OBLICON Digest April 252020

Adamson University
College of Law
D. ExtinguishmentofObligations(1231)
Art. 1231. Obligations are extinguished:
1. Payment or performance – most natural way of extinguishing obligation
2. Loss of the thing due or impossibility of performance
3. Condonation or remission of the debt
4. Confusion or merger of the rights of the creditor and debtor
5. Compensation
6. Novation
7. Other causes of extinguishment of obligations
- Annulment
- Rescission
- Fulfillment of resolutory condition
- Prescription
8. Additional miscellaneous causes from Tolentino
- Arrival of resolutory period
- Compromise
- Mutual dissent (Opposite of mutual agreement)
- Death – extinguishes obligations which are of a purely personal
character, apart from its extinctive effect in some contracts such as partnership
and agency
- Renunciation by the creditor
- Abandonment
- Insolvency
1. PaymentorPerformance(1232)
a. Concept(1232)
-Fulfillment of the prestation due, a fulfilment that extinguishes the obligation by the
realization of the purposes for which it was constituted
-Juridical act which is voluntary, licit and made with the intent to extinguish the
obligation
b. Requisites
Requisites of a Valid Payment
1. Person who pays
2. Person to whom payment is made
3. Thing to be paid
4. Manner, time and place of payment
i. Whocanpay
• GeneralRule
(Creditor cannot refuse valid tender of payment)
1. Debtor
2. Anyone acting on his behalf
a. Duly authorized agent or representatives
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b. Heirs
c. Successors in interest or assignees
• Exceptions:
- thirdpersonwhoisaninterestedparty(1302[3])
1. Third person is an interested party (creditor cannot refuse valid tender of
payment)
Meaning of interested party – interested in the extinguishment of obligations such
as
a. Co-debtors
b. Sureties
c. Guarantors
d. Owners of mortgaged property or pledge
Art. 1302 – It is presumed that there is legal subrogation:

Par 3: (When, even without the knowledge of the debtor, a person
interested in the fulfilment of the obligation pays, without prejudice to the effects
of confusion as to the latter’s share.
- thirdpersonwhoisnotaninterestedpartybutwiththeconsentofdebtor(1302[2],1236,par.1)
2. Third person is NOT an interested party but with consent of debtor
Art. 1302(2) – When a third person, not interested in the obligation, pays with the
express approval of the creditor
Art. 1236(1) – 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.
- thirdpersonwhoisnotaninterestedpartyandwithouttheconsentofthedebtor,withoutthe
knowledgeoragainstthewillof thedebtor(1236,par.2; 1237,1236,par.1)
3. Third person is NOT an interested party and WITHOUT the knowledge or against
the will of the debtor
Art. 1236(1) - 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.
Art. 1236(2) – 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 only recover only insofar as the payment has been beneficial to
the debtor
Right of Third Person

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• A person who pays a debt for the account of another may recover from the
debtor the sum so paid out, at least to the extent in which the payment may
have been beneficial to the debtor.
Amount of Recovery
• Limits the 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.
• Payment made without knowledge of the debtor cannot obligate the debtor to
such third person to an amount more than what he could have been compelled
by the creditor to pay.
• Remedy for Payment of what is not due - against the person who received
the payment under such conditions, and not against the debtor who did not
benefit from the amount.
Prescription
• Partial payment made by stranger without authorization of the debtor, will not
stay the running of the period of prescription with respect to the remainder of
the debt.
Payment against Debtor’s Will
• Third person can recover from the debtor only to the extent that the payment
has benefited him. But as between the debtor and creditor, the obligation is
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 into his
rights, such as those arising from a mortgage, guaranty or penalty.
Reimbursement and Subrogation

• The third person 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.
• Subrogation take place by virtue of payment of the credit - the payor
actually steps into the shoes of the creditor and becomes entitled, not only to
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recover what he has paid, but also to exercise all the rights which the creditor
could exercise
Subrogation of Creditor - the creditor may assign his rights to a third person,
but in such case, the resulting rights and obligations of the creditor and the third
person would be different from those arising from payment.
- thirdpersonwhodoesnotintendtobereimbursed (1238)
Article 1238. Payment made by a third person who does not intend to be
reimbursed by the debtor is deemed to be a donation, which requires the debtor's
consent. But the payment is in any case valid as to the creditor who has accepted
it. (n)
***No one should be compelled to accept the generosity of another***
• inanobligationtogive(1239,1427)
Effect of Incapacity
- Creditor cannot be compelled to accept it when the person has no
capacity to make the payment.
- Consignation (to transfer to another) will not be proper
- In case he accepts it, payment will not be valid
Exception: When a minor between 18 and 21 years of age, who has
entered into a contract without the consent of the parent or guardian,
voluntarily pays a sum of money or delivers a fungible thing in fulfillment
of the obligation, there shall be no right to recover the same from the
obligee who has spent or consumed it in good faith.
• incaseofactivesolidarity(1214)
Judicial Demand
• Solidary Creditors are tacitly mutual representative of each other for
demanding payment. However, it lasts only until one of them goes ahead of
the others and sues the debtor.
• When one creditor makes a judicial demand for payment, the tacit
representation by the other creditors is considered revoked, and not during the
pendency of the action, the creditors who did not sue lose their representation
of the other.
• When there is already a judicial demand, a payment to any of the creditors
who did not sue would be a payment to a third person, in so far as the shares
of the others in the credit are concerned.
• If the payee does not turn over to the others their shares in the payment, the
debtor can still be required to pay to the plaintiff the full amount minus the
share of the creditor to whom payment was made.
• This does not definitely eliminate the other creditors from suing, but only
during the time that the effects of the action exist.
- Action is dismissed - other creditors may in turn sue the debtor.
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- Before dismissal the debtor pays to another creditor, he does so at his

own risk
Extra-Judicial Demand
• Same effect as judicial demand in terminating the mutual representation
among the solidary creditors and concentrating the agency in the creditor who
made the demand.
Demand by Several Creditors
• Demand separately - Debtor should pay to the one who first notified him.
• Demand at the same time - They join together in a single action or written
demand upon the debtor, the latter preserves his right to choose and may pay
anyone of those demanding payment.
Partial Payment
• If a debtor has already paid the share of a creditor who made no demand upon
him, his obligation to that extent should be considered reduced.
In Mixed Solidarity
• When one creditor makes a demand upon one of the debtors, the latter cannot
pay to any other creditor but the one who made the demand.
• This prohibition does not apply to the debtors upon whom no demand has
been made and so they may pay to any creditor who may not be the one who
made the demand.
ii. Towhompaymentcanbemade
To whom payment can be made:

1. Creditor/person in whose favor the obligation has been constituted
 Refers to the original creditor, or the creditor at the time the obligation was
created
2. His successor in interest
 Refers to the person whom the original credit has been transferred such
as the assignees and the heirs of the original creditor (In Baritua vs CA,
the insurance company paid to the widow of the victim the civil liability
arising from a bus accident instead of paying the victim’s parents. The
Court ruled that the payment was valid because the widow and the child
are those referred to in law as the persons authorized to receive the
payment, them being the legal heirs of the victim)
3. Any person authorized to receive it
 Not only a person authorized by the same creditor but also the person
authorized by law to do so such as guardian, executor or administrator of
estate of the deceased, assignee or liquidator of a partnership or
corporation or any other who may be authorized by law to do so.
• Generalrule(1240)
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-The payment is not valid and the obligation is not extinguished even if in good faith of
the debtor
ARTICLE 1240 Payment shall be made to the person in whose favor the obligation
has been constituted, or his successor in interest, or any person authorized to
receive it.
Authority of a person to receive payment for the creditor is either Legal or Conventional
1. Legal – when it is conferred by law (authority of a guardian of an incapacitated
creditor, administrator of the estate of the deceased creditor)
2. Conventional – when the authority has been given by the creditor himself (when
an agent is appointed to collect from the debtor)
• Exceptions:
1. The obligation is extinguished if the mistake is imputable to the fault or
negligence of the creditor
2. Payment made in good faith to any person in possession of credit (Art 1242)
ARTICLE 1241: Payment to a person who is incapacitated to administer his
property shall be valid if he has kept the thing delivered, or insofar as the
payment has been beneficial to him.
Payment made to a third person shall also be valid insofar as it has redounded to
the benefit of the creditor. Such benefit to the creditor need not be proved in the
following cases:
(1) If after the payment, the third person acquires the creditor’s rights
(2) If the creditor ratifies the payment to the third person;
(3) If by the creditor’s conduct, the debtor has been led to believe that the third
person had authority to receive the payment
- incapacitatedperson(1241,par.1)
Art 1241, Par. 1:
General rule: Payments made to an incapacitated person is deemed invalid
Exception:
1. If the creditor has kept the thing delivered
2. If the payment has been beneficial to him
a. The 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 his legal representative would
have or could have done under similar circumstances. (Tolentino)
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b. The benefit is deemed to exist when the thing is preserved or kept to be

applied to rational purposes for the benefit of the incapacitated.
(Tolentino)
c. Benefit to the creditor need not be proved in the following cases:
i. If after the payment, the third person acquires the creditor’s right
ii. If the creditor ratifies the payment to the third person
iii. If by the creditor’s conduct, the debtor has been led to believe that
the third person had authority to receive the payment
iv. Assignment of credit without notice to debtor (Art 1626)
- thirdperson(1241,par.2)
Art 1241, Par 2 – Payment made to third persons:
General rule: The payment is deemed valid if the third person proved that it will redound
to the creditor’s benefit, otherwise the payment is void
Exception: When the proof of benefit is not required. The following does not need to be
proven:
a. If after the payment, the third person acquires the creditor’s rights
b. If the creditor ratifies the payment to the third person;
c. If by the creditor’s conduct, the debtor has been led to believe that the third
person had authority to receive the payment
d. Assignment of credit without notice to the debtor
e. Payment in good faith to any person in possession of the credit shall release the
debtor (Art 1242) Effect: The debtor is released from the obligation
Fault of the creditor
Even when the creditor receives no benefit from the payment to a third person, he
cannot demand a new payment if the mistake of the debtor was due to the fault of the
creditor. If a creditor sends a signed receipt for payment by ordinary mail to the debtor
but it happens to fall into the hands of a third person who presents it to the debtor, and
the latter pays on the strength of such signed receipt, the debtor cannot be made to pay
the creditor again. It is the creditor who must bear the consequences of his own
negligence. (Tolentino)
• whenproofofbenefitnotrequired(1241,par.3;1242)
ARTICLE 1242: Payment made in good faith to any person in possession of the
credit shall release the debtor.
The possession referred to in the above article is the possession of the credit, not the
possession of the document evidencing it.
Examples:
1. An heir who enters upon the hereditary estate and collects the credits thereof,
but who is later deprived of the inheritance because of his incapacity to succeed
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2. The assignee of a credit who collects it, but later the assignment is rescinded or
annulled
3. The holder of an instrument payable to bearer, who merely found it
Requisites to render the payment effective:
1. Possession of the credit must be legal
2. Payment must be made in good faith (good faith is always presumed)
**The good faith on the part of the debtor is required, whether or not the payee acts in
good faith is immaterial in this article.
• incaseofactivesolidarity(1214)
ARTICLE 1214: The debtor may pay one of the solidary creditors; but if any
demand, judicial or extrajudicial, has been made by one of them, payment should
be made to him
 A demand may either be judicial or extrajudicial.
 Solidary creditors are tacitly mutual representatives of one another for
demanding payment.
1. Judicial and Extrajudicial Demand

 When one creditor makes a judicial demand for payment, the tacit
representation by the other creditors is considered revoked.
 During the pendency of the action, the creditors who did not sue lose their
representation of the others.
 Once the suit is filed, the debtor can only make a payment to the plaintiff,
making the payment to the other creditors who did not sue would be a
payment to a third person.
 In such cases, if the debtor pays to another creditor, he does so at his own
risk.
2. Mixed Solidarity
 In the event that one creditor makes a demand upon one of the debtors,
the latter cannot make a payment to any other creditor other than the one
who made the demand.
 The other debtors upon which no demand was made, have the option to
make a payment to any creditor who may not be the one who made the
demand.
3. Demand by Several Creditors
 If the creditors demand payment separately, the debtor should make a
payment to the one who notified him first.
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 If the creditors demand at the same time, the debtor has the right and
choose to pay anyone of those demanding the payment.
iii. Whatistobepaid(Identity)
• GeneralRule
• Specificcases:
- Togiveaspecificthing(1244)
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 of forbearance cannot be substituted by

another act or forbearance against the obligee’s will.
Substitution of Prestation: If there is an agreement or consent of the creditor, the

debtor is allowed to deliver a different thing or perform a different prestation. In this
case, there may be dation in payment (1245) or a novation (1291).
Waiver of Defects: The defects of the thing delivered may be waived by the creditor if
he:
 Expressly declares; or
 With knowledge thereof, he accepts the thing without protest or
disposes/consumes it.
- Togiveagenericthing(1246)
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.
Determination of Quality: In cases falling under this article, if there is disagreement

between the debtor and the creditor as to the quality of the thing delivered, the court
should decide if it complies with the obligation, taking into consideration the purpose
and other circumstances of the obligation.
Waiver of Benefit: Either the creditor or the debtor may waive the benefit of this article.
In case of waiver: the creditor may require a thing of inferior quality, and the debtor may
deliver an object of superior quality, UNLESS the price to be paid in the latter case is
dependent upon the quality.
- Topaymoney(1249,1250;R.A.529,R.A.4100,R.A.8183)
Art. 1249. The payment of debts in money shall be made in the currency stipulated,
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and if it is not possible to deliver such currency, then in the currency which is legal
tender in the Philippines.
The delivery of the 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 fault of the creditor they have been impaired.
In the meantime, the action derived from the original obligation shall be held in
abeyance.
NOTE: Republic Act No. 529 modified the present article. Under this Act, payments of
all monetary obligations should now be made in currency which is legal tender in the
Philippines. A stipulation providing payment in a foreign currency is null and void, but it
does not invalidate the entire contract.
Republic Act. 8183 repealed Republic Act. 529.

R.A. No. 8183 Sec. 1: All monetary obligations shall be settled in the Philippine
currency which is legal tender in the Philippines. However, the parties may agree that
the obligation or transaction shall be settled in any other currency at the time of
payment. (Approved: June 11, 1996)
Legal Tender: Legal tender means such currency which in a given jurisdiction can be
used for the payment of debts, public and private which cannot be refused by the
creditor.
Currency in Payment: This article sanctions payment of debts other than that which is
legal tender in the Philippines, if there is a stipulation to that effect.
Nicolas v. Matias (1955): Pursuant to the terms of an agreement, an obligation

assumed during the Japanese occupation was not payable until after liberation of the
Philippines, it was held that the parties to the agreement are deemed to have intended
that the amount stated in the contract be paid in such currency as may be legal tender
at the time of maturity.
The obligation in such case must be satisfied in Philippine currency.
Delivery of Instruments: The delivery of notes or other commercial instruments shall

produce the effects of payment only when they are collected.
The provision is applicable not only to those instruments executed by third persons but
also to a note executed by the debtor himself.
Non-payment of note: creditor may sue upon the original contract

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Payment by Check: Obligations must be paid in money that is legal tender, hence, the
payment by check may be validly refused by the creditor, even if such check may be
good. This rule applies even if payment is made to the court.
Arrietav.NARIC,supra
FACTS:
On May 19, 1952, plaintiff-appellee participated in the public bidding called by the
NARIC for the supply of 20,000 metric tons of Burmese rice. As her bid of $203.00 per
metric ton was the lowest, she was awarded the contract for the same. Accordingly, on
July 1, 1952, plaintiff-appellee Paz P. Arrieta and the appellant corporation entered into
a Contract of Sale of Rice, under the terms of which the former obligated herself to
deliver to the latter 20,000 metric tons of Burmess Rice at $203.00 per metric ton, CIF
Manila. In turn, the defendant corporation committed itself to pay for the imported rice
"by means of an irrevocable, confirmed and assignable letter of credit in U.S. currency
in favor of the plaintiff-appellee and/or supplier in Burma, immediately." However it was
only in July when the manager sent a an application to PNB and the letter of credit was
only opened on September 8, 1952. As a result of the delay, the allocation of appellee's
supplier in Rangoon was cancelled and the 5% deposit, amounting to 524,000 kyats or
approximately P200,000.00 was forfeited. As it turned out, however, the appellant
corporation not in any financial position to meet the condition. Plaintiff then filed a
breach of contract with the RTC. The RTC ruled in favor of Arrieta and awarded
$286,000.00 as damages for breach of contract
ISSUE
Whether or not the damages issued should be in the form of Philippines currency
RULING
Yes. In the premises, however, a minor modification must be effected in the dispositive
portion of the decision appealed from insofar as it expresses the amount of damages in
U.S. currency and not in Philippine Peso. Republic Act 529 specifically requires the
discharge of obligations only "in any coin or currency which at the time of payment is
legal tender for public and private debts." In view of that law, therefore, the award
should be converted into and expressed in Philippine Peso.We already pronounced in
the case of Eastboard Navigation, Ltd., v. Juan Ysmael& Co., Inc., G.R. No. L-9090,
September 10, 1957, if there is any agreement to pay an obligation in the currency other
than Philippine legal tender, the same is null and void as contrary to public policy
(Republic Act 529), and the most that could be demanded is to pay said obligation in
Philippine currency "to be measured in the prevailing rate of exchange at the time the
obligation was incurred.
Therefore, RA 529 which specifically requires the discharge of obligations only "in any
coin or currency which at the time of payment is legal tender for public and private
debt", the award of damages in U.S. dollars made by the lower court in the case at bar
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.
Kalalov.Luz,34SCRA377
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FACTS:
On 17 November 1959, Octavio Kalalo entered into an agreement with Alfredo Luz
where he was to render engineering design services for a fee. On 11 December 1961,
Kalalo sent Luz a statement of account where the balance due for services rendered
was P59,505. On 18 May 1962, Luz sent Kalalo a resume of fees due to the latter, and
a check for P10,861.08. Kalalo refused to accept the check as full payment of the
balance of the fees due him. On 10 August 1962, Kalalo filed a complaint containing 4
causes of action, to compel luz to pay him his fees, the relevant ones are $28,000
(representing 20% of the amount paid to Luz in the International Research Institute
project) and the balance of P30,881.25 as fees; The trial court ruled in favor of Kalalo,
declaring that the $28,000 is to be converted into the Philippine currency on the basis
of the current rate of exchange at the time of the payment of this judgment, as certified
to by the Central Bank of the Philippines. Appellant Luz appealed.
ISSUE:
Whether or not the rate of exchange of dollar to peso at the time of the payment of the
judgment should be applied
RULING:
Yes. Republic Act 529 provides that if the obligation was incurred prior to the
enactment of the Act and require payment in a particular kind of coin or currency other
than the Philippine currency the same shall be discharged in Philippine currency
measured at the prevailing rate of exchange at the time the obligation was incurred. As
We have adverted to, Republic Act 529 was enacted on June 16, 1950.
In this case, the obligation of appellant to pay appellee the 20% of $140,000.00, or the
sum of $28,000.00, accrued on August 25, 1961, or after the enactment of Republic Act
529. It follows that the provision of Republic Act 529 which requires payment at the
prevailing rate of exchange when the obligation was incurred cannot be applied.
Republic Act 529 does not provide for the rate of exchange for the payment of obligation
incurred after the enactment of said Act. The logical Conclusion, therefore, is that the
rate of exchange should be that prevailing at the time of payment. This view finds
support in the ruling of this Court in the case of Engel vs. Velasco & Co. 2 3 where this
Court held that even if the obligation assumed by the defendant was to pay the plaintiff
a sum of money expressed in American currency, the indemnity to be allowed should be
expressed in Philippine currency at the rate of exchange at the time of judgment rather
than at the rate of exchange prevailing on the date of defendant's breach.
It is Our considered view, therefore, that appellant should pay the appellee the
equivalent in pesos of the $28,000.00 at the free market rate of exchange at the time of
payment. And so the trial court did not err when it held that herein appellant should pay
appellee $28,000.00 "to be converted into the Philippine currency on the basis of the
current rate of exchange at the time of payment of this judgment, as certified to by the
Central Bank of the Philippines
St.PaulFireandMarineInsurancev.Macondray,70SCRA122
FACTS:
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Winthrop Products, Inc. of New York shipped aboard the SS ‘Tai Ping’, 218 cartons and
drums of drugs and medicine which were consigned to Winthrop Stearns, Inc. Manila
Philippines. Barber Steamship Lines, Inc. issued a Bill of Lading in the name of
Winthrop Products, Inc. as shipper, with arrival notice in Manila to consignee Wintrhop
Stearns, Inc. Manila. The shipment was insured by the shipper against loos and/or
damage with St. Paul Fire and Marine Insurance Company. Thereafter, SS Tai Ping
arrived at the Port of Manila and discharged the shipment into the custody of Manila
Port Service. The shipment was discharged complete and in good order with the
exception of 1 drum and serveral cartons which were in bad order condition. The
consignee filed a claim in the amount of P1,109.47 representing the C.I.F value of the
damaged drum and cartons of medine with the carrier and Manila Port Service.
However, both the carrier and Manila Port Service refused to pay such claim. The
consignee then filed its claim with the insurer. On the basis of such claim, the insurance
company paid to the consignee the insured value of the lost and damaged goods,
including other expenses in connection therewith in the total amount of $1,134.46. As
subrogee of the rights of the shipper and/or cosignee, the insurer instituted with the CFI
an action against the defendants for the recovery of the amount of $1,134.46. CFI ruled
in favor of plaintiffs, ordered defendants to solidarily pay the petitioner a total of
P1,109.67php. Petitioner appealed with the SC with the contention that , it should be
entitled to recover from defendants the amount of $1,134.46 which it actually paid to the
consignee and which represents the value of the lost and damaged shipment as well as
other legitimate expenses.
ISSUES:
1. Whether or not, in case of loss or damage, the liability of the carrier to the
consignee is limited to the C.I.F value of the goods which were lost or damaged
2. Whether the insurer who has paid the claim in dollars to the consignee should be
reimbursed in its peso equivalent on the date of discharge of the cargo or on the
date of the judgment
RULING:
YES. The liabilities of the defendants with respect to the lost or damaged shipments are
expressly limited to the C.I.F. value of the goodsas per contract of sea carriage
emobodied in the bill of lading. A stipulation fixing or limiting the sum that may be
recovered from the carrier on the loss or deterioration of the goods is valid, provided it is
(a) reasonable and just under the circumstances, 9 and (b) has been fairly and freely
agreed upon. In this case, the liabilities of the defendants- appellees with respect to the
lost or damaged shipments are expressly limited to the C.I.F. value of the goods as per
contract of sea carriage embodied in the bill of lading.The shipper and consignee are,
therefore, bound by such stipulations. It is for this reason that the consignee filed its
claim against the defendant on the basis of the C.I.F. value of the lost or damaged
goods in the aggregate amount of P1,109.67
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On the date of the discharge of the cargo. The plaintiff, as insurer, after paying the
claim of the insured for damages under the insurance, is subrogated merely to the rights
of the assured. The plaintiff-appellant, as insurer, after paying the claim of the insured
for damages under the insurance, is subrogated merely to the rights of the assured. As
subrogee, it can recover only the amount that is recoverable by the latter. Since the
right of the assured, in case of loss or damage to the goods, is limited or restricted by
the provisions in the bill of lading, a suit by the insurer as subrogee necessarily is
subject to like limitations and restrictions.
Equally untenable is the contention of the plaintiff-appellant that because of

