Miko P.

Martin, 2015–01836

Obligations Reviewer
C2023
Contents
SECTION ONE: THE CONCEPTUAL FRAMEWORK.............................................................................................. 1

I. General Provisions............................................................................................................................................. 1

1. Obligation as a Concept........................................................................................................................... 1

2. Sources of Obligations............................................................................................................................. 1

3. Nature & Effect........................................................................................................................................ 3

4. Transmissibility........................................................................................................................................ 4

SECTION TWO: CLASSIFICATION OF OBLIGATIONS.......................................................................................... 5

I. Pure Obligations................................................................................................................................................. 5

1. Definition.................................................................................................................................................. 5

II. Conditional Obligations..................................................................................................................................... 5

1. Definition of Condition.............................................................................................................................. 5

2. Kinds of Conditional Obligations.............................................................................................................. 5

3. Constructive Fulfillment............................................................................................................................ 9

III. Reciprocal Obligations................................................................................................................................... 10

1. Definition................................................................................................................................................ 10

2. Implied Power to Rescind...................................................................................................................... 10

3. In Case Both Parties Are in Breach....................................................................................................... 12

IV. Obligations With a Period.............................................................................................................................. 12

1. Definition................................................................................................................................................ 12

2. When Courts May Fix a Period.............................................................................................................. 13

3. Beneficiary of Period.............................................................................................................................. 13

4. When Debtor Loses Right to Make Use of Period.................................................................................14

5. In Case of Loss, Deterioration or Improvement of the Thing..................................................................14

6. In Case of Premature Payment or Delivery............................................................................................ 14

V. Alternative & Facultative Obligations.............................................................................................................. 14

1. Definition................................................................................................................................................ 14

2. In Case of Loss...................................................................................................................................... 15

3. Right to Choose..................................................................................................................................... 15

VI. Joint, Solidary, Divisible & Indivisible Obligations..........................................................................................16

1. When Solidary....................................................................................................................................... 16

2. When Joint............................................................................................................................................. 17
 3. When Indivisible or Divisible.................................................................................................................. 17

4. Joint Indivisible Obligation..................................................................................................................... 18

5. Rights & Obligations of Solidary Creditors.............................................................................................18

6. Who Debtor Must Pay............................................................................................................................ 18

7. When Solidary Creditor Extinguishes Obligation...................................................................................19

8. Who Creditor May Proceed Against....................................................................................................... 19

9. Payment by Solidary Debtor.................................................................................................................. 19

10. Remission by Creditor............................................................................................................................ 20

11. In Case of Loss...................................................................................................................................... 20

12. Defenses of Solidary Debtors................................................................................................................ 20

VII. Obligations With A Penal Clause.................................................................................................................. 20

1. Purpose of Penalty................................................................................................................................. 20

2. When Courts May Reduce..................................................................................................................... 21

3. Effect of Nullity....................................................................................................................................... 22

SECTION 3: NON-PERFORMANCE OF OBLIGATIONS.......................................................................................23

1. Kinds of Non-Performance..................................................................................................................... 23

2. Effect of Fortuitous Events..................................................................................................................... 25

3. Subsidiary Remedies of Creditor........................................................................................................... 26

SECTION 4: EXTINGUISHMENT OF OBLIGATIONS............................................................................................ 27

I. Payment or Performance................................................................................................................................. 27

1. In General.............................................................................................................................................. 27

2. Application of Payments........................................................................................................................ 33

3. Payment by Cession.............................................................................................................................. 33

4. Tender of Payment and Consignation.................................................................................................... 34

II. Loss of the Thing Due..................................................................................................................................... 35

1. Definition................................................................................................................................................ 35

2. When Loss Extinguishes........................................................................................................................ 35

3. When Loss Does Not Extinguish........................................................................................................... 36

4. Partial Loss............................................................................................................................................ 36

5. Presumption of Fault.............................................................................................................................. 36

6. Unforeseen Difficulty.............................................................................................................................. 37

7. Creditor’s Rights.................................................................................................................................... 38

III. Condonation or Remission of Debt................................................................................................................ 38

 1. Nature & Requisites............................................................................................................................... 38

2. Implied Renunciation............................................................................................................................. 38

3. Renunciation of Accessory Obligations.................................................................................................. 39

IV. Confusion or Merger of Rights....................................................................................................................... 39

V. Compensation................................................................................................................................................. 39

1. General Rules........................................................................................................................................ 39

2. Specific Scenarios................................................................................................................................. 41

VI. Novation......................................................................................................................................................... 42

1. The Concept of Novation....................................................................................................................... 42

2. Requisites.............................................................................................................................................. 44

3. Expromision and Delegacion................................................................................................................. 44

4. Effect on Accessory Obligations............................................................................................................ 45

5. Void Obligations..................................................................................................................................... 45

6. Conditional Obligations.......................................................................................................................... 45

7. Subrogation........................................................................................................................................... 45

SECTION 5: NATURAL OBLIGATIONS................................................................................................................. 47

1. Definition................................................................................................................................................ 47

2. Kinds...................................................................................................................................................... 47
 SECTION ONE: THE CONCEPTUAL FRAMEWORK
I. General Provisions
1. Obligation as a Concept
1.1. Categories
There are 2 Categories to Obligations: Civil Obligations and Natural Obligations.
ART. 1423 provides that Civil Obligations “give a right of action to compel their performance.”
The Article also provides that Natural Obligations, “not being based on positive law but on equity and natural
law, do not grant a right of action to enforce their performance, but after voluntary fulfillment by the obligor, they
authorize the retention of what has been delivered or rendered by reason thereof”.
Until SECTION FIVE: NATURAL OBLIGATIONS, the rules discussed will mainly be referring to Civil Obligations.

1.2. Definition
A definition for “Obligations” can be found in ART. 1156, which provides that “[a]n obligation is a juridical necessity
to give, to do or not to do.”
Arias Ramos gives another definition for Obligations – a definition reiterated by Justice J.B.L. Reyes and cited in
Jurisprudence:
“An obligation is a juridical relation whereby a person (called the creditor) may demand from another
(called the debtor) the observance of a determinative conduct (the giving, doing or not doing), and in
case of breach, may demand satisfaction from the assets of the latter.”1

1.3. Essential Elements

Jurisprudence provides for the 3 Essential Elements of an Obligation, the concurrence of which would
constitute the Obligation:
- “The Vinculum Juris or Juridical Tie which is the efficient cause established by the various sources of
obligations (law, contracts, quasi-contracts, delicts and quasi-delicts);
- The Object which is the prestation or conduct, required to be observed (to give, to do or not to do); and
- The Subject-Persons who, viewed from the demandability of the obligation, are the active (obligee) and the
passive (obligor) subjects.”2
Many terms refer to the Subject-Persons of an obligation – the following are one of the more common terms used
by the courts:
Active Subject Passive Subject
- Obligee - Obligor
- Creditor - Debtor
- Lessor - Lessee

2. Sources of Obligations
ART. 1157 provides that “[o]bligations arise from:
1. Law; 4. Acts or omissions punished by law; and
2. Contracts; 5. Quasi-Delicts.”
3. Quasi-Contracts;
Because an Obligation can arise from multiple Sources, a single act can give rise to multiple Obligations, so long
as the aforementioned Sources of Obligations covers the occurrence of said single act.
For example, in the case of People vs. Culas y Raga (G.R. No. 21116, June 5, 2017), Culas was found guilty of
Statutory Rape. As such, Culas must suffer the penalty of Reclusion Perpetua, and must also pay Php 100,000.00 as
Civil Indemnity, Php 100,000.00 in Moral Damages and Php 100,000.00 in Exemplary Damages. However, before the
Judgement could become Final, Culas died. Thus, under ART. 89 PAR. 1 OF THE REVISED PENAL CODE, Culas’s
Criminal Liability was totally extinguished.
1
Makati Stock Exchange, Inc. vs. Campos (G.R. No. 138814, April 16, 2009)
2
Ang Yu Asuncion vs. CA (G.R. No. 109125, December 2, 1994)
[1]
 On the question of whether the victim can still receive the Civil Liability from the Criminal Action filed against
Culas, the Court ruled in the negative. The Court provided that “the death of the accused prior to final judgment
terminates his criminal liability and only the civil liability directly arising from and based solely on the offense
committed.” However, the Court also provided that “the claim for civil liability survives notwithstanding the death of
accused, if the same may also be predicated on a source of obligation other than delict. ARTICLE 1157 of the Civil
Code enumerates these other sources of obligation from which the civil liability may arise as a result of the same act
or omission.” Thus, the victim may still file a Separate Civil Action against the Estate of Culas for the acts that he has
done against her.

2.1. Law
ART. 1158 provides that “[o]bligations derived from law are not presumed. Only those expressly determined in
this Code or in special laws are demandable, and shall be regulated by the precepts of the law which establishes
them; and as to what has not been foreseen, by the provisions of this Book.”
The case of OSG VS. AYALA LAND, INC. (G.R. NO. 177056, SEPTEMBER 18, 2009) is an application on how
“obligations derived from law are not presumed.” The Senate, after reviewing the National Building Code and its
Implementing Rules & Regulations (IRR), submitted a Committee Report concluding that shopping malls are no longer
allowed to collect parking fees.
The Court ruled that because the National Building Code and its IRR “do not mention parking fees, then simply,
said provisions do not regulate the collection of the same. The RTC and the Court of Appeals correctly applied
ARTICLE 1158 of the New Civil Code…”

2.2. Contracts
Contracts are defined by ART. 1305, which provides that “[a] contract is a meeting of minds between two
persons whereby one binds himself, with respect to the other, to give something or to render some service.”
A more elaborate definition is given in Jurisprudence, as the Court cites Sanchez Roman – A Contract is a:
“... juridical convention manifested in legal form, by virtue of which one or more persons bind themselves
in favor of another or others, or reciprocally, to the fulfilment of a prestation to give, to do, or not to do.”3
ART. 1159 provides that “[o]bligations arising from contracts have the force of law between the contracting
parties and should be complied with in good faith.”
When ART. 1159 provides that “contracts have the force of law between the contracting parties…”, it
provides for the Binding Effect of Contracts, in that a Contract is treated as law between the contracting
parties. ART. 1159 also provides that “[obligations arising from contracts… should be complied with in good
faith.” That Contracts must be complied with in Good Faith is the Manner of Compliance required of
Obligations arising from Contracts.

2.3. Quasi-Contracts
ART. 2142 provides that “[c]ertain lawful, voluntary and unilateral acts give rise to the juridical relation of quasi-
contract to the end that no one shall be unjustly enriched or benefited at the expense of another.”

2.4. Acts or Omissions Punished by Law

ART. 1161 provides that “[c]ivil obligations arising from criminal offenses shall be governed by the PENAL
LAWS, subject to the provisions of ARTICLE 2177, and of the pertinent provisions of CHAPTER 2, PRELIMINARY TITLE, ON
HUMAN RELATIONS, AND OF TITLE XVIII OF THIS BOOK, regulating damages.”

2.5. Quasi-Delicts
ART. 2176 provides that “[w]hoever by act or omission causes damage to another, there being fault or
negligence, is obliged to pay for the damage done. Such fault or negligence, if there is no pre-existing contractual
relation between the parties, is called a quasi-delict and is governed by the provisions of this Chapter.”

3. Nature & Effect

3.1. Obligation To Give

3
SM Land, Inc. vs. Bases Conversion and Development Authority (G.R. No. 203655, March 18, 2015)
[2]
 3.1.1. Obligation to Deliver
In an Obligation to Deliver, the Debtor may be tasked to deliver either a Determinate or Indeterminate Thing:
- On Determinate Things, ART. 1460 provides that “[a] thing is determinate when it is particularly designated or
physically segregated from all others of the same class.
The requisite that a thing be determinate is satisfied if at the time the contract is entered into, the thing is
capable of being made determinate without the necessity of a new or further agreement between the parties.”
ART. 1165 PAR. 1 provides that “[w]hen what is to be delivered is a determinate thing, the creditor, in
addition to the right granted him by ARTICLE 1170, may compel the debtor to make the delivery.”
In delivering the Determinate Thing, Accessories attached or included with the Thing must also be
delivered. ART. 1166 provides that “[t]he obligation to give a determinate thing includes that of delivering all
its accessions and accessories, even though they may not have been mentioned.”
- On Indeterminate Things, the Civil Code Commentator Manresa provides that “a generic thing is one of
whose determination is confined to that of its nature, to the genus (genero) to which it pertains.”4
ART. 1165 PAR. 2 provides that “[i]f the thing is indeterminate or generic, he may ask that the obligation be
complied with at the expense of the debtor.”
Regardless whether the Debtor is tasked to deliver a Determinate or Indeterminate thing, ART. 1165 PAR. 3
provides that “[i]f the obligor delays, or has promised to deliver the same thing to two or more persons who do not
have the same interest, he shall be responsible for any fortuitous event until he has effected the delivery.”
Additionally, ART. 1244 PAR. 1 provides that “[t]he 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.”

3.1.2. Obligation to Take Care of Thing

ART. 1163 provides that “[e]very person obliged to give something is also obliged to take care of it with the
proper diligence of a good father of a family, unless the law or the stipulation of the parties requires another
standard of care.”

3.1.3. Obligation to Deliver of Fruits

ART. 442 provides that “Natural fruits are the spontaneous products of the soil, and the young and other products
of animals. Industrial fruits are those produced by lands of any kind through cultivation or labor. Civil fruits are the
rents of buildings, the price of leases of lands and other property and the amount of perpetual or life annuities or other
similar income.”
Thus, the Article provides for 3 Types of Fruits – Natural, Industrial, and Civil Fruits.
In the event that the Thing to Be Delivered does bear fruit, ART. 1164 provides that “[t]he creditor has a right to the
fruits of the thing from the time the obligation to deliver it arises. However, he shall acquire no real right over it until the
same has been delivered to him.”

