their effects • compensation may be total (when
the two obligations are of the same amount); or • partial
(when the amounts are not equal).
• As to origin • it may be legal; • facultative; •
conventional; • or judicial.
• It is legal when it takes place by operation of law
because all requisites are present. • It is facultative when
it can be claimed by one of the parties, who, however,
has the right to object to it, such as when one of the
obligations has a period for the benefit of one party alone
and who renounces that period so as to make the
obligation due. • It is conventional when the parties
agree to compensate their mutual obligations even if
some requisite is lacking. • It is judicial when decreed by
the court in a case where there is a counterclaim.
From Dean Pineda:
Compensation Distinguished From Payment.
In compensation, there can be partial extinguishment of
the obligation; in payment, the performance must be
completer, unless waived by the creditor. Payment
involves delivery of action, while compensation (legal
compensation) takes place by operation of law without
simultaneous delivery.
Compensation Distinguished from Merger.
In compensation, there are at least two persons who
stand as principal creditors and debtor of each other, in
merger, there is only one person involved in whom the
characters of creditor and debtor are merged. In merger,
there is only one obligation, while in compensation, there
are two obligations involved.
Art. 1279. In order that compensation may be proper, it
is necessary:
(1) That each one of the obligors be bound principally,
and that he be at the same time a principal creditor of the
other;
(2) That both debts consist in a sum of money, or if the
things due are consumable, they be of the same kind, and
also of the same quality if the latter has been stated;
(3) That the two debts be due;
(4) That they be liquidated and demandable;
(5) That over neither of them there be any retention or
controversy, commenced by third persons and
communicated in due time to the debtor. (1196)
• For compensation to take place, the parties must be
mutually debtors and creditors (1) in their own right, and
(2) as principals. Where there is no relationship of
mutual creditors and debtors, there can be no
compensation. Because the 1st requirement that the
parties be mutually debtors and creditors in their own
right, there can be no compensation when one party is
occupying a representative capacity, such as a guardian
or an administrator. The 2nd requirement is that the
parties should be mutually debtors and creditors as
principals. This means that there can be no compensation
when one party is a principal creditor in one obligation
but is only a surety or guarantor in the other.
• The things due in both obligations must be fungible, or
things which can be substituted for each other. • Both
debts must be due to permit compensation. •
Demandable means that the debts are enforceable in
court, there being no apparent defenses inherent in them.
The obligations must be civil obligations, including
those that are purely natural. An obligation is not
demandable, therefore, and not subject to compensation,
in the following cases: (1) when there is a period which
has not yet arrived, including the cases when one party is
in a state of suspension of payments; (2) when there is a
suspensive condition that has not yet happened; (3) when
the obligation cannot be sued upon, as in natural
obligation. • A debt is liquidated when its existence and
amount is determined. Compensation can only take place
between certain and liquidated debts.
From Dean Pineda:
The five requisites of a legal compensation are
enumerated in the Article. All requisites must be present
before compensation can be effectual.
• First Requisite—That each of the obligators be bound
principally and that he be at the same time a principal
creditor of the other. >>The parties must be mutual
creditor and debtor of each other and their relationship is
a principal one, that is, they are principal debtor and
creditor of each other.
• Second Requisite—That both debts consist in such 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. >>When the debts consist of
money, there is not much of a problem when it comes to
compensation to the concurrent amount. It is a matter of
mathematical computation. When the debt consist of
things, it is necessary that the things are consumable
which must be understood as ‘fungible’ and therefore
susceptible of substitution. More than that they must be
of the same kind. If the quality has been states, the things
must be of the same quality.
• Third Requisite—That the two debts are due. >> A debt
is ‘due’ when its period of performance has arrived. If it
is a subject to a condition, the condition must have
already been fulfilled. However, in voluntary
compensation, the parties may agree upon the
compensation of debts which are not yet due.
• Fourth Requisite—That they be liquidated and
demandable. >> A debt is considered ‘liquidated’ when
its amount is clearly fixed. Of if it is not yet specially
fixed, a simple mathematical computation will determine
its amount or value. It is ‘unliquidated’ when the amount
is not fixed because it is still subject to a dispute or to
certain condition.
It is not enough that the debts be liquidated. It is also
essential that the same be demandable. A debt is
demandable if it is not yet barred by prescription and it is
not illegal or invalid.
• 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. >> A debt
of a
thing cannot be a subject of compensation if the same
had been subject of a garnishment of which the debtor
was timely notified. When a credit or property had been
properly garnished of attached, it cannot be disposed of
without the approval of the court.
Art. 1280. Notwithstanding the provisions of the
preceding article, the guarantor may set up compensation
as regards what the creditor may owe the principal
debtor. (1197)
• The liability of the guarantor is only subsidiary; it is
accessory to the principal obligation of the debtor. If the
principal debtor has a credit against the creditor, which
can be compensated, it would mean the extinguishment
of the guaranteed debt, either totally or partially. This
extinguishment benefits the guarantor, for he can be held
liable only to the same extent as the debtor.
From Dean Pineda:
Exception to the Rule On Compensation; Right of
Guarantor to Invoke Compensation Against Creditor. The
general rule is that for compensation to operate, the
parties must be related reciprocally as principal creditors
and debtors of each other. Under the present Article, the
guarantor is allowed to set up compensation against the
creditor.