extraordinary inflation, it should be reimbursed for its dollar payments at the rate of —
exchange on the date of the judgment and not on the date of the loss or damage. The
obligation of the carrier to pay for the damage commenced on the date it failed to deliver
the shipment in good condition to the consignee.
Papav.A.V.Valencia,284SCRA643
FACTS:
Myron Papa is the administrator of the estate of Angela Butte. In 1973, he sold a portion
of said estate to Felix Peñarroyo through A.U. Valencia and Co., Inc. Peñarroyo gave
Papa P5,000.00 plus a check worth P40,000.00. However, Papa was not able to deliver
the certificate of title to Peñarroyo. A litigation ensued and ten years after, Papa argued
that the sale between him and Peñarroyo was never consummated because he did not
encash the 40K check and that the 5K cash was merely earnest money. RTC and CA
ruled in favor of defendants. Petitioner appealed.
ISSUE:
Whether or not the delivery of a check produces the effect of payment only when it is
cashed
RULING:
No. While it is true that the delivery of a check produces the effect of payment only
when it is cashed, pursuant to Art. 1249 of the Civil Code, the rule is otherwise if the
debtor is prejudiced by the creditor's unreasonable delay in presentment. The
acceptance of a check implies an undertaking of due diligence in presenting it for
payment, and if he from whom it is received sustains loss by want of such diligence, it
will be held to operate as actual payment of the debt or obligation for which it was
given. It has, likewise, been held that if no presentment is made at all, the drawer
cannot be held liable irrespective of loss or injury unless presentment is otherwise
excused. This is in harmony with Article 1249 of the Civil Code under which payment by
way of check or other negotiable instrument is conditioned on its being cashed, except
when through the fault of the creditor, the instrument is impaired.
Granting that petitioner had never encashed the check, his failure to do so for more than
ten (10) years undoubtedly resulted in the impairment of the check through his
unreasonable and unexplained delay.
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PhilippineAirlinesv.CourtofAppeals,181SCRA557
FACTS:
Amelia Tan, under the name and style of Able Printing Press commenced a complaint
for damages before the CFI Manila. After trial, CFI rendered judgment in favor of Amelia
Tan and against Philippine Airlines, Inc. (PAL). PAL􏰀filed its appeal with the Court of
Appeal (CA). CA modified the judgment condemning PAL to pay Tan the sum of
P25,000.00 as damages and P5,000.00 as attorney's fee, with costs.
Tan filed a motion praying for the issuance of a writ of execution of the judgment
rendered by the CA. An order of execution was issued in favor of Tan. The writ was duly
referred to Deputy Sheriff Emilio Z. Reyes. Four months later, Tan moved for the
issuance of an alias writ of execution stating that the judgment rendered by the lower
court, and affirmed with modification by the CA, remained unsatisfied.
PAL filed an opposition to the motion stating that it had already fully paid its
obligation to plaintiff through the deputy sheriff of the respondent court, Emilio Z. Reyes,
as evidenced by cash vouchers properly signed and receipted by said Emilio Z. Reyes.
It was later found out that Reyes absconded.
However, PAL was still directed to pay Tan as she didn’t received the payment.
ISSUE:
Whether payment of judgment to the implementing officer as directed in the writ of
execution constitutes satisfaction of judgment in this case?
RULING:
No, it is not.
In general, a payment, in order to be effective to discharge an obligation, must be
made to the proper person. Article 1240 of the Civil Code provides that 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.
Thus, payment must be made to the obligee himself or to an agent having
authority, express or implied, to receive the particular payment. Payment made to one
having apparent authority to receive the money will, as a rule, be treated as though
actual authority had been given for its receipt. Likewise, if payment is made to one who
by law is authorized to act for the creditor, it will work a discharge. The receipt of money
due on a judgment by an officer authorized by law to accept it will, therefore, satisfy the
debt.
However, it is different in this case. The payment made by the petitioner to the
absconding sheriff was not in cash or legal tender but in checks. The checks were not
payable to Amelia Tan or Able Printing Press but to the absconding sheriff.
In the absence of an agreement, either express or implied, payment means the
discharge of a debt or obligation in money and unless the parties so agree, a debtor has
no rights, except at his own peril, to substitute something in lieu of cash as medium of
payment of his debt. Consequently, unless authorized to do so by law or by consent of
the obligee, a public officer has no authority to accept anything other than money in
payment of an obligation under a judgment being executed. Strictly speaking, the
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acceptance by the sheriff of the petitioner's checks, in the case at bar, does not, per se,
operate as a discharge of the judgment debt.
• PaymentofInterest(1956)
Art. 1956. No interest shall be due unless it has been expressly stipulated in writing.
iv. Howpaymentistobemade(Integrity)
• GeneralRule(1233)
GENERAL RULE: Art. 1233. A debt shall not be understood to have been paid unless
the thing or service in which the obligation consists has been completely delivered or
rendered, as the case may be.
TWO REQUISITES FOR PAYMENT:

1. Identity of the Prestation – this means that the very thing or service due must be
delivered or released.
2. Its Integrity – It means that the prestation must be fulfilled completely.
Time of Payment: Payment must be made on the stipulated date. Payment may be
made on a Sunday or any legal holiday.
Proof of Payment: The burden of proving that a debt has been extinguished by
payment falls to the debtor. This applies even when the loan is usurious.
Issuance of Receipt: The refusal of the creditor to issue a receipt, without just cause,
is a ground for consignation under art. 1256. The court can order the creditor to issue a
receipt.
Javier v. Brinas: Where in their transactions, receipts evidencing payments made by

the defendant had been issued by the plaintiff, the testimony alone of defendant would
be insufficient to prove alleged payments which are without receipts.
- Partialpaymentisnotallowed;exceptions(1248)
Article 1248. Unless there is an express stipulation to that effect, the creditor
cannot be compelled partially to receive the prestations in which the obligation
consists. Neither may the debtor be required to male 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.
As a general rule, a debt shall not be understood to have been paid unless the thing or
service in which the obligation consist has been completely delivered or rendered, as
the case may be. (Art. 1233)
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 Therefore, partial payment is not allowed except in the following:

1.) When the obligation expressly stipulates the contrary;
2.) When the different prestations which constitute the objects of the obligations are
subject to different terms and conditions; Ex. When the debt is payable in
installment.
3.) When the obligation is in part liquidated and in part unliquidated.(Jurado) Ex.
(Example: D owes C P3 million plus damages. Even if the amount of damages has
not yet been ascertained, the P3 million is already known or liquidated. This is
already demandable and payable.) (Paras)
Partial payment is allowed considering that the unity and integrity of the obligation is
not substantially impaired. However, this article does not apply to obligations where
there’s a plurality of parties (joint and solidary) because they are under to different
rules, neither when there are several prestations which are subject to different terms
and conditions.
• Substantialperformanceingoodfaith(1234)
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 obligors.
Substantial performance or compliance is, in a sense, a performance
according to the fair intent of the contract, with an attempt in good faith to
perform (Rosete, et al. v. Perober Dev. Corp. CA-GR 61032-R). There is
substantial performance when the party claiming it has a willful intent to
perform or comply the obligation however, due to oversight,
misunderstanding or any excusable neglect failed to completely perform
the obligation, for which the other party may be adequately indemnified by
an allowance and deduction from the contract price or by an award of
damages.
In order to determine whether there is a substantial performance, there
must be a slight deviation from the obligation, the omission and defect
must be technical and unimportant for example:
o Where A contracted B to deliver 100 sacks of rice but only 98
sacks were delivered by B.
In this case, the remedy is that A may deduct the amount of 2 sacks
undelivered from the total contract price (as if B paid for the undelivered
sacks).
In case of substantial performance, the obligee is benefited. So the obligor
should be allowed to recover as if there has been a strict and complete
fulfillment, less damages suffered by the obligee. This last condition
affords a just compensation for the relative breach committed by the
obligor.(Jurado)
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• Estoppel(1235)
Art. 1235 When the obligee accepts the performance, knowing its incompleteness
or irregularity, and without expressing ay protest or objection, the obligation is
deemed fully complied with.
A person entering 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. (Tolentino).
When the obligee accepts the performance, knowing its incompleteness or irregularity,
and without expressing any protest or objection. This rule is based on the principle of
estoppel. (Jurado)
To constitute a waiver, however, there must be an intentional relinquishment of a known
right. There must have been acceptance of the defective performance with actual
knowledge of the incompleteness or the defect…A word accept means to take as
satisfactory or sufficient, or agree to an incomplete or irregular performance.
Estoppel of Creditor
A creditor cannot object because of the defects in performance resulting from his own
acts or directions. And where a party makes particular objections to the sufficiency of
performance, he is estopped to later set up other objection. (Tolentino)
• Presumptionsinpaymentofinterests/installments(1176)
Art. 1176 The receipt of the principal by the creditor, without reservation with
respect to the interest shall give rise to the presumption that said interest has
been paid.
The receipt of a later installment of debt without reservations as to prior
installments, shall likewise raise the presumption that such installments have
been paid.
(1) Example of Par. 1 (Receipt of Principal Without Reservation as to Interest)

Ex. A creditor of P1,000,000, with 8% interest, received P1,000,000 in payment of the
principal. Interest was not referred to in the payment. It is presumed that the 8% interest
had already been previously paid. This is because under Art. 1253, Civil Code, payment
of the interest as a rule precedes payment of the principal. Thus, even if there is a
receipt evidencing payment of the principal, the accumulated interest may in certain
cases still be recovered. (Paras)
If the creditor issued a receipt for the debtor for the principal, without the reservation of
the interest, it may be presumed that the interest is also paid, applying Art. 1253 of the
Civil Code that interest will come first in payment before the principal.
(2) Example of Par. 2 (Receipt of a Later Installment)
If a creditor receives the fourth installment of a debt, it is understood that the first three
installments have been paid. (Paras)
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When the creditor issued a receipt for the debtor acknowledging payment of a latter
installment of a specified debt without any reservation with respect to prior installments,
there also arises a disputable presumption that such prior installments have already
been paid. (Jurado)
However, this rule is not applicable in case of payment of tax because the tax for one
year is independent of the taxes for other years. They do not constitute installments of
the same obligation. (Tolentino)
v. Whenispaymenttobemade
• GeneralRule(1169)
• Nodemand,nodelay;Exceptions
vi. Wherepaymentistomade
• Placeexpresslydesignated(1251,par.1)
• Whenplaceofpaymentisnotexpresslydesignated(1251,par.2to4)
Article 1251
Payment shall be made in the place designated in the obligation.
There being no express stipulation and if the undertaking is to deliver a
determinate thing, the payment shall be made wherever the thing might be at the
moment the obligation was constituted.
In any other case the place of payment shall be the domicile of the debtor.
If the debtor changes his domicile in bad faith or after he has incurred in delay,
the additional expenses shall be borne by him.
These provisions are without prejudice to venue under the Rules of Court.
Place where obligation shall be paid: (These are successive)
1.) If there is a stipulation, the payment shall be made in the place designated.
2.) If there is no stipulation:
a. The thing to be delivered is specific or determinate, the payment shall be
made at the place where the thing was, at the perfection of the contract.
b. The thing to be delivered is generic (such as money) and those specific or
determinate things temporarily located at some place, the place of payment
shall be the domicile of the debtor. In this case, the creditor bears the
expenses in going to the debtor’s place to accept payment.
vii. Whopaysforexpensesformakingpayment(1247)
Article 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.
General Rule:
 The extrajudicial expenses required by the payment shall be for the account of
the debtor, except if there is stipulation to the contrary.
 With regard to judicial costs, the Rules of Court shall govern.
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Note:
Losing party generally pays judicial costs. The court may, however, for special reasons,
adjudge that either party shall pay the costs or that the same be divided as may be
equitable.
c. ApplicationofPayments
i. Concept(1252)
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.
Application of payments
 It is the designation of the debt to which should be applied the payment made by
a debtor who has various debts of the same kind and favor of one and the same
creditor.
The application of payments as to debts not yet due cannot be made unless:
1.) There is stipulation that the debtor may so apply; or
2.) It is made by the debtor or creditor, as the case may be for whose benefit the
period has been constituted.
ReparationsCommissionv.UniversalDeepFishing,83SCRA764
FACTS:
Universal Deep-Sea Fishing Corporation was awarded six 6 trawl boats by the
Reparations Commission as end-user of reparations goods. These fishing boats were
delivered to Universal 2 at a time. Each delivery being covered by a Contract of
Conditional Purchase and Sale providing for identical schedules of payments. The first
installment representing 10% of the total cost was to be paid 24 months after delivery
and the balance of the total cost to be paid in 10equal installments.
The first was due one year after the first installment. To guarantee the faithful
compliance with the obligations under said contract, a performance bond in the amount
of P53,643.00, with UNIVERSAL as principal and the Manila Surety & Fidelity Co., Inc.,
as surety, was executed in favor of the Reparations Commission. A corresponding
indemnity agreement was executed to indemnify the surety company for any damage,
loss charges, etc., which it may sustain or incur as a consequence of having become a
surety upon the performance bond.
Thereafter, Reparations Commission sued Universal and its surety to recover various
amounts of money due under the contracts, they claimed that the amounts were not yet
due and demandable.
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The surety company also contended that the action is premature, but set up a cross-
claim against UNIVERSAL for reimbursement of whatever amount of money it may
have to pay the plaintiff by reason of the complaint, including interest, and for the
collection of accumulated and unpaid premiums on the bonds with interest thereon.
With leave of courts first obtained, the surety company led a third-party complaint
against Pablo S. Sarmiento, one of the indemnitors in the indemnity agreements. The
third-party defendant Pablo S. Sarmiento denied personal liability claiming that he
signed the indemnity agreements in question in his capacity as acting general manager
of Universal.
ISSUE:
Whether the P10,000.00 paid as down payment by Universal to the Reparations
Commission can be applied to guarantee indebtedness?
RULING:
No, it cannot.
Articles 1252 to 1254 of the Civil Code apply to a person owing several debts of the
same kind to a single creditor. They cannot be made applicable to a person whose
obligation as a mere surety is both contingent and singular, which in this case is the full
and faithful compliance with the terms of the contract of conditional purchase and sale
of reparations goods. The obligation included the payment, not only of the first
Installment in the amount of P53,643.00, but also of the 10 equal yearly installments of
P56,597.20 per annum. The amount of P10,000.00 was, indeed, deducted from the
amount of P53,643.00, but then the first of the 10equal yearly installments had also
accrued; hence, no error was committed in holding the surety company to the full extent
of its undertaking.
Paculdov.Regalado,345SCRA134
FACTS:
Nereo J. Paculdoand Bonifacio C. Regalado entered into a contract of lease over a
parcel of land with a wet market building in Fairview Park, Quezon City. Aside from that
lease, Paculdo leased 11 other property from Regalado, 10of which were located within
the Fairview compound, while the eleventh was located along Quirino Highway, Quezon
City. He also purchased from the latter 8 units of heavy equipment and vehicles.
On November 19, 1991, Regalado proposed that Paculdo's security deposit for
the Quirino lot, be applied as partial payment for his account under the subject lot as
well as to real estate taxes on the Quirino lot. Petitioner conformed thereto evidenced
by his signature.
In an earlier letter, dated July 15, 1991, Regalado informed Paculdo that the
payment was to be applied not only to petitioner's accounts under both the subject land
and the Quirino lot but also to heavy equipment bought by the latter from respondent.
Petitioner claimed that the amount applied as payment for the heavy equipment was
critical because it was equivalent to more than2 months rental of the subject property.
Paculdo failed to pay for the month of May 1992, and the monthly rental for the
months of June and July 1992, which resulted for Regalado to initiate an action against
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him. After judgment was rendered ordering the petitioner to vacate the leased wet
market building and to pay back rentals, he paid the amount of P11,478,121.85 for
security deposit and rentals but the respondent, without petitioner's consent, applied
portions of the payment to his other obligations with the respondent.
ISSUE:
Would petitioner's failure to object to the letter of July 15, 1991 and its proposed
application of payments amount to consent to such application?
RULING:
No, it is not.
The right to specify which among his various obligations to the same creditor is to
be satised first rests with the debtor, as provided by Article 1252 of the Civil Code.
At the time the petitioner made the payments, he made it clear to respondent that
they were to be applied to his rental obligations on the Fairview wet market property.
Though he entered into various contracts and obligations with respondent, including a
lease contract over 11property on Quezon City and sale of 8heavy equipment, all the
payments made, about P11,000,000.00 were to be applied to rental and security
deposit on the Fairview wet market property.
There was no clear assent by petitioner to the change in the manner of
application of payment. The petitioner's silence as regards the application of payment
by respondent cannot mean that he consented thereto. There was no meeting of the
minds. Though an offer may be made, the acceptance of such offer must be
unconditional and unbounded in order that concurrence can give rise to a perfected
contract. Hence, petitioner could not be in estoppel. Assuming arguendo that, as
alleged by respondent, petitioner did not, at the time the payments were made, choose
the obligation to be satised first, respondent may exercise the right to apply the
payments to the other obligations to petitioner. But this is subject to the condition that
the petitioner must give his consent. Petitioner's silence is not tantamount to consent.
The consent must be clear and definite.
ii. Requisites
The requisites are:
1.) There must be one debtor and one creditor;
2.) There must be two or more debts;
3.) The debts must be of the same kind;
4.) The debts to which payment made by the debtor has been applied must be due;
and
5.) The payment made must not be sufficient to cover all the debts.
iii. RulesinApplicationofPayments(1252‐1253)
Rules on application of payment:
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1.) The debtor has the first choice; The right to make the application once exercised
is irrevocable unless the creditor consents to the change;
2.) If the debtor does not apply payment, the creditor may make the designation by
specifying in the receipt which debt is being paid;
3.) If the creditor has not also made the application, or if the application is not valid,
the debt, which is most onerous to the debtor among those due, shall be deemed
to have been satisfied; and
4.) If the debts due are of the same nature and burden, the payment shall be applied
to all them proportionately.
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.
• Ifrulesarenotapplicableorcannotbeinferred(1254)
• Meaningofthe“mostonerousdebtor”
d. PaymentbyCession
i. Concept(1255)
ii. Requisites
iii. Effects
iv. ComparedtoAssignmentofReceivables
e. DationinPayment
i. Concept(1245)
• DistinguishedfromPaymentbyCession
DevelopmentBankofthePhilippinesv.CourtofAppeals,284SCRA14
Facts:
Lydia P. Cuba obtained from the DBP 3 separate loans which was covered by a
promissory notes. As a security for said loans, Cuba executed two Deeds of
Assignment of her Leasehold Rights over her 44-hectare fishpond.
For failure of Cuba to pay her loans, DBP appropriated her Leasehold Rights over the
fishpond without foreclosure proceedings. Then, Cuba offered and agreed to
repurchase her leasehold rights from DBP. For failure to pay the monthly amortizations
stipulated in the deed of conditional sale executed by DBP in favor of Cuba, DBP took
possession of the leasehold right and subsequently sold the it to Agripina Capera.
Issue:
Whether the assignment constitutes dation in payment?
Ruling:
No, it does not.
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Under Article 1245 of the Civil Code, Dation in payment is whereby property is alienated
to the creditor in satisfaction of a debt in money, shall be governed by the law on sales.
Dation in payment does not apply where assignment was a mere security and not in
satisfaction of indebtedness. It bears stressing that the assignment in this case, being in
its essence a mortgage, was but a security and not a satisfaction of indebtedness.
DBP's act of appropriating Cuba's rights was violative of Article 2088 of the Civil Code,
which forbids a creditor from appropriating, or disposing of, the thing given as security
for the payment of debt. DBP cannot take refuge in the deed of assignment to justify its
act of appropriating the leasehold rights since the said deed did not provide that the
leasehold rights would automatically pass to DBP upon Cuba's failure to pay the loans
on time. It merely provided for the appointment of DBP as attorney-in-fact with authority,
among other things, to sell or otherwise dispose of the said real rights, in case of default
by Cuba, and to apply the proceeds to the payment of the loan.
There is no merit in the contention that the assignment novates the promissory notes in
that the obligation to pay a sum of money was substituted by the assignment of the
rights over the fishpond. The said assignment merely complemented or supplemented
the promissory notes. The obligation to pay a sum of money remained, and the
assignment merely served as security for the loans covered by the promissory notes.
ii. Requisites
iii. Effects
FilinvestCreditCorporationv.PhilippineAcetylene,111SCRA421
FACTS:
Philippine Acetylene Co. purchased from Alexander Lim a motor vehicle for P55K to be
paid in installments. As security for the payment of said promissory note, the appellant
executed a chattel mortgage over the same motor vehicle in favor of said Alexander
Lim. Then, Lim assigned to the Filinvest all his rights, title, and interests in the
promissory note and chattel mortgage by virtue of a Deed of Assignment.
Phil Acetylene defaulted in the payment of nine successive installments. When Filinvest
sent a demand letter, Phil Acetylene wrote back of its desire to return the mortgaged
property, which return shall be in full satisfaction of its indebtedness. Thus, the vehicle
was returned to the Filinvest. However, they failed to sell the motor vehicle, as there
were unpaid taxes on the said vehicle. Filinvest requested the appellant to update its
account by paying the installments in arrears and accruing interest. They also offered to
deliver back the motor vehicle to the appellant but the latter refused to accept it, so
appellee instituted an action for collection of a sum of money with damages.
Accordng to Phil Acetylene, the delivery of the motor vehicle to Filinvest extinguished its
money obligation as it amounted to a dation in payment. Assuming arguendo that the
return did not extinguish, it was justified in refusing payment since the appellee is not
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entitled to recover the same due to the breach of warranty committed by the original
vendor-assignor Alexander Lim.
ISSUE:
Whether or not there was dation in payment that extinguished Phil Acetylene’s
obligation?
RULING:
No. The mere return of the mortgaged motor vehicle by the mortgagor does not
constitute dation in payment in the absence, express or implied of the true intention of
the parties. Dacion en pago is the transmission of the ownership of a thing by the debtor
to the creditor as an accepted equivalent of the performance of obligation. In dacion, the
debtor offers another thing to the creditor who accepts it as equivalent of payment of an
outstanding debt. The undertaking really partakes in one sense of the nature of sale,
that is, the creditor is really buying the thing or property of the debtor, payment for which
is to be charged against the debtor’s debt. As such, the essential elements of a contract
of sale, namely, consent, object certain, and cause or consideration must be present.
In this case, the evidence on the record fails to show that the Filinvest consented to the
mortgaged motor vehicle be construed as actual payment, more specifically dation in
payment or dacion en pago. The fact that the mortgaged motor vehicle was delivered to
him does not necessarily mean that ownership thereof, as juridically contemplated by
dacion en pago, was transferred from appellant to appellee. In the absence of clear
consent of appellee to the preferred special mode of payment, there can be no transfer
of ownership of the mortgaged motor vehicle from appellant to appellee. If at all, only
transfer of possession of the mortgaged motor vehicle took place, for it is quite possible
that appellee, as mortgagee, merely wanted to secure possession to forestall the loss,
destruction, fraudulent transfer of the vehicle to third persons, or its being rendered
valueless if left in the hands of the appellant.
An examination of the language of the document executed by appellant captioned