3.2. Obligation To Do
The General Rule is that when a Debtor fails in an Obligation to Do, then that Debtor may be liable for Damages.
ART. 1167 PAR. 1 provides that “[i]f a person obliged to do something fails to do it, the same shall be executed at his
cost.”
Additionally, ART. 1167 PAR. 2 provides that “[t]his same rule shall be observed if he does it in contravention of the
tenor of the obligation. Furthermore, it may be decreed that what has been poorly done be undone.”
In Jurisprudence, the cost found in the phrase “the same shall be executed at his cost” has been taken to mean
the cost needed to either finish the obligation or change the contravention in which it was done.
In the case of VIL-REY PLANNERS VS. LEXBER (G.R. NO. 189401 & G.R. NO. 189447, JUNE 15, 2016), Vil-Rey
Planners and Lexber entered into a contract, wherein Vil-Rey Planners undertook to work on Lexber’s compacted
backfill. Vil-Rey Planners only accomplished 95% of the job, and so Lexber had to turn to another contractor to finish
it.

4
De Leon vs. Soriano (G.R. No. L-2724, August 24, 1950)
[3]
 The Court ruled that “[t]he law provides that the obligation of a person who fails to fulfill it shall be executed at that
person’s cost. The CA was correct in ruling that Vil-Rey should be held liable for the amount paid by Lexber to another
contractor to complete the works.”

3.3. Obligation To Not Do

ART. 1168 provides that “[w]hen the obligation consists in not doing, and the obligor does what has been
forbidden him, it shall also be undone at his expense.”

3.4. Transmissibility
ART. 1178 provides that “[s]ubject to the laws, all rights acquired in virtue of an obligation are transmissible, if
there has been no stipulation to the contrary.”

[4]
 SECTION TWO: CLASSIFICATION OF OBLIGATIONS
I. Pure Obligations
1. Definition
ART. 1179 provides for the definition and rule on Pure Obligations. The Article provides that “[e]very obligation
whose performance does not depend upon a future or uncertain event, or upon a past event unknown to the parties,
is demandable at once.
Every obligation which contains a resolutory condition shall also be demandable, without prejudice to the effects
of the happening of the event.”
In the case of HSBC VS. SPS. BROQUEZA (G.R. NO. 178610, NOVEMBER 17, 2010), the Spouses Broqueza were
employees of HSBC and are members of HSBC–Staff Retirement Plan (HSBC-SRP) – By virtue of their membership
with HSBC-SRP, they are secured future benefits once they retire. The Spouses obtained some loans amounting to
~Php 240,000.00, which are paid by an automatic deduction on their salary. To execute the automatic salary
deduction, the Spouses Broqueza and HSBC-SRP executed a promissory note in favor of HSBC-SRP:
“FOR VALUE RECEIVED, I/WE _____ jointly and severally promise to pay to THE HSBC
RETIREMENT PLAN (hereinafter called the “PLAN”) at its office in the Municipality of Makati, Metro
Manila, on or before until fully paid the sum of PESOS ___ Philippine Currency without discount, with
interest from date hereof at the rate of Six per cent (6%) per annum, payable monthly.”
A labor dispute arose between HSBC and their employees. As a result, HSBC let go of some of their employees,
including the Spouses Broqueza. Because the Spouses no longer have their jobs at HSBC, they could no longer pay
back the loans. HSBC-SRP now demands payment for the loans.
The Court ruled in favor of HSBC. The Court ruled that “there is no date of payment indicated in the Promissory
Notes. The RTC is correct in ruling that since the Promissory Notes do not contain a period, HSBCL-SRP has the right
to demand immediate payment. ARTICLE 1179 of the Civil Code applies. The spouses Broqueza’s obligation to pay
HSBCL-SRP is a pure obligation. The fact that HSBCL-SRP was content with the prior monthly check-off from Editha
Broqueza’s salary is of no moment.”

II. Conditional Obligations

1. Definition of Condition
ART. 1179(1) provides that “[e]very obligation whose performance does not depend upon a future or uncertain
event, or upon a past event unknown to the parties, is demandable at once.” Thus, if the Obligation DOES depend
upon a future or uncertain event, or some past event unknown to the parties, the Obligation IS NOT demandable at
once. The event upon which the Obligation depends on is called “the Condition”.
To be precise, a “Condition” is a “future and uncertain event upon which an obligation or provision is made to
depend. It is a future and uncertain event upon which the acquisition or resolution of rights is made to depend by
those who execute the juridical act.”5

4. Kinds of Conditional Obligations

4.1. Suspensive or Resolutory
ART. 1181 provides that “[i]n conditional obligations, the acquisition of rights, as well as the extinguishment or
loss of those already acquired, shall depend upon the happening of the event which constitutes the condition.”
A careful reading of the Article reveals 2 Kinds of Conditions – Suspensive and Resolutory Conditions.
- Suspensive Conditions are those Conditions that result in the acquisition of a Right.
- Resolutory Conditions are those Conditions that result in the extinguishment or loss of a Right already
acquired.
In the case of GONZALES VS. HEIRS OF CRUZ (G.R. NO. 131784, SEPTEMBER 16, 1999), the Heirs of Cruz has
agreed to lease parcel of land to Gonzales. The Contract of Lease stated that:

5
Gonzales vs. Heirs of Cruz (G.R. No. 131784, September 16, 1999)
[5]
 Clause 9 – “[t]he LESSORS (Heirs of Cruz) hereby commit themselves and shall undertake to obtain a
separate and distinct T.C.T. over the herein leased portion to the LESSEE (Gonzales)…”
As it turns out, the land was not even under the Heirs’ names. When Gonzales refused to pay for the land that he
was already leasing, the Heirs of Cruz filed a complaint against him.
The Court ruled that “the obligation of the petitioner (Gonzales) to buy the land cannot be enforced unless
respondents (Heirs of Cruz) comply with the suspensive condition that they acquire first a separate and distinct TCT in
their names. The suspensive condition not having been fulfilled, then the obligation of the petitioner to purchase the
land has not arisen.”

4.1.1. Rules Governing Suspensive Conditions

4.1.1.1. Retroactive Effect
ART. 1187 provides that “[t]he effects of a conditional obligation to give, once the condition has been
fulfilled, shall retroact to the day of the constitution of the obligation. Nevertheless, when the obligation imposes
reciprocal prestations upon the parties, the fruits and interests during the pendency of the condition shall be deemed
to have been mutually compensated. If the obligation is unilateral, the debtor shall appropriate the fruits and interests
received, unless from the nature and circumstances of the obligation it should be inferred that the intention of the
person constituting the same was different.
In obligations to do and not to do, the courts shall determine, in each case, the retroactive effect of the
condition that has been complied with.”
In the case of Romulo A. Coronel, et al. vs. Court of Appeals, et al. (G.R. No. 103577, October 7, 1996), the
Respondent Alcaraz Family sought to buy a House-and-Lot from the Petitioner Coronel Family. The Alcaraz Family
paid a Php 50,000.00 Down Payment for the House-and-Lot, which was worth Php 1,240,000.00. In the Receipt of
Down Payment, the Coronel Family promised to transfer the TCT of the House-and-Lot to their own name, since the
House-and-Lot was still under their deceased Father’s name, once they received the Down Payment from the Alcaraz
Family. However, when the Alcaraz Family did pay, and after the Coronel Family transferred the TCT to their own
name, they did not sell the land to the Alcaraz Family. Instead, they sold the same House-and-Lot to Mabanag for Php
1,580,000.00, with a Down Payment of Php 300,000.00. Thus, the Coronel Family cancelled their Contract with the
Alcaraz Family and returned the Php 50,000.00. The Alcaraz Family now petitions to have the land returned to them.
For their Defense, the Coronel Family claimed that because the Alcaraz Family has not yet paid the full price, the
Coronel Family had no Obligation to Sell the House-and Lot.
The Court ruled against the Coronel Family. The Court first noted the Obligations and Conditions present in the
sale:
1. “Ramona [Alcaraz] will make a down payment of Fifty Thousand (P50,000.00) Pesos upon execution of the
document aforestated;
2. The Coronels will cause the transfer in their names of the title of the property registered in the name of their
deceased father upon receipt of the Fifty Thousand (P50,000.00) Pesos down payment;
3. Upon the transfer in their names of the subject property, the Coronels will execute the deed of absolute sale in
favor of Ramona [Alcaraz] and the latter will pay the former the whole balance of One Million One Hundred
Ninety Thousand (P1,190,000.00) Pesos.”
The Receipt of Down Payment was executed on January 19 – Thus, the 1 st Condition was fulfilled. The TCT was
then transferred to the Coronel Family on February 6 – Thus, the 2 nd Condition was fulfilled. Reiterating ART. 1187 on
Retroactivity, the Court ruled that “the rights and obligations of the parties with respect to the perfected contract of
sale became mutually due and demandable as of the time of fulfillment or occurrence of the suspensive condition on
February 6, 1985. As of that point in time, reciprocal obligations of both seller and buyer arose.”

4.1.1.2. Right of the Creditor and the Debtor

ART. 1188 provides that “[t]he creditor may, before the fulfillment of the condition, bring the appropriate
actions for the preservation of his right.
The debtor may recover what during the same time he has paid by mistake in case of a suspensive
condition.”

[6]
 4.1.1.3. In Case of Improvement, Loss or Deterioration of the Thing During the Pendency
of the Condition
ART. 1189 provides that “[w]hen the conditions have been imposed with the intention of suspending the efficacy of
an obligation to give, the following rules shall be observed in case of the improvement, loss or deterioration of the
thing during the pendency of the condition:
1. If the thing is lost without the fault of the debtor, the obligation shall be extinguished;
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 of commerce, or disappears in such a way that its existence is
unknown or it cannot be recovered;
3. When the thing deteriorates without the fault of the debtor, the impairment is to be borne by the creditor;
4. If it deteriorates through the fault of the debtor, the creditor may choose between the rescission of the
obligation and its fulfillment, with indemnity for damages in either case;
5. If the thing is improved by its nature, or by time, the improvement shall inure to the benefit of the creditor;
6. If it is improved at the expense of the debtor, he shall have no other right than that granted to the
usufructuary.”
The Article defines the term ‘Loss’ – at least how ‘Loss’ must be understood in Suspensive Conditions. The Article
provides that the Thing is Lost when “it perishes, or goes out of commerce, or disappears in such a way that its
existence is unknown or it cannot be recovered”.
Additionally, the Article affords the Right of Usufruct to the Debtor that improves the Thing at his own expense.
ART. 562 defines Usufruct:
ART. 562 – Usufruct gives a right to enjoy the property of another with the obligation of preserving its form
and substance, unless the title constituting it or the law otherwise provides.
As to what Property the Usufructuary may enjoy, ART. 566 provides that, generally, “[t]he usufructuary shall be
entitled to all the natural, industrial and civil fruits of the property in usufruct. With respect to hidden treasure which
may be found on the land or tenement, he shall be considered a stranger.”
Broken down, the Article provides for rules when the Thing –
Trigger Rule
Is Lost – Without Fault of the Debtor The Obligation is extinguished.
Through Fault of the Debtor The Debtor is obliged to pay Damages
Deteriorates – Without Fault of the Debtor The Impairment shall be borne by the Creditor.
Through Fault of the Debtor The Creditor may either:
- Rescind the Obligation
- Compel its fulfillment
Either way, the Debtor must pay for Damages.
Is Improved – By its Nature The Improvement inures to the benefit of the
Creditor.
At the Expense of the Debtor The Debtor has the Rights afforded to an
Usufructuary.
4.1.2. Rules Governing Resolutory Conditions
4.1.2.1. Effect of Occurrence in Obligations to Give
ART. 1190 PAR. 1 provides that “[w]hen the conditions have for their purpose the extinguishment of an
obligation to give, the parties, upon the fulfillment of said conditions, shall return to each other what they have
received.”
In the case of MCIAA VS. TUDTUD (G.R. NO. 174012, NOVEMBER 14, 2008), the National Airports Corporation
(NAC) was seeking to expand the Cebu Lahug Airport by acquiring the land around it. On 1949, the NAC acquired
Benjamin Tudtud’s land in exchange for Just Compensation, and the NAC assured Tudtud that he and his
Successors-in-Interest would be entitled to repurchase the land when and in the event that the land was no longer
used for Airport purposes. In 1990, possession of the land transferred from NAC to Mactan Cebu International Airport
Authority (MCIAA). Cebu Lahug Airport was eventually closed after Mactan International Airport was opened. Now,
Benjamin Tudtud’s Successors-in-Interest are seeking to repurchase the land at the same price it was first acquired,
without interest.

[7]
 The Court noted that Tudtud’s Obligation is an Obligation with a Resolutory Condition. The Obligation here is for
Tudtud to give his land to NAC in exchange for Just Compensation, and the Resolutory Condition here is the event
that the land acquired from Tudtud no longer be used for Airport purposes. The Court ruled that pursuant ART. 1190
PAR. 1, MCIAA (as the new possessors of the land) and Tudtud’s Successors-in-Interest must return what they have
received from each other. Thus, “the MCIAA is obliged to reconvey Lot No. 988 (the land) to respondents (Tudtud’s
Successors-in-Interest)” while “respondents must return to the MCIAA what they received as just compensation for the
expropriation of Lot No. 988, plus legal interest to be computed from default, which in this case runs from the time the
MCIAA complies with its obligation (to return the land) to the respondents.”

4.1.2.2. In Case of Loss, Deterioration, or Improvement

ART. 1190 PAR. 2 provides that “[i]n case of the loss, deterioration or improvement of the thing, the provisions
which, with respect to the debtor, are laid down in the preceding article shall be applied to the party who is bound to
return.”
Said preceding Article is ART. 1189, as discussed in SECTION TWO: CLASSIFICATION OF OBLIGATIONS – II.
Conditional Obligations – 2. Kinds of Conditional Obligations – 2.1. Suspensive or Resolutory – 2.1.1. Rules Governing
Suspensive Conditions – 2.1.1.3. In Case of Improvement, Loss or Deterioration of the Thing During the Pendency of the
Condition.
4.1.2.3. In Case of Obligations To Do or Not To Do
ART. 1190 PAR. 3 provides that “[a]s for the obligations to do and not to do, the provisions of THE SECOND
PARAGRAPH OF ARTICLE 1187 shall be observed as regards the effect of the extinguishment of the obligation.”
The aforementioned Article, which is ART. 1187 PAR. 2, provides that “[i]n obligations to do and not to do, the
courts shall determine, in each case, the retroactive effect of the condition that has been complied with.”