Art. 1281. Compensation may be total or partial. When
the two debts are of the same amount, there is a total
compensation. (n)
• Total Compensation—debts are of the same amount. •
Partial Compensation—Debts are not of the same
amount; operative only up to the concurrent amount.
Art. 1282. The parties may agree upon the compensation
of debts which are not yet due. (n)
• Voluntary compensation is not limited to obligations
which are not yet due. The parties may compensate by
agreement any obligations, in which the objective
requisites provided for legal compensation are not
present. It is necessary, however, that the parties should
have the capacity to dispose of the credits which they
compensate, because the extinguishment of the
obligations in this case arises from their wills and not
from law.
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
damages and the amount thereof. (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)
• Although a rescissible or voidable debt can be
compensated before it is rescinded or annulled, the
moment it is rescinded or annulled, the decree of
rescission or annulment is retroactive, and the
compensation must be considered as cancelled.
Recission of annulment requires mutual restitution; the
party whose obligation is annulled or rescinded can thus
recover to the extent that his credit was extinguished by
the compensation, because to that extent he is deemed to
have made a payment.
Art. 1285. The debtor who has consented to the
assignment of rights made by a creditor in favor of a
third person, cannot set up against the assignee the
compensation which would pertain to him against the
assignor, unless the assignor was notified by the debtor
at the time he gave his consent, that he reserved his right
to the compensation.
If the creditor communicated the cession to him but the
debtor did not consent thereto, the latter may set up the
compensation of debts previous to the cession, but not of
subsequent ones.
If the assignment is made without the knowledge of the
debtor, he may set up the compensation of all credits
prior to the same and also later ones until he had
knowledge of the assignment. (1198a)
• Assignment after Compensation.
When compensation has already taken place before the
assignment, inasmuch as it takes place ipso jure, there
has already been an extinguishment of one of the other
of the obligations.
A subsequent assignment of an extinguished obligation
cannot produce any effect against the debtor. The only
exception to this rule is when the debtor consents to the
assignment of the credit; his consent constitutes a waiver
of the compensation, unless at the time he gives consent,
he informs the assignor that he reserved his right to the
compensation.
• Assignment before compensation.
The assignment may be made before compensation has
taken place, either because at the time of assignment one
of the debts is not yet due or liquidated, or because of
some other cause which impedes the compensation. As
far as the debtor is concerned, the assignment does not
take effect except from the time he is notified thereof.
If the notice of assignment is simultaneous to the
transfer, he can set up compensation of debts prior to the
assignment. If notice was given to him before the
assignment, this takes effect at the time of the
assignment; therefore the same rule applies. If he
consents to the assignment, he waives compensation
even of debts already due, unless he makes a reservation.
• But if the debtor was notified of the assignment, but he
did not consent, and the credit assigned to a third person
matures after that which pertains to the debtor, the latter
may set up compensation when the assignee attempts to
enforce the assigned credit, provided that the credit of
the debtor became due before the assignment. But it f the
assigned credit matures earlier than that of the debtor, the
assignee may immediately enforce it, and the debtor
cannot set up compensation, because the credit is not yet
due.
• If the debtor did not have knowledge of the assignment,
he may set up by way of compensation all credits
maturing before he is notified thereof. Hence, if the
assignment is concealed, and the assignor still contracts
new obligation in favor of the debtor, such obligation
maturing before the latter learns of the assignment will
still be allowable by way of compensation. The assignee
in such case would have a personal action against the
assignor.
Art. 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.
(1199a)
• This article applies to legal compensation and not to
voluntary compensation.
Art. 1287. Compensation shall not be proper when one
of the debts arises from a depositum or from the
obligations of a depositary or of a bailee in
commodatum. Neither can compensation be set up
against a creditor who has a claim for support due by
gratuitous title, without prejudice to the provisions of
paragraph 2 of Article 301. (1200a)
• The prohibition of compensation when one of the debts
arises from a depositum (a contract by virtue of which a
person [depositary] receives personal property belonging
to another [depositor], with the obligation of safely
keeping it and returning the same) or commodatum (a
gratuitous contract by virtue of which one of the parties
delivers to the other a non-consumable personal property
so that the latter may use it for a certain time and return
it) is based on justice. A deposit of commodatum is given
on the basis of confidence in the depositary of the
borrower. It is therefore, a matter of morality, the
depositary or borrower performs his obligation.
•With respect to future support, to allow its
extinguishment by compensation would defeat its
exemption from attachment and execution and may
expose the recipient to misery and starvation. Common
humanity and public policy forbid this consequence.
Support under this provision should be understood, not
only referring to legal support, to include all rights which
have for their purpose the subsistence of the debtor, such
as pensions and gratuities.
Art. 1288. Neither shall there be compensation if one of
the debts consists in civil liability arising from a penal
offense. (n)
• If one of the debts consists in civil liability arising from
a penal offense, compensation would be improper and
inadvisable because the satisfaction of such obligation is
imperative.
• The person who has the civil liability arising from
crime is the only party who cannot set up the
compensation; but the offended party entitled to the
indemnity can set up his claim in compensation of his
debt.
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)
• It can happen that a debtor may have several debts to a
creditor. And vice versa. Under these circumstances,
Articles 1252 to 1254 shall apply.
Art. 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.
• Legal compensation takes place from the moment that
the requisites of the articles 1278 and 1270 co-exist; its
effects arise on the very day which all its requisites
concur. • Voluntary of conventional compensation takes
effect upon the agreement of the parties. • Facultative
compensation takes place when the creditor declares his
option to set it up. • Judicial compensation takes place
upon final judgment. • Effects of Compensation.