"Voluntary Surrender with Special Power of Attorney To Sell" reveals that the
possession of the mortgaged motor vehicle was voluntarily surrendered by the appellant
to the appellee authorizing the latter to look for a buyer and sell the vehicle in behalf of
the appellant who retains ownership thereof, and to apply the proceeds of the sale to
the mortgage indebtedness, with the undertaking of the appellant to pay the difference,
if any, between the selling price and the mortgage obligation. With the stipulated
conditions as stated, the appellee, in essence was constituted as a mere agent to sell
the motor vehicle which was delivered to the appellee, not as its property, for if it were,
he would have full power of disposition of the property, not only to sell it as is the limited
authority given him in the special power of attorney.
f. TenderofPaymentandConsignation
i. TenderofPayment
• Concept
• Requisites
ii. Consignation
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• ConceptandPurpose
• Requisites
- Whentenderandrefusalnotrequired(1256,par.2)
- Twonoticerequirement(1257,par.1;1258,par.2);
Effectsofnon‐compliance
• Effects(1260,par1)
Article 1260 (par.1)
Once the consignation has been duly made, the debtor may ask the judge to
order the cancellation of the obligation.
Consignation takes effect:
 When at the time the creditor accepts the said consignation with or without
any objections during the time the Court declares that it is legally valid, the
said consignation shall be deemed already completed.
Retroactivity of Consignation:
 It shall be deemed that the payment is made at the time of the deposit of the
thing in court
 It shall be deemed the same when it was placed at the disposal of the judicial
authority.
Effects of Consignation: (once the consignation has been accepted by the creditor or
the court has been declared that it has been legally valid)
1. The debtor is released in the same manner as if had performed his
obligation during the time of the consignation.
i. same effect as valid payment
2. From the moment of the said consignation, the accrual of interest on the
said obligation is suspended.
3. Without the fault of the debtor, the deteriorations or loss of the thing or the
consigned occurring must be borne by the creditor.
i. due to the risks of the thing that are transferred to creditor
from the time of the deposit.
4. Any increase or increment in value of the said thing after the time of
consignation inures to the benefit of the creditor.
- Withdrawalbydebtorbeforeacceptancebycreditororapprovalofcourt(1260,par.2)
Article 1260 (par. 2)
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.
Withdrawal by the Debtor:
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 It always depending upon the consignation if it has already been accepted

or judicially declared proper with regards to the debtor’s right to withdraw
the thing or amount deposited in court.
 Prior to the said withdrawal of the thing, the debtor is still the owner of the
said thing and may withdraw the same.
 The said obligation will may remain in full force as before the
deposit.
 The debtor only loses his right over to the thing once the consignation has
been accepted by the creditor or judicially declared as properly made
where he cannot withdraw the same without the consent of the creditor.
 The obligation is revived against the debtor personally if the
creditor consents to withdraw in such case.
 All the rights of preference of the creditor over the thing and all his action
against co-debtors, guarantors and sureties are extinguished.
 The debtor must bear all the expenses incurred when the consignation by
the latter has been revoked.
- Withdrawalbydebtorafterproperconsignation(1261)
Article 1261
If, the consignation having 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.
 The debtor cannot withdraw the thing or amount deposited unless
the creditor consents and accepted the consignation or has already
been made judicially declared as proper.
 If the creditor authorizes the debtor to withdraw the consignation
the obligation has been revived which it has been extinguished by
the consignation.
 The relationship of the debtor and the creditor
restored to the same condition in which it was before
the consignation.
Third persons
 Solidary co-debtors, guarantors and sureties who were
benefited by the said consignation are not prejudiced by the
said revival of obligation between debtor and creditor.
Guarantors and Sureties
 They are released from the obligation upon the consignation
and their liability cannot revive without their consent if the
consignation is withdrawn with the authorization of the
creditor.
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Co-debtors
 They are released from the liability to the creditor upon the
consignation but such liability of the latter’s corresponding
share of the obligation subsists.
 The withdrawal of the consignation releases the solidary co-
debtor only from his solidary liability for the share of others
but not from his liability for his own share.
 Withcreditorapproval
 Withoutcreditorapproval
• ExpensesofConsignation
DeGuzmanv.CourtofAppeals,137SCRA730
FACTS:
On February 1971, the petitioners, as SELLER, and the private respondent, as BUYER,
executed a Contract to Sell covering two (2) parcels of land owned by the petitioners
located in Pasay City. It was stipulated therein that the private respondent should pay
the balance of the purchase price of P133,640.00 on or before February 17, 1975. Two
days before the said date, the private respondent asked the petitioners to furnish her
with a statement of account of the balance due; copies of the certificates of title covering
the two parcels of land subject of the sale; and a copy of the power of attorney executed
by Rolando Gestuvo in favor of Pilar de Guzman. But, the petitioners denied the
request.As a result, the private respondent filed a complaint for specific performance
with damages against the petitioners with the CFIRizal. The trial rendered a decision
and approved a compromise agreement between the parties where the respondents will
pay 240K (due date Jan 27,1978) and petitioners to execute the transfer of the title. The
petitioners filed a motion contending that the respondents failed to abide with the terms
of the compromise agreement where it was held that respondents deposited the amount
with the court only on January 30, 1978.
ISSUE:
Whether or not the private respondents substantially complied with the terms and
conditions of the compromise agreement
RULING:
Yes. Her failure to deliver to the petitioners the full amount on January 27, 1978 was not
her fault. The blame lies with the petitioners. The record shows that the private
respondent went to the sala of Judge Bautista on the appointed day to make payment,
as agreed upon in their compromise agreement. But, the petitioners were not there to
receive it. Only the petitioners' counsel appeared later, but, he informed the private
respondent that he had no authority to receive and accept payment. Instead, he invited
the private respondent and her companions to the house of the petitioners to effect
payment. But, the petitioners were not there either. They were informed that the
petitioner Pilar de Guzman would arrive late in the afternoon, possibly at around 4:00
o'clock. The private respondent was assured, however, that she would be informed as
soon as the petitioners arrived. The private respondent, in her eagerness to settle her
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obligation, consented and waited for the call which did not come and unwittingly let the
period lapse. The next day, January 28, 1978, the private respondent went to the office
of the Clerk of the Court of First Instance of Rizal, Pasay City Branch, to deposit the
balance of the purchase price. But, it being a Saturday, the cashier was not there to
receive it. So, on the next working day, Monday, January 30, 1978, the private
respondent deposited the amount of P30,000.00 with the cashier of the Office of the
Clerk of the Court of First Instance of Rizal, Pasay City Branch, to complete the
payment of the purchase price of P250,000.00. Since the deposit of the balance of the
purchase price was made in good faith and that the failure of the private respondent to
deposit the purchase price on the date specified was due to the petitioners who also
make no claim that they had sustained damages because of the two days delay, there
was substantial compliance with the terms and conditions of the compromise
agreement.
TLGInternationalContinentalEnterprising,Inc.v.Flores,47SCRA437
FACTS:
In a case for an action for declaratory relief involving the rights of Bearcon Trading Co,
Inc. as lesseeof the premises of Juan Fabella, Judge Flores granted TLG’s Motion to
Intervene.TLG intervened as sub-lessee of Bearcon over the property to protect its
rights as sub-lessee and to enable it, during pendency of the case, to make
a consignation of the monthly rentals as it was at a loss as to who is lawfully and
rightfully entitled to receive payments of the monthly rentals. TLG deposited with the
Clerk of Court of the CFI P3, 750.00.
Upon Juan Fabella’s prayer, Judge Flores issued an Omnibus Order dismissing the
complaint and the complaint in intervention on ground that the subject matter could
be better ventilated in the ejectment case against Bearcon. Petitioner filed its Motion
to withdraw the P3, 750.00 it deposited because the Order dismissed the case and
complaint in intervention without a resolution having been made as to the right of
Fabella/Bearcon to the rentals deposited by TLG. This left TLG without any recourse but
to apply for authority to withdraw the amount and turn it over to Fabella.
Judge Flores denied it and the motion for reconsideration as well.
ISSUE:
Whether or not the CFI could authorize the withdrawal of the deposits considering that
the Court "has not ordered the intervenor to make any deposit in connection" with the
case
RULING:
YES. There is no question that in cases of consignation the debtor is entitled as a