4.2. Potestative, Casual or Mixed

ART. 1182 provides that “[w]hen the fulfillment of the condition depends upon the sole will of the debtor, the
conditional obligation shall be void. If it depends upon chance or upon the will of a third person, the obligation shall
take effect in conformity with the provisions of this Code.”
ART. 1182 actually provides for Another 2 Kinds of Conditions – Potestative and Casual Conditions.
- Potestative Conditions are those conditions that depend upon the sole will of the debtor – such conditions
shall render the Conditional Obligation void.
- Casual Conditions are those conditions that depend upon chance. Unlike Obligations with Potestative
Conditions, Obligations with Casual Conditions are not automatically rendered void.
A mixture of both Potestative and Casual Conditions gives rise to a 3rd Kind of Condition – Mixed Conditions.
In the case of LIM VS. CA (G.R. NO. 87047, OCTOBER 30, 1990), Lim and Dy entered into a Compromise
Agreement, in which Dy can occupy Lim’s premises “for as long as [Dy] needed the premises and can meet and pay
said increases.”
The Court ruled that the stipulation “is a purely potestative condition because it leaves the effectivity and
enjoyment of leasehold rights to the sole and exclusive will of the lessee. It is likewise a suspensive condition because
the renewal of the lease, which gives rise to a new lease, depends upon said condition.”
In the case of NAGA TELEPHONE VS. CA (G.R. NO. 107112, FEBRUARY 24, 1994), telephone company Naga
Telephone Co., Inc. (NATELCO) entered into a contract with electric power company Camarines Sur II Electric
Cooperative, Inc. (CASURECO II). In the Contract, CASURECO II agreed to let NATELCO install telephone lines on
CASURECO II’s electric light posts inside Naga City only – In exchange, NATELCO would install for free 10 telephone
connections on CASURECO II’s warehouses and its administrators’ homes. More notably, the Contract between them
provided:
Clause (a) – “That the term or period of this contract shall be as long as the party of the first part
(NATELCO) has need for the electric light posts of the party of the second part (CASURECO II) it
being understood that this contract shall terminate when for any reason whatsoever, the party of the
second part (CASURECO II) is forced to stop, abandoned [sic] its operation as a public service and it
becomes necessary to remove the electric lightpost;”

[8]
 After 10 Years, CASURECO II filed to have the Contract reformed. Apparently, NATELCO used CASURECO II’s
electric posts outside of Naga City, which was against their Contract. Additionally, NATELCO’s increasing subscriber
count forced NATELCO to add more telephone lines to CASURECO II’s electric light posts. The heavier telephone
lines have greatly diminished the structural integrity of the electric light posts, causing some posts to be destroyed by
typhoon.
The Case would eventually reach the Court of Appeals, which ruled in favor of CASURECO II. The Court of
Appeals ruled that:
1) The Contract may be reformed due to Unforeseen Difficulties, under ART. 1267; and
2) Clause (a) is a potestative condition, which renders it void.
[NOTE: The Court’s decision on the application of ART. 1267 is discussed in SECTION FOUR: EXTINGUISHMENT OF
OBLIGATIONS – II. Loss of the Thing Due – 6. Unforeseen Difficulty]
The Court agreed that Clause (a) does include a Potestative Condition. However, Clause (a) also contains a
Casual Condition. The Court noted that the statement “That the term or period of this contract shall be as long as the
party of the first part (NATELCO) has need for the electric light posts of the party of the second part (CASURECO II)
…” is Potestative. On the other hand, the Court noted that the statement “…this contract shall terminate when for any
reason whatsoever, the party of the second part (CASURECO II) is forced to stop, abandoned [sic] its operation as a
public service and it becomes necessary to remove the electric lightpost” is Casual. Thus, the Court ruled that “the
contract is subject to mixed conditions, that is, they depend partly on the will of the debtor and partly on chance,
hazard or the will of a third person, which do not invalidate the aforementioned provision.”

4.3. Impossible
ART. 1183 provides that “[i]mpossible conditions, those contrary to good customs or public policy and those
prohibited by law shall annul the obligation which depends upon them. If the obligation is divisible, that part
thereof which is not affected by the impossible or unlawful condition shall be valid.
The condition not to do an impossible thing shall be considered as not having been agreed upon.”

4.4. Positive or Negative

ART. 1184 provides that “[t]he condition that some event happen at a determinate time shall extinguish the
obligation as soon as the time expires or if it has become indubitable that the event will not take place.”
ART. 1185 provides that “[t]he condition that some event will not happen at a determinate time shall render the
obligation effective from the moment the time indicated has elapsed, or if it has become evident that the event cannot
occur.
If no time has been fixed, the condition shall be deemed fulfilled at such time as may have probably been
contemplated, bearing in mind the nature of the obligation.”

5. Constructive Fulfillment
ART. 1186 provides that “[t]he condition shall be deemed fulfilled when the obligor voluntarily prevents its
fulfillment.” This act by the obligor of preventing the fulfillment of the condition is called Constructive Fulfillment.
Constructive Fulfillment has 2 Requisites, namely:
1. “The intent of the obligor to prevent the fulfillment of the condition; and
2. The actual prevention of the fulfillment.
Mere intention of the debtor to prevent the happening of the condition, or to place ineffective obstacles to its
compliance, without actually preventing the fulfillment, is insufficient.”6
For example, in the case of FEDERAL EXPRESS (FEDEX) CORP. VS. ANTONINO (G.R. NO. 199455, JUNE 27, 2018),
FedEx claims that Antonino & Sison failed to file for Non-Delivery of a Package within the agreed 45 Day Filing Period.
Because of such failure, Antonino & Sison cannot claim damages from FedEx. However, the Court noted that FedEx
was nonchalant in answering Antonino & Sison’s follow-ups on the Package, and never even notified Antonino &
Sison on when they completed “delivery” of the Package.
The Court ruled that “[i]t is one with the Regional Trial Court and the Court of Appeals in stressing that
respondents’ inability to expediently file a formal claim can only be attributed to petitioner hampering its

6
International Hotel Corp. vs. Joaquin, Jr. (G.R. No. 158361, April 10, 2013)
[9]
fulfillment. Thus, respondents must be deemed to have substantially complied with the requisite 45-day period for
filing a formal claim.”

III. Reciprocal Obligations

1. Definition
Reciprocal Obligations “are those created or established at the same time, out of the same cause, and which
results in a mutual relationship of creditor and debtor between parties.”7
“Reciprocal obligations are to be performed simultaneously, so that the performance of one is conditioned upon
the simultaneous fulfillment of the other.”8

6. Implied Power to Rescind

Rescission, as defined in Jurisprudence, is “to declare a contract void in its inception and to put an end to it
as though it never were. It is not merely to terminate it and release parties from further obligations to each other but
to abrogate it from the beginning and restore the parties to relative positions which they would have
occupied had no contract ever been made.”9
ART. 1191 provides that “[t]he power to rescind obligations is implied in reciprocal ones, in case one of the
obligors should not comply with what is incumbent upon him.
The injured party may choose between the fulfillment and the rescission of the obligation, with the payment of
damages in either case. He may also seek rescission, even after he has chosen fulfillment, if the latter should become
impossible.
The court shall decree the rescission claimed, unless there be just cause authorizing the fixing of a period.
This is understood to be without prejudice to the rights of third persons who have acquired the thing, in
accordance with ARTICLES 1385 AND 1388 and THE MORTGAGE LAW.”
In choosing Rescission, “ARTICLE 1191 itself clearly states that the options of rescission and specific performance
come with “with the payment of damages in either case.” The very same breach or delay in performance that triggers
rescission is what makes damages due.
When the contracting parties, by their own free acts of will, agreed on what these damages ought to be, they
established the law between themselves. Their contemplation of the consequences proper in the event of a breach
has been articulated. When courts are, thereafter, confronted with the need to award damages in tandem with
rescission, courts must not lose sight of how the parties have explicitly stated, in their own language, these
consequences. To uphold both ARTICLE 1191 OF THE CIVIL CODE and the parties’ will, contractually stipulated
liquidated damages must, as a rule, be maintained.”10

6.1. Breach Contemplated

In applying ART. 1191, the General Rule is that “the rescission (or resolution) of a contract will not be permitted for
a slight or casual breach, but only for such substantial and fundamental violations as would defeat the very
object of the parties in making the agreement.”11
In the case of ONG VS. CA (G.R. NO. 97347, JULY 6, 1999), Ong entered into a Contract to Sell with the Spouses
Robles, wherein the Spouses with transfer to Ong possession of a land title once Ong pays. However, Ong failed to
pay, and so the Spouses had the Contract to Sell rescinded. Because the Contract was rescinded, the Spouses
received damages from Ong.
The Court ruled against the Spouses, not finding a Breach that would necessitate Rescission. The Court ruled that
“[i]n a contract to sell, the payment of the purchase price is a positive suspensive condition, the failure of which is not
a breach, casual or serious, but a situation that prevents the obligation of the vendor to convey title from acquiring an
obligatory force.” Thus, the Obligation having not come into being in the first place, there was no substantial and
fundamental breach to speak of. The Court ordered that the Spouses return the payment for Damages.

7
Vernen Realty Development Corp. vs. CA (G.R. No. 101762, July 6, 1993)
8
Integrated Packaging Corp vs. CA (G.R. No. 115117, June 8, 2000)
9
Huibonhoa vs. CA (G.R. No. 95897, G.R. No. 102604, December 14, 1999)
10
PEZA vs. Pilhino Sales Corp. (G.R. No. 185765, September 28, 2016)
11
Nolasco vs. Cuerpo (G.R. No. 210215, December 9, 2015)
[10]
 6.2. Distinguished from Other Types of Rescission
ART. 1380 provides that “[c]ontracts validly agreed upon may be rescinded in the cases established by law.”
ART. 1381 goes on to provide which Contracts are Rescissible. Between ART. 1191 and ART. 1381, for ART. 1191
to apply, Jurisprudence provides that “there must be reciprocal prestations as distinguished from mutual obligations
between or among the parties.”12
As for ART. 1381, “[w]hen a party seeks the relief of rescission as provided in ARTICLE 1381, there is no need for
reciprocal prestations to exist between or among the parties. All that is required is that the contract should be among
those enumerated in ARTICLE 1381 for the contract to be considered rescissible. Unlike ARTICLE 1191, rescission
under ARTICLE 1381 must be a subsidiary action because of ARTICLE 1383.”13
The Article mentioned, ART. 1383, provides that “[t]he action for rescission is subsidiary; it cannot be instituted
except when the party suffering damage has no other legal means to obtain reparation for the same.”

6.3. Judicial or Extrajudicial

ART. 1191 PAR. 3 provides that “[t]he court shall decree the rescission claimed, unless there be just cause
authorizing the fixing of a period.”
Now although ART. 1191 PAR. 3 provides that “[t]he court shall decree the rescission claimed…”, the Court has
also noted that “there is nothing in the law that prohibits the parties from entering into agreement that violation of the
terms of the contract would cause cancellation thereof, even without court intervention. In other words, it is not
always necessary for the injured party to resort to court for rescission of the contract.”14
Further elaborating on this, the Court in UP VS. DE LOS ANGELES (G.R. NO. L-28602, SEPTEMBER 29, 1970)
provided that “it must be understood that the act of a party in treating a contract as cancelled or resolved on
account of infractions by the other contracting party must be made known to the other [party] and is always
provisional, being ever subject to scrutiny and review by the proper court. If the other party denies that
rescission is justified, it is free to resort to judicial action in its own behalf, and bring the matter to court.
Then, should the court, after due hearing, decide that the resolution of the contract was not warranted, the responsible
party will be sentenced to damages; in the contrary case, the resolution will be affirmed, and the consequent
indemnity awarded to the party prejudiced.
In other words, the party who deems the contract violated may consider it resolved or rescinded, and act
accordingly, without previous court action, but it proceeds at its own risk. For it is only the final judgment of the
corresponding court that will conclusively and finally settle whether the action taken was or was not correct in law.”
However, in the case of IRINGAN VS. CA (G.R. NO. 129107, SEPTEMBER 26, 2001), the Court provided that “even if
the right to rescind is made available to the injured party, the obligation is not ipso facto erased by the failure of the
other party to comply with what is incumbent upon him. The party entitled to rescind should apply to the court for
a decree of rescission. The right cannot be exercised solely on a party's own judgment that the other
committed a breach of the obligation. The operative act which produces the resolution of the contract is the
decree of the court and not the mere act of the vendor. Since a judicial or notarial act is required by law for a valid
rescission to take place, the letter written by respondent declaring his intention to rescind did not operate to validly
rescind the contract.”
The conflict between the two Rulings it this – The Court in UP VS. DE LOS ANGELES ruled that one of the Parties
may consider the Obligation as Rescinded while the Court in IRINGAN VS. CA ruled that the Party entitled to Rescind
must apply to the Court for a Decree of Rescission. To resolve this, recall that UP VS. DE LOS ANGELES also ruled that
the Party who deems the contract violated may consider it resolved or rescinded, and act accordingly, without
previous court action, but it proceeds at its own risk – The risk being the other Party denying the Rescission and
applying for Judicial Action.
Additionally, the Court IRINGAN VS. CA also ruled that the Right to Rescind cannot be exercised solely by the Party
entitled to Rescission when said Party considers the acts of the other Party as a Breach of the Obligation. Instead, as
provided by the Court in UP VS. DE LOS ANGELES, the Party entitled to Rescission must also let the other Party know
of its intention to treat the Obligation as Rescinded, due to said other Party’s infractions.