(1) Both debts are extinguished to the concurrent
amount;
(2) interests stop accruing on the extinguished obligation
of the part extinguished;
(3) the period of prescription stops with respect to the
obligation or part extinguished;
(4) all accessory obligations of the principal obligation
which has been extinguished are also extinguished.
• Renunciation of Compensation. Compensation can be
renounces, either at the time an obligation is contracted
or afterwards. Compensation rests upon a potestative
right, and a unilateral decision of the debtor would be
sufficient renunciation. Compensation can be renounced
expressly of impliedly.
No Compensation. Even when all the requisites for
compensation occur, the compensation may not take
place in the following cases:
(1) When there is renunciation of the effects of
compensation by a party; and (2) when the law prohibits
compensation.
(Unless otherwise indicated, commentaries are sourced
from the Civil Code book IV by Tolentino).
NOVATION
HOW OBLIGATIONS ARE MODIFIED
Art 1291. Obligations may be modified by:
(1) Changing their object or principal condition
(2) Substituting the person of the debtor
(3) Subrogating a third person in the rights of a creditor
• Novation is the extinguishment of an obligation by a
substitution or change of the obligation by a subsequent
one which extinguishes or modifies the first either by:
changing the object or principal conditions
by substituting the person of the debtor
subrogating a third person in the rights of the creditor
• Novation is a juridical act of dual function. At the time
it extinguishes an obligation it creates a new one in lieu
of the old
• Classification of Novation • as to nature 1. Subjective
or personal – either passive or active. Passive if there is
substitution of the debtor. Active if a third person is
subrogated in the rights of the creditor. 2. Objective or
real – substitution of the object with another or changing
the principal conditions 3. Mixed – Combination of
subjective and objective
• as to form
1. Express – parties declare that the old obligation is
substituted by the new 2. Implied – an incompatibility
exists between the old and the new obligation that cannot
stand together
• as to effect
1. Partial – when there is only a modification or change
in some principal conditions of the obligation
1. Total – when the old obligation is completely
extinguished
• Requisites of Novation:
• A previous valid obligation
• Agreement of all parties • Extinguishment of the old
contract – may be express of implied • Validity of the
new one
NOVATION IS NOT PRESUMED
Art 1292. In order that an obligation may be
extinguished by another which substitutes the same, it is
imperative that it is so declared in unequivocal terms, or
that the old and the new obligations be on every point
incompatible with each other
• Novation must be clearly proved since its existence
cannot be presumed.
• In an express novation, contracting parties disclose that
their object in making the new contract is to extinguish
the old contract. Otherwise, the old contract remains in
force and a new contract is added to it, and each gives
rise to an obligation still in force.
•In implied novation, all that is required is
incompatibility between the original and the subsequent
contracts. No specific form is required. The test of
incompatibility is whether they can stand together.
• In order that there may be an implied novation arising
from the incompatibility of the old and the new
obligations, the change must refer to the object, the cause
or the principal conditions of the obligation.
• An obligation is not novated by unimportant
modifications which do not alter its essence. • The
determination of whether the changes in any given
contract or obligation are sufficient to bring about a
novation, must depend upon the facts and circumstances
of each case. The distinction between a principal and an
accidental condition in the contract or obligation is
relative.
NOVATION BY SUBSTITUTION OF DEBTOR
Art 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 Arts 1236 and 1237.
• There are two forms of novation which consist in the
substitution of debtor: expromision and delegacion
• Expromision – change does not emanate from the
debtor and may be made even without his knowledge,
since it consists in a third person assuming the
obligation. Requires the consent of the third person and
the creditor.
• Delegacion – the debtor offers and the creditor accepts
the third person who consents to the substitution. The
consent of these three is necessary.
• Release of old debtor. It is not enough to extend the
juridical relation to a third person. It is necessary that the
old debtor is released from the obligation and the third
person (the new debtor) takes his place. Without such
release, there is no novation.
• Consent of creditor.
An indispensable element whether in expromision or in
delegacion. • Substitution of one debtor for another may
delay or prevent the fulfillment of the obligation by
reason of the inability or insolvency of the new debtor.
Hence, the creditor should agree to accept the
substitution in order that it may be binding on him. • The
consent of the creditor may be expressed or implied.
• Consent of debtor.
Not necessary in case of expromision. Needed in
delegacion because the initiative comes from the old
debtor. In both cases, the consent of the new debtor is
necessary because he is to assume the obligation. • The
consent of the new debtor is as essential as that of the
creditor for the novation to become effective. • Effect on
debtors. The novation has the effect of releasing the
original debtor from the obligation and of making the
new debtor liable therefor.
• Payment by the new debtor gives him the rights
mentioned in 1236 and 1237.
• If the novation is by delegacion and the new debtor
pays the obligation, he could demand from the old debtor
what he has paid. Subrogation may take place by virtue
of 1302.
• If the novation is by expromision, the new debtor can
recover only insofar as the payment has been beneficial
to the old debtor. There can be no subrogation because of
the express provisions of 1237.
PROVISIONS RELEVANT TO ART. 1293
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 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.
Art 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.
Art 1302 It is presumed that there is legal subrogation:
1. When a creditor pays another creditor who is
preferred, even without the debtor’s knowledge
2. When a third person, not interested in the obligation,
pays with the express or tacit approval of the debtor.