matter of right to withdraw the deposit made with the court, before the consignation is
accepted by the creditor or prior to the judicial approval of such consignation. This is
explicit from the second paragraph of Article 1260 of the new Civil Code which states
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that: "Before the creditor has accepted the consignation, or before a judicial declaration
sum deposited, allowing the obligation to remain in force".
In this case, the case was dismissed before the amount deposited was either accepted
by the creditor or a declaration made by the Court approving such consignation. Such
dismissal rendered the consignation ineffectual. Under such circumstances it was
incumbent upon Respondent to have allowed the withdrawal by petitioner of the sums of
money deposited by it with the Court.
Respondent nevertheless insists that the Court had no authority to authorize its
withdrawal since it "has not ordered intervenor to make" the deposit. This contention
ignores the fact that the deposit was made by petitioner as a consequence of the
admission by the Court of its "Complaint In Intervention". It must be noted that the
aforesaid deposit was made with and officially receipted by the Clerk of Court.
McLaughlinv.CourtofAppeals,144SCRA693
FACTS:
On February 28, 1977, petitioner McLaughlin and respondent Flores entered into a
contract of conditional sale of real property. Petitioner then filed with the Court of First
Instance for the rescission of the deed of conditional sale due to the failure of
respondent to pay the balance due on May 31, 1977. The parties then submitted a
Compromise Agreement whereby respondent acknowledged his indebtedness to
petitioner and promised to pay the installments and monthly rental of one thousand
pesos until the obligation is fully paid, for the use of the property. Petitioner then filed a
motion for the Writ of Execution alleging that the respondent failed to pay the
installments due and prayed that the contract be rescinded. The trial court granted the
motion prompting the respondent to file a motion for reconsideration and at the same
time tendering the amount due payable to the petitioner at the Pacific Banking
Corporation which covered the entire obligation. The trial court denied the motion. The
respondent then filed with the Court of Appeals which nullified the orders of the lower
court. Hence, the instant petition.
ISSUE:
Whether or not the tender of payment was valid
RULING:
Yes, the tender of payment was valid. The Court ruled that the tender made by
respondent of a certified bank manager's check payable to petitioner was a valid tender
of payment. The payment covered not only the balance of the purchase price but also
the arrears in the rental payments. However, although private respondent had made a
valid tender of payment which preserved his rights as a vendee in the contract of
conditional sale of real property, he did not follow it with a consignation or deposit of the
sum due with the court. According to Article 1256 of the Civil Code of the Philippines, if
the creditor to whom tender of payment has been made refuses without just cause to
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accept it, the debtor shall be released from responsibility by the consignation of the
thing or sum due; Article 1257 provides that in order that the consignation of the thing
(or sum) due may release the obligor, it must first be announced to the persons
interested in the fulfillment of the obligation; and Article 1258 provides that consignation
shall be made by depositing the thing (or sum) due at the disposal of the judicial
authority and that the interested parties shall also be notified thereof.
As the Court held in the case of Soco vs. Militante: "Tender of payment must be
distinguished from consignation. Tender is the antecedent of consignation, that is, an
act preparatory to the consignation, which is the principal, and from which are derived
the immediate consequences which the debtor desires or seeks to obtain. Tender of
payment may be extrajudicial, while consignation is necessarily judicial, and the priority
of the first is the attempt to make a private settlement before proceeding to the
solemnities of consignation.” In the case at bar, although the respondent had preserved
his rights as a vendee in the contract of conditional sale of real property by a timely valid
tender of payment of the balance of his obligation which was not accepted by petitioner,
he remains liable for the payment of his obligation because of his failure to deposit the
amount due with the court. The decision of the Court of Appeals is affirmed with
modifications.
Socov.Militante,123SCRA160
FACTS:
On January 17, 1973 petitioner Soco, and respondent Francisco entered into a contract
of lease concerning a commercial building and lot, owned by petitioner for a period of 10
years. Francisco noticed that Soco did not send a collector anymore for the payment
and that at times, he paid there was no receipt given to him. Francisco sent Soco a
letter and proceeded to pay his rentals to the latter through checks issued by
Commercial Bank and Trust Company where he had a checking account. Soco had
been receiving payment from the bank from June 1975 to April 1977.It was revealed
that Francisco had been sub-leasing a portion of the building to NACIDA at a monthly
rental rate higher than what he paid to Soco. Soco then alleged that beginning May
1977, Francisco stopped paying the rentals and through her lawyer, she sent a notice to
respondent to vacate the leased premises. However, respondent replied that the rentals
due had been paid by Commercial Bank and Trust Company through the Clerk of Court
of the City Court of Cebu. Nevertheless, petitioner proceeded to file the instant case of
illegal detainer. The Court of First Instance ruled that there was substantial compliance
of the requisites of consignation, hence Francisco cannot be evicted since his payments
were valid which reversed the judgment of the City Court of Cebu ruling that the
consignation was not valid and ordering Francisco to vacate the leased premises.
Hence, this petition.
ISSUE:
Whether or not the consignation of the rentals was valid to discharge the lessee’s
obligation to pay the same.
RULING:
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No, the consignation was not valid. The Court held that in order that consignation may
be effective, the debtor must first comply with certain requirements prescribed by law.
The debtor must show (1) that there was a debt due; (2) that the consignation of the
obligation had been made because the creditor to whom tender of payment was made
refused to accept it, or because he was absent or incapacitated, or because several
persons claimed to be entitled to receive the amount due (Art. 1176, Civil Code); (3) that
previous notice of the consignation had been given to the person interested in the
performance of the obligation (Art. 1177, Civil Code); (4) that the amount due was
placed at the disposal of the court (Art. 1178, Civil Code); and (5) that after the
consignation had been made the person interested was notified thereof (Art. 1178, Civil
Code). Failure in any of these requirements is enough ground to render a consignation
ineffective.
In the present case, respondent failed to prove the following requisites of a valid
consignation: First, the respondent failed to prove tender of payment of monthly rentals
to the petitioner. Second, respondent also failed to prove the first notice to the lessor
prior to consignation. In this connection, the purpose of the notice is in order to give the
creditor an opportunity to reconsider his unjustified refusal and to accept payment
thereby avoiding consignation and the subsequent litigation. This previous notice is
essential to the validity of the consignation and its lack invalidates the same. Third,
respondent lessee likewise failed to prove the second notice, that is after consignation
has been made, to the lessor. The reason for the notification to the persons interested
in the fulfillment of the obligation after consignation had been made, is to enable the
creditor to withdraw the goods or money deposited…” And lastly, the fourth requisite
that respondent lessee failed to prove is the actual deposit or consignation of the
monthly rentals since not a single copy of the official receipts issued by the Clerk of
Court was presented to prove the actual deposit or consignation. The Court ruled that
the evidence is clear in showing that the lessee has violated the terms of the lease
contract and he may, therefore, be judicially ejected. The decision of the Court of First
Instance is reversed and set aside.
Sottov.Mijares,28SCRA17
FACTS:
The defendants owed plaintiff the balance of 5,106 pesos which defendant alleged they
offered to pay the plaintiff who refused to receive the said amount. Plaintiff filed a
Motion to Deposit. Defendant signified their willingness to deposit the said amount
provided that the complaint be dismissed and that they be absolved from all other
liabilities. The lower court ordered the defendant to deposit the amount of 5,106 pesos
to the Clerk of Court. Defendants then moved to reconsider the order since the said
amount was actually secured by a real estate mortgage and that they would premise
their willingness to deposit said amount on the condition that the plaintiff will cancel the
mortgage and be ordered to return to defendants the tile of the mortgaged property. The
lower court then ordered the defendant to deposit the said amount with the Clerk of
Court within ten days from receipt of the order. Hence, this petition.
ISSUE:
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Whether or not the court acted in the judicious exercise of its discretion in ordering the
defendants to deposit but without the condition they had stated.
RULING:
No, the Court ruled that whether or not to deposit at all the amount of an admitted
indebtedness, or to do so under certain conditions, is a right which belongs exclusively
to the debtor. If the debtor refuses, he may not be compelled to do so. A consignation is
a facultative remedy which he may or may not avail of. If made by the debtor, the
creditor merely accepts it, if he wishes; or the court declares that it has been properly
made, in either of which events the obligation is ordered cancelled. Indeed, the law says
that "before the creditor has accepted the consignation or before a judicial declaration
sum deposited, allowing the obligation to remain in force. "If the debtor has such right of
withdrawal, he surely has the right to refuse to make the deposit in the first place. For
the court to compel him to do so was a grave abuse of discretion amounting to excess
of jurisdiction. The decision of the lower court is set aside.
Reisenbeckv.CourtofAppeals,209SCRA657
FACTS:
Petioner/Plaintiff Reinsenbeck filed a complaint for consignation and damages at the
RTC of Cebu against respondent Juergen Maile. Respondent then filed a Manifestation
Accepting Consignation and Motion to Dismiss stating "without necessarily admitting
the correctness of obligation of plaintiff to defendant”. He will accept the amount of
P113, 750 consigned by Petioner provided that the case will be dismissed outright with
cost against the petitioner, however, Reinsen beck opposed the manifestation.
Respondent Maile filed an Answer with Special Defenses and Counterclaim. Petitioner
filed his Answer to Counterclaim. Respondent filed a rejoinder/reply to the petitioner's
opposition.
The trial court ruled in favor of the defendant, stating that there was valid consignation
and the defendant may accept the payment by consignation with reservation to prove
damages and other claims. Motion for reconsideration is dismissed.
The Court of Appeals dismissed the petition for certiorari and denied the Motion for
Reconsideration filed by the plaintiff.
ISSUE:
Whether Maile can accept with reservation the amount consigned by Reinsenbeck?
HELD:
Yes. The acceptance of Maile, with reservation, of the amount consigned by
Reisenbeck is legally permissible. Before the consignation can be judicially declared
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proper, the creditor may prevent the withdrawal of the amount consigned by the debtor,
by accepting the consignation, even with reservations.
When the creditor accepts the money consigned with conditions and reservations, it will
not constitute a waiver of the claims he reserved against the debtor. Thus, when the
amount consigned does not cover the entire obligation, the creditor may accept it,
reserving his right to the balance.
The Supreme Court mentioned their ruling in the case of Sing Juco wherein they held
that the plaintiff’s acceptance of the money consigned, unconditionally and without
reservation, was a waiver of his other claims under the contract however, in the case at
bar, Maile accepts the consignation with some reservation, he is still entitled to demand
other claims, as he did in his answer with special defenses and counter claims. The
acceptance of the consignation because of the reservation did not extinguished the
entire indebtedness
Be it noted that the consignation is completed at the time the creditor accepts the same
without objections, or if the court declares that it has validly made in accordance with
law.
RuralBankofCaloocanv.CourtofAppeals,104SCRA151
FACTS:
Maxima Castro accompanied by Severino Valencia went to the Rural Bank of Caloocan
to apply for an industrial loan for 3,000.00. Castro and Valencia spouses were then
granted a loan of 3,000.00 each. Two promissory notes were signed in favor of the
bank, the first one was signed by Castro, for her own loan and the second note was
signed by Valencia Spouses and Castro as co-maker, for the Spouses’ loan. The two
loans were secured by real estate mortgage of Castro’s house and lot.
On February 1961, Castro received a letter from the Sheriff of Manila that her house
and lot was to be sold in a public auction to satisfy the obligation covering the two
promissory notes for the amount of P 6,000.00 plus 12% interest per annum and
attorney’s fee. Castro and the Valencias asked for the postponement, it was granted but
was still eventually sold.
Castro contends that it was only at the time she received the letter from the Sheriff, she
found out that the property was mortgaged for the amount of P6,000.00 and not for P
3,000.00 and she was made to sign a promissory note as co-maker without her being
informed.
Castro filed a case at the CFI of Manila “Re: Sum of Money” against petitioner Bank and
Desiderio, Spouses Valencia and others alleging that she was induced to sign as a co-
maker a promissory note without her consent and to mortgage her house and lot to
secure the questioned note.
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At the time of the filing of complaint, Castro deposited the amount of P3,383.00 with the
Court in full payment of her personal loan plus interest. In her amended complaint, she
prayed that the annulment of the promissory note and mortgage contract in so far it
exceeds P3,000.00; for the discharge of her personal obligation with the bank by
reason of a deposit of P3,383.00 with the Court a quoupon the filing of her complaint;
and for the annulment of the foreclosure sale of her property.
ISSUE:
Whether the consignation made by Castro was valid.
RULING:
No.
The consignation made by Castro was invalid.
The consignation made without prior offer of the tender of payment to the Bank is invalid
considering that it is a substantial compliance of the requisites of valid consignation
stated in Article 1256 of the New Civil Code.
The fact that the Bank was holding Castro liable for the sum of P6,000.00 plus 12%
interest per annum, while the amount consigned was only P3,000.00 plus 12% interest,
that at the time of the consignation, the Bank had long foreclosed the mortgaged
extrajudicially and the sale of the mortgage property had already been scheduled for
April 10, 1961 for non-payment of the obligation, and that despite the fact that the Bank
already knew of the deposit made by Castro because the receipt of the deposit was
attached to the record of the case, said Bank had not made any claim of such deposit,
and that therefore, Castro was right in thinking that it was futile and useless for her to
make previous offer and tender of payment directly to the Bank only in the aforesaid
amount of P3,000.00 plus 12% interest. Under such circumstances, it will constitute a
valid consignation however, due to strict provisions of the law, under the more liberal
considerations of equity it is invalid.
Licuananv.Diaz,175SCRA530
FACTS:
The petioner Licuanan and the respondent Pienda entered into a contract of lease,
wherein the petitioner is the owner of an apartment which was rented by the latter. The
monthly rental will be P180.00 payable within five (5) days every month.
In the year 1978, respondent received a letter from the law office of Amado E.
Salalongos and Associates stating that upon arrival of the owner, she found out that the
respondent was occupying the garage of the apartment which is not included in their
contract, and she is given five (5) days to vacate the premises in which the respondent
denied.
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In August 1978, another letter was received by respondent form Atty. Melo, demanding
the payment of April to August rentals in the amount of P900.00.
Petioner then filed a case for unlawful detainer and damages against the respondent
alleging that shefailed to pay the monthly rentals and despite the repeated demands to
pay the arrears in rentals and to vacate the property the respondent did not do so. The
respondent denies that she fails to pay the rentals alleging that it was the petitioner who
refuses to accept her payment and upon the advice of the Office of the Civil Relations,
AFP, she deposited her monthly rentals with that office for the months of April to
September, 1978, inclusive at P80.00 a month; and that she admits having received the
letter of demand dated August 23, 1978. She also called Atty. Melo and informing him
that she deposited the rentals in the said office and the petitioner may withdraw the
same.
The trial court ruled to dismiss both the case for unlawful detainer and the petition for
consignation. The Court of Appeals affirmed the decision. The Motion for
Reconsideration was denied.
ISSUE:
Whether private respondent's deposit of the rentals due to petitioner with Civil Relations
Service, now Office for Civil Relations, AFP, is a valid consignation.
RULING:
NO. The private respondent's deposit of the rentals due to petitioner with Civil Relations
Service, now Office for Civil Relations, AFP, is not valid consignation.
This was previously ruled in the case of Landicho v Tensuan wherein the law prescribes
that such consignation or deposit of rentals should be made with the Court and/or under
Batas Pambansa Bldg. 25 in the bank and not elsewhere.
Likewise, in the case of Soco, Articles 1256- 1261 provided the essential requisites of
valid consignation. And these Articles must be in strict compliance. The substantial
compliance is not enough for that would render directory construction to the law. One of
the requisite of a valid consignation is that after the consignation has been made, the
person interested was notified thereof the reason is to enable the creditor to withdraw
the goods or money deposited.
In the present case, the perusal of the records will readily show that private respondent
failed to comply with this requirement. Even granting that petitioner was present when
the hearing officer of the Office of the Civil Relations, AFP, instructed private
respondent to deposit the April rental, it will be noted that petitioner was not notified that
a deposit was made in the said office; and in the succeeding monthly rentals, no tender
of payment was made to petitioner, now was she given any choice that consignation will
be made or that consignation had been made.
Wherefore, the decision CFI of Manila was REVERSED and SET ASIDE.
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Chanv.CourtofAppeals,230SCRA685
FACTS:
Felisa Chan, the petitioner and Grace Cu, private respondent entered into a contract of
lease whereby the latter will occupy two rooms of a building owned by the former
located in Manila. The term of the lease is 1 year. The monthly rental was raised every
year. Said contract of lease was renewed every year for 2 successive years or up to
February 1, 1986. After February 1, 1986, there was no written contract of lease
executed by the parties, but Cu has continuously occupied the premises. Eventually,
Chan terminated the lease, giving Cu until January 1, 1990 to vacate the premises.
Because of the dispute between the parties, Chan did not collect the rental for
December 1989. Whereupon, Cu tendered to Chan a check, which the latter refused to
accept. Cu’s lawyer tendered the payment in cash in the same amount with notice to
Chan that if she will not accept the payment, the same will be deposited in court by way
of consignation. On January 15, 1990, Cu filed a civil case for consignation with the
Metropolitan Trial Court of Manila. She alleged that Chan refused to accept, without
justifiable cause, the rentals for the premises in question. Chan interposed in her
answer a counterclaim for ejectment. The MeTC and RTC declared that the
consignation of rentals made by Cuis valid and legal and released Cu from the
obligation of paying the said rentals. However, on appeal, CA reversed and set aside
the decisions of the MeTC and the RTC and dismissed the complaint for consignation
for lack of merit. Hence, this petition.
ISSUE:
Whether the consignation made by the debtor-lessee is valid.
RULING:
YES, there is a valid consignation.
On the validity of the consignation, both parties agree that the controlling case in Ponce
de Leon vs Syjuco Inc, 90 phil. 311. The court believes that under the undisputed facts
earlier narrated, petitioner has complied with all requisites laid down in the said case,
namely; “The debtor must show (1) that there was a debt due; (2) that the consignation
of the obligation had been made because the creditor to whom tender of payment was
made refused to accept it, or because he was absent or incapacitated, or because
several persons claimed to be entitled to receive the amount due (Art. 1176 Civil Code);
(3) that previous notice of the consignation had been given to the person interested in
the performance of the obligation (Art. 1177, Civil Code); (4) that the amount due was
placed at the disposal of the court and (5) that after the consignation had been made
the person interested was notified thereof.”
MeatPackingCorp.v.Sandiganbayan,359SCRA409
FACTS:
Meat Packing Corporation of the Philippines (MPCP) is a corporation wholly owned by
GSIS. It is the owner of 3 parcels of land in Pasig as well as the meat processing and
packing plant thereon. On November 3, 1975, MPCP and Philippine Integrated Meat
Corporation (PIMECO) entered into a lease-purchase arrangement over its aforesaid
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property with a rescission clause that, if the lessee-vendee (PIMECO) should fail or
default in the payment of rentals equivalent to the cumulative sum total of 3 annual
installments, the Agreement shall be deemed automatically canceled and forfeited
without the need of judicial intervention. MPCP and PIMECO on the same date, entered
into a Supplementary and Loan Agreement, the total contract price of the lease-
purchase agreement was increased to P93,695,552.59, payable over a period of 28
years, at the annual rental rate of P3,346,269.70.
Later, PCGG sequestered all the assets, properties, and records of PIMECO, including
the meat packing plant and the lease-purchase agreement. However, as alleged by
PIMECO, after sequestration, PCGG became erratic and irregular in its payments of
annual rentals to MCP, thus, MPCP wrote a letter to PIMECO, giving notice of the
rescission of the lease-purchase agreement on the ground, among others, of non-
payment of rentals of more than P2M. MPCP sought to PCGG the turnover of the meat
packaging plant on the ground that the lease-purchase agreement had already been
rescinded. PCGG ordered the transfer of the plant to MCP, under various conditions.
Sandiganbayan found that PCGG committed grave abuse of authority, power, and
discretion in unilaterally terminating the lease-purchase agreement of PIMECO and
MPCP, and in turning over its management, control, and operation to the latter.
In the meantime, PCGG tendered to MCP two checks in the total amount of
P5,000,000.00 for the accrued rentals, which MCP refused to accept. However,
Sandiganbayan declared that the tender and consignation of the checks have been
validly made, and ordered MCP to accept the payment. Hence, this petition.
ISSUE:
Whether or not there is a valid tender of payment and consignation.
RULING:
YES. The tender of payment and consignation by PCGG have been validly made.
The Supreme Court stated that, consignation is the act of depositing the thing due with
the court or judicial authorities whenever the creditor cannot accept or refuses to accept
payment, and it generally requires a prior tender of payment. Tender is the antecedent
of consignation. Tender of payment may be extrajudicial, while consignation is
necessarily judicial, and the priority of the first is the attempt to make a private
settlement before proceeding to the solemnities of consignation. Tender and
consignation, where validly made, produces the effect of payment and extinguishes the
obligation. 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.
In the case at bar, there was prior tender by PCGG for payment of the rentals in arrears.
MPCP’s refusal to accept the same on the ground merely that its lease-purchase
agreement with PIMECO had been rescinded was unjustified. PIMECO paid, and
MPCP received several amounts due under the lease-purchase agreement. Certainly,
the acceptance by MPCP of such payments negates any rescission of the lease-
purchase agreement. Further, under the terms of the lease-purchase agreement, the
amount of arrears in rentals or amortizations must be equivalent to the cumulative sum
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of three annual installments, in order to warrant the rescission of the contract, therefore,
it must be shown that PIMECO failed to pay the aggregate amount of at least
P10,038,809.10 before the lease-purchase agreement can be deemed automatically
canceled. Assuming in the extreme that, as alleged by MPCP, the arrears at the time of
tender amounted to P12,578,171.00, the tender and consignation of the sum of
P5,000,000.00, which had the effect of payment, reduced the back rentals to only
P7,578,171.00, an amount less than the equivalent of three annual installments. Thus,
with the Sandiganbayan’s approval of the consignation and directive for MPCP to
accept the tendered payment, the lease-purchase agreement could not be said to have
been rescinded. Hence, there was a valid tender of payment and consignation on the
part of PCGG.
Petition is hereby dismissed.
2. LossorImpossibility
a. LossoftheThingDue
i. Concept(1189,par.2)
Article 1189 (par.2)
If the thing is lost through the fault of the debtor, he shall be obliged to pay
damages; it is understood that the thing is lost when it perishes, or goes out if
commerce, or disappears in such a way that its existence is unknown or it cannot be
recovered.
 It is understood that the thing is lost when;
o When the thing perishes.
 The house is destroyed by fire
 The crop is washed away by flood
 The fruits are rotten
 The animal dies
o When the thing goes out the commerce of man.
 The thing is declared by law as a contraband
 Such private land belonging to the municipality is converted into
plaza
o When the thing disappears in such manner that the existence is unknown
or it cannot be recovered.
 The thing is dropped in a forest or in any place where it cannot be
found
 The thing is stolen by unknown person
 Partial loss
o When it is due to the fault or negligence of the debtor
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 The creditor can demand the rescission of the obligation

 The creditor can demand a specific performance of the obligation
 When it is due to fortuitous event
 If it is substantial loss the obligation is extinguished
 If it is unsubstantial loss the debtor shall deliver the thing promised
in its impaired condition.
ii. Kinds
• Total
• Partial
iii. Requisites(1262)
Article 1262
An obligation which consists in the delivery of a determinate thing shall be
extinguished if it should be lost or destroyed without the fault of the debtor, and before
he has inured delay.
When by law or stipulation, the obligor is liable even for fortuitous event, 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.
 General Rule: The obligation is extinguished when the object or thing of the
obligation is lost or destroyed.
Requisites:
 The object or thing lost must be determinate
 The object or thing lost is without fault of the debtor
 The thing is lost prior to the delayed incurred by the debtor
iv. Presumption(1266,1267)
Art. 1266
Subsequent Impossibility
 A modification or extinguishment of the obligation, depending on whether or not it
is imputable to the debtor
 Refers to an impossibility which arises after the obligation has been constituted.
Nature of Impossibility
 Physical impossibility
 When the act by reason of its nature cannot be accomplished.
 Legal impossibility
 When the act, by reason of a subsequent law is prohibited.
Impossibility maybe objective or subjective
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 Objective
 When the act or service in itself, without considering the person of the obligor,
becomes impossible.
 Subjective
 When the act or service cannot be done by the debtor himself, but it can be
accomplished by others.
Note: Objective and subjective impossibility produce the same effect.
V. Effects
 The impossibility of performance releases the debtor from his obligation.
Because the obligation is legitimate in its origin, the supervening impossibility of
the prestation, independent of the will of the obligor, cannot render the latter
liable beyond the restitution of what he may have received in advance from the
creditor; it cannot make him liable for damages.
Partial impossibility
 Partial impossibility cannot be subjected to inflexibility rules, but attention must
be directed to the importance and consequence of the partial impossibility and
the purpose of the obligation in each case.
Temporary impossibility
 Temporary obstacle to the performance of the prestation, which may be
expected to disappear in the near future, do not extinguish the obligation, but
merely delay its fulfillment, unless by its nature or by the will of the parties it has
to be performed at a determinate time. But if the obstacles are of an unknown
and unforeseen duration, the obligation may be considered judicially impossible
of performance; it is extinguished, and is not revived by the fact that it becomes
possible later when circumstances change.
Art. 1267
General Rule: Impossibility of performance releases the obligor. However, when the
service has become so difficult as to be manifestly beyond the contemplation of the
parties, the court should be authorized to release the obligor in whole or in part.
Requisites:
1. The event or change in circumstances could not have been foreseen at the time
of the execution of the contract.
2. It makes the performance of the contract extremely difficult but not impossible.
3. The event must not be due to the act of any of the parties.
4. The contract is for a future prestation.
v. Effects
• Inanobligationtogiveaspecificthing(1262,1268)
Art. 1262
 There is no physical or legal loss, but the thing belongs to another, the
performance by the debtor of the obligation undoubtedly becomes impossible.
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This would not have happened if the thing had belonged to the debtor at the time
of the obligation was constituted.
Art. 1268
 When the debtor tenders or offers payment, and the creditor refuses to
receive it without reason, there are two alternatives open to the debtor;
either
1. Tot consign the thing and thereby relieve himself from any further
responsibility for such thing.
2. To just keep the thing in his possession with the obligation to use due
diligence, subject to the general rules of obligations, but no longer to
liability imposed by this article.
 In an obligation to give a generic thing