12
The Wellex Group, Inc. vs. U-Land Airlines, Co., Ltd. (G.R. No. 167519, January 14, 2015)
13
The Wellex Group, Inc. vs. U-Land Airlines, Co., Ltd. (G.R. No. 167519, January 14, 2015)
14
Froilan vs. Pan Oriental Shipping Co. (G.R. No. L-11897, October 31, 1964)
[11]
7. In Case Both Parties Are in Breach
ART. 1192 provides that “[i]n case both parties have committed a breach of the obligation, the liability of the first
infractor shall be equitably tempered by the courts. If it cannot be determined which of the parties first violated the
contract, the same shall be deemed extinguished, and each shall bear his own damages.”
The Court in YAO VS. MATELA (G.R. NO. 167767. AUGUST 29, 2006) provides for what must happen when both
parties are in breach and it cannot be determined which of the parties first violated the contract. The Spouses Yao
contracted the Architect Matela to design and construct a house – the Spouses provided for specific tiles and furniture
to be used. However, Matela created a shoddy house, and so the Spouses refused to pay the full price.
The Court cites a Commentary provided by Court of Appeals Justice Desiderio Jurado:
“The rule then is that in reciprocal obligations, one party incurs in delay from the moment the other
party fulfills his obligation, while he himself does not comply or is not ready to comply in a proper manner
with what is incumbent upon him.”
With this, noting the manner in which Matela fulfilled his Obligation, the Court ruled that “Matela failed to comply
with his obligation to construct the townhouses based on the agreed specifications. As such, he cannot be discharged
from his obligations by mere delivery of the same to the spouses Yao.”
A provision in the New Civil Code seemingly contradicts ART. 1192. ART. 2215(1) provides that “[i]n contracts,
quasi-contracts, and quasi-delicts, the court MAY equitably mitigate the damages under circumstances other than
the case referred to in the preceding article, as in the following instances:
1. That the plaintiff himself has contravened the terms of the contract;”
This is opposed to the wording in ART. 1192, that “… the liability of the first infractor SHALL be equitably tempered
by the courts.” Jurisprudence provides that “ARTICLES 1192 and 2215 of the Civil Code are not irreconcilably
conflicting. The plaintiff referred to in ARTICLE 2215(1) should be deemed to be the second infractor, while the one
whose liability for damages may be mitigated is the first infractor. Furthermore, the directions to equitably temper the
liability of the first infractor in ARTICLES 1192 and 2215 are both subject to the discretion of the court, despite the word
“shall” in ARTICLE 1192, in the sense that it is for the courts to decide what is equitable under the circumstances.”15

IV. Obligations With a Period

1. Definition
“Period” has been defined as “a space of time which has an influence on obligation as a result of a juridical act,
and either suspends their demandableness or produces their extinguishment. Obligations with a period are
those whose consequences are subjected in one way or another to the expiration of said period or term.”16
ART. 1193 provides that “[o]bligations for whose fulfillment a day certain has been fixed, shall be demandable
only when that day comes.
Obligations with a resolutory period take effect at once, but terminate upon arrival of the day certain.
A day certain is understood to be that which must necessarily come, although it may not be known when.
If the uncertainty consists in whether the day will come or not, the obligation is conditional, and it shall be
regulated by the rules of the preceding Section.”
The case of SOLANTE VS. COMMISSION ON AUDIT (G.R. NO. 207348, AUGUST 19, 2014) provides for what may be
considered “a day certain…” for the purposes of ART. 1193. In this case, F.F. Cruz entered into a Contract of
Reclamation with the City of Mandaue – F.F. Cruz shall undertake to create structures on parcel of land given by the
City to Cruz, and Cruz shall return the land to the City once the project is done. The Contract specifically provides that
“[t]he project is estimated to be completed in six (6) years…”. F.F. Cruz and the City of Mandaue also entered into a
Memorandum of Agreement, which states that all built structures “existing upon the completion of the said Mandaue
City Reclamation Project shall ipso facto belong to the [City of Mandaue] in Ownership…”. Unfortunately, the project
was halted, since the City of Mandaue undertook a Road Widening Project, and so they had to demolish some
structures made by F.F. Cruz. As such, F.F. Cruz was compensated for the demolished structures. The Commission
on Audit was against this, stating that the Project took longer than the estimated 6 years, and that the structures were
demolished past the 6-year estimate for the project.
15
Ong vs. Bagñalbal (G.R. No. 149140, September 12, 2006)
16
Lirag Textile Mills, Inc. vs. CA (G.R. No. L-30736, April 14, 1975)
[12]
 First, the Court ruled that “[a] plain reading of the Contract of Reclamation reveals that the six (6)-year period
provided for project completion, or, with like effect, termination of the contract was a mere estimate and cannot be
considered a period or a “day certain” in the context of the aforequoted ART. 1193.” Having established that the
Obligation is NOT an Obligation with a Period, the Court concluded that “the Memorandum of Agreement does not
state that the structures shall inure in ownership to the City of Mandaue after the lapse of six (6) years from the
execution of the Contract of Reclamation. What the Memorandum of Agreement does provide is that ownership of the
structures shall vest upon, or ipso facto belong to, the City of Mandaue when the Contract of Reclamation shall have
been completed. Logically, before such time, or until the agreed reclamation project is actually finished, F.F.
Cruz owns the structures.”

8. When Courts May Fix a Period

ART. 1197 provides that “[i]f the obligation does not fix a period, but from its nature and the circumstances it can
be inferred that a period was intended, the courts may fix the duration thereof.
The courts shall also fix the duration of the period when it depends upon the will of the debtor.
In every case, the courts shall determine such period as may under the circumstances have been probably
contemplated by the parties. Once fixed by the courts, the period cannot be changed by them.”
In applying ART. 1197, Jurisprudence provides for a Two-Step Process:
1. “The Court must first determine that "the obligation does not fix a period" (or that the period is made to
depend upon the will of the debtor)," but from the nature and the circumstances it can be inferred that a period
was intended" (ART. 1197 PAR. 1 & 2).
2. The Court must then proceed to the second step, and decide what period was "probably contemplated by the
parties" (ART. 1197 PAR. 3).”17
In the case of MACASAET VS. MACASAET (G.R. NO. 154391 & G.R. NO. 154392, SEPTEMBER 30, 2004), Petitioner
Ismael Macasaet is the son of Respondents Vicente and Rosario Macasaet. Ismael has been living in Vicente and
Rosario’s land and has used it for his construction business. Vicente and Rosario has demanded that Ismael pay Php
500.00 in rent, but Ismael has failed to do so. As such, Vicente and Rosario have filed a complaint to have Ismael
vacate. Ismael claims that he was granted the land by Verbal Agreement as his Advanced Inheritance. Vicente and
Rosario claims that Ismael was allowed to live in the land because of their love and tolerance of him. Because it was
unclear whether or not there was a verbal agreement, Ismael now asks the Court to determine the Period on how long
Ismael can reside in the land.
The Court did not provide for a Period. The Court clarifies that ART. 1197 only applies “to a situation in which the
parties intended a period.” Upon reviewing the facts, the Court concluded that the parties did not intend to have a
period. The Court ruled that “when Vicente and Rosario invited [Ismael] to use the lots, they did so out of parental love
and a desire for solidarity expected from Filipino parents. No period was intended by the parties. Their mere failure to
fix the duration of their agreement does not necessarily justify or authorize the courts to do so.”
In case the Obligation allows the Debtor to pay when he is available, ART. 1180 provides that “[w]hen the debtor
binds himself to pay when his means permit him to do so, the obligation shall be deemed to be one with a period,
subject to the provisions of ARTICLE 1197.” By providing that the Obligation is still subject to the provisions of ART.
1197, the Period must still be fixed by the courts.

9. Beneficiary of Period
ART. 1196 provides that “[w]henever in an obligation a period is designated, it is presumed to have been
established for the benefit of both the creditor and the debtor, unless from the tenor of the same or other
circumstances it should appear that the period has been established in favor of one or of the other.”
To say that the period “is presumed to have been established for the benefit of both the creditor and the debtor…”
would mean that when Courts construe how Periods must be interpreted, it must benefit both the Creditor and the
Debtor – it must not prejudice one or the other.
For example, in the case of LL & CO. VS. HUANG CHAO (G.R. NO. 142378, MARCH 7, 2002), the Court had to rule
on a Contract of Lease, which specifically provides that it shall last for “FIVE (5) YEARS from the effectivity of said
lease, and with the option to renew…” Exercising this Option to Renew, Huang Chao (the lessee) renewed their
Contract with LL & Co. – this is despite LL & Co.’s repeated demands for Huang Chao to vacate the premises. The

17
Araneta vs. Philippine Sugar (G.R. No. L-22558, May 31, 1967)
[13]
Metropolitan Trial Court, Regional Trial Court, and Court of Appeals all presumed that the Contract of Lease was
made in favor of the Lessor (Huang Chao).
The Court ruled against Huang Chao, noting that “in a reciprocal contract like a lease, the period of the lease must
be deemed to have been agreed upon for the benefit of both parties, absent language showing that the term was
deliberately set for the benefit of the lessee or lessor alone. We are not aware of any presumption in law that the term
of a lease is designed for the benefit of the lessee alone.” That being said, the Court ruled that without such
presumption in their favor, Huang Chao could not have validly renewed the Contract of Lease without LL & Co.
agreeing.

10. When Debtor Loses Right to Make Use of Period

ART. 1198 provides that “[t]he debtor shall lose every right to make use of the period:
1. When after the obligation has been contracted, he becomes insolvent, unless he gives a guaranty or
security for the debt;
2. When he does not furnish to the creditor the guaranties or securities which he has promised;
3. When by his own acts he has impaired said guaranties or securities after their establishment, and when
through a fortuitous event they disappear, unless he immediately gives new ones equally satisfactory;
4. When the debtor violates any undertaking, in consideration of which the creditor agreed to the period;
5. When the debtor attempts to abscond.”

11. In Case of Loss, Deterioration or Improvement of the Thing

ART. 1194 provides that “[i]n case of loss, deterioration or improvement of the thing before the arrival of the day
certain, the rules in ARTICLE 1189 shall be observed.”

12. In Case of Premature Payment or Delivery

ART. 1195 provides that “[a]nything paid or delivered before the arrival of the period, the obligor being unaware of
the period or believing that the obligation has become due and demandable, may be recovered, with the fruits and
interests.”

V. Alternative & Facultative Obligations

1. Definition
12.1. Alternative
Jurisprudence provides that “[i]n an alternative obligation, there is more than one object, and the fulfillment of one
is sufficient, determined by the choice of the debtor who generally has the right of election.”18
ART. 1199 PAR. 1 provides that “[a] person alternatively bound by different prestations shall completely perform
one of them.”

12.2. Facultative
ART. 1206 PAR. 1 provides that “[w]hen only one prestation has been agreed upon, but the obligor may
render another in substitution, the obligation is called facultative.”

13. In Case of Loss

13.1. Alternative
13.1.1. Where Obligor Has Right to Choose
18
Arco Pulp & Paper Co., Inc. vs. Lim (G.R. No. 206806, June 25, 2014)
[14]
 ART. 1204 provides that “[t]he creditor shall have a right to indemnity for damages when, through the fault of
the debtor, all the things which are alternatively the object of the obligation have been lost, or the compliance
of the obligation has become impossible.
The indemnity shall be fixed taking as a basis the value of the last thing which disappeared, or that of the
service which last became impossible.
Damages other than the value of the last thing or service may also be awarded.”

13.1.2. Where Obligee Has Right to Choose

ART. 1205 provides that “[w]hen the choice has been expressly given to the creditor, the obligation shall cease to
be alternative from the day when the selection has been communicated to the debtor.
Until then the responsibility of the debtor shall be governed by the following rules:
1. If one of the things is lost through a fortuitous event, he shall perform the obligation by delivering that
which the creditor should choose from among the remainder, or that which remains if only one subsists;
2. If the loss of one of the things occurs through the fault of the debtor, the creditor may claim any of those
subsisting, or the price of that which, through the fault of the former, has disappeared, with a right to
damages;
3. If all the things are lost through the fault of the debtor, the choice by the creditor shall fall upon the price of any
one of them, also with indemnity for damages.
The same rules shall be applied to obligations to do or not to do in case one, some or all of the prestations should
become impossible.”

13.2. Facultative
ART. 1206 PAR. 2 provides that “[t]he loss or deterioration of the thing intended as a substitute, through the
negligence of the obligor, does not render him liable. But once the substitution has been made, the obligor is
liable for the loss of the substitute on account of his delay, negligence or fraud.”

14. Right to Choose

14.1. Who Has the Right
In Alternative Obligations, the Right to Choose generally belongs to the Debtor. ART. 1200 PAR. 1 provides that
“[t]he right of choice belongs to the debtor, unless it has been expressly granted to the creditor.”
In Facultative Obligations, the Right to Choose also belongs to the Debtor. ART. 1206 PAR. 1 provides that
“[w]hen only one prestation has been agreed upon, but the obligor may render another in substitution, the
obligation is called facultative.”

14.2. Limitations on Choice

The General Rule is that a Debtor must perform only one of the Prestations, and the Debtor must perform it
completely. ART. 1199 PAR. 2 provides that “[t]he creditor cannot be compelled to receive part of one and part of
the other undertaking.”
Additionally, ART. 1200 PAR. 2 provides that “[t]he debtor shall have no right to choose those prestations which
are impossible, unlawful or which could not have been the object of the obligation.”

14.3. When Right to Choose Is Lost

ART. 1202 provides that “[t]he debtor shall lose the right of choice when among the prestations whereby he is
alternatively bound, only one is practicable.”
ART. 1203 provides that “[i]f through the creditor’s acts the debtor cannot make a choice according to the terms of
the obligation, the latter may rescind the contract with damages.”

14.4. When Choice Is Effective

ART. 1201 provides that “[t]he choice shall produce no effect except from the time it has been communicated.”