3. When, even without the knowledge of the debtor, a
person interested in the fulfillment of the obligation
pays, without prejudice to the effects of confusion as to
the latter’s share.
SUBSTITUTION BY EXPROMISION
(Without the knowledge of the debtor)
Art 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.
• Intent of the law is to release the old debtor from any
further liability in passive subjective novation, except in
the exceptional cases in art 1295 which applies to
delegacion. • If the novation is by expromision, no
liability for the new debtor’s insolvency can be enforced
against the old debtor, because the latter did not have the
initiative in making the change, which might have been
made without his knowledge.
SUBSTITUTION BY DELEGACION
Art 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.
• Provides two exemptions by which the creditor is
permitted to sue the old debtor:
1. When the insolvency was prior to the delegacion and
is publicly known;
1. When the old debtor knew of such insolvency at the
time he delegated the obligation.
• The knowledge of the creditor that the new debtor was
insolvent at the time of delegacion, will bar him from
recovering from the old debtor.
EFFECT OF NOVATION TO ACCESSORY
OBLIGATIONS
Art 1296. When the principal obligation is extinguished
in consequence of a novation, accessory obligations may
subsist only insofar as they may benefit third person who
did not give their consent.
• The extinguishment of the principal obligation by
novation extinguishes the obligation to pay interests,
unless otherwise stipulated. • This article is specially
applicable to substitution of debtors. • Exemption
provided in this article with respect to third persons.
Although technically it is an accessory obligation, it is in
reality a distinct obligation in favor of a third person, and
cannot be extinguished by novation without the consent
of the latter.
ORIGINAL OBLIGATION SUBSISTS IF THE NEW
OBLIGATION IS VOID
Art 1297. If the new obligation is void, the original one
shall subsist, unless the parties intended that the former
relations should be extinguished in any event.
• If the new obligation is not entirely void but merely
voidable, the novation becomes effective. • BUT if the
action to annul is brought, and the obligation is set aside,
it will be deemed as if there had been no novation. The
original obligation subsists, unless the parties intended to
definitely extinguish it at all events.
• If the original obligation is pure and the new obligation
is subject to a suspensive condition
• If the intention is merely to attach the condition to the
original obligation, then there is no novation. • If the new
conditional obligation is intended to substitute the
original pure obligation, the novation itself, and the
consequent extinguishment of the original obligation, is
subject to the condition. If the condition is not fulfilled
before one of the parties withdraws from the proposed
conditional contract, there is no novation at all.
• After a novation has taken place, thru a change of the
object of the obligation, the old obligation can no longer
be enforced. If the new obligation is extinguished by the
loss of the object, the creditor cannot demand the object
of the original obligation.
NOVATION IS VOID IF ORIGINAL OBLIGATION IS
VOID
Art 1298. The novation is void if the original obligation
was void, except when annulment may be claimed only
by the debtor, or when ratification validates acts which
are voidable.
• When the original obligation has been ratified before
novation, the novation is effective. • Even if there has
been no previous ratification at the time of novation, if
the nullity can be claimed only by the debtor, the consent
of the debtor to the novation will render the novation
effective because such consent is impliedly a waiver of
the action for nullity. • However, the defect is not
completely cured if the novation takes place by
expromision, where the old debtor has not intervened or
consented. • Prescription. When a debt is already barred
by prescription, it cannot be enforced by the creditor. •
BUT a new contract, recognizing and assuming the
prescribed debt, would be valid and enforceable • The
prescription, being available only to the debtor, can be
waived by him. He does so by voluntarily promising to
pay the prescribed debt. The novation of prescribed debt
is thus valid.
Art 1299. If the original obligation was subject to a
suspensive or resolutory condition, the new obligation
shall be under the same condition, unless it is otherwise
stipulated.
• If old obligation is conditional and new obligation is
pure • If the intention is merely to suppress the condition,
there is no novation • If the intention is to extinguish the
original obligation itself by the creation of a new
obligation, the latter does not arise except from the
fulfillment of the condition of the original obligation. • If
the suspensive condition of the original obligation is not
performed, that obligation does not come into existence,
and the cause for the new obligation would then be
wanting. • If the condition of the old obligation is
resolutory, its happening would resolve the old
obligation and place it in the same category as a void
obligation or one which has been extinguished. • Where
the original obligation is conditional, the novation itself
must be held to be conditional also. • Note: the parties
may by their express will substitute a pure obligation for
a conditional one.
• If both obligations are conditional • If the conditions in
the two obligations are not incompatible with each other,
and they can stand together, they must all be fulfilled in
order that the novation may become effective and the
new obligation be enforceable. • If only the conditions
affecting the old obligation are fulfilled, those affecting
the new obligation are not, or vice-versa, then there is no
novation. • If the conditions of the old and new
obligation are incompatible with each other, there is an
obvious intention to substitute the new conditional
obligation for the old conditional obligation.
SUBROGATION
Art 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.
• SUBROGATION is the transfer of all the rights of the
creditor to a third person, who substitutes him in all his
rights. • Subrogation may either be conventional or legal.