• Inanobligationtogiveagenericthing(1263)
Art. 1263
 In the loss of generic thing, the obligation is not extinguished if the object is
indeterminate or generic.
 When all the things of the kind stipulated disappear or perish, the obligation to
deliver a generic object is extinguished.
• Incaseofpartialloss(1264)
Art. 1264
 Partial loss is not imputable to the fault or negligence of the debtor, but to
fortuitous events or circumstances beyond his control.
 Partial loss does not extinguish the obligation; the thing should be delivered to
the creditor in its impaired condition, without any liability for damages on the part
of the debtor but if the portion that is lost is of such an extent or nature that the
obligation would not have been constituted without it, then the obligation is
extinguished.
• Actionagainstthirdpersons(1269)
b. ImpossibilityofPerformance
i. Concept(1266,1267)
ii. Kinds
• Total
• Partial
iii. Requisites(1266)
iv. Effects
• Inobligationstodo(1266‐1267;1262,par.2)
• Impossibilitydistinguishedfromdifficulty
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• Incaseofpartialimpossibility(1264)
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. (Art. 1264)
Rule
Whether or not the partial loss or of the thing is of such importance that it would be
tantamount to a complete loss or destruction, shall depend upon the sound discretion of
the court.
Occeñav.CourtofAppeals,73SCRA637
FACTS:
Respondent Tropical Homes, Inc. entered into a subdivision contract to develop

petitioner’s land. They agreed that respondent would receive 40% from the sale of the
subdivision lots. Thereafter, development costs rose to unanticipated levels and not
within the remotest contemplation of the parties, which prompted respondent to file an
action for the modification of the terms and conditions of the contract, particularly on the
sharing of sale proceeds. Petitioner moved to dismiss complaint for lack of cause of
action. The lower court denied said motion. On appeal, CA also dismissed the petition
citing Article 1267 on impossible obligations. However, petitioner insists that the
increase in said development costs do not constitute sufficient cause of action for
modification of the contract. Hence, this petition.
ISSUE:
Whether or not respondent may demand modification of the contract on the ground that
the performance has manifestly beyond the contemplation of the parties.
RULING:
No. Respondent cannot demand modification of the contract on the impossibility of

performance.
Supreme Court ruled that Article 1267 of the Civil Code which states that: “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” is only
applicable if the remedy sought is the release from the compliance of the obligation not
a modification of the same.
The cited article does not grant the courts authority to remake, modify or revise the
contract or to fix the division of shares between the parties as contractually stipulated
with the force of law between the parties, so as to substitute its own terms for those
covenanted by the parties themselves.
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In the case at bar, the respondent complaints for modification of contract which
manifestly has no basis in law and therefore states no cause of action. Hence, petition
is granted.
NagaTelephoneCompanyv.CourtofAppeals,230SCRA351
PNCCv.CourtofAppeals,272SCRA183
3. CondonationorRemission
a. Concept
 Condonation or remission is the gratuitous abandonment by the creditor of his
right. In plain language, this refers to the forgiveness of indebtedness. To
extinguish the obligation, it requires debtor’s consent.
b. Kinds
1) As to form - remission may be express or implied. It is express when it is made in
accordance with the formalities prescribed by law for donations; it is implied
when, although it is not made in accordance with the formalities prescribed by
law for donations, it can be deduced from the acts of the obligee or creditor.
2) As to extent - remission may be total or partial. It is total when the entire
obligation is extinguished; it is partial when it refers only to the principal or to the
accessory obligation or to an aspect thereof which affects the debtor as for
instance solidarity.
• Totalorpartial
• Expressorimplied(1270,par.1)
Art. 1270. Condonation or remission is essentially gratuitous, and requires the
acceptance by the obligor. It may be made expressly or impliedly.
c. Requisites(1270,par.2)
One and the other kind shall be subject to the rules which govern in officious
donations. Express condonation shall, furthermore, comply with the forms of
donation. (1187)
 Condonation is an act of liberality. Creditor does not enforce the debtor’s
prestation which in effect, a donation of the obligee’s credit in favour of the
debtor.
 It requires the implied/express consent of debtors
 It is governed by the rules of inofficious donation
Yamv.CourtofAppeals,303SCRA1
d. Presumptions(1271‐1272;1274)
1) Presumption when private document evidencing debt is found in the possession
of the debtor – when the private document evidencing the debt is found in the
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possession of the debtor, the same is presumed to have been delivered

voluntarily by the creditor to the debtor (Art. 1272). Thus, there is no such
presumption if the document is a public document which is easily available being
a public record.
2) Presumption 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 – When the
thing pledged after its delivery to the creditor is found in the possession of the
debtor, the accessory obligation of pledged is presumed remitted but not the
principal obligation. (Art. 1274)
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)
 This article creates a presumption that if a private document evidencing credit is
given by the creditor to the debtor, it implies that he is condoning the debt.
 This waiver can be nullified by showing that it is inofficious
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)
 Creates a presumption that if the debtor has the document and it is not known to
him where he got it, it is presumed that it was given by creditor voluntarily.
 Delivery is presumption of payment and not remission. Only when it is known
that there is no payment should there be a presumption of remission
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)
 Creates a presumption that the obligation has been remitted if the thing pledge is
found in the possession of the debtor, or third person.
e. Effects
i. Ingeneral
ii. Incaseofjointorsolidaryobligations
f. GoverningRules(1270)
Art. 1270. Condonation or remission is essentially gratuitous, and requires the
acceptance by the obligor. It may be made expressly or impliedly.
g. RenunciationofPrincipalorAccessoryObligation(1273)
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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)
Accessory follows the principal. When principal is waived, the accessory is waived as
well. But when accessory is waived, principal remains in force
4. Confusion or Merger
a. Concept
b. Requisites
c. Effects
i. Ingeneral(1275)
Art. 1275. The obligation is extinguished from the time the characters of creditor
and debtor are merged in the same person. (1192a)
 This involves only one person, who becomes a creditor and debtor of himself.
ii. Incaseofjointorsolidaryobligations(1277)
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)
 Total obligation is not extinguish if merger occurred on joint obligation,
extinguishment occurs only up to the extent of his proportionate share. In case of
solidary obligation, whole obligation is extinguished.
d. ConfusioninPrincipalorAccessoryObligations(1276)
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)
 Indebtedness guaranteed by a 3rd person is also extinguished if there is
confusion/merger. Thus, guarantor is benefitted because the accessory
obligation of the guarantee is extinguished.
5. Compensation
a. Concept(1278);distinguishedfromConfusion
Art. 1278. Compensation shall take place when two persons, in their own right,
are creditors and debtors of each other. (1195)
 Compensation involves debts of two persons, who, in their own right, are debtors
and creditors of each other.
 Kinds of compensation
o As to extent
 Total – both obligations are of the same amount, and thus are
entirely extinguished.
 Partial – two obligations are of different amounts and a balance
remains
o As to cause/origin
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 Legal – by operation of law, with or without knowledge of the

parties
 Voluntary – agreement of parties
 Judicial – order of the court in litigation
 Facultative – can be set up by only one of the parties.
b. Kinds
i. TotalorPartial
ii. Legal
• Requisites(1279‐1280):Duedistinguishedfromdemandable
Article 1279
In order that compensation may prosper, 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
Gantionv.CourtofAppeals,28SCRA235
FACTS:
GanTion filed an ejectment case against Ong Wan Seing alleging for the non-payment
of the latter for the rents due in months August and September amounting of P180 per
month or a total amount of P360. Ong denied the said allegation and said that the
agreed monthly rental was only P160 which he was offered to but refused by Tion. Tion
obtained a favorable judgment in the MTC Manila but upon the appeal the Court of First
Instance dated July 2, 1962, the said court reversed the judgment and dismissed the
complaint and ordered the plaintiff to pay the sum of P500 as attorney’s fees and Ong
able to obtained a writ of execution of the judgment for the attorney’s fees in his favor.
On October 10, 1963, Tion demanded Ong for his unpaid rents corresponding to a
period from August 1961 to October 1963 a total amount of P4, 320.
Tion file a petition to the Court of Appeals claiming that Ong was still indebted for the
said unpaid rentalsin the sum of P4, 320 and contends that the said the P500 which
served as the attorney’s fees of Ong’s counsel should be included as a legal
compensation.
ISSUE:
Whether or not there has been legal compensation between GanTion and Ong Wan
Seing.
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RULING:
Although respondent Ong is still indebted to the petitioner for unpaid rentals in an
amount of more than P4, 000, the sum of P500 cannot be subjected as legal
compensation for which it is a trust fund for the benefit of the lawyer, which would have
to be turned over by the client to his counsel.
Pursuant to article 1278, “both parties must be creditors and debtors of each other in
their own right” and the one of the requisite of legal compensation pursuant to article
1279, “that each one of them must be bound principally and the same time be a
principal creditor of the other”, are not present in the instant case, since the real creditor
who shall benefit the amount of P500 was the defendant’s counsel.
According to article 2208, the award for attorney’s fees is made in favor of the litigant,
not for his counsel, the litigant is the judgment creditor and who may enforce the
judgment by execution. Therefore, such credit may properly be the subject of the legal
compensation. Also, it would be unjust to compel petitioner to pay P500 when his
creditor is indebted to him for the amount more than P4, 000.
BankofthePhilippineIslandsv.Reyes,255SCRA571
FACTS:
On September 25, 1985, private respondent Edvin F. Reyes opened a joint saving
account with his wife Sonia S. Reyes at BPI Cubao, Shopping Center Branch. On
February 11, 1986 Reyes also held another joint account with his grandmother the one
named Emeteria M. Fernandez at same bank branch, where he regularly deposited in
the said account the U.S. Treasury Warrants payable to the order of Fernandez as her
monthly pension. However, on December 28, 1989, Fernandez died without the
knowledge of the U.S. Treasury Department and the said department still sent her
monthly pension amounting to U.S $377.003 or P10, 556. On January 4, 1990, private
respondent deposited the said U.S treasury check of Fernandez in the saving account
joint with his grandmother. The said check was then sent to the United States for further
clearing. On March 8, 1990, the latter closed the said saving account and transferred its
funds amounting to P14, 112.19 to the savings joint account with his wife. However, on
January 16, 1991 the said check was dishonored as it was discovered that Fernandez
died three days prior to its issuance, and it was also the first time the petitioner bank
came to know of the death of Fernandez. Whereby, the U.S. Department of Treasury
requested the petitioner bank to refund the said amount of money. On an urgent
telegram issued by the petitioner bank dated February 19, 1991, requesting Reyes to
contact the Manager Grace Romero or Assistant Manager Carmen Bernardo. Upon
calling the petitioner bank, Reyes assured that he would drop by the bank to look into
the matter, also verbally authorized the petitioner bank to debit from his other joint
account the amount dishonored by the U.S Treasury Department where the petitioner
bank debited the said amount from the joint account with Reyes’ wife. However,
February 21, 1991 Edvin Reyes with his lawyer visited the petitioner bank and shown to
then the refund documents and demanded the petitioner bank the restitution of the
debited amount claiming that due to the said debit, he failed to withdraw his money
when he needed them.
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Private Respondent filed a complaint for damages against the petitioner bank before the
Regional Trial Court of Quezon City alleging the counterclaim for moral and exemplary
damages, however the petitioner bank comment on the said allegation that the private
respondent gave his express verbal authorization to debit the said amount and the latter
refused to execute a written authority. Whereby, the lower court dismissed the
complaint of the private respondent; however, the Court of Appeals reversed the said
decision. Petitioner now contended that respondent Court of Appeals erred on its
decision.
ISSUE:
Whether or not the Court of Appeals erred upon its decision that legal compensation is
proper.
HELD:
The Court of Appeals erred when it failed to rule that legal compensation is proper.
According to article 1278 of the New Civil Code the “compensation shall take place
when two persons, in their right, are creditors and debtors of each other.” Also stating
article 1290 of the New Civil Code; “When all the requisites mentioned in article 1279
are present, compensation shall take 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.”
All the elements of legal compensation in article 1279 are present in the case at bar. (a)
The obligors bound principally are at the same time creditors of each other. The mere
fact that the petitioner bank stands as a debtor of his depositor, the private respondent;
at same time, petitioner bank is the creditor of the private respondent with respect to the
dishonored check which the private respondent illegally transferred to his joint account;
(b) The debts involved consist of a sum of money; they are (c) due; (d) liquidated and
demandable; (e) They are not claimed by a third person.
Therefore, the decision of the Court of appeals is Annulled and set aside and the
decision of the Regional Trial Court is reinstated.
PhilippineNationalBankv.SapphireShipping,259SCRA174
FACTS:
Philippine National Bank appropriated $2,627.11 and P34, 340.38 from remittances of the
named Ramon Lapez abroad. The said first remittance was made by the NCB of Jeddah, which
to be credited to the Lapez’saccount in Citibank, Greenhills Branch; the second one made from
Libya which intended to be deposited also to Lapez’s account with the Philippine National Bank.
The former made a written demand for the remittance of the equivalent of $2,627.11 through a
letter which was dated December 4, 1986. The said letter was answered by PNB on December
22, 1986 stating that the latter is inviting Lapez to come for a conference. Consequently, prior
to the said dates mentioned, in sometime in November 1980 and also in January 1981, Lapez
received duplicated credits and a total amount of P87, 380.44. However the PNB claims that
Lapez’s claim has already prescribed. Thereafter, PNB demanded Lapez to refund the duplicated
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credits which was erroneously made on his account, with the knowledge and consent of Lapez
providing the receipt dated February 18, 1987, a deduction was made amounting P34, 340.38.
Both the Trial Court and the Court of Appeals ruled in favor of Ramon Lapez, which the
petitioner bank filed for petition to the Supreme Court.
ISSUE:
Whether or not the petitioner bank was legally justified in making the compensation to recover
$2,627.11 with its legal interest rate from year 1987 and for the amount of P34, 340.38 that
erroneously made in 1980 and 1981
RULING:
No, however, with regards to the case of the $2,627.11, one of the requisites for legal compensation
pursuant to article 1279 is missing. The said article clearly states that,
“In order that compensation may prosper, 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 consists 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 by
any retention or controversy, commenced by third persons and communicated in due time to the
debtor.”
When in terms of the relationship of Lapez being the depositor of PNB, it is no doubt that they
are creditor and debtor respectively. However, as to the relationship created by the telexed
fund transfers from abroad, the said contract between the foreign bank and local bank asking
the latter to pay an amount to a beneficiary is a stipulation, in which it results a stipulation in
favor of a third person.
However, the Court believes that insofar as the amount of P34, 340.38 is concerned, all the
essential elements under article 1279 of the New Civil Code are present, and the said amount
may properly be the subject of compensation or setoff. Pursuant to article 1286, the
compensation shall takes place.
CKHIndustrialDevelopmentv.CourtofAppeals,272SCRA333
Facts: Petitioner CKH is the owner of two parcels of land consisting of 4,590 square
meter and 300 square meter located in Karuhatan, Valenzuela. CKH is a corporation
built by Cheng Kim Heng. Upon Cheng’s death, the corporation was transferred to his
second wife Rubi Saw.
Before coming to the Philippines, Cheng was married to Hung Yuk Wah, who lived in
Hongkong together with their children, Chong Tak Kei, Chong Tak Choi, and Chong Tak
Yam. In 1976 Cheng migrated to the Philippines and, in 1977 Cheng married Rubi Saw.
He brought his first wife and their children to the Philippines becomes a naturalized
Citizens. Cheng died in 1984.
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On May 8, 1988, Rubi Saw and Lourdes Chong, Kei’s wife, met at the 1266 Soler St.,
Sta. Cruz, Manila, where Cheng’s friend Uy Chi Kim resides. They executed a Deed of
Absolute Sale, where Saw in behalf of CHK Corp. agreed to sell the subject properties
to Century-Well, a corporation owned in part by Lourdes Chong, Kei and Choi.
Issue: Whether or not there is a valid compensation of the obligations of Cheng Kim
Heng to his sons with the purchase price of the sale.
Ruling: There can be no valid compensation of the purchase price with the obligations
of Cheng Kim Heng stated in the promissory notes, because CKH and Century-Well the
principal contracting parties, are not mutually bound as creditors and debtors in their
own name. The promissory notes did not indicate that Cheng acknowledged any
indebtedness to Century-Well. The promissory notes reveal CKHs indebtedness to
Chong Tak Choi and Chong Tak Kei.
Their interest in the promissory notes cannot be offset against the obligations between
CKH and Century-Well arising out of the deed of absolute sale, Choi and Kei’s interest
in Century-Well can be considered a declaration of unity of their civil personalities.
Corporations, such as Century-Well, have personalities separate and distinct from their
stockholders, except only when the law sees it fit to pierce the veil of corporate identity,
especially when the corporate fiction is shown to be used to defeat public convenience,
justify wrong, protect fraud or defend crime, or where a corporation the mere alter ego
or business conduit of a person. The Court cannot make such a ruling absent a
demonstration of the merit of such a disposition. Considering the foregoing premises,
the Court finds it proper to grant the prayer for rescission of the subject deed of sale, for
failure of consideration.
Mirasolv.CourtofAppeals,351SCRA44
Facts:
Spouses Mirasol are sugarland owners and planters. Philippine National Bank (PNB)
financed the Mirasols' sugar production venture from 1973 to 1974 and under a crop
loan financing scheme from 1974 to 1975. The Mirasols signed Credit Agreements, a
Chattel Mortgage on Standing Crops, and a Real Estate Mortgage in favor of PNB. The
Chattel Mortgage empowered PNB to negotiate and to sell the latter's sugar in both
domestic and export markets and to apply the proceeds to the payment of their
obligations to it.
President Ferdinand Marcos issued Presidential Decree ordered No. 5792 in November
1974. It authorized PHILEX to purchase sugar allocated for export to the United States
and to other foreign markets. It further authorized PNB to finance PHILEX's purchases.
It states that whatever profit PHILEX might get from sales of sugar abroad was to be
remitted by the government. PNB continued to finance the sugar production of the
Mirasols for 1975-1976 and 1976-1977. These crop loans and similar obligations were
secured by real estate mortgages over several properties of the Mirasols and chattel
mortgages over standing crops. The believe that the proceeds of their sales to PNB
were more than enough to pay their obligations, petitioners asked PNB for an
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accounting of the proceeds of their export sugar but was ignored. Petitioners continued
to avail loans from PNB and make unfunded withdrawals from their current accounts.
PNB then asked petitioners to settle their due and demandable accounts. Petitioners
conveyed to PNB real properties by way of dacion en pago but did not suffice, leaving a
balance of P1,513,347.78. Mirasols failed to settle said the balance. PNB then
proceeded to extrajudicially close the mortgaged properties. After applying the proceeds
of the auction sale of the mortgaged realties, PNB still had a deficiency claim of
P12,551,252.93.
Petitioners continued to ask PNB to account for the proceeds of the sale in export sugar
for 1973-1974 and 1974-1975, insisting that said proceeds could offset their outstanding
obligations if it was properly liquidated. Thus, PNB refuses to because PD 579 states
that all earnings from the export sales of sugar pertained to the National Government
and subject to disposition of the President for public purposes.
On August 9, 1979, the Mirasols filed a suit for accounting, specific performance, and
damages against PNB, Judgement renders in favor of the plaintiffs.
Issue: Whether or not the Court of Appeals committed an error in upholding the validity
of the foreclosure on petitioners property and in upholding the validity of the dacion en
pago.
Ruling:
No, Mirasols admitted that they were indebted to PNB in the sum stated in the latter's
counterclaim. Petitioners insist that the debt can be offset by the unliquidated amounts
PNB owed them for crop years 1973- 1974 and 1974-1975. For legal compensation to
take place, the requirements set forth in Articles 1278 and 1279 of the Civil Code must
be present.
In this case, compensation cannot take place between the parties because: First,
neither of the parties are mutually creditors and debtors of each other. Under P.D. No.
579, neither PNB nor PHILEX could retain any difference claimed by the Mirasols in the
price of sugar sold by the two firms. P.D. No. 579 prescribed where the profits from the
sales will remit by the government.
Thus, Court of Appeals is correct that, there was nothing with which PNB was supposed
off-set because the government will get the proceeds. Compensation cannot take place
where one claim, as in the instant case, is still the subject of litigation, as the same
cannot be deemed liquidated. With respect to the duress allegedly employed by PNB,
which impugned petitioners' consent to the dacion en pago.
AssociatedBankv.Tan,446SCRA282
Facts:
Vicente Tan is a businessman and a regular depositor-creditor of the Associated Bank.
On September 1990, he deposited a UCBP postdated check amounting to P101,000.00
issued by a certain Willy Cheng from Tarlac. The check was credited in his bank record
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which makes his balance a total of P297,000.00, as of October 1, 1990, from his original
deposit of P196,000.00. Upon the advice and instruction of the bank that the
P101,000.00 check was already cleared and backed up by sufficient funds, Tan
withdrew P240,000.00, leaving a balance of P57,793.45. A day after, Tan deposited
P50,000.00 which makes his existing balance in a total amount of P107,793.45,
because of the several checks he has issued to his business partners. However, his
suppliers and business partners went back to him alleging that the checks he issued
bounced for insufficiency of funds. Tan informed the bank regarding with the incident
because he knew that his account has sufficient funds to pay the amount of the checks,
but the bank did not do anything about it.
Tan filed a complaint for damages on December 19, 1990. He alleged that he was
advised that he had sufficient funds to pay the checks and because of the incident, his
suppliers decreased for lack of trust. He further averred that he continuously lost profits
in the amount of P250,000.00. Tan therefore prayed for exemplary damages and
ordered the petitioner to pay him the sum of P1,000,000.00 for moral damages,
P250,000.00 for lost profits, P50,000.00 for attorney’s fees plus 25% of the amount
claimed including P1,000.00 per court appearance.
On February 7, 1991, Petitioner (Bank) filed a motion to dismiss but was denied for lack
of merit. On March 20, 1991 petitioner filed its Answer denying the allegations of
respondent and alleged that no banking institution would give an assurance to any of its
client/depositor that the check he deposited had already been cleared and backed up by
sufficient funds however, it could be presumed that it has been honored by the drawee
bank the number of days that ordinarily takes for a check to be cleared. Petitioner
alleged that on October 2, 1990, it gave notice to the respondent to return of his UCPB
check deposit. On the same date respondent deposited the amount of P50,000.00 to
cover the returned check.
Petitioner argued that respondent had no cause of action against it and it has all the
right to debit the account of the respondent due to the dishonor of the check deposited
by the respondent which he withdrew prior to its clearing. It further claimed that it has no
liability with the clearing of deposited checks as the clearing is being handled by the
Central Bank and in accepting check deposit, it merely obligates itself as depositor’s
collecting agent subject to actual payment by the drawee bank. The court is in favor of
respondent – Tan
Issue: Whether or not the right to debit of the said bank is properly exercised
Ruling:
No, the bank generally has a right of setoff over the deposits for the payment of any
withdrawals on the part of a depositor. The right of a collecting bank to debit a client’s
account for the value of a dishonored check that has previously been credited has fairly
been established.
Petitioner allowed the respondent to withdraw the value of the deposited check
prior to its clearing. That act certainly disregarded the clearance requirement of the
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banking system. Such a practice is unusual, because a check is not legal tender or
money; and its value can properly be transferred to a depositor’s account only after the
check has been cleared by the drawee bank. Petitioner should not have authorized the
withdrawal by respondent of P240,000 on October 1, 1990, as this amount was over
and above his outstanding cleared balance of P196,793.45.24
In receiving items on deposit, this bank obligates itself only as the Depositor’s
Collecting agent, assuming no responsibility beyond carefulness in selecting
correspondents, and until such time as actual payments shall have come to its
possession, this Bank reserves the right to charge back to the Depositor’s account any
amounts previously credited whether or not the deposited item is returned. However,
this reservation is not enough to insulate the bank from any liability.
A bank is liable for the wrongful or tortuous acts and declarations of its officers or
agents within the course and scope of their employment. Due to the very nature of their
business, banks are expected to exercise the highest degree of diligence in the
selection and supervision of their employees. Respondent would have sufficient funds
for the checks if P101,000.00 not been debited to his account, the subject checks would
not have been dishonored.
Villanuevav.Tantuico,182SCRA263
Perezv.CourtofAppeals,127SCRA636
SilahisMarketingCorp.v.IntermediateAppellateCourt,180SCRA21
BankofthePhilippineIslandsv.CourtofAppeals,255SCRA571
FACTS:
Edvin F. Reyes opened “joint and/or” Savings Accounts No. 3185-0172-56 with his wife
and 3185-0128-82 with his grandmother, Esmeteria M. Fernandez at Bank of the
Philippine Islands (BPI) Cubao, Shopping Center Branch. He regularly deposited in this
account the U.S. Treasury Warrants payable to the order of Emeteria M. Fernandez as
her monthly pension. Subsequently, Fernandez died without the knowledge of U.S.
Treasury Department and a U.S. Treasury Warrant (No. 21667302) in the amount of
$377.00 or P10,556.00 was still sent to Fernandez. Private respondent deposited the
said U.S. treasury check of Fernandez in Savings Account No. 3185-0128-82. The U.S.
Veterans Administration Office in Manila conditionally cleared the check and it was then
sent to the United States for further clearing.
Two months after, private respondent closed Savings AccountNo. 3185-0128-82 and
transferred its funds amounting to P13,112.91 to Savings Account No. 3185-0172-56,
the joint account with his wife. Thereafter, the US Treasury Warrant (No. 21667302)
was dishonored as it was discovered that Fernandez died three (3) days prior to its
issuance. The U.S. Department of Treasury requested petitioner bank for a refund.
The petitioner called BPI after receiving an urgent telegram and verbally authorized
them to debit from his other joint account the amount stated in the dishonored U.S.
Treasury Warrant. On the same day, petitioner bank debited the amount of P10,556.00
from private respondent's Savings Account No. 3185-0172-56.
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Private respondent filed a suit for damages against the petitioners, the RTC ruled in
favor of the latter. Consequently, private respondent appealed the said decision before
CA and the latter set aside the RTC’s decision.
ISSUE:
Whether or not the respondent court (Court of Appeals) erred when it failed to rule that
legal compensation is proper?
HELD:
Yes, the respondent court erred when it failed to rule that legal compensation is proper.
Compensation shall take place when two persons, in their own right, are creditors and
debtors of each other. Article 1290 of the Civil Code provides that "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
operates even against the will of the interested parties and even without the consent of
them. Since this compensation takes place ipso jure, its effects arise on the very day on
which all its requisites concur. When used as a defense, it retroacts to the date when its
requisites are fulfilled.
Article 1279 states that 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.
The elements of legal compensation are all present in the case at bar. The obligors
bound principally are at the same time creditors of each other. Petitioner bank stands as
a debtor of the private respondent, depositor. At the same time, said bank is the creditor
of the private respondent with respect to the dishonored U.S. Treasury Warrant which
the latter illegally transferred to his joint account. The debts involved consist of a sum of
money. They are due, liquidated, and demandable. They are not claimed by a third
person.
• Effects(1290,1289)
Article 1289
A debtor must inform the creditor which of them shall be the object of compensation
in case of various debts which are susceptible of compensation
In case he fails to do so, then the compensation shall be applied to the most
onerous obligation
Article 1290
1. Compensation occurs automatically if the requisites of Article 1279 concurs
Full legal capacity of parties not required
iii. Conventional(1279,1282)
Article 1282
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Voluntary or conventional compensations- includes any compensation which takes