[15]
 This is so to give the Creditor “opportunity to express his consent, or to impugn the election made by the debtor,
and only after said notice shall the election take legal effect when consented by the creditor, or if impugned by the
latter, when declared proper by a competent court.”19

VI. Joint, Solidary, Divisible & Indivisible Obligations

Joint Obligations are obligations wherein “each debtor is liable only for a proportionate part of the debt, and the
creditor is entitled to demand only a proportionate part of the credit from each debtor.”20
On the other hand, Solidary Obligations are obligations wherein “each of the debtors is liable for the entire
obligation, and each of the creditors is entitled to demand the satisfaction of the whole obligation from any or all of the
debtors.”21

1. When Solidary
14.5. When Expressly Stated
ART. 1207 provides that “[t]he concurrence of two or more creditors or of two or more debtors in one and the same
obligation does not imply that each one of the former has a right to demand, or that each one of the latter is bound to
render, entire compliance with the prestation. There is a solidary liability only when the obligation expressly so states,
or when the law or the nature of the obligation requires solidarity.”
To say that the obligation expressly states that it is Solidary, certain terms must appear in the agreement.
Jurisprudence provides for some terms used in Solidary Obligations:
- “Individually - Collectively
- Separately - Distinctively
- Respectively - Severally”22
Even if the agreement states that the Debtor shall be “Individually & Jointly”23 or “Jointly & Severally”24 liable, the
Debtor would still be Solidarily liable for the obligation.

14.6. Indivisibility Does Not Mean Solidarity

ART. 1210 provides that “[t]he indivisibility of an obligation does not necessarily give rise to solidarity. Nor does
solidarity of itself imply indivisibility.”
ART. 1210 essentially provides that Solidarity of an Indivisible Obligation is never presumed, and must be proven
through facts.
For example, in the case of AFP RETIREMENT VS. SPS. SANVICTORES (G.R. NO. 207586, AUGUST 17, 2016), Prime
East Properties, Inc. (PEPI) offered Sanvictores a plot of land to buy. Sanvictores accepted, and so PEPI and AFP
Retirement entered into a Contract to Sell with Sanvictores – In the Contract, PEPI and AFP Retirement were named
“SELLER” while Sanvictores was named “BUYER”. Unfortunately, PEPI was not able to deliver the Deed of Absolute
Sale to Sanvictores after Sanvictores paid the full price for the land. As such, Sanvictores filed a complaint against
PEPI and AFP Retirement, claiming that PEPI and AFP Retirement must EACH pay the full price of the Obligation.
AFP Retirement claims that it should not be involved in the case – the land is PEPI’s to sell, and even if it must be
involved in the case, PEPI and AFP Retirement must only be liable for half of the price of the Obligation.
The Court ruled in favor of Sanvictores, stating that “there is no doubt that the nature of the obligation of PEPI
and [AFP Retirement] under the subject contract to sell was solidary. In the said contract, PEPI and [AFP
Retirement] were expressly referred to as the “SELLER” while Sanvictores was referred to as the “BUYER.” Indeed,
the contract to sell did not state “SELLERS” but “SELLER.” This could only mean that PEPI and [AFP Retirement]
were considered as one seller in the contract.” Thus, PEPI and AFP Retirement must EACH pay the full price for the
Obligation.

14.7. Solidarity Despite Differing Obligations

19
Arco Pulp & Paper Co., Inc. vs. Lim (G.R. No. 206806, June 25, 2014)
20
PH Credit Corp. vs. CA (G.R. No. 109648, November 22, 2001)
21
PH Credit Corp. vs. CA (G.R. No. 109648, November 22, 2001)
22
Ronquillo vs. CA (G.R. No. L-55138, September 28, 1984)
23
Ronquillo vs. CA (G.R. No. L-55138, September 28, 1984)
24
Inciong vs. CA (G.R. No. 96405, June 26, 1996)
[16]
 ART. 1211 provides that “[s]olidarity may exist although the creditors and the debtors may not be bound in the
same manner and by the same periods and conditions.”
For example, in the case of LAFARGE CEMENT VS. CONTINENTAL CEMENT CORP. (G.R. NO. 155173, NOVEMBER 23,
2004), the Court ruled that “[t]he fact that the liability sought against [Continental Cement] is for specific performance
and tort, while that sought against the individual respondents is based solely on tort does not negate the solidary
nature of their liability for tortuous acts alleged in the counterclaims.”

15. When Joint

ART. 1208 provides that “[i]f from the law, or the nature or the wording of the obligations to which the preceding
article (Art. 1207) refers the contrary does not appear, the credit or debt shall be presumed to be divided into as many
shares as there are creditors or debtors, the credits or debts being considered distinct from one another, subject to the
Rules of Court governing the multiplicity of suits.”
For example, in the case of PHILIPPINE CREDIT CORP. VS. CA (G.R. NO. 109648, NOVEMBER 22, 2001), the Court
ruled that the liability imposed by the Trial Court on the Respondents was Joint, after finding that “[i]n the dispositive
portion of the January 31, 1984 Decision of the Trial Court, the word solidary neither appears nor can it be
inferred therefrom.”

16. When Indivisible or Divisible

16.1. Obligations
ART. 1225 provides that “[f]or the purposes of the preceding articles, obligations to give definite things and those
which are not susceptible of partial performance shall be deemed to be indivisible.
When the obligation has for its object the execution of a certain number of days of work, the accomplishment of
work by metrical units, or analogous things which by their nature are susceptible of partial performance, it shall be
divisible.
However, even though the object or service may be physically divisible, an obligation is indivisible if so provided
by law or intended by the parties.
In obligations not to do, divisibility or indivisibility shall be determined by the character of the prestation in each
particular case.”
In sum:
Indivisible Divisible
Obligations to Give Definite Things (ART. 1225 PAR. 1) Obligations which for their Object have either:
Obligations to Do which are NOT susceptible to Partial - The execution of a certain number of days of work,
Performance (ART. 1225 PAR. 1) - The accomplishment of work by metrical units, or
If provided by Law or intended by the Parties, even if the - Analogous Things which are subject to Partial
Object or Service is physically Divisible (ART. 1225 PAR. Performance. (ART. 1225 PAR. 2)
3)
 In obligations not to do, divisibility or indivisibility shall be determined by the character of the prestation in each
particular case.
In the case of SPS. LAM VS. KODAK PHILIPPINES, LTD. (G.R. NO. 167615, JANUARY 11, 2016), the Spouses Lam
purchased 3 Kodak Minilab Equipment at Php 1,1796,000.00 each. The Spouses purchased such Minilab Equipment
through a Letter Agreements, as the 3 Minilab Equipment were being sold under a single “Package”. When Kodak
delivered the 1st Minilab Equipment, the Spouses executed Postdated Checks at Php 35,000.00 each for 12 Months.
However, by the 10th Month, the Spouses requested the bank that they stop delivering the checks to Kodak, claiming
that they would be unable to pay. In return, Kodak did not deliver the remaining 2 Minilab Equipment, and demanded
that the Spouses the 1 Minilab Equipment in their possession. The Spouses refused and resolved to rescind their
Contract with Kodak, on the grounds of Kodak’s non-delivery of the remaining 2 Minilab Equipment. The Spouses now
claim that Kodak’s Obligation to Deliver the 3 Minilab Equipment is an Indivisible Obligation – The Minilab Equipment
were sold as a “Package”. As such, recovering the 1 Minilab Equipment that they did deliver would be unjustified.
The Court ruled in favor of the Spouses Lam, finding the Obligation to be Indivisible. The Court provided that “[a]n
obligation is indivisible when it cannot be validly performed in parts, whatever may be the nature of the thing which is
the object thereof. The indivisibility refers to the prestation and not to the object thereof.” The Court noted that
[17]
“[r]espondent’s obligation was to deliver all products purchased under a “package,” and, in turn, petitioners’ obligation
was to pay for the total purchase price, payable in installments.” As such, the Court ruled that “the intention of the
parties is for there to be a single transaction covering all three (3) units of the Minilab Equipment.”

16.2. Things
ART. 1223 provides that “[t]he divisibility or indivisibility of the things that are the object of obligations in which
there is only one debtor and only one creditor does not alter or modify the provisions of Chapter 2 of this Title.”
Said Chapter is on the Nature and Effects of Obligations, which were discussed in SECTION ONE: THE
CONCEPTUAL FRAMEWORK – I. General Provisions – 3. Nature & Effect.

17. Joint Indivisible Obligation

ART. 1209 provides that “[i]f the division is impossible, the right of the creditors may be prejudiced only by their
collective acts, and the debt can be enforced only by proceeding against all the debtors. If one of the latter should be
insolvent, the others shall not be liable for his share.”
ART. 1224 provides that “[a] joint indivisible obligation gives rise to indemnity for damages from the time
anyone of the debtors does not comply with his undertaking. The debtors who may have been ready to fulfill
their promises shall not contribute to the indemnity beyond the corresponding portion of the price of the
thing or of the value of the service in which the obligation consists.”

18. Rights & Obligations of Solidary Creditors

18.1. Do Useful & Non-Prejudicial Acts
ART. 1212 provides that “[e]ach one of the solidary creditors may do whatever may be useful to the others, but
not anything which may be prejudicial to the latter.”
The case of QUIOMBING VS. CA (G.R. NO. 93010, AUGUST 30, 1990) provides for an example of what may or may
not be considered as Prejudicial to Co-Creditors. In this case, Respondent Spouses Saligo entered into a Construction
& Service Agreement with Nicencio Quiombing and Dante Biscocho, in which Quiombing and Biscocho solidarily
“jointly & severally” (remember that this means “solidarily”) bound themselves to construct for the Spouses a house.
After the house was completed, the Spouses were unable to pay. As a result, Quiombing filed for Recovery of the
payment from the Spouses. In their Defense, the Spouses asked that the courts dismiss the Complaint because it was
filed only by Quiombing and not Quiombing and Biscocho together. The Spouses claim that Quiombing’s filing for
Recovery without including Biscocho would be prejudicial to Biscocho, pursuant ART. 1212.
The Court ruled in favor of Quiombing. After reiterating on the nature of Solidary Obligations, in which Solidary
Creditors may enforce the entire Obligation on each of the Debtors, the Court ruled that “[i]t did not matter who as
between them (Quiombing and Biscocho) filed the complaint because the private respondents were liable to either of
the two as a solidary creditor for the full amount of the debt. Full satisfaction of a judgment obtained against them by
Quiombing would discharge their obligation to Biscocho, and vice versa; hence, it was not necessary for both
Quiombing and Biscocho to file the complaint.” On ART. 1212, because such filing can be done individually by
Quiombing, the Court ruled that “[s]uing for the recovery of the contract price is certainly a useful act that Quiombing
could do by himself alone.”

18.2. Not Assign Rights

ART. 1213 provides that “[a] solidary creditor cannot assign his rights without the consent of the others.”

19. Who Debtor Must Pay

ART. 1214 provides that “[t]he debtor may pay any 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.”

20. When Solidary Creditor Extinguishes Obligation

[18]
 ART. 1215 provides that “[n]ovation, compensation, confusion or remission of the debt, made by any of the
solidary creditors or with any of the solidary debtors, shall extinguish the obligation, without prejudice to the provisions
of ARTICLE 1219.
The creditor who may have executed any of these acts, as well as he who collects the debt, shall be liable to the
others for the share in the obligation corresponding to them.”

21. Who Creditor May Proceed Against

ART. 1216 provides that “[t]he creditor may proceed against any one of the solidary debtors or some or all of them
simultaneously. The demand made against one of them shall not be an obstacle to those which may subsequently be
directed against the others, so long as the debt has not been fully collected.”
In the case of PNB VS. INDEPENDENT PLANTERS ASSOC. (G.R. NO. L-28046, MAY 16, 1983), the PNB is appealing a
Decision reached by the Court of First Instance (CFI). The PNB was pursuing several Solidary Debtors for the
Collection of a Sum of Money. However, during the pendency of the case at the CFI, one of the Solidary Debtors
(Ceferino Valencia) died. As such, the CFI dismissed PNB’s Complaint, stating that the CFI no longer has Jurisdiction
over the Complaint and that the proper Action now is to pursue Valencia’s Estate. Now, the PNB claims that the CFI
still had Jurisdiction over the Complaint as regards to the surviving Solidary Debtors.
The Court ruled in favor of PNB. The Court quotes ART. 1216 and provides that “the quoted ARTICLE 1216 grants
the creditor the substantive right to seek satisfaction of his credit from one, some or all of his solidary debtors, as he
deems fit or convenient for the protection of his interests; and if, after instituting a collection suit based on contract
against some or all of them and, during its pendency, one of the defendants dies, the court retains jurisdiction to
continue the proceedings and decide the case in respect of the surviving defendants.”

22. Payment by Solidary Debtor

ART. 1217 provides that “[p]ayment made by one of the solidary debtors extinguishes the obligation. If two or more
solidary debtors offer to pay, the creditor may choose which offer to accept.
He who made the payment may claim from his co-debtors only the share which corresponds to each, with the
interest for the payment already made. If the payment is made before the debt is due, no interest for the intervening
period may be demanded.
When one of the solidary debtors cannot, because of his insolvency, reimburse his share to the debtor paying the
obligation, such share shall be borne by all his co-debtors, in proportion to the debt of each.”
Jurisprudence expounds on the amount that the Solidary Debtor may recover from his co-debtors, further
elaborating on ART. 1217 PAR. 2. “ARTICLE 1217 makes plain that the solidary debtor who effected the payment to the
creditor “may claim from his co-debtors only the share which corresponds to each, with the interest for the payment
already made.” Such solidary debtor will not be able to recover from the co-debtors the full amount already paid to the
creditor, because the right to recovery extends only to the proportional share of the other co-debtors, and not
as to the particular proportional share of the solidary debtor who already paid.”25
In the case of VIGILLA VS. PHILIPPINE COLLEGE OF CRIMINOLOGY, INC. (G.R. NO. 200094, JUNE 10, 2013), Vigilla et
al are Janitors and Supervisors for the Maintenance Department of the Philippine College of Criminology (PCCr).
Technically however, the Janitors are under the employ of Metropolitan Building Services, Inc. (MBSI). Sometime in
2008, PCCr discovered that MBSI’s Certificate for Incorporation has been revoked, and so PCCr terminated its
relationship with MBSI, which resulted in MBSI’s Employees losing their jobs. Now, Vigilla and the other dismissed
Employees have filed a complaint against PCCr and MBSI for Illegal Dismissal. Vigilla et al claims that PCCr were
their true Employers, not MBSI, since MBSI’s Certificate for Incorporation has been revoked, PCCr directly controls
MBSI’s operations, there was no contract between PCCr and MBSI, and the selection of Employees was done by
PCCr. For its Defense, PCCr presents numerous Releases, Waivers and Quitclaims signed by the dismissed
Employees in favor of MBSI – Such Releases, Waivers and Quitclaims serve to prove that MBSI is the true Employer
of the dismissed Employees.
The Court ruled against Vigilla et al., ruling that “the Releases, Waivers and Quitclaims executed by petitioners in
favor of MBMSI redounded to the benefit of PCCr pursuant to ARTICLE 1217 OF THE NEW CIVIL CODE. The reason is
that MBMSI is solidarily liable with the respondents for the valid claims of petitioners pursuant to ARTICLE 109 OF THE
LABOR CODE.”