• Conventional • Takes place by agreement of the parties
• Requires the intervention and consent of three persons:
the original creditor, the new creditor and the debtor •
Legal subrogation • Takes place without agreement but
by operation of law because of certain acts • This is the
subrogation referred to in art 1302
CONVENTIONAL SUBROGATION
Art 1301. Conventional subrogation of a third person
requires the consent of the original parties and of the
third person
• Consent of all parties is essential • Original creditor –
because his right is extinguished • New creditor –
because he becomes a party to a new relation • Debtor –
because the old obligation is extinguished and he
becomes liable under the new obligation
• Under our Code, conventional subrogation is not
identical to assignment of credit. • Conventional
subrogation • Debtor’s consent is necessary •
Extinguishes the obligation and gives rise to a new one •
Nullity of the old obligation may be cured by
subrogation such that the new obligation may be
perfectly valid • Assignment of Credit • Debtor’s consent
is not required • Refers to the same right which passes
from one to another • Nullity of an obligation is not
remedied by the assignment of the creditor’s right to
another
LEGAL SUBROGATION
Art 1302. It is presumed that there is legal subrogation:
(1) When a creditor pays another another creditor who is
preferred, even without the debtor’s knowledge;
(2) When a third person, not interested in the obligation,
pays with the express or tacit approval of the debtor;
(3) When, even without the knowledge of the debtor, a
person interested in the fulfillment of the obligation
pays, without prejudice to the effects of confusion as to
the latter’s share
• Payment to Preferred Creditor • Example: X has two
obligations: (1) a mortgage debt in favor of Pedro and
(2) a simple unsecured obligation in favor of Jose. • If
Jose pays the mortgage obligation to Pedro, even without
the knowledge of Juan, then Jose would be subrogated in
the rights of Pedro • It is not material what amount Jose
actually pays to Pedro; so long as Pedro accepts such
amount as full payment of the mortgage credit, there will
be subrogation. • However, the debtor in cases like this,
can still set up against the new creditor the defenses
which he could have used against the original creditor,
such as: • Compensation; • Payments already made; or •
Vice or defect of the original obligation
• Payment with Debtor’s Approval • Example: (1) a third
person pays the creditor without the consent of the
debtor, he is only entitled to reimbursement from the
debtor for the amount paid by him. • If amount paid <
credit : even if the creditor has accepted it as full
payment, the third person is entitled to
reimbursement only for what he actually paid. • The third
person cannot proceed against sureties, guarantors or
mortgages and pledges
• Example: (2) a third person pays with the consent
(expressly or tacitly) of the debtor, • There will be
subrogation and the payor can exercise all the rights of
the creditor rising from the very obligation itself,
whether against the debtor or against third persons.
• Payment by Interested Party • Persons who have an
interest in the fulfillment of the obligation are those who
would be benefited by the extinguishment of the
obligation. Ex: • Co-debtors • Sureties • Guarantors •
Owners of property mortgaged or pledged to secure the
obligation
• Example: Solidary debtor pays the obligation, he is
subrogated in the rights of the creditor. • The scope of
this subrogation, however, should not be misunderstood.
The payor cannot take advantage of the solidarity and
recover the amount in excess of his share of the
obligation from any of his codebtors. • The solidarity
terminates by his payment and the obligation among the
co-debtors becomes joint.
EFFECT OF SUBROGATION
Art 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
• Subrogation transfers to the third person or new
creditor the entire credit, with all the corresponding
rights, either against the debtor or against third persons. •
If a suspensive condition is attached to the credit
transferred, that condition must be fulfilled in order that
the new creditor may exercise his right. BUT prestations
which could not have been required of the original
creditor cannot be demanded of the new one.
PARTIAL SUBROGATION
Art 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.
CASES:
MILLAR v CA
Millar obtained a favorable judgment ordering
respondent Gabriel to pay him a certain sum. A writ of
execution was issued and the jeep of respondent Gabriel
was seized. The parties entered into an agreement (a
chattel mortgage) whereby, to secure the payment of the
judgment debt, agreed to mortgage the vehicle in favor
of the petitioner. Respondent Gabriel failed to pay. The
CA ruled in favor of the respondent on the ground that
the subsequent agreement of the parties impliedly
novated the judgment obligation.
ISSUE: WON the subsequent agreement of the parties
impliedly novated the judgment obligation.
RULING:
• NO. The subsequent agreement of the parties did not
novate the judgment obligation by implication. • Implied
novation entails incompatibility of the old and the new
obligations. • The mere reduction of the amount due does
not constitute sufficient incompatibility, especially in the
light of the explanation of the petitioner that the reduced
indebtedness was result of the partial payments made by
the respondent before the execution of the subsequent
agreement.
• The stipulation for the payment of the obligation under
the terms of the chattel mortgage serves only to provide
an express and specific method for its extinguishment,
which is payment in two equal installments. The chattel
mortgage simply gave a method and more time to enable
him to fully satisfy the judgment indebtedness. • The
chattel mortgage agreement in no manner introduced any
substantial modification or alteration of the judgment. •
Instead of extinguishing the obligation of the respondent
arising from the agreement, the deed of chattel mortgage
expressly ratified and confirmed the existence of the
same.
Doctrine:
• Only those essential and principal changes introduced
by the new obligation producing an alteration or
modification of the essence of the old obligation result in
implied novation. • When the new obligation merely
reiterates or ratifies the old obligation, such does not
effectuate any substantial incompatibility between the
two obligations.
DORMITORIO v FERNANDEZ
The case involves two decisions rendered by the
respondent Judge Fernandez. In dispute is a certain lot
bought by Lazalita from the Municipality of Victorias.