place by agreement of the parties even if all the requisites for legal compensation
are not present
Requisites:
1. Each of the parties has the right to dispose of the credit he seeks to compensate
2. They agree to the mutual extinguishment of their credits
iv. Judicial(1283)
Article 1283
Jurisdiction of the court (Value Demand)
GR: Jurisdiction depends upon the totality of the demand in all the causes of action,
irrespective of whether the plural cases arose out of the same or different
transactions
XPN: 1. Where the claim joined under the same complaint are separately owed by,
or due to, different parties in which cases each separate claim
furnishes the jurisdictional test
2. Where not all the causes of action joined are demands or claims for money
v. Facultative
d. WhenCompensationisnotallowed(1287‐1288)
Article 1287
Debts in favor of the government (i.e. taxes, fees, duties and similar forced
contributions)
-cannot be extinguished by compensation
Article 1288
Instances when legal compensation not allowed by law:
1. Where one of the debts arises from depositum
2. Where one of the debts arises from a commodatum
3. Where one of the debts arises from a claim for support due by gratuitous title
4. Where one of the debts consists in civil liability arising from a penal offense
e. CompensationofDebtsPayableinDifferentPlaces(1268)
Art. 1968 Compensation of Debts Payable in Different Places
Two alternatives open to the debtor when the latter offers payment and the creditor
refuses without reason:
 To consign the thing and relieve himself from any further responsibility of such
thing
 To keep the thing in his possession with the obligation to use due diligence
subject to general rules of obligations
f. EffectofNullityofDebtstobeCompensated(1284)
Art. 1284 Effect of Nullity of Debts to be Compensated
 The rescission or annulment of debt is retroactive, therefore, compensation must
be considered cancelled.
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 The party whose obligation is annulled can recover because his credit was
extinguished by the compensation.
g. EffectsofAssignmentofCredit
i. withconsentofdebtor(1285,par.1)
ii. withknowledgebutwithoutconsentofdebtor(1285,par.2)
iii. withoutknowledgeofdebtor(1285,par.3)
Art. 1285 Effects of Assignment of Credit
 With consent of debtor – debtor waives compensation even of debts already
due, unless he makes a reservation
 With knowledge but without consent of debtor – when credit assigned to a third
person matures:
1) 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.
2) earlier than that of the debtor, assignee may immediately enforce it and debtor
cannot setup compensation
 Without knowledge of debtor – debtor may setup by way of compensation all
credits maturing before he is notified
6. Novation
a. Concept(1291)
Art. 1291
Novation- is the extinguishment of an obligation by the substitution or change of the
obligation by a subsequent one which extinguishes or modifies at first, either by
changing the object or principal conditions or by substituting the person of the debtor or
by subrogating a third person in the right of the creditor. It is a juridical act of dual
function in that at the time it extinguishes an obligation it creates a new one in lieu of the
old.
i. Changeindebtor
ii. Changeinobject
iii. Changeinthirdpersonwhoissubrogated
iv. Changeincreditorwithitsconsentoratitsinstanceisnotnovation
b. Kinds
i. Astoform:expressorimplied
Express- when the parties declared that the old obligation is extinguished and
substituted by the new obligation.
Express Novation – takes place only when the contracting parties expressly disclose
that their object in making the new contract is to extinguish the old one otherwise the old
contract remain in force and the new contract is added to it, and each gives rise to an
obligation still in force.
Implied- when there is incompatibility between the old and new obligations that cannot
stand together
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Implied Novation – There’s no specific for required. The test of incompatibility between
two obligations or contracts is whether they can stand together each one having an
independent existence. If they cannot, they are incompatible, and the subsequent
obligation novates the firs. Upon such novation the new obligation can be the basis of
an action.
In order that there may be an implied novation arising from the incompatibility of the old
and new obligations, the change must refer to the object, cause or principal conditions
of the obligation, there must be an essential change.
ii. Astoorigin:conventionalorlegal
iii. Astoobject
• objectiveorreal
Objective or Real- change of the obligation by substituting the object with another or
changing the principal condition
• subjectiveorpersonal
Subjective or Personal- modification of the obligation by the change of the subject; it is
passive if there is a substitution of the debtor, and it is passive when a third person is
subrogated in the rights of the creditor.
• mixed
Mixed- combination of the subjective and objective novation
c. Requisites(1292)
Requisites of Novation:
1. There must be a previous valid obligation
2. The agreement of all the parties to new contract
3. The extinguishment of the old contract
4. The validity of new one
- Novation requires the creation of a new contractual relations as well as the

extinguishment of the old. Extinguishment of the old obligation by the new one is
a necessary element of novation. In order that a contract may be considered as
novated it is indispensable that the new contract which purports to annul the
previous one be valid and effective.
Art. 1292
Novation is never presumed. There is no novation in the absences of a new contract
executed by the parties. It must be established that the old and new contracts are
incompatible in all points or that the will to novate appear by the express agreement of
the parties or in acts of equivalent import.
Millarv.CourtofAppeals,38SCRA642
FACTS:
Eusebio S. Millar obtained a favorable judgment from the Court of First Instance of
Manila, in civil case 27116, condemning Antonio P. Gabriel to pay him the sum of P1,-
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746.98 with interest at 12% per annum from the date of the filing of the complaint, the
sum of P400 as attorney’s fees, and the costs of suit. From the said judgment, the
respondent appealed to the Court of Appeals which, however, dismissed the appeal.
Subsequently, after remand by the Court of Appeals of the case, the petitioner moved
ex parte in the court of origin for the issuance of the corresponding writ of execution to
enforce the judgment. Acting upon the motion, the lower court issued the writ of
execution applied for, on the basis of which the sheriff of Manila seized the respondent’s
Willy’s Ford jeep.
The respondent, however, pleaded with the petitioner to release the jeep under an
arrangement whereby the respondent, to secure the payment of the judgment debt,
agreed to mortgage the vehicle in favor of the petitioner. The petitioner agreed to the
arrangement; thus, the parties, executed a chattel mortgage on the jeep, stipulating,
inter alia, that -
“This mortgage is given as security for the payment to the said EUSEBIO S. MILLAR,
mortgagee, of the judgment and other incidental-expenses, in Civil Case No. 27116 of
the Court of First Instance of Manila against Antonio P. Gabriel, MORTGAGOR, in the
amount of ONE THOUSAND SEVEN HUNDRED (P1,700.00) PESOS, Philippine
currency, which MORTGAGOR agrees to pay as follows:
March 31, 1957 - EIGHT HUNDRED FIFTY (P850.00) PESOS;
April 30, 1957 - EIGHT HUNDRED FIFTY (P850.00) PESOS”
Several alias writs of execution were obtained but returned unsatisfied. Thereafter, the
respondent filed an urgent motion for the suspension of the execution sale on the
ground of payment of the judgment obligation. The lower court ordered the suspension
of the execution sale to afford the respondent the opportunity to prove his allegation of
payment of the judgment debt, and set the matter for hearing. Consequently, the lower
court ruled that novation had taken place, and that the parties had executed the chattel
mortgage only “to secure or get better security for the judgment”.
The respondent appealed before CA, but the latter affirmed the lower court’s decision.
The appellate court stated that the following circumstances sufficiently demonstrate the
incompatibility between the judgment debt and the obligation embodied in the deed of
chattel mortgage, warranting a conclusion of implied novation:
1. The judgment orders the respondent to pay the petitioner the sum of P1,746.98 with
interest at 12% per annum from the filing of the complaint, plus the amount of P400 and
the costs of suit, the deed of chattel mortgage limits the principal obligation of the
respondent to P1,700;
2. The judgment mentions no specific mode of payment of the amount due to the
petitioner, the deed of chattel mortgage stipulates payment of the sum of P1,700 in two
equal installments;
3.The judgment makes no mention of damages, the deed of chattel mortgage obligates
the respondent to pay liquidated damages in the amount of P300 in case of default on
his part; and
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4. The judgment debt was unsecured, the chattel mortgage, which may be foreclosed
extra-judicially in case of default, secured the obligation.
ISSUE:
Whether or not there’s substantial incompatibility between the mortgage obligation and
judgment liability sufficient to justify a conclusion of implied novation?
HELD:
No, there’s no substantial incompatibility between the mortgage obligation and judgment
liability sufficient to justify a conclusion of implied novation.
The defense of implied novation requires clear and convincing proof of complete
incompatibility between the two obligations. The law requires no specific form for an
effective novation by implication. The test is whether the two obligations can stand
together. If they cannot, incompatibility arises, and the second obligation novates the
first. If they can stand together, no incompatibility results, and novation does not take
place.
Anent the first circumstance provided by CA, the Court ruled that where a new
obligation reiterates or ratifies the old obligation, although the former effects but minor
alterations or slight modifications with respect to the cause or object or conditions of the
latter, such changes do not effectuate any substantial incompatibility between the two
obligations. 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. In the case at bar, the mere reduction of the amount due in no sense
constitutes a sufficient indicium of incompatibility, especially in the light of (a) the
explanation by the petitioner that the reduced indebtedness was the result of the partial
payments made by the respondent before the execution of the chattel mortgage
agreement and (b) the latter’s admissions bearing thereon. On the third circumstance,
the Court agreed with the petitioner that the P300 pertains to attorney’s fees and not to
liquidated damages in the absence of clear and convincing proof.
Further, with regards to the second and fourth circumstances, the Court held that the
stipulation for the payment of the obligation under the terms of the deed of chattel
mortgage serves only to provide an express and specific method for its extinguishment
—payment in two equal installments. The chattel mortgage simply gave the respondent
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 judgment, the deed of chattel mortgage expressly ratified and confirmed
the existence of the same, amplifying only the mode and period for compliance by the
respondent.
Also, the unmistakable terms of the deed of chattel mortgage reveal that the parties
constituted the chattel mortgage purposely to secure the satisfaction of the then existing
liability of the respondent arising from the judgment against him in civil case 27116. As
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a security for the payment of the judgment obligation, the chattel mortgage agreement
effectuated no substantial alteration in the liability of the respondent.
Dormitoriov.Fernandez,72SCRA388
FACTS:
The Municipality of Victorias, Negros Occidental sold parcel of lot to Serafin Lazalita. In
1948, Lazalita occupied Lot No. 1, block 16 and the payment of the said lot was
completed in 1958. He had been in full and peaceful possession of the said land for 8
years and had introduced permanent and valuable improvements thereon.
In 1955, Leoncia and Agustin Dormitorio also purchased a land from Municipality of
Victorias. The Dormitorios bought Lot No. 2, block 16, but the actual possession thereof
was not obtained since the property was occupied by Lazalita. As a result, the
Dormitorios filed an ejectment suit against Lazalita before the Court of First Instance
(CFI). CFI rendered judgment in favor of the Dormitorios, ordering Lazalita to vacate the
land and to pay a monthly rental of P20 per month. It was revealed based on the survey
that the lot sold to Lazalita was converted to the Municpal Road known as Jover Street
and the lot presently occupied by him is supposed to be the Lot. No.2 bought by
Dormitorios.
Thereafter, Lazalita filed a case against the Municipality averring that the value of the
improvements he made on the disputed lot had far exceeded the purchase price. In
response, the Municipality proposed an amicable settlement by giving Lazalita another
lot or to pay him back the amount necessary and just for him to acquire another lot for
his residence and for expenses of transferring his present residential house thereto.
Consequently, the parties agreed and submitted an “Agreed Stipulation of Facts” before
the court.
The Dormitorios filed and obtained a judgment for a writ of execution for the
enforcement of the earlier judgment of the court ordering Lazalita to vacate the lot and
pay monthly rentals thereof. However, the writ of execution was thereafter set aside on
the grounds that such writ was obtained by means of fraud, misrepresentation and
concealment of the true facts of the case, the plaintiffs were able to mislead the
Honorable Court, thru an Ex-Parte Motion to issue by mistake an Order for the issuance
of a Writ of Execution by making this Honorable Court believe that the earlier decision is
still enforceable and executory.
ISSUE:
Whether or not a final and executory judgment of a trial court may be novated by
subsequent agreement of the parties?
HELD:
Yes, a final and executory judgment of a trial court may be novated by subsequent
agreement of the parties.
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The Supreme Court in showing that novation is present in the case at bar, held that,
citing Barretto vs. Lopez, the agreement filed by the parties created between them new
rights and obligations which naturally superseded the prior judgment of the trial court. It
is proper to show that there is animus novandi between the parties for novation to
properly take effect. Also, in Santos vs. Acuna, it was contended that a lower court
decision was novated by the subsequent agreement of the parties. Implicit in this
Court’s ruling is that such a plea would merit approval if indeed that was what the
parties intended.
Also the latter decision (Civil Case 6553), it was the result of a compromise and had an
effect of res judicata. The parties were, therefore, bound by it and that there was thus
an element of bad faith when petitioners did try to evade its terms.
MagdalenaEstatev.Rodriguez,18SCRA967
FACTS:
Defendant bought from the plaintiff a parcel of Land. Defendant issued a promissory
note which represents the unpaid purchase price of the said land. On the same date,
defendant and Luzon Surety Co., Inc. executed a surety bond in favour of the petitioner,
the latter being the surety of the defendant to guarantee payment of the purchase price
of bought land. When promissory note becomes due and demandable, Luzon Surety
paid the guaranteed amount to plaintiff. Subsequently, plaintiff demanded payment from
the defendant for the alleged accumulated interest on the principal amount, but to no
avail.
Defendant contended that the plaintiff waived or condoned the interest due upon its
unqualified acceptance of the principal payment knowing its incompleteness and without
exercising its rights to apply a portion thereof to interest as provided in Art 1235 and
1253 of the Civil Code. In addition, they claimed that there was a novation or
modification of the obligation because plaintiff accepted without reservation the
subsequent agreement set forth in the surety bond despite its failure to provide that it
also guaranteed payment of interest.
ISSUE:
Whether or not there was a novation or modification of the obligation.
RULING:
No, there was no novation of the obligation.
Under our Civil Code, it is a settled rule that novation is never presumed. For novation
to be favoured, it needs to be established that the old and new contracts are
incompatible in all points, or that the will to novate appears by express agreement of the
parties or in acts of similar imports. An obligation to pay a sum of money is not novated
by merely executing a new document that changes only the terms of payment and
adding other obligations not incompatible with the old one or is merely supplemented by
a new one. The mere fact that the creditor receives a guaranty or accepts payments
from third person who has agreed to assume the obligation, when there is no
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agreement that the first debtor shall be release from responsibility does not constitute a
novation, and the creditor can still enforce the obligation against the original debtor. In
this case, the surety bond is not a new and separate contract but an accessory of the
promissory note.
Reyesv.SecretaryofJustice,264SCRA35
FACTS:
Reyes, president of EUROTRUST, entered into a contract of loan with Eleazar,
president of BERMIC. Based on the mentioned contract, EUROTRUST extended
financial support for the construction of BERMIC’s condominium and Business Park.
The loan was without collateral but with higher interest rate, in which, BERMIC issued
12 post-dated checks to cover the payments of the loan. Some of the checks were
dishonoured by the drawee bank due to stop payment order by Eleazar. Despite notice
and several demand by Reyes, Eleazar still failed to pay.
Subsequently, Reyes was investigated by Senate for her involvement in large scale
scam. AFP-MBAI, who invested in EUROTRUST for government securities, conducted
its own investigation and found out that after the securities were delivered to AFP-MBAI,
the said securities were borrowed by EUROTRUST from AFP-MBAI but failed to return
the same. In turns-out that the said securities were lent by Reyes to BERMIC.
EUROTRUST and BERMIC agreed that the latter will settle its obligation to the real
owners of the fund which are the AFP-MBAI and DECS-IMS. The said agreement was
formalized in two letters. BERMIC then negotiated with AFP-MBAI and DECS-IMS.
ISSUES:
Whether or Not there was a novation by substitution of creditor?
Whether or Not there was a novation by substitution of debtor?
RULING:
(1)The Supreme Court ruled that there was no novation by substitution of creditor. In
order for said novation to take place, the following indispensable requisites must be
complied: (1) there must be previous valid obligation; (2) there must be agreement
between parties concerned to a new contract; (3) old obligation must be extinguish; and
(4) new contract must be valid.
It was said that Eleazar would directly settle its obligation with the real owners of the
funds – the AFPMBAI and DECS IMC as evidenced by two letters executed by Reyes
and Eleazar. However, further perusal of said letters, clearly shows that there was
nothing therein that would evince that AFP-MBA Iand DECS-IMS agreed to substitute
for the petitioner as the new creditor of Eleazar in the contract of loan.
It is evident that the two letters merely gave Eleazar an authority to directly settle the
obligation of petitioner to AFP-MBAI and DECS-IMC. It is essentially an agreement
between petitioner and respondent Eleazar only. There was no mention whatsoever of
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AFP-MBAI and DECS-IMC’s consent to the new agreement between petitioner and
Eleazar, much less an indication of AFP-MBAI and DECS-IMC’s intention to be the
substitute creditor in the loan contract. It is a well settled rule that novation by
substitution of creditor requires an agreement among the three parties concerned – the
original creditor, the debtor and the new creditor.
The fact that Eleazar made payments to AFP-MBAI and the latter accepted them does
not ipso facto result in novation. There must be an express intention to novate
— animus novandi. Novation is never
presumed. Article 1300 of the Civil Code provides inter alia that conventional
subrogation must be clearly established in order that it may take effect.
(2 ) The Court ruled that novation by substitution of debtor must always be with the
consent of the creditor. Article 1293 of the Civil Code is explicit, thus:
Novation which consists in substituting a new debtor in the place of the original one,
may be made even without or against the will of the latter, but not without the consent of
the creditor. Payment by the new debtor gives him the rights mentioned in Articles 1236
and 1237
Consent of creditor to a novation by change of debtor is as indispensable as the