25
Escaño vs. Ortigas, Jr. (G.R. No. 151953, June 29, 2007)
[19]
 ART. 1218 provides that “[p]ayment by a solidary debtor shall not entitle him to reimbursement from his co-debtors
if such payment is made after the obligation has prescribed or become illegal.”

23. Remission by Creditor

ART. 1219 provides that “[t]he remission made by the creditor of the share which affects one of the solidary
debtors does not release the latter from his responsibility towards the co-debtors, in case the debt had been totally
paid by anyone of them before the remission was effected.”
ART. 1220 provides that “[t]he remission of the whole obligation, obtained by one of the solidary debtors, does not
entitle him to reimbursement from his co-debtors.”

24. In Case of Loss

ART. 1221 provides that “[i]f the thing has been lost or if the prestation has become impossible without the fault of
the solidary debtors, the obligation shall be extinguished.
If there was fault on the part of any one of them, all shall be responsible to the creditor, for the price and
the payment of damages and interest, without prejudice to their action against the guilty or negligent debtor.
If through a fortuitous event, the thing is lost or the performance has become impossible after one of the solidary
debtors has incurred in delay through the judicial or extrajudicial demand upon him by the creditor, the provisions of
the preceding paragraph shall apply.”

25. Defenses of Solidary Debtors

ART. 1222 provides that “[a] solidary debtor may, in actions filed by the creditor, avail himself of all defenses which
are derived from the nature of the obligation and of those which are personal to him, or pertain to his own share. With
respect to those which personally belong to the others, he may avail himself thereof only as regards that part of the
debt for which the latter are responsible.”

VII. Obligations With A Penal Clause

1. Purpose of Penalty
Jurisprudence provides that a Penal Clause is “an accessory obligation which the parties attach to a principal
obligation for the purpose of insuring the performance thereof by imposing on the debtor a special prestation
(generally consisting in the payment of a sum of money) in case the obligation is not fulfilled or is irregularly or
inadequately fulfilled.”26 Specifically, Penal Clauses serve a Double Function:
1. “To provide for liquidated damages; and
2. To strengthen the coercive force of the obligation by the threat of greater responsibility in the event of
breach.”27
ART. 1226 provides that “[i]n obligations with a penal clause, the penalty shall substitute the indemnity for
damages and the payment of interests in case of noncompliance, if there is no stipulation to the contrary.
Nevertheless, damages shall be paid if the obligor refuses to pay the penalty or is guilty of fraud in the fulfillment of
the obligation.
The penalty may be enforced only when it is demandable in accordance with the provisions of this Code.”
In the case of CABARROGUIS VS. VICENTE (G.R. NO. L-14304, MARCH 23, 1960), Cabarroguis was injured when she
was riding on Vicente’s Jeep. They entered into a Compromise Agreement wherein Vicente shall pay Cabarroguis
Php 2,500.00, and should Vicente fail to pay Cabarroguis within 60 Days, he shall pay an additional Php 200.00. It
happened that he only paid Php 1,500.00, and so Cabarroguis filed against Vicente – the Judgement reads:
“In view of all foregoing, the Court hereby renders judgment, sentencing the defendant to pay to the
plaintiff the amount of P1,200.00 with interest at legal rate from the date of the filing of the complaint until
full payment, and to pay the costs.”
Vicente appealed the Decision, citing ART. 1226, in that he should no longer pay for Interests on the
Obligation (to pay for the remaining Php 1,000.00) since the Penalty stipulated in the Penal Clause (to pay Php
200.00) substitutes indemnity for damages and payment of interests.

26
Pryce Corp. vs. PAGCOR (G.R. No. 157480, May 6, 2005)
27
Florentino vs. Supervalue (G.R. No. 172384, September 12, 2007)
[20]
 The Court ruled in favor of Vicente. The Court reiterated the General Rule that “the penalty shall substitute
the indemnity for damages and the payment of interests. The exceptions to this rule, according to the same
article, are:
1. When the contrary is stipulated;
2. When the debtor refuses to pay the penalty imposed in the obligation, in which case the creditor is
entitled to interest on the amount of the penalty, in accordance with ARTICLE 2209; and
3. When the obligor is guilty of fraud in the fulfillment of the obligation.”
The Court noted that Vicente does not need to pay for the Interests on the Obligation itself. However, the Court
did note that Vicente also refused to pay for the Penalty. Thus, according to the 2nd Exception to the General Rule,
Vicente must pay for the Interests, NOT on the Obligation itself, but on the Penalty.
ART. 1227 provides that “[t]he debtor cannot exempt himself from the performance of the obligation by
paying the penalty, save in the case where this right has been expressly reserved for him. Neither can the creditor
demand the fulfillment of the obligation and the satisfaction of the penalty at the same time, unless this right
has been clearly granted him. However, if after the creditor has decided to require the fulfillment of the
obligation, the performance thereof should become impossible without his fault, the penalty may be
enforced.”
As for the Evidence needed to enforce the Penalty, ART. 1228 provides that “[p]roof of actual damages suffered
by the creditor is not necessary in order that the penalty may be demanded.”

26. When Courts May Reduce

As a General Rule, “courts are not at liberty to ignore the freedom of the parties to agree on such terms and
conditions as they see fit as long as they are not contrary to law, morals, good customs, public order or public
policy.”28
However, courts are still given the power to reduce a stipulated Penalty in a Contract. “[C]ourts may equitably
reduce a stipulated penalty in the contract in two instances:
1. If the principal obligation has been partly or irregularly complied; and
2. Even if there has been no compliance if the penalty is iniquitous or unconscionable.”29
This is in accordance with ART. 1229, which provides that “[t]he judge shall equitably reduce the penalty when the
principal obligation has been partly or irregularly complied with by the debtor. Even if there has been no performance,
the penalty may also be reduced by the courts if it is iniquitous or unconscionable.”
In its exercise of power to reduce the amount stipulated in a Penalty, the Court has come to consider certain
Factors in fixing the amount of the Penalty. “To be considered in fixing the amount of penalty are factors such as – but
not limited to:
- the type, extent and purpose of the penalty;
- the nature of the obligation;
- the mode of the breach and its consequences;
- the supervening realities;
- the standing and relationship of the parties;
- and the like.”30
In the case of MAKATI DEVELOPMENT CORP. VS. EMPIRE INSURANCE CO. (G.R. NO. L-21780, JUNE 30, 1967), Makati
Development Corp. (MDC) sold to Respondent Andal parcel of land worth Php 55,615.00. In the Deed of Sale
between MDC and Andal, there contains a “Special Condition” which stipulates that in the event that Andal fails to
construct 50% of his residence on the land within 2 years, then the Bond that Andal delivered to MDC will be forfeit,
meaning that MDC would keep the Bond. The Bond is worth Php 11,123.00. It happened that Andal sold the land to a
certain Juan Carlos. Neither Andal nor Juan Carlos fully constructed a house on the land. Thus, MDC filed a complaint
against Andal.
The Court agreed that Andal must pay forfeit the Bond – The “Special Condition” was in face a Penal Clause.
However, the Court decided that the amount that Andal must forfeit must be tempered. First, the Court noted that
“Juan Carlos had finished more than 50 per cent of his house by April, 1961, or barely a month after the expiration on
28
Filinvest Land, Inc. vs. CA (G.R. No. 138980, September 20, 2005)
29
Filinvest Land, Inc. vs. CA (G.R. No. 138980, September 20, 2005)
30
Pryce Corp. vs. PAGCOR (G.R. No. 157480, May 6, 2005)
[21]
March 31, 1961 of the stipulated period.” Thus, the Court ruled that “[t]here was therefore a partial performance of the
obligation within the meaning and intendment of ARTICLE 1229.”

27. Effect of Nullity

ART. 1230 provides that “[t]he nullity of the penal clause does not carry with it that of the principal obligation.
The nullity of the principal obligation carries with it that of the penal clause.”

[22]
 SECTION 3: NON-PERFORMANCE OF OBLIGATIONS
1. Kinds of Non-Performance
ART. 1170 provides that “[t]hose who in the performance of their obligations are guilty of fraud, negligence, or
delay, and those who in any manner contravene the tenor thereof, are liable for damages.” These speaks of 4 Kinds
of Non-Performance, which are:
1. Delay; 3. Negligence; and
2. Fraud; 4. Contravention of the tenor.
27.1. Delay
Jurisprudence provides for the 3 Requisites of Default, which are:
1. “That the obligation be demandable and already liquidated;
2. That the debtor delays performance; and
3. That the creditor requires the performance judicially or extrajudicially.”31
In the case of RCBC VS. CA (G.R. NO. 133107, MARCH 25, 1999), Atty. Lustre purchased a Toyota, to pay for
which he mortgaged said Toyota to RCBC. He issued 24 monthly checks in favor of RCBC, but it was found that the
5th check was not signed. First, the Court noted that “Article 1170 of the Civil Code states that those who in the
performance of their obligations are guilty of delay are liable for damages. The delay in the performance of the
obligation, however, must be either malicious or negligent.”
The court ruled that “assuming that private respondent was guilty of delay in the payment of the value of the
unsigned check, private respondent cannot be held liable for damages. There is no imputation, much less evidence,
that private respondent acted with malice or negligence in failing to sign the check. Indeed, we agree with the Court of
Appeals’ finding that such omission was mere "inadvertence" on the part of [Atty. Lustre].”

27.1.1. Demand
27.1.1.1. When Demand Is Necessary
ART. 1169, PAR. 1 provides the General Rule that “[t]hose obliged to deliver or to do something incur in delay from
the time the obligee judicially or extrajudicially demands from them the fulfillment of their obligation.”
In the case of CETUS DEVELOPMENT, INC. VS. CA (G.R. NO. 77647, AUGUST 7, 1989), Respondents were lessees of
Cetus Development, Inc.. Cetus Development, Inc. would send a collector to their homes to collect on their rent, but it
happened that one day, the collector never came. Because the collector did not come, the Respondents did not pay
their rent for that month, and so now Cetus Development, Inc. demands that the Respondents vacate the premises.
The Court first provided that “[t]he demand required in ARTICLE 1169 OF THE CIVIL CODE may be in any form,
provided that it can be proved. The proof of this demand lies upon the creditor. Without such demand, oral or written,
the effects of default do not arise.” With this pronouncement, the Court ruled that “[c]oupled with the fact that no
collector was sent as previously done in the past, the private respondents cannot be held guilty of mora solvendi or
delay in the payment of rentals.”

27.1.1.2. When Demand Is Not Necessary

ART. 1169, PAR. 2 provides that “the demand by the creditor shall not be necessary in order that delay may
exist:
1. When the obligation or the law expressly so declare; or
2. When from the nature and the circumstances of the obligation it appears that the designation of the time when
the thing is to be delivered or the service is to be rendered was a controlling motive for the establishment of
the contract; or
3. When demand would be useless, as when the obligor has rendered it beyond his power to perform.”

Reiterating and elaborating on ART. 1169, PAR. 2, Jurisprudence provides that “[t]here are four instances when
demand is not necessary to constitute the debtor in default:
31
Gilat Satellite Networks vs. UCPB General Insurance (G.R. No. 189563, April 7, 2014)
[23]
 1. When there is an express stipulation to that effect;
2. Where the law so provides;
3. When the period is the controlling motive or the principal inducement for the creation of the obligation; and
4. Where demand would be useless.
In the first two paragraphs, it is not sufficient that the law or obligation fixes a date for performance; it must further
state expressly that after the period lapses, default will commence.”32

27.1.2. Special Rule for Reciprocal Obligations

ART. 1169 PAR. 3 provides that “[i]n reciprocal obligations, neither party incurs in delay if the other does not
comply or is not ready to comply in a proper manner with what is incumbent upon him. From the moment one of the
parties fulfills his obligation, delay by the other begins.”
In other words, there is NO Delay when neither party has fulfilled the Reciprocal Obligation or when one party has
not yet fulfilled the Obligation while the other is not yet ready to comply in the Proper Manner incumbent upon him.
There IS Delay the moment one Party PROPERLY fulfills the Obligation – From that moment on, the Party who has
not yet fulfilled his Obligation is already incurring in Delay.

27.2. Fraud
The Court, citing Commentaries from Tolentino, defines Fraud as “the voluntary execution of a wrongful act, or a
wilfull omission, knowing and intending the effects which naturally and necessarily arise from such act or omission; the
fraud referred to in ARTICLE 1170 OF THE CIVIL CODE OF THE PHILIPPINES is the deliberate and intentional evasion of the
normal fulfillment of obligation; it is distinguished from negligence by the presence of deliberate intent, which is lacking
in the latter.”33
ART. 1171 provides that “[r]esponsibility arising from fraud is demandable in all obligations. Any waiver of an
action for future fraud is void.”