Lazalita had been in continuous possession of the lot and
had introduced valuable improvements therein. It turned
out that the lot bought by Lazalita was converted into a
municipal road and that the lot in his possession is
actually the lot bought by Dormitorio. The first order
issued by Respondent Judge was favorable to
Dormitorio. Lazalita appealed and brought an action
against the Municipality of Victorias. The parties
executed an “Agreed Stipulation of Facts” which
provides Lazalita the option to be paid a just amount to
acquire another lot or for Victorias to give Lazalita
another lot. In his second order, respondent Judge set
aside the first order on the basis of the “Agreed
Stipulation of Facts.”
Ruling:
• Court upheld the judgment of the respondent Judge in
setting aside his first order in accordance with the
Agreed Stipulation of Facts.
• The presence of animus novandi (intent) is undeniable
for there is a later decision expressly superseding the
earlier one. • The later decision was the result of a
compromise, it had the effect of res judicata. The parties,
therefore, were bound by it.
Doctrine:
When, after judgment has become final, facts and
circumstances transpire which render its execution
impossible or unjust, the interested party may ask the
court to modify or alter the judgment to harmonize the
same with justice and the facts.
ZAPANTE v DE ROTAECHE
Ramon Echevarria, as legal representative of a
commercial firm, commenced an action against Zapanta
for the purpose of recovering a sum of money. Judgment
was rendered in favor of plaintiff firm. Zapanta and the
firm entered into an agreement which contained a
provision that “said commercial firm shall be at liberty to
enter suit against him” with reference to the judgment.
By virtue of the agreement, Zapanta continued to make
payments but left a certain amount of balance. For failure
of Zapanta to comply with the provisions of the
agreement, the defendant sued for the purpose of
recovering the balance. A writ of execution was issued.
The sheriff attached and sold practically all the property
which the plaintiff had.
Issue: WON the provision of the agreement “said
commercial firm shall be at liberty to enter suit against
him,” had the effect of extinguishing the rights of the
defendant which resulted from the judgment rendered
against him.
Ruling:
• The agreement does not expressly extinguish the
obligations existing in said judgment. On the contrary, it
expressly recognizes the obligations existing between the
parties in said judgment and expressly provides a method
by which the same shall be extinguished. • The contract,
instead of containing provisions “absolutely
incompatible” with the obligations of the judgment,
expressly ratifies such obligations and contains
provisions for satisfying them.
• Court ruled in favor of defendant. When the plaintiff
failed to comply with the conditions of said contract, the
defendant had a right to resort to the methods provided
by law for the satisfaction of the obligations created by
the judgment.
Doctrine:
• In order that an obligation be extinguished by novation,
the law requires that the novation or extinguishment
shall be expressly declared or that the old and new
obligations shall be absolutely incompatible.
TAN SIUCO v HABANA
The plaintiff Tan Siuco entered into a written contract
with defendant Habana for the construction of a certain
building. At different times during the construction,
modifications, alterations and changes were requested by
the defendant. Before any change was made, the
question of plaintiff’s compensation was mentioned and
that in referring to such changes, the defendant said
“pase cuenta” (bring in your bill). After the construction,
the plaintiff seeks to recover an amount over and above
the agreed original amount. The trial court ruled in favor
of the plaintiff on the ground that, in legal effect, the
written contract was annulled and set aside by the action
and conduct of the parties. That the whole combined
actions and conduct of the parties amounted to a
novation. For such reason, plaintiff is entitled to recover
on a quantum meruit.
Issue: WON the actions and conduct of the parties had
novated the written agreement entered by them
Ruling:
• The law states that there must be an express intention
to novate – animus novandi. A novation is never
presumed. • When the defendant said “pase cuenta”
(bring in your bill), the court reasoned that defendant
intended that plaintiff should bring in his bill for the
reasonable value of any alterations and changes which
were made at his request. • There is no claim or pretense
that anything was said by either party about terminating
or rescinding the contract. The statement “bring in your
bill” was never intended to apply to the original contract
and should be confined and
limited to a bill for the amount of any changes,
alterations, or modifications made at defendant’s request.
• Thus, plaintiff was never released from the original
contract. He was entitled to recover upon a quantum
meruit, and as to what was the reasonable value of the
building as it was constructed.
Doctrine:
• The intention of the parties to novate must be very
clear and expressed.
GUERRERO v CA
Jose Robles borrowed a sum of money from Chan Too,
to ensure payment of which the Alto Surety and
Insurance Co. executed a bond, whereby it bound itself
jointly and severally with Robles for the payment of the
loan to Chan Too. In consideration of the issuance of the
bond, Robles, Vicente Legarda and herein petitioner
Guerrero executed an “Agreement of Counter-Guaranty
with Mortgage and Pledge,” undertaking jointly and
severally to indemnify ALTO for any damage, loss,
payments. The agreement contains a provision which
states: “indemnities will be paid to the surety company
as soon as demand is received from the creditor or as
soon as it becomes liable to make payment xxx.” Robles
failed to pay his indebtedness to Chan Too. Judgment
was rendered by the lower court against Robles and
ALTO on the basis of a compromise agreement executed
by the parties. This case is instituted by ALTO against
petitioner Guerrero on the basis of the “Agreement of
Counter-Guaranty with Mortgage and Pledge.”
Issue: WON the petitioner was released from his
obligation under the counter-guaranty agreement by
virtue of novation.