creditor's consent in order that a novation take place. The mere circumstance of AFP-
MBAI receiving payments from Eleazar, who acquiesced to assume the obligation of
petitioner under the contract of sale of securities, does not constitute novation when
there is no clear agreement to release petitioner from her responsibility.In this case, it
only creates a juridical relation of co-debtorship or suretyship on the part of Eleazar to
the contractual obligation of petitioner to AFP-MBAI and the latter can still enforce the
obligation against the petitioner.
Cochingyanv.RBSuretyandInsurance,151SCRA339
FACTS:
In Nov. 1963, Pacific Agricultural Suppliers, Inc. (PAGRICO) was granted an increase in
its line of credit from P400,000 to P800,000 (principal obligation) with PNB. PAGRICO
submitted Surety Bond 4765, issued by R&B Surety and Insurance Co. in the amount of
P400,000 in favor of PNB to secure the latter’s approval. On Dec. 23, 1963, R&B issued
2 identical Indemnity agreements were entered into by the Catholic Church Mart and by
Joseph Cochinghay and PAGRICO in consideration of the Surety Bond. The
indemnitors were bound to pay jointly and severally to R&B to pay an annual premium
of P5,103.05 and “for the faithful compliance of the terms and conditions set forth in said
Surety Bond for a period beginning… until the same is CANCELLED and/or
DISCHARGED”. PNB demanded payment from R&B of the sum of P400,000 when
PAGRICO failed to comply with its principal obligation. R&B sent formal demand letters
to Cochinghay for reimbursement of the payments made to PNB and for a discharge of
its liability to the PNB under the Surety Bond. The CFI ruled against the petitioners .
ISSUE:
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Whether or not the Surety Bond and their respective obligations under the Indemnity
agreements were extinguished by novation brought about by the execution of the
Trust Agreement
RULING:
No. The Trust Agreement expressly provides for the continuing subsistence of that
obligation by stipulating that “the Trust Agreement shall not in any manner release” R&B
from its obligation under the Surety Bond. Absent an unequivocal declaration of
extinguishment of a pre-existing obligation, a showing of complete incompatibility
between the old and the new obligation would sustain a finding of novation by
implication. However, the parties to the new obligation expressly recognized the
continuing existence and validity of the old one, where the other arties expressly
negated the lapsing of the old obligation, there can be no novation. What the trust
agreement did was, at most, merely to bring in another person or persons to assume
the same obligation that R&B was bound to perform under the Surety Bond.
BroadwayCentrumCondominiumv.TropicalHut,224SCRA302
FACTS:
On Nov 28, 1980, Petitioner Broadway Centrum Condominium Corporation and private
respondent Tropical Hut Food Market Inc. executed a contract of lease for a period of
10 years commencing from Feb. 1, 1981 to Feb. 1, 1991 “renewable for a like period
upon the mutual agreement of both parties”. On Apr. 20, 1982, Tropical Hut requested
for a rental rate reduction due to financial difficulties caused by the expansion project of
the road. Broadway agreed to a “provisional and temporary agreement” wherein
Tropical will pay a monthly rental on the basis of 2% of fo gross receipts or P60,000.
After the completion of the project months later, Broadway sent a letter returning the old
rental rates of the lease. Tropical asked to retain the provisional rates which was denied
by Broadway and insisted to enforce the original contract details. The RTC ruled that
the April 20, 1982 provisional agreement shall be effected which was affirmed by the
CA.
ISSUE:
Whether or not the provisional agreement novated the Contract of Lease
RULING:
No. If objective novation is to take place, it is essential that the new obligation expressly
declare that the old obligation to extinguished, or that now obligation be on every point
incompatible with the old one. Novation is never presumed; it must be established either
by the discharge of use old debt by the express terms of the new agreement or by the
acts of the parties whose intention to dissolve the old obligation as a consideration of
the emergence of the new one must be clearly manifested. In the case, the provisional
agreement reduced the monthly rent of Tropical indefinitely which meant that Broadway
is left with the discretion to return to the original contractual rates of rent whenever it felt
appropriate to do so. The course of negotiations between Broadway and Tropical clearly
indicated that what they were negotiating was temporary only and was not to span or
alter the original 10 years Contract of Lease.
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Molinov.SecurityDinersInternational,363SCRA358
FACTS:
Petitioner was held liable as surety for the outstanding credit card debts of Danilo Alto
with respondent SDIC. Allegedly, Danilo applied for a regular card with SDIC with
petitioner as his surety.
A Surety Undertaking was then signed by the petitioner which states that “Any novation
in the agreement shall not release me/us from this Surety Undertaking, it being
understood that said undertaking is a continuing one and shall subsist and bind me/us
until all such obligations, charges and fees have been fully paid and satisfied”.
Later, Danilo requested the upgrading of his regular card to a diamond edition which
entitles the cardholder to purchase goods and pay services from member
establishments in unlimited amounts. The upgrading was consented to by petitioner.
Danilo, however, failed to pay his obligations thereafter.
ISSUE:
Whether or not the upgrading of the card is a novation of the original agreement
governing the use of the Alto's firs credit card, as to extinguish petitioner's obligation
and surety undertaking which was accessory to it
HELD:
Novation, as a mode of extinguishing obligations, may be done in two ways: by explicit
declaration, or by material incompatibility (implied novation). As what is stated in
Fortune Motors vs. Court of Appeals:
“. . . The test of incompatibility is whether the two obligations can stand together, each
one having its independent existence. If they cannot, they are incompatible and the
latter obligation novates the first. Novation must be established either by the express
terms of the new agreement or by the acts of the parties clearly demonstrating the intent
to dissolve the old obligation as a consideration for the emergence of the new one. The
will to novate, whether totally or partially, must appear by express agreement of the
parties, or by their acts which are too clear or unequivocal to be mistaken.”
There is no doubt that the upgrading was a novation of the original agreement covering
the first credit card issued to Danilo Alto, basically since it was committed with the intent
of cancelling and replacing the said card. However, the novation did not serve to
release petitioner from her surety obligations because in the Surety Undertaking she
expressly waived discharge in case of change or novation in the agreement governing
the use of the first credit card.
Garciav.Llamas,417SCRA292
FACTS:
Petitioner and De Jesus borrowed P400,000.00 from respondent. On the same day,
they executed a promissory note wherein they bound themselves jointly and severally to
pay the loan on or before 23 January 1997 with a 5% interest per month. De Jesus
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issued a check for the full payment but the same bounced making the load remained
unpaid. It prompted the respondent to file a complaint against the two debtors. In his
defense, Garcia argued that novation took place, either through the substitution of De
Jesus as sole debtor or the replacement of the promissory note with check.
ISSUE:
Whether or not novation took place
HELD:
No novation took place. The partied did not declare that the old obligation had been
extinguished by the issuance and acceptance of check, or that check would take the
place of the note. There is no incompatibility between the promissory note and the
check. On one hand, the note evidences the loan obligation; and on the other, the check
answers for it. Verily, the two can stand together.
Petitioner's argument that the obligation was novated by the substitution of debtors has
no merit. In order to change the person of the debtor, the old one must be expressly
released from the obligation, and the new debtor must assume the former's place in the
relation. Well-settled is the rule that novation is never presumed, therefore, change in
the person of the debtor must be clear and express.
Moreover, it must be noted that for novation to be valid and legal, the law requires that
the creditor expressly consent to the substitution of a new debtor. Since novation
implies a waiver of the right the creditor had before the novation, such waiver must be
express.
CaliforniaBusLinesv.StateInvestment,418SCRA297
FACTS:
Delta Motors Corporation M.A.N Division applied for financial assistance from the
respondent State Investment Housing Inc., a domestic corporation engaged in the
business of quasi-banking. The respondent agreed to extend the credit line of Delta in
three separate credit agreements. Delta availed of the credit line by discounting with
SIHI some of its receivables which evidence actual sales of Delta’s vehicles.
The petitioner, California Bus Lines Inc., purchased 35 units of diesel buses and 2 units
of diesel conversion engines to Delta on instalment basis. To secure the payment of the
obligation to Delta, CBLI and its president executed 16 promissory notes in favor of
Delta. In each promissory note it was stated that the obligation is payable in 60 monthly
instalments with interest rate of 14% per annum. CBLI promised to pay the holder the
said notes 25% of the amount due on the same as attorney’s fees and expenses
collection whether actually incurred or not in case of judicial proceedings to enforce
collection. They also executed chattel mortgage over 35 units of buses in favor of Delta.
CBLI defaulted on all payment dues; they entered into a reconstructing agreement with
Delta to cover its obligations. The reconstructing agreement states the new payment
schedule of its past due instalments extending the period to pay and stipulating daily
remittance instead of previously agreed monthly remittance of payments. In case of
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default in new agreement, Delta will have the authority to take over the management
and operations of CBLI until they paid the full due accounts. CBLI and Delta increased
the interest rate to 16% per annum and added 2% per annum for documentation fee
and 4% per annum for restructuring fee.
Delta executed a Continuing Deed of Assignment of Receivables in favor of SIHI as

security of payment for its obligation per credit agreements. In view of Delta’s failure to
pay, the loan agreements were restructured under a Memorandum Agreement. They
obliged themselves to pay the fixed monthly amortization to SIHI and to discount with
SIHI P8, 000,000 worth of receivables with the understanding that they shall apply the
proceeds against Delta’s overdue accounts.
CBLI continued having trouble in meeting it’s obligation to Delta. This prompted Delta to
threaten CBLI with the enforcement of the management takeover clause. Based on the
Memorandum of Agreement of Delta executed a Deed of Sale assigning to SIHI five of
the sixteen promissory notes from CBLI. SIHI subsequently sent a demand letter to
CBLI requiring them to remit the payments due on the five promissory notes directly.
Delta transferred the ownership of its available buses to SIHHI which in turn
acknowledged full payment of Delta’s remaining obligation. CBLI agreed that Delta
should exercise its right to extra judicially foreclose on the chattel mortgage of the 35
bus units.
The petitioner refused to pay the respondent the value of the five promissory notes
contending that the compromise agreement was in full settlement of all its obligations to
Delta including its obligations under the promissory notes. The respondent filed a
complaint against the petitioner to collect the five promissory notes with interest of 14%
per annum.
ISSUE:
Whether or not the Reconstructing Agreement between the petitioner and the
respondent novated the five promissory notes assigned by Delta to the respondent.
RULING:
No. The obligation of CBLI does not novated the five promissory notes assigned by
Delta to SIHI. The Court applied in this case the rule that the obligation is not novated
by an instrument that expressly recognizes the old, changes only the terms of payment
and adds other obligations not incompatible with the old ones, or where the new
contract merely supplements the old one.
In order for an obligation be novated the four elements of novation must be present.
Extinguishment of the old obligation is an essential element of novation. The reason
why there is no novation in this case is because the restructuring agreement between
the parties is incompatible with the obligations. There was no change in the object of the
obligations. The restructuring agreement merely provided the new schedule of
payments and additional security in paragraph 6 (c) giving Delta authority to take over
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the management and operations of CBLI. In this case the accidental modification in an
existing obligation is present which does not constitute novation because the extension
or shortening of the period for the performance of the obligation is generally considered
as a merely accidental and does not bring about a novation.
The Court has ruled that the agreement entered between CBLI and SIHI is not
tantamount to novation because changes on the manner of payment, restructure on the
mode of payments by the buyer so that it could be settled its outstanding obligation
even though there’s a delinquency in payment, different schedule and manner of
payment stipulated by the parties is not equivalent to novation due to the absence of the
four requisites required in order for the novation case will prosper.
Babstv.CourtofAppeals,350SCRA341
FACTS:
Elizalde Steel Consolidated Inc. (ELISCON) obtained from Commercial Bank and Trust
Company (CBTC) a loan with interest rate of 14% per annum evidenced by a
promissory note. ELISCON defaulted in its payments leaving an outstanding balance of
more than 2 million pesos. The letters of credit in the other hand were opened by
ELISCON by CBTC using the credit facilities of the Pacific Multi Commercial
Corporation (MULTI).
Chua and Babst executed a Continuing Suretyship whereby they bound themselves
jointly and severally liable to pay any indebtedness of MULTI to CBTC amounting to 8
million pesos each. CBTC opened for ELISCON in favor of National Steel Corporation,
ELISCON defaulted in its obligation the amounts of letters of credit leaving an
outstanding balance at total of more than 3 million pesos.
Bank of the Philippine Islands (BPI) and CBTC entered into a merger, wherein BPI as
the surviving corporation acquired all the assets and assumed all the liabilities of CBTC.
ELISCON encountered financial difficulties and became heavily indebted to the
Development Bank of the Philippines (DBP). In order to settle the obligations, ELISCON
proposed to convey to DBP by way of special mode of payment all its fixed assets
mortgaged with DBP as payment for the indebtedness. DBP took over the assets of
ELISCON including its indebtedness to BPI. DBP proposed formulas for the settlement
of all ELISCON’s obligations to its creditors but BPI expressly rejected the formula
submitted to it for not being acceptable. BPI, as successor of the interest of CBTC
instituted a complaint with the RTC for 13 sum of money against ELISCON, MULTI and
Babst.
Babst filed his answer alleging that he signed the Continuing Suretyship on the
understanding that it covers only obligations which MULTI incurred solely for its benefit
and not for any third party liability, and he had no knowledge or information of any
transaction between MULTI and ELISCON. MULTI, on its part denied the knowledge of
the merger between BPI and CBTC and averred that the guaranty under its Board
Resolution did not cover purchases made by ELISCON in the form of trust receipts.
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ISSUE:
Whether or not there was a valid novation contract between the parties
RULING:
Yes. There is a valid novation between the parties. BPI’s conduct evinced a clear and
unmistakable consent to the substitution of DBP for ELISCON as debtor. Hence, there
was a valid novation which resulted in the release of ELISCON from its obligation to BPI
whose cause of action should be directed against the DBP as the new debtor.
In order to give novation its legal effect the law requires the creditor should give its
consent for substitution of a new debtor. The consent must be given expressly for the
reason that the novation extinguishes the personality of the first debtor who is to be
substituted by the new one. BPI contends that there must be an express consent from
the creditor. Based on the facts of the case acquired all the assets and assumed all the
liabilities of CBTC.
Article 1293 provides that 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.
It is a form of extinctive novation, which states that there must be changing the object or
principal condition or by substituting the debtor or subrogating the third person in the
rights of the creditor. The extinguishment of obligation in the contract of Suretyship
executed by Babst and MULTI are also extinguished in this case which results to
novation.
d. Effects(1296)
Effect
 Partial- there is a modification or change in some principal conditions of the
obligation
 Total- when the old obligation is completely extinguished
Art. 1296
The extinguishment of the principal obligation by novation extinguishes the obligation to
pay interest unless otherwise stipulated. The rule in this article is applicable to novation
by substitution of debtors. The exception provided has reference to a stipulation in
favour of a third person which is subordinated to the principal obligation.
There would be novation in the following cases:

- Change of an obligation from one to pay a sum of money to one for the delivery
of some property or the rendition of the service or vice versa.
- The conversation of a deposit into a lease or a loan
- When a simple obligation is changed into an alternative one or vice versa
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Accidental modifications in an existing obligation do not extinguish it by novation. Mere

modification of debt agreed upon between the parties does not constitute novation. The
execution of public instrument to confirm a private document recognizing oral contract
or the substitution of the title or evidence of the credit does not constitute novation. The
extension or shortening of the period for the performance of the obligation is generally
considered as a merely accidental and does not bring about a novation.
e. EffectsoftheStatusoftheOriginalandNewObligation
i. nullityorvoidabilityoforiginalobligation(1298)
Art. 1298
When the original obligation is void, wanting in some requisite or otherwise inexistent,
there can be no novation because one of the requisites for novation would be lacking.
The rule in this article applies to a voidable contract which has already been set aside or
annulled by decree of a competent court and an obligation which has already been
extinguished is also inexistent. Hence, it cannot be novated.
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 the 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 for the action of
nullity. To have a valid novation when the original obligation is voidable at the instance
of the debtor it is necessary that such obligation should have the essential requisites for
its existence and the debtor consent to the novation with knowledge of the cause for
nullity and after it has ceased.
When the debt is already barred with 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
and he does so by voluntarily promising to pay the prescribed debt. The novation of a
prescribed debt is thus valid.
ii. nullityorvoidabilityofnewobligation(1297)
Art. 1297
In order that a contract may be considered as novated it is indispensable that the new
contract which purports to annul the previous one be valid and effective. A mere draft of
a contract which is not perfected because of the lack of consent of the parties thereto
cannot annul a prior valid and effective contract that produces rights and obligations
between parties.
If the new obligation is not entirely void, but only voidable, the novation becomes
effective. Thus, there were new contract is set aside on the ground of minority of one of
the parties the attempted novation fails, the original contract subsists.
If the condition is not fulfilled before one of the parties withdraws from the proposed
conditional contract, there’s no novation at all. After a novation takes place, by the
change of the object of the obligation, the old obligation can no longer be enforced.
iii. suspensiveorresolutoryconditionororiginalobligation(1299)
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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. (n)
Old Obligation Conditional – There is no novation if the intention of creating new

obligation is to suppress it; but if is to extinguish the original obligation itself, the latter
does not arise except from the fulfillment of the condition of the original obligation.
Where the original obligation is conditional, the novation itself must be held to be
conditional also, and its efficacy depends upon whether the condition which affects the
former is complied with or not.
But parties may by their express will substitute a pure to conditional one.
Both Obligations Conditional – If both are conditional:

a. If both conditions are not incompatible, they must all be fulfilled in order that
novation may become effective and the new obligation may be enforceable
b. If only the conditions affecting the old conditions are fulfilled and those for new
are not fulfilled, there is no novation.
c. If the only the obligation of the new are fulfilled and those for old are not, there
will be no novation since the requisite of the previous existing obligation would be
wanting.
d. If the conditions are incompatible, there is an obvious intention to substitute the
new for the old; the result will be extinguishment of the old leaving the new
subject to its condition. The obligation of the new must be fulfilled for that
obligation to be enforceable.
f. ObjectiveNovation
g. SubjectiveNovation
i. Bychangeofdebtor
• Expromision
- Requisites(1293)
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 Articles 1236 and 1237. (1205a)
- Effects(1294)
• Delegacion
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 obligations shall not
give rise to any liability on the part of the original debtor. (n)
- Requisites(1293)
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 Articles 1236 and 1237. (1205a)
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- Effects(1295)
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 the delegated his
debt. (1206a)
Expromision Delegacion
the initiative for the change does not the debtor offers, and the creditor
come from — and may even be made accepts, a third person who consents
without the knowledge of — the to the substitution and assumes the
debtor, since it consists of a third obligation; thus, the consent of these
person's assumption of the obligation. three persons are necessary
As such, it logically requires the
consent of the third person and the
creditor
Requisites: Requisites:
a.) Initiative for the substitution a.) Initiative for substitution must
must emanate from the new emanate from the old debtor;
debtor;
b.) Consent of the new debtor;
b.) Consent of the creditor to the
substitution; and c.) Acceptance by the creditor; and
c.) Old debtor must be released d.) Old debtor must be released
from the obligation. from his obligation.
Effects: Effects:
- If the substitution was effected - The right of the creditor can no
without the knowledge and longer be revived except:
against the will if the original
debtor, the new debtor’s i. Insolvency already
insolvency or nonfulfillment existing and of public
shall not revive the original knowledge at the time
debtor’s liability. when the original debtor
delegated his debt
If the substitution of was effected with
the knowledge and consent of the ii. Insolvency was already
original debtor’s liability to the creditor existing and known to
the original debtor when
he delegated his debt.
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There other cases that the old debtor