27.3. Negligence
ART. 1173 provides that “[t]he fault or negligence of the obligor consists in the omission of that diligence which
is required by the nature of the obligation and corresponds with the circumstances of the persons, of the time
and of the place. When negligence shows bad faith, the provisions of ARTICLES 1171 and 2201, PARAGRAPH 2, shall
apply.”
As for where liability for negligence may arise from, ART. 1172 provides that “[r]esponsibility arising from
negligence in the performance of every kind of obligation is also demandable, but such liability may be
regulated by the courts, according to the circumstances.”
PICART VS. SMITH, JR. (G.R. NO. L-12219, MARCH 15, 1918) is one of the leading cases that discusses Negligence.
In this case, Picart was riding on his horse when Smith approached from the opposite direction in his car. As the Smith
neared the bridge, he saw Picart on his horse – He blew his car horn to warn Picart. He continued onto the bridge
while honking his horn. Picart saw and heard Smith approaching, and so he tried to maneuver his horse onto the
railing of the bridge. Smith approached without slowing down, then turned his car to the right to avoid hitting the horse.
Unfortunately, since the car was so close, the horse panicked and turned towards the car. Thus, the car hit the horse’s
leg, causing Picart to fall off and suffer a concussion. The horse would then die of its injuries.
The Court provides for what would be known as the Foreseeability Test – “Did the defendant (Smith) in doing the
alleged negligent act use that reasonable care and caution which an ordinarily prudent person would have used in the
same situation? If not, then he is guilty of negligence.” It must be noted that Smith may have had the right to assume
that Picart and his horse would have switched to the proper side of the road before Smith entered the bridge.
However, when Smith was already in the middle of the bridge, seeing that Picart has not moved, Smith should have
either stopped or switched to the other side of the road, as a Prudent Man with common knowledge of horses would
do. Instead, Smith continued until he was already close to the horse. In the Court’s opinion, a Prudent Man would
have assumed that the horse is capable of being excited or frightened by the approaching car. As such, Smith failed
the Foreseeability Test.
The Court did note that Picart was also negligent, in that Picart was on the wrong side of the road in the first place.
However, the Court provides for what would be known as the Last Clear Chance Doctrine – “It will be noted that the

32
Rivera vs. Sps. Chua (G.R. No. 184458 & G.R. No. 184472, January 14, 2015)
33
Legaspi Oil Co., Inc. vs. CA (G.R. No. 96505, July 1, 1993)
[24]
negligent acts of the two parties were not contemporaneous, since the negligence of the defendant (Smith)
succeeded the negligence of the plaintiff (Picart) by an appreciable interval. Under these circumstances the law is
that the person who has the last fair chance to avoid the impending harm and fails to do so is chargeable with
the consequences, without reference to the prior negligence of the other party.”

27.4. Contravention of the Tenor

ART. 1167 provides that “[i]f a person obliged to do something fails to do it, the same shall be executed at his cost.
This same rule shall be observed if he does it in contravention of the tenor of the obligation. Furthermore, it may
be decreed that what has been poorly done be undone.”
Tolentino’s Commentaries on the Civil Code, as repeatedly cited in Jurisprudence, provides for what may be
considered as In Contravention of the Tenor:
“The phrase "in any manner contravene the tenor" of the obligation includes any illicit act which
impairs the strict and faithful fulfillment of the obligation, or every kind or defective performance.”34
In the case of CHAVEZ VS. GONZALES (G.R. NO. L-27454, APRIL 30, 1970), Chavez brought his Typewriter to
Gonzales – Gonzales was in the business of fixing Typewriters, and Chavez was hoping to have his own Typewriter
cleaned and repaired. Chavez then left his Typewriter with Gonzales. Gonzales was taking long in repairing the
Typewriter, which frustrated Chavez. At one point, Gonzales even asked for Php 6.00 to purchase spare parts.
Chavez finally demanded that Gonzales return his Typewriter. Unfortunately, Gonzales returned the Typewriter “in
shambles, with the interior cover and some parts and screws missing.” Chavez then delivered his ruined Typewriter to
Freixas Business Machines to have it repaired. The total costs for repair was at Php 89.95 – Chavez now demands
that Gonzales pay the total costs. However, Gonzales claims that he should not be liable for the total cost. Rather,
Gonzales should only be liable for the missing parts, which would all cost at Php 31.10.
The Court ruled in favor of Chavez. The Court ruled that Gonzales Contravened the Tenor of the Obligation. “It is
clear that the defendant-appellee contravened the tenor of his obligation because he not only did not repair
the typewriter but returned it “in shambles”, according to the appealed decision. For such contravention, as
appellant contends, he is liable under ARTICLE 1167 of the Civil Code, jam quot, for the cost of executing the obligation
in a proper manner. The cost of the execution of the obligation in this case should be the cost of the labor or service
expended in the repair of the typewriter, which is in the amount of Php 58.75. because the obligation or contract was
to repair it.”
Additionally, the Court ruled there was Failure or Negligence in the part of Gonzales. The Court provided that
Gonzales is liable “under ARTICLE 1170 of the Code, for the cost of the missing parts, in the amount of Php 31.10, for
in his obligation to repair the typewriter he was bound, but failed or neglected, to return it in the same
condition it was when he received it.”

28. Effect of Fortuitous Events

Generally, the Obligor IS NOT responsible for Fortuitous Events that affect the Obligation. According to ART. 1174,
“[e]xcept in cases expressly specified by the law, or when it is otherwise declared by stipulation, or when the nature of
the obligation requires the assumption of risk, no person shall be responsible for those events which could not be
foreseen, or which, though foreseen, were inevitable.”
The Court provides for 4 Requisites for Fortuitous Events to Exempt the Debtor’s Liability:
1. “The cause of the breach of the obligation must be independent of the will of the debtor;
2. The event must be either unforseeable or unavoidable;
3. The event must be such as to render it impossible for the debtor to fulfill his obligation in a normal manner;
and
4. The debtor must be free from any participation in, or aggravation of the injury to the creditor.”35
If any of these Requisites are absent, the Obligor cannot escape liability. For example, in the case of TANGUILIG
VS. CA (G.R. NO. 117190, JANUARY 2, 1997), Tanguilig constructed a Windmill for Herce Jr. – the construction was
worth Php 60,000. However, after construction, the Windmill collapsed, and so Herce Jr. refused to pay the full price
of the construction. Tanguilig claims that the Windmill collapsed due to “Strong Winds”, which he claims is a Fortuitous
Event. However, the Court ruled that “[Tanguilig] merely stated that there was a “Strong Wind.” But a strong wind in

34
Arrieta vs. NARIC (G.R. No. L-15645, January 31, 1964)
35
Nakpil & Sons vs. CA (G.R. No. L-47851, October 3, 1986)
[25]
this case cannot be fortuitous – unforseeable nor unavoidable. On the contrary, a strong wind should be present
in places where windmills are constructed, otherwise the windmills will not turn.”
In another case, DIOQUINO VS. LAUREANO (G.R. NO. L-25906, MAY 28, 1970), Atty. Dioquino was to register his
car at the Motor Vehicles Office. He had Motor Vehicles Officer Laureano drive his car back to the Office for
registration. However, on the way, children started throwing rocks at the car, breaking the windshield. Now. Atty.
Dioquino demands payment for damages from Laureano while Laureano claims that the incident was a Fortuitous
Event. The Court ruled in favor of Laureano, but they first noted that the Trial Court “was misled, apparently, by the
inclusion of the exemption from the operation of such a provision of a party assuming the risk, considering the nature
of the obligation undertaken.” However, the Court still ruled that “[w]hat happened was clearly unforeseen. It was a
fortuitous event resulting in a loss which must be borne by the owner of the car. An element of reasonableness in the
law would be manifestly lacking if, on the circumstances as thus disclosed, legal responsibility could be imputed to an
individual in the situation of defendant Laureano.”
Additionally, there are other instances wherein the Obligor is still liable for Fortuitous Events. ART. 1165 PAR. 3
provides that “[i]f the obligor delays, or has promised to deliver the same thing to two or more persons who do
not have the same interest, he shall be responsible for any fortuitous event until he has effected the delivery.”

29. Subsidiary Remedies of Creditor

ART. 1177 provides that “[t]he creditors, after having pursued the property in possession of the debtor to satisfy
their claims, may exercise all the rights and bring all the actions of the latter for the same purpose, save those which
are inherent in his person; they may also impugn the acts which the debtor may have done to defraud them.”
On the application of ART. 1177, Jurisprudence provides that “the following successive measures must be
taken by a creditor before he may bring an action for rescission of an allegedly fraudulent sale:
1. Exhaust the properties of the debtor through levying by attachment and execution upon all the property of the
debtor, except such as are exempt by law from execution;
2. Exercise all the rights and actions of the debtor, save those personal to him (accion subrogatoria); and
3. Seek rescission of the contracts executed by the debtor in fraud of their rights (accion pauliana).”36

36
Adorable vs. CA (G.R. No. 119466, November 25, 1999)
[26]
 SECTION 4: EXTINGUISHMENT OF OBLIGATIONS
There are 6 Main Ways to Extinguish the Obligation. ART. 1231 provides that “[o]bligations are extinguished:
1. By payment or performance;
2. By the loss of the thing due;
3. By the condonation or remission of the debt;
4. By the confusion or merger of the rights of the creditor and debtor;
5. By compensation;
6. By novation.
Other causes of extinguishment of obligations, such as annulment, rescission, fulfillment of a resolutory condition,
and prescription, are governed elsewhere in this Code.”

I. Payment or Performance
1. In General
29.1. Definition & Requirements
ART. 1232 provides that “[p]ayment means not only the delivery of money but also the performance, in any
other manner, of an obligation.”
For a debt to be considered paid, ART. 1233 provides that “[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.”

29.2. Changes in Performance/Payment

29.2.1. Substantial Performance in Good Faith
ART. 1234 provides that “[i]f the obligation has been substantially performed in good faith, the obligor may recover
as though there had been a strict and complete fulfillment, less damages suffered by the obligee.”
Jurisprudence provides that “ARTICLE 1234 applies only when an obligor admits breaching the contract after
honestly and faithfully performing all the material elements thereof except for some technical aspects that cause
no serious harm to the obligee.”37
For example, in the case of INTERNATIONAL HOTEL CORP. VS. JOAQUIN, JR. (G.R. NO. 158361, APRIL 10, 2013),
Joaquin Jr. was tasked with finding and securing a Financer by the International Hotel Corp. Board of Directors for a
Hotel Project. He was paid 17,000 shares of stock after presenting Material Handling Corp. as a Financer. Eventually,
the deal with Material Handling Corp. fell through and Joaquin Jr. was no longer able to find and secure another
Financer. As such, his 17,000 shares of stock was cancelled. Now, Joaquin Jr. claims that he Substantially Complied
with the Obligation – that is to find and secure a Financer. The Court ruled against Joaquin Jr., stating that “the
principle of substantial performance is inappropriate when the incomplete performance constitutes a material breach
of the contract. A contractual breach is material if it will adversely affect the nature of the obligation that the obligor
promised to deliver, the benefits that the obligee expects to receive after full compliance, and the extent that the
nonperformance defeated the purposes of the contract.” Thus, after finding that Joaquin Jr.’s Main Objective was to
find and secure a Financer for the International Hotel Corp.’s Hotel Project, the Court ruled that there was NO
Substantial Compliance.

29.2.2. Incomplete or Irregular Performance

ART. 1235 provides that “[w]hen the obligee accepts the performance, knowing its incompleteness or irregularity,
and without expressing any protest or objection, the obligation is deemed fully complied with.”
Note that compared to Substantial Performance in Good Faith, Incomplete or Irregular Performance DOES NOT
reduce the payment that the Debtor would receive from the Creditor.
The case of ESGUERRA VS. VILLANUEVA (G.R. NO. L-23191, DECEMBER 19, 1967) provides for the Manner of
Acceptance of Incomplete or Irregular Performance. In this case, Petitioner Esguerra and Respondent De Guzman
entered into a Compromise Agreement after De Guzman failed to pay for his debt to Esguerra. The Compromise
Agreement contains that De Guzman must pay Esguerra Php 2,260.00 on or before November 26, 1962. Failure to do
37
International Hotel Corp. vs. Joaquin, Jr. (G.R. No. 158361, April 10, 2013)
[27]
so would have Writs of Attachment on De Guzman’s properties be executed in favor of Esguerra. However, it
happened that De Guzman paid Esguerra after November 26, 1962 – First paying Php 800.00 then Php 1,400 on a
later date. As such, Esguerra filed in Court for the Writs of Attachment on De Guzman’s properties to be executed. In
his defense, De Guzman claims that because Esguerra “received” the payment, it must be construed that Esguerra
“accepted” it, and that the Obligation must be deemed fully complied with in accordance with ART. 1235.
The Court ruled in favor of Esguerra. “The verb “accept,” as used in ARTICLE 1235, means to take as “satisfactory
or sufficient,” or to “give assent to,” or to “agree” or “accede” to an incomplete or irregular performance. The
circumstances obtaining in the case at bar clearly show that the Esguerras had neither acceded or assented to said
payment, nor taken the same as satisfactory or sufficient compliance with the judgment aforementioned.” Thus, the
Court ordered that the Writs of Attachment be executed.

29.2.3. Partial Prestations

ART. 1248 provides that “[u]nless there is an express stipulation to that effect, the creditor cannot be compelled
partially to receive the prestations in which the obligation consists. Neither may the debtor be required to make
partial payments.
However, when the debt is in part liquidated and in part unliquidated, the creditor may demand and the
debtor may effect the payment of the former without waiting for the liquidation of the latter.”