Ruling:
• NO, the petitioner was not released under his obligation
by virtue of the counter-guaranty agreement. • A perusal
of the terms of the counter-guaranty agreement reveals
that it is one of indemnity. • Based on the terms of said
agreement, the liability of the petitioner has likewise
matured upon demand. The release of his obligation by
virtue of novation must be proved by clear and
convincing evidence. • In the absence of an express
release, nothing less than a showing of complete
incompatibility between the two
obligations – “agreement of counter-guaranty” and the
compromise agreement – would justify a finding of
novation by implication. • No such incompatibility exists
in this case between the two obligations that would
sustain the defense of novation.
GARCIA JR. v CA
Western Minolco Corporation (WMC) obtained from
Philippine Investments Systems Organization (PISO)
two loans. Garcia and Kahn executed a surety agreement
binding themselves jointly and severally for the payment
of the loan. Upon failure of WMC to pay after repeated
demands, demand was made on Garcia pursuant to the
surety agreement. Garcia likewise failed to pay. Lasal
Development Corporation (to which the credit had been
assigned by PISO) sued Garcia for the recovery of the
debt.
RULING:
• The Court did not sustain the claim of petitioner that
the various communications made by WMC with DBP,
together with the memorandum of agreement, are
sufficient to establish the new obligation made by WMC
with all its creditors. • While it is true that, as a general
rule, no form of words or writing is necessary to give
effect to a novation. Nevertheless, since the parties
involved are corporations, it must first be proved that
that the contracts were executed by authorized persons.
This point was not sufficiently proven. Thus, such
communications cannot be considered to give rise to a
valid new obligation.
DOCTRINE:
• Novation requires the validity of a new obligation. • A
valid new obligation is an essential requisite for the
novation of a previous valid obligation. • In the case of
juridical persons particularly a corporation, a valid
obligation must be given effect through persons with
authority to enter into contract/agreement in behalf of the
corporation.
LIGUTAN v CA
Petitioners Ligutan obtained a loan from respondent
Security Bank and Trust Company. The obligation
matured and petitioners failed to pay. Despite demands,
petitioners still defaulted on their obligation. The bank
filed a complaint for recovery of the due amount. During
the pendency of the case, petitioners executed a real
estate mortgage to secure the existing indebtedness of
petitioners with the bank.
ISSUE: WON the subsequent execution of the real estate
mortgage as security for the existing loan would have
resulted in the extinguishment of the original contract
because of novation.
RULING:
• The subsequent execution of the real estate mortgage
did not result in the extinguishment of the original
contract. • Petitioners acknowledge that the real estate
mortgage contract does not contain any express
stipulation by the parties intending it to supersede the
existing loan agreement between the petitioners and the
bank. Respondent bank has correctly postulated that the
mortgage is but an accessory contract to secure the loan.
Doctrine:
An obligation to pay a sum of money is not extinctively
novated by a new instrument which merely changes the
terms of payment or adding compatible covenants or
where the old contract is merely supplemented by the
new one.
Additional information from the case
• Extinctive novation requires:
1. a previous valid obligation
1. the agreement of all parties to the new contract 2. the
extinguishment of the obligation 3. validity of the new
obligation
• 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 obligation be on every point incompatible with
each other.
• The incompatibility should take place in any of the
essential elements of the obligation:
1. the juridical relation or tie
• Ex: from a mere commodatum to a lease of things
1. the object or principal condition
• Ex: change of the nature of the prestation
1. the subjects
• Ex: substitution of the debtor or the subrogation of the
creditor
• Extinctive novation does not necessarily imply that the
new agreement should be complete by itself; certain
terms and conditions may be carried, expressly or by
implication, over to the new obligation.
BROADWAY CENTRUM v TROPICAL FOOD
Petitioner Broadway Centrum and private respondent
Tropical Hut executed a contract of lease. Tropical Hut
was experiencing low sales volume and was proposing
for a reduction in rentals. Broadway, recognizing that the
low sales volume was the result of the temporary closure
of a major thoroughfare, executed a “provisional and
temporary” agreement with Broadway which temporarily
reduced the rentals of Tropical conditioned upon good
faith implementation by Tropical of the six principal
suggestions of Broadway to improve operations of
Tropical. Months after, Broadway informed Tropical that
rental will be increased gradually. Tropical was adamant
that it cannot afford any increase in rentals.
Issue: WON the provisional and temporary agreement
had novated the contract of lease.
Ruling:
Basis in law
• Novation is the extinguishment of an obligation by the
substitution of that obligation with a subsequent one,
which terminates it, either by: • changing its object or
principal conditions; or • by substituting a new debtor in
place of the old one; or • by subrogating a third person to
the rights of the creditor.
• Novation through a change of the object or principal
conditions of an existing obligation is referred to as an
objective (or real) novation.
• If objective novation is to take place, it is essential that
the new obligation expressly declare that the old
obligation is to be extinguished or that the new
obligation be on every point incompatible with the old
one.
• The rule that novation is never presumed is not to be
avoided by merely referring to partial novation. The will
to novate, whether totally or partially, must appear by
express agreement of the parties, by their acts which are
too clear and unequivocal to be mistaken.
Applying the law to the case
• The provisional and temporary agreement did not
extinguish or alter the obligations of Tropical and the
rights of Broadway under the lease contract.
1. The agreement was by its own terms a “provisional
and temporary agreement” conditioned upon good faith
implementation of six suggestions made by Broadway to
improve the operations of Tropical. The non-
specification by Broadway of the period of time during
which the reduced rentals would remain in effect, only
meant that Broadway retained for itself the discretionary
right to return to the original contractual rates whenever
Broadway felt it appropriate to do so.