will be liable: 1.) If the new debtor is
only secondarily liable; 2.) If the third
person is only an agent of the debtor;
and 3.) Where the new debtor is
bound solidarily with the old debtor.
It is observed that the old debtor is
liable in these cases because there is
no novation; the debtor has not been
released for the obligation
Garciav.Llamas,417SCRA292(2003)
FACTS:
This case started as a complaint for sum of money and damages by respondent Llamas
against the petitioner, Garcia and de Jesus. The complaint alleged that on December
1996, petitioner and de Jesus borrowed P400,000.00 from respondent. On the same
day, the parties executed a promissory note which they bound themselves jointly and
severally to pay the loan on or before January 1997 with a 5% interest per month; that
the loan has long been overdue and, despite repeated demands, petitioner and de
Jesus have failed and refused to pay it; and that, by reason of their unjustified refusal,
respondent was compelled to engage the services of counsel. Petitioner Garcia
answered averred that he assumed no liability under the promissory note because he
signed it merely as an accommodation party for de Jesus; and, alternatively, that he is
relieved from any liability arising from the note inasmuch as the loan had been paid by
de Jesus by means of a check dated April 1997; and that, in any event, the issuance of
the check and respondent's acceptance novated or superseded the note. The
respondent replied to the petitioner, asserting that the loan remained unpaid since the
check issued by de Jesus bounced, and that Garcia's answer was not even
accompanied by a certificate of non-forum shopping.RTC rendered judgment in favor of
respondent, ordering petitioner & de Jesus to pay jointly & severally. CA ruled that no
novation, express or implied, had taken place.
ISSUE:
Whether there was novation of the obligation.
RULING:
No novation of obligation. In general, there are two modes of substituting the person of
the debtor: (1)expromision and (2) delegacion. In expromision, the initiative for
thechange does not come from and may even be made without the knowledge of
thedebtor, since it consists of a third person's assumption of the obligation. As such,
itlogically requires the consent of the third person and the creditor. In delegacion, the
debtor offers, and the creditor accepts, a third person who consents to the substitution
and assumes the obligation; thus, the consent of these three persons are necessary.
Both modes of substitution by the debtor require the consent of the
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creditor.Novationmay also be extinctive or modificatory. It is extinctive when an old

obligation is terminated by the creation of a new one that takes the place of the former.
It is merely modificatory when the old obligation subsists to the extent that it remains
compatible with the amendatory agreement. Whether extinctive or modificatory,
novation is made either by changing the object or the principal conditions, referred to as
objective or real novation; or by substituting the person of the debtor or subrogating a
third person to the rights of the creditor, an act known as subjective or personal
novation.
In this case, the parties did not unequivocally declare that the old obligation had been
extinguished by the issuance and the acceptance of the check, or that the check would
take the place of the note. There is no incompatibility between the promissory note and
the check.
Moreover, it must be noted that for novation to be valid and legal, the law requires that
the creditor expressly consent to the substitution of a new debtor. Since novation
implies a waiver of the right the creditor had before the novation, such waiver must be
express. It cannot be supposed, without clear proof, that the present respondent has
done away with his right to exact fulfillment from either of the solidary debtors. More
important, De Jesus was not a third person to the obligation. From the beginning, he
was a joint and solidary obligor of the P400,000 loan; thus, he can be released from it
only upon its extinguishment. Respondent's acceptance of his check did not change the
person of the debtor, because a joint and solidary obligor is required to pay the entirety
of the obligation. It must be noted that in a solidary obligation, the creditor is entitled to
demand the satisfaction of the whole obligation from any or all the debtors.It is up to the
former to determine against whom to enforce collection. Having made himself jointly
and severally liable with De Jesus, petitioner is therefore liablefor the entire obligation.
Quintov.People,305SCRA709(1999)
FACTS:
This case is petition for review where the petitioner, Quinto, was convicted of crime of
Estafa. The controversy started when the petitioner asked Cariaga, the private
complainant to allow her to have pieces of some of her jewelry for some of prospective
buyer. The agreement stated that if the petitioner have not sold the pieces of jewelry in
5 days, it should be return to the owner. The petitioner failed to return it and asked for
extension that last for six months.She sent to Leonida a demand letter which the latter
ignored. The inexplicable delay of Leonida in returning the items spurred the filing of the
case for estafa against her.In the petitioner’s defense, she narrated that the solo ring
was sold by certain Mrs. Camacho, the buyer paid in check on half amount only and the
remaining half was paid by installments directly to Cariaga. Quinto also transacted with
Mrs. Camacho the marques and the ring; Mrs. Camacho then failed to pay the full
amount. Quinto brought Cariaga to Mrs. Camacho and both agreed that the payment
will be in installments. Quinto was also able to sell the diamond ring to Mrs. Ramos,
unfortunately she was unable to pay the whole amount again Quinto brought Cariago to
Mrs. Ramos and they talked about the terms of payment. In the first payment Mrs.
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Ramos gave Quinto a ring, in the next payment was P5,000. Quinto herself paid the
P2,000.
RTC found that the petitioner is guilty beyond reasonable doubt of crime of Estafa. CA
affirmed the decision of the lower court.
ISSUES:
Whether the agreement between petitioner and private complainant was effectively
novated when the latter consented to receive payment on installments directly from Mrs.
Camacho and Mrs. Ramos.
RULING:
No, there is no novation of obligation. Novation, in its broad concept, may either be
extinctive or modificatory. It is extinctive when an old obligation is terminated by the
creation of a new obligation that takes the place of the former; it is merely modificatory
when the old obligation subsists to the extent it remains compatible with the amendatory
agreement. Novation is never presumed, it must appear by express agreement of the
parties, or by their acts that are too clear and unequivocal to be mistaken. The
extinguishment of the old obligation by the new one is a necessary element of novation
which may be effected either expressly or impliedly. The term "expressly" means that
the contracting parties incontrovertibly disclose that their object in executing the new
contract is to extinguish the old one. While there is no specific form is required for an
implied novation, and all that is prescribed by law would be an incompatibility between
the two contracts. While there is no hard and fast rule to determine what might
constitute to be a sufficient change that can bring about novation, the touchstone for
contrariety, however, would be an irreconcilable incompatibility between the old and the
new obligations
In this case, the changes alluded to by petitioner consists only in the manner of
payment. There was really no substitution of debtors since private complainant merely
acquiesced to the payment but did not give her consent to enter into a new contract
There are two forms of novation by substituting the person of the debtor, depending on
whose initiative it comes from, to wit: expromision and delegacion. In the former, the
initiative for the change does not come from the debtor and may even be made without
his knowledge. Since a third person would substitute for the original debtor and assume
the obligation, his consent and that of the creditor would be required. In the latter, the
debtor offers, and the creditor accepts, a third person who consents to the substitution
and assumes the obligation, thereby releasing the original debtor from the obligation,
here, the intervention and the consent of all parties thereto would perforce be
necessary. In either of these two modes of substitution, the consent of the creditor, such
as can be seen, is an indispensable requirement
It is thus easy to see why Cariaga's acceptance of Ramos and Camacho's payment on
installment basis cannot be construed as a case of either expromision or
delegacionenough to justify the attendance of extinctive novation. Not too uncommon is
when a stranger to a contract agrees to assume an obligation; and while this may have
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the effect of adding to the number of persons liable, it does not necessarily imply the
extinguishment of the liability of the first debtor. Neither would the fact alone that the
creditor receives guaranty or accepts payments from a third person who has agreed to
assume the obligation, constitute an extinctive novation absent an agreement that the
first debtor shall be released from responsibility.
ii. Bychangeofcreditor–subrogationofathirdpersonintherightsofthe creditor(1300)

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. (1209a)
Kinds of Subrogation
Subrogation is the transfer of all the rights of the creditor to a third person, who
substitutes him in in all his rights. It may either be legal or conventional
1. Legal Subrogation – takes place without agreement but by operation of law

because of certain acts
2. Conventional Subrogation – takes place by agreement of the parties
Requires the intervention and consent of three persons:

a. Original creditor
b. New Creditor
c. Debtor
• Conventionalsubrogation
- Requisites(1301)
Art. 1301. Conventional subrogation of a third person requires the consent of the
original parties and of the third person. (n)
Requisites of Conventional Subrogation

*Consent of all parties; consent is essential
 Consent of the creditor-because his right is extinguished
 Consent of the new creditor-because he becomes a party to a new relation
 Consent of the debtor-because the old obligation is extinguished and he
becomes liable under a new obligation.
- Distinguishedfromassignmentofcredit
Conventional subrogation Assignment of credit
Debtor’s consent is necessary Debtor’s consent is not required

Extinguishes an obligation and gives rise Refers to the same right which passes
to a new on from one person to another
Nullity of an old obligation may be cured Nullity of an obligation is not remedied by
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such that the new obligation will be the assignment of the creditor’s right to
perfectly valid another
- Effects(1303‐1304)
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. (1212a)
Effect of 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
 When a suspensive condition is attached to the credit so transferred
-Condition must be fulfilled in order that the new creditor may exercise his right
-Prestations which could not have been required of the original creditor cannot be
demanded of the new one.
Subrogation in insurance
 Upon payment of the loss, the insurer is entitled to be subrogated pro tanto to
any right of action which the insured may have against the third person whose
negligence or wrongful act caused the loss
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. (1213)
Partial Subrogation
 Refers to hierarchy of credits
 Conforms to justice and equity
 Because of the partial payment, the 3rd person is only partially conventionally
subrogated
Licarosv.Gatmaitan, G.R. No. 142838. August 9, 2001

FACTS:
The Anglo-Asean Bank and Trust Limited (Anglo-Asean) is a private bank registered
and organized to do business under the laws of the Republic of Vanuatu but not in the
Philippines. Its business consists primarily in receiving fund placements by way of
deposits from institutions and individual investors from different parts of the world.
Enticed by the lucrative prospects of doing business with Anglo-Asean, Abelardo
Licaros, a Filipino businessman, decided to make a fund placement with said bank
sometime in the 1980’s. He encountered difficulties in retrieving his interests/profits and
even his very investment. He decided to seek the counsel of Antonio P. Gatmaitan who
was a reputable banker and investment manager. Gatmaitan voluntarily offered to
assume the payment of Anglo-Asean’s indebtedness to Licaros subject to certain terms
and conditions. In order to effectuate and formalize their respective commitments, they
executed a notarized memorandum of agreement on July 29, 1988. Gatmaitan
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executed in favor of Licaros a non-negotiable promissory note with assignment of cash

dividends. Gatmatian promises to pay Licaros P3,150,000 without interest as material
consideration for the full settlement of his money claims from Anglo-Asean Bank.
Gatmaitan presented to Anglo-Asean the said memorandum of agreement for the
purpose of collecting Licaro’s placement thereat.
No formal response was ever made by said bank to either Licaros or Gatmaitan.
Gatmaitan did not bother anymore to make good his promise to pay Licaros the amount
stated in his promissory note however Licaros thought differently. He felt that he had a
right to collect on the basis of the promissory note regardless of the outcome of
Gatmaitan's recovery efforts. Licaros addressed successive demand letters to
Gatmaitan demanding payment of the latter’s obligation under the promissory note.
Gatmaitan however did not accede to these demands. Licaros then filed a complaint
that Gatmaitan should pay him assailing that the memorandum of agreement is an
assignment of credit.
ISSUE: Whether or not the Memorandum of Agreement (MOA) between petitioner and
respondent is one of assignment of credit or one of conventional subrogation?
HELD:
The Memorandum of Agreement (MOA) is in the nature of a conventional subrogation
which requires the consent of the debtor, Anglo-Asean Bank, for its validity. The MOA
never came into effect due to the failure of the parties to get the consent of Anglo-Asean
Bank thus respondent never became liable for the amount stipulated therein. Gatmaitan
and Licaros had intended to treat their agreement as one of conventional subrogation is
plainly borne by a stipulation in their MOA, to wit: “Whereas, the parties herein have
come to an agreement on the nature, form and extent of their mutual prestations which
they now record herein with the express conformity of the third parties concerned “ and
with the notation “With our conforme” over the words “Anglo-Asean Bank and Trust”. It
is basic in the interpretation of contracts that the intenion of the parties must be the one
pursued.
Assignment of credit is the process of transferring the right of the assignor to the
assignee who would have then have the right to proceed against the debtor while
subrogation has been defined transfer of all the rights of the creditor to a third person
who substitutes him in all his rights. It can be either legal or conventional. Legal
subrogation takes place by operation of law because of certain acts. Conventional
subrogation is that which takes place by agreement of parties. Debtor’s consent is
necessary in conventional subrogation and it extinguishes the obligation and gives rise
to a new one. Compare to assignment of credit, nullity of an old obligation may be cured
by subrogation such that a new obligation will be perfectly valid. Also an agreement
among the original creditor, debtor and new creditor is required in conventional
subrogation as what Article 1301 of the civil code states.
• LegalSubrogation
- Requisites
- Whenpresumed(1302)
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 Payment to preferred creditor (even without debtor’s knowledge)

 Payment by a 3rd person not interested in the obligation, with debtor’s approval
 Payment by interested party (even without debtor’s knowledge)
Art. 1302. It is presumed that there is legal subrogation:

(1) When a creditor pays another creditor who is preferred1 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
Payment to preferred creditor

 Refers to hierarchy of credits
 Subrogation when the original creditor accepts the amount as full payment
(amount actually paid is immaterial)
-Preferred creditor cannot refuse a valid tender of payment
 Debtor can still set up against the new creditor the defenses which he could have
used against the original creditor
Payment with debtor’s approval

 If 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 the amount he paid is less than the credit, even if the creditor has accepted it
as full payment
-Third person is entitled to reimbursement only for what he actually paid. He
cannot proceed against sureties, guarantors or mortgages and pledges.
 But if the debtor had consented, expressly or tacitly, to such payment by the third
person
-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

 Interested party is someone who would be benefited by the extinguishment of the
obligation
 When a solidary debtor pays the obligation, he is subrogated in the rights of the
creditor
 Payor cannot take advantage of the solidarity and recover the amount in excess
of his share of the obligation from any of his co-debtors
 The solidarity terminates by his payment, and the obligation among the co-
debtors becomes joint, each being liable to the payor for his respective share.
- Effects(1303‐1304)
Same as conventional subrogation
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 Transfer of credit with all the rights thereto appertaining against the debtor or
against third persons
 Original creditor’s right for the remainder of the debt is preferred to the subrogee.
AstroElectronicsCorp.v.PhilippineExportandForeignLoanGuarantee Corp., G.R. No. 136729. September

23, 2003
FACTS:
Petitioner Astro Electronics Corp. (Astro) was granted several loans by the Philippine
Trust Company (Philtrust) amounting to P3,000,000 with interest, secured by three
promissory notes signed twice by petitioner Roxas, as President of Astro and in his
personal capacity. Roxas also signed a Continuing Surety ship Agreement in favor of
Philtrust Bank, as President of Astro and as surety. When Astro thereafter failed to pay
these loan obligations to Philtrust despite demands, respondent Philippine Export and
Foreign Loan Guarantee Corp. (Philguarantee) paid 70% of the amount as guaranteed
in behalf of Astro.
Philguarantee filed against Astro and Roxas a complaint for sum of money. Roxas
disclaims any liability on the instruments alleging that he merely signed the same in
blank and the phrases “in his personal capacity” and “in his official capacity” were
fraudulently inserted without his knowledge.
ISSUE: Whether or not Roxas should be jointly and severally liable with Astro?
HELD:
In signing his name aside from being the President of Astro, Roxas became a co-maker
of the promissory notes and cannot escape any liability arising from it He did not deny
signing of the notes twice and did not offer any explanation why he did so. Roxas, as
President of Astro, is reasonably, a businessman who is presumed to take ordinary care
of his concerns. The three promissory notes uniformly provide: "FOR VALUE
RECEIVED, I/We jointly, severally and solidarily, promise to pay to PHILTRUST BANK
or order. .." An instrument which begins with "I", "We", or "Either of us" promise to pay,
when signed by two or more persons, makes them solidarily liable.
Roxas’ acquiescence is not necessary for subrogation to take place because the instant
case is one of the legal subrogation that occurs by operation of law, and without need of
the debtor’s knowledge. Legal subrogation is that which takes place without agreement
but by operation of law because of certain acts. Instances mentioned in Article 1302
shows when legal subrogation is presumed. Philguarantee, as guarantor, became the
transferee of all the rights of Philtrust as against Roxas and Astro because the
guarantor who pays is subrogated by virtue thereof to all the rights which the creditor
had against the debtor.
7. Other modes

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Adamson University

Art. 1302 – It is presumed that there is legal subrogation:

2. Third person is NOT an interested party but with consent of debtor

Art. 1236(1) – The creditor is not bound to accept payment or performance by a

Right of Third Person

Reimbursement and Subrogation

- Before dismissal the debtor pays to another creditor, he does so at his

To whom payment can be made:

b. The benefit is deemed to exist when the thing is preserved or kept to be

1. Judicial and Extrajudicial Demand

In obligations to do or not to do, an act of forbearance cannot be substituted by

Substitution of Prestation: If there is an agreement or consent of the creditor, the

Determination of Quality: In cases falling under this article, if there is disagreement

Republic Act. 8183 repealed Republic Act. 529.

Nicolas v. Matias (1955): Pursuant to the terms of an agreement, an obligation

The obligation in such case must be satisfied in Philippine currency.

Delivery of Instruments: The delivery of notes or other commercial instruments shall

Non-payment of note: creditor may sue upon the original contract

Equally untenable is the contention of the plaintiff-appellant that because of

TWO REQUISITES FOR PAYMENT:

Javier v. Brinas: Where in their transactions, receipts evidencing payments made by

 Therefore, partial payment is not allowed except in the following:

(1) Example of Par. 1 (Receipt of Principal Without Reservation as to Interest)

An examination of the language of the document executed by appellant captioned

 It always depending upon the consignation if it has already been accepted

Judge Flores denied it and the motion for reconsideration as well.

YES. There is no question that in cases of consignation the debtor is entitled as a

Hence, this petition.

Whether the consignation made by Castro was valid.

The consignation made by Castro was invalid.

 The creditor can demand the rescission of the obligation

 In an obligation to give a generic thing

Respondent Tropical Homes, Inc. entered into a subdivision contract to develop

No. Respondent cannot demand modification of the contract on the impossibility of

possession of the debtor, the same is presumed to have been delivered

Art. 1271. The delivery of a private document evidencing a credit, made

 Legal – by operation of law, with or without knowledge of the

Voluntary or conventional compensations- includes any compensation which takes

- Novation requires the creation of a new contractual relations as well as the

Consent of creditor to a novation by change of debtor is as indispensable as the

Delta executed a Continuing Deed of Assignment of Receivables in favor of SIHI as

There would be novation in the following cases:

Accidental modifications in an existing obligation do not extinguish it by novation. Mere

Art. 1299. If the original obligation was subject to a suspensive or resolutory

Old Obligation Conditional – There is no novation if the intention of creating new

Both Obligations Conditional – If both are conditional:

There other cases that the old debtor

creditor.Novationmay also be extinctive or modificatory. It is extinctive when an old

ii. Bychangeofcreditor–subrogationofathirdpersonintherightsofthe creditor(1300)

1. Legal Subrogation – takes place without agreement but by operation of law

Requires the intervention and consent of three persons:

Requisites of Conventional Subrogation

Debtor’s consent is necessary Debtor’s consent is not required

Licarosv.Gatmaitan, G.R. No. 142838. August 9, 2001

executed in favor of Licaros a non-negotiable promissory note with assignment of cash

 Payment to preferred creditor (even without debtor’s knowledge)

Art. 1302. It is presumed that there is legal subrogation:

Payment to preferred creditor

Payment with debtor’s approval

Payment by Interested Party

AstroElectronicsCorp.v.PhilippineExportandForeignLoanGuarantee Corp., G.R. No. 136729. September

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