1. The formal notarized lease contract made it clear that
a temporary and provisional reduction of rentals was not
to be construed as alteration or waiver of any of the
terms of the lease contract itself.
2. The course of negotiations between Broadway and
Tropical before the execution of the provisional and
temporary agreement clearly indicated that what they
were negotiating was a temporary and provisional
reduction of rentals. 3. The agreement was bereft of any
sign of mutual recognition that the reduced rentals had so
permanently replaced the contract stipulations on rentals.
• Only evidence of the clearest and most explicit kind
will suffice for the purpose of novation.
OTHER CAUSES
1. Prescription 2. Death – applied to purely personal
character, apart from its extinctive effect in some
contract such as partnership and agency; in general,
obligations are transmissible to heirs or to the estate. 3.
Renunciation on the part of the creditor – as a rule does
not extinguish obligations, but in some contracts lack of
interest of the creditor amounts to abuse of right; so the
debtor must be relieved. 4. Compromise 5. Fulfillment of
resolutory conditions 6. Arrival of resolutory periods 7.
Rescission & Nullity of contracts 8. Mutual dissent of
the parties 9. Will of one of the parties/Unilateral Dissent
– agency & partnership 10. Change of Civil Status 11.
Force Majeure 12. Abandonment – under Art 662
CASES:
INTERNATIONAL CORPORATE BANK v CA1
Nature: Petition to review the decision of the Court of
Appeals
Facts (as established by the CA):
VISCO & SIP mortgaged its machineries, plant and
equipment to 11 banks to continue its operation.
Unfortunately, they failed and defaulted in the payment.
In the meantime, Emeterio Ramos came in and took
control of the companies; still it was not viable. Hence,
the banks formed a consortium to take over the
management. Mr. Ramos refused to transfer the
management until he is reimbursed for the cash advances
he made for the companies.
The banks and Mr. Ramos reached an agreement that Mr. pending labor case and desired to enter into a
Ramos shall be reimbursed with non-interest bearing compromise agreement for its losses for the inactivity.
notes and that the banks shall discount these notes up to Then, Ace-Agro filed a complaint with RTC for breach
1/3 of the total verified claim. The banks failed; hence a of contract and damages.
compromise agreement was entered into with the banks In the meantime, the labor case was resolved against
stating that Ramos shall be issued non-interest bearing Cosmos and Ace-Agro.
notes with the sum of P500,000 and will discount two- RTC, then, rendered its decision in favor of Ace-Agro;
thirds (2/3) of the said notes in 30 days after the signing Cosmos appealed. The CA reversed the decision finding
of the compromise agreement. Ramos complied with his favor for Cosmos.
obligations and the banks enabled Ramos to negotiate the Issue:
said notes in the sum of P350,000. However, two notes WON there was extinguishment of obligations due to the
were not discounted because the banks foreclosed and fire that occurred in the Cosmos plant.
acquired VISCO’s assets and sold them to National Steel Held:
Corp. • No, although force majeure may extinguish a contract,
Ramos filed a complaint before RTC for recovery of in this case it is not applicable. • SC held that the
P1,495,292.70 as the remaining balance. RTC favored termination of contract that Ace-Agro was speaking of
Ramos and ordered the banks to pay him. Banks was at most a temporary termination due to the fact that
appealed but CA affirmed the RTC ruling. there were still other bottles to be cleaned and boxes to
Issue: be repaired. • The Court found that Ace-Agro’s refusal of
WON there was constructive fulfillment of the condition the offer of Cosmos to resume operations because it
to grant 2/3 discount on the notes to Ramos of the wanted an extension of the contract to make up for the
compromise agreement. period of inactivity was unjustifiable. Incurrence of
Held: additional cost is no basis for its refusal.
• The SC ruled that the constructive fulfillment in the • Hence, the petition for review is DENIED and the
mind of the banks cannot stand as it was a last ditch decision of the CA is AFFIRMED.
effort to exculpate itself; that instead of rehabilitating the Doctrine:
company, they foreclosed its properties and sold it to A force majeure scenario can extinguish an obligation;
National Steel Corp. • The case is DISMISSED. however, this was not entirely true to the case due to the
ACE-AGRO DEVELOPMENT CORP. v CA abovementioned reason.
Nature: Petition for review on certiorari of a decision of
the Court of Appeals
Facts:
Ace-Agro is engaged in the business of cleaning
softdrink bottles and repairing wooden shells of Cosmos
Bottling Corp. Ace-Agro
does this inside Cosmos’ plant in San Fernando,
Pampanga. They entered into a service contract which
they renewed every year.
Then, a fire broke out in Cosmos’ plant destroying, inter
alia, AceAgro’s area. Hence, Ace-Agro could not clean
bottles. On May 15, 1990, Ace-Agro asked Cosmos if it
could resume its service; but petitioner was advised that
on account of the fire, which had “practically burned
all...old softdrink bottles and wooden shells,” Cosmos
was terminating their contract.
Ace-Agro asked for reconsideration but received no
reply. Hence, Ace-Agro issued a memorandum to their
employees stating that their service with Cosmos is
terminated as well as the employment of its people. The
employees filed a complaint for illegal dismissal before
the Labor Arbitrator.
Cosmos, in a letter, agreed for the resumption of the
service. However, Ace-Agro refused to do so due to the