29.3. Subjects of Payment

29.3.1. Payment by 3rd Party
ART. 1236 provides that “[t]he creditor is not bound to accept payment or performance by a third person who has
no interest in the fulfillment of the obligation, unless there is a stipulation to the contrary.
Whoever pays for another may demand from the debtor what he has paid, except that if he paid without the
knowledge or against the will of the debtor, he can recover only insofar as the payment has been beneficial to the
debtor.”
In the case of SPS. PUBLICO VS. BAUTISTA (G.R. NO. 174096, JULY 20, 2010), the Spouses Publico obtained a loan
worth Php 200,00.00 from Bautista and Mortgaged their land to secure said loan. The land is covered by a Transfer
Certificate of Title (TCT), which the Spouses let Bautista take possession of to Mortgage the land. Afterwards, the
Spouses asked for the TCT from Bautista to use the TCT to obtain a loan from Hiyas Bank, the money from which the
Spouses would use to pay back their loan to Bautista. Bautista returned the TCT to the Spouses, and the Spouses
were able to obtain the loan. However, they Spouses were not able to pay back Bautista nor Hiyas Bank. Because the
TCT was now in the possession of Hiyas Bank, fearful that Hiyas Bank would Foreclose the Mortgage, Bautista
offered Hiyas Bank to pay the loan herself. In the presence of Jose Publico (but NOT the wife, Divinia Publico),
Bautista paid for the Spouses’ loan to Hiyas Bank. Afterwards, the Spouses still unable to pay for their loan to her,
Bautista filed to Foreclose the Mortgage. In their defense, the Spouses claim that because Divinia Publico was not
aware of Bautista’s paying their debt to Hiyas Bank, invoking ART. 1236, Bautista can only recover insofar as the pay
had benefited the Spouses. The Spouses has taken this to mean a Sum of Money, rather than the TCT.
The Court ruled in favor of Bautista. “Petitioners’ invocation of ARTICLE 1236 OF THE CIVIL CODE does not help
them. They cannot deny their indebtedness to respondent on the basis of said Article since the payment advanced by
respondent on petitioners’ behalf redounded to their benefit and Divinia never objected to it when she came to learn of
it.” Additionally, the Court clarified that the TCT returning to the possession of the Spouses is considered a “benefit”.
“It is thus immaterial that Divinia was unaware of respondent’s action for the law ultimately allows recovery to the
extent that the debtors-petitioners were benefited.”
In the event that the 3rd Person pays without knowledge of the Debtor, ART. 1237 provides that “[w]hoever pays on
behalf of the debtor without the knowledge or against the will of the latter, cannot compel the creditor to subrogate him
in his rights, such as those arising from a mortgage, guaranty, or penalty.”

29.3.1.1. When Payment by a 3rd Person is Deemed a Donation

ART. 1238 provides that “[p]ayment 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.”

[28]
 Converse ART. 1238, if the 3rd Person intends to be reimbursed, then the payment by said 3 rd person cannot be
deemed to be a donation. In the case of MOREÑO-LENTFER VS. JURGEN WOLFF (G.R. NO. 152317, NOVEMBER 10,
2004), Victoria Moreño-Lentfer and her husband Gunter Lentfer are confidants of Respondent Wolff, for whom they let
deposit 200,000.00 Deutschmarks in their Bank Account. Moreño-Lentfer informs Wolff that a friend, John Cross, is
selling beach houses. Wolff agrees to Cross’s offer, and Wolff pays 221,700.00 Deutschmarks through a Bank-to-
Bank Transaction. Upon seeing the Deed of Sale though, Wolff finds that the Deed of Sale was made out to Moreño-
Lentfer. As such, Wolff filed for Annulment of Sale and Reconveyance of Property. In Court, Moreño-Lentfer claims
that the Wolf’s money in her and her husband’s bank account was actually a Donation from Wolff.
The Court ruled against Moreño-Lentfer, stating that “[t]he absence of intention to be reimbursed, the qualifying
circumstance in ART. 1238, is negated by the facts of this case. Respondent’s acts contradict any intention to donate
the properties to petitioner Moreño-Lentfer. When respondent learned that the sale of the beach house and
assignment of the lease right were in favor of Victoria Moreño-Lentfer, he immediately filed a complaint for annulment
of the sale and reconveyance of the property with damages and prayer for a writ of attachment.” Thus, the sale was
annulled, and the property was transferred to Wolff.

29.3.2. Payment Recipient

ART. 1240 provides that “[p]ayment 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.”
However, when Payment is made to the WRONG Party, “the obligation is not extinguished as to the creditor who
is without fault or negligence even if the debtor acted in utmost good faith and by mistake as to the person of the
creditor or through error induced by fraud of a third person.”38
In the case of SPS. CULABA VS. CA (G.R. NO. 125862, APRIL 15, 2004), the Spouses Culaba were engaged in the
Sale and Distribution of San Miguel Corp (SMC) Beer Products – SMC would deliver the Beer Products to the
Spouses, and the Spouses would pay. According to SMC, despite repeated demands, the Spouses have not paid for
a recent delivery of Beer Products. However, the Spouses claim that they have paid. A man in SMC Supervisor
Uniform driving an SMC Van arrived to whom the Spouses paid. Apparently, the man representing himself as a SMC
Supervisor was a fraud.
The Court ruled against the Spouses Culaba. “The basis of agency is representation. A person dealing with
an agent is put upon inquiry and must discover upon his peril the authority of the agent. In the instant case, the
petitioners’ loss could have been avoided if they had simply exercised due diligence in ascertaining the identity of the
person to whom they allegedly made the payments. The fact that they were parting with valuable consideration should
have made them more circumspect in handling their business transactions. Persons dealing with an assumed agent
are bound at their peril to ascertain not only the fact of agency but also the nature and extent of authority, and in case
either is controverted, the burden of proof is upon them to establish it.”

29.3.3. Payment Made to a 3rd Person

ART. 1241 PAR. 2 provides that “[p]ayment 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.”

29.3.4. Payment to Possessor of Credit

ART. 1242 provides that “[p]ayment made in good faith to any person in possession of the credit shall release
the debtor.”
In the case of ORATA VS. INTERMEDIATE APPELLATE COURT (G.R. NO. 73471, MAY 8, 1990), Orata is renting the
land owned by the deceased Florencio Dela Cruz, who is the husband of Gertrude Dela Cruz and grandfather of
Celso Teodoro. After Florencio’s death, Gertrude became the Administratix of Florencio’s Property, including the land.
Soon after, the Transfer Certificate of Title (TCT) that covered the land was transferred to Celso. As Administratix,
Gertrude expected to receive Orata’s payment for rent. However, she did not receive any. Gertrude accused Orata of
not paying rent, so Gertrude filed an Ejectment Case against Orata. However, Orata claims that she has been paying

38
Cembrano vs. City of Butuan (G.R. No. 163605, September 20, 2006)
[29]
her rent to Celso, since the TCT is now in Celso’s possession. Orata still paid to Celso even after Celso’s TCT was
cancelled and returned to the deceased Florencio’s Estate.
The Court ruled in favor of Orata. The Court reiterated ART. 1242, and ruled that Celso was in Possession of the
Credit when the TCT was still in his possession. “Since a certificate of title is conclusive evidence of ownership in
favor of the person named therein and every person dealing with registered land may safely rely on its correctness,
petitioner was in good faith in paying the rentals to her lessor, Teodoro, who was in fact the registered owner, also up
to November 9, 1983.” Additionally, Celso was still a Person in Possession of the Credit even after the TCT was
transferred back to the deceased Florencio’s Estate. “Significantly, after Teodoro’s title was cancelled on November 9,
1983, the new title that replaced it was issued in the name of his grandparent, the deceased Florencio dela Cruz. As a
grandson and legal heir of the registered owner, Teodoro was a co-owner of the property. Payment of the obligation to
him discharged the debtor, but he (Teodoro) should account to the other co-owners for their share of the credit.”

29.3.5. Incapacity of Subjects

29.3.5.1. Incapacity to Pay
ART. 1239 provides that “[i]n obligations to give, payment made by one who does not have the free disposal of the
thing due and capacity to alienate it shall not be valid, without prejudice to the provisions of ARTICLE 1427 UNDER THE
TITLE ON “NATURAL OBLIGATIONS.””

29.3.5.2. Payment to Incapacitated

ART. 1241 PAR. 1 provides that “[p]ayment 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.”

29.4. Payment After Judicial Order to Retain

ART. 1243 provides that “[p]ayment made to the creditor by the debtor after the latter has been judicially
ordered to retain the debt shall not be valid.”

29.5. Substitution of Prestation

ART. 1244 provides that “[t]he debtor of a thing cannot compel the creditor to receive a different one,
although the latter may be of the same value as, or more valuable than that which is due.
In obligations to do or not to do, an act or forbearance cannot be substituted by another act or forbearance
against the obligee’s will.”
The case of CATHAY PACIFIC VS. SPS. VASQUEZ (G.R. NO. 150843, MARCH 14, 2003) presents the novel question: If
the Creditor was compelled by the Debtor to receive a thing of GREATER Quality, would the Creditor still be entitled to
Damages?
In this case, the Spouses Vasquez are Frequent Flyers with Cathay Pacific, which entitles them to some
privileges. On a flight to Manila from Hong Kong, the Spouses were accompanied by their 2 guests, Cruz and de Dios,
and 2 maids. The Spouses and their guests bought Business Class Tickets, where they expected to spend the flight
together while discussing some business. However, Cathay Pacific had fully booked the Business Class Section of the
plane. As such, the Spouses Vasquez, being Frequent Flyers, were involuntarily upgraded to First Class. The
Spouses refused to accept the upgrade but were eventually told by the crew that if the Spouses continued to refuse
the upgrade, they would not be allowed to board the plane. As such, the Spouses moved to First Class. In Manila,
they filed a complaint against Cathay Pacific, claiming that the involuntary upgrade was a Breach of their Contract of
Carriage.
The Court ruled in favor of the Spouses Vasquez. The Court noted that the privilege to be upgraded to First Class,
like all other privileges, can be waived. “They (the Spouses Vasquez) clearly waived their priority or preference when
they asked that other passengers be given the upgrade. It should not have been imposed on them over their
vehement objection. By insisting on the upgrade, Cathay breached its contract of carriage with the Vazquezes.”

29.6. Dation in Payment

ART. 1245 provides that “[d]ation in payment, whereby property is alienated to the creditor in satisfaction of a debt
in money, shall be governed by the law of sales.”

[30]
 On why Dation in Payment “… shall be governed by the law of sales.”, Jurisprudence provides that it is because
“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, the payment for which is to be charged against the debtor’s obligation.”39
Because Dation in Payment partakes of the nature of Sales, the Court provides that “the essential elements of a
contract of sale, namely, consent, object certain, and cause or consideration must be present.”40

29.7. Same Quality

ART. 1246 provides that “[w]hen 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.”

29.8. Other Details of the Payment

29.8.1. Extrajudicial Expenses
ART. 1247 provides that “[u]nless 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.”

29.8.2. Payment Currency & Value

ART. 1249 PAR. 1 provides that “[t]he payment of debts in money shall be made in the currency stipulated, and if
it is not possible to deliver such currency, then in the currency which is legal tender in the Philippines.”
Jurisprudence provides for a history of what has been considered valid currency and legal tender here in the
Philippines:
“Although the Civil Code took effect on August 30, 1950, jurisprudence had upheld the continued
effectivity of Republic Act No. 529, which took effect earlier on June 16, 1950. Pursuant to Section 158 of
Republic Act No. 529, any agreement to pay an obligation in a currency other than the Philippine
currency is void; 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. On June 19, 1964,
Republic Act No. 4100 took effect, modifying Republic Act No. 529 by providing for several exceptions to
the nullity of agreements to pay in foreign currency.
On April 13, 1993, Central Bank Circular No. 138961 was issued, lifting foreign exchange restrictions
and liberalizing trade in foreign currency. In cases of foreign borrowings and foreign currency loans,
however, prior Bangko Sentral approval was required. On July 5, 1996, Republic Act No. 8183 took
effect, expressly repealing Republic Act No. 529 in Section 263 thereof. The same statute also explicitly
provided that parties may agree that the obligation or transaction shall be settled in a currency other than
Philippine currency at the time of payment.”41

1.1.1.1. In Case of Extraordinary Inflation or Deflation

ART. 1250 provides that “[i]n case an extraordinary inflation or deflation of the currency stipulated should
supervene, the value of the currency at the time of the establishment of the obligation shall be the basis of payment,
unless there is an agreement to the contrary.”
Jurisprudence provides for 3 Requisites for Extraordinary Inflation to Affect the Obligation:
1. “That there was an official declaration of extraordinary inflation or deflation from the Bangko Sentral ng
Pilipinas (BSP);
2. That the obligation was contractual in nature; and
3. That the parties expressly agreed to consider the effects of the extraordinary inflation or deflation.”42
Admittedly, the Requisites provided by Jurisprudence makes it harder to claim Extraordinary Inflation or Deflation
– It’s highly doubtful whether the Bangko Sentral ng Pilipinas would ever declare a state of Extraordinary Inflation or
Deflation. Additionally, the parties are required to EXPRESSLY AGREE that Extraordinary Inflation or Deflation will

39
Tan Shuy vs. Sps. Maulawin (G.R. No. 190375, February 8, 2012)
40
Filinvest Credit Corp. vs. Philippine Acetylene Co., Inc. (G.R. No. L-50449, January 30, 1982)
41
Union Bank vs. Sps. Tiu (G.R. No. 173090 & G.R. No. 173091, September 7, 2011)
42
Equitable PCI vs. Ng Sheung (G.R. No. 171545, December 19, 2007)
[31]
affect the Obligation – as opposed to Extraordinary Inflation or Deflation AUTOMATICALLY affecting the Obligation by
virtue of ART. 1250.

29.8.3. Payment in Negotiable Instruments

ART. 1249 PAR. 2 provides that “[t]he delivery of promissory notes payable to order, or bills of exchange or other
mercantile documents shall produce the effect of payment only when they have been cashed, or when through
the fault of the creditor they have been impaired.”
An example of such Mercantile Document is the Check. Jurisprudence provides that “[a] check, whether a
manager’s check or ordinary check, is not legal tender, and an offer of a check in payment of a debt is not a valid
tender of payment and may be refused receipt by the oblige or creditor.”43
ART. 1249 PAR. 3 provides that “[i]n the meantime, the action derived from the original obligation shall be held in
abeyance.”

29.8.4. Interests & Installments

ART. 1176 provides that “[t]he 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 a debt without reservation as to prior installments, shall likewise raise the
presumption that such installments have been paid.”
There is a possible conflict between ART. 1176 and ART. 1253, as ART. 1176 provides that “receipt of the principal
by the creditor… shall give rise to the presumption that said interest has been paid…” while ART. 1253 provides
that “[i]f the debt produces interest, payment of the principal shall not be deemed to have been made until the
interests have been covered.” In short, one Article provides that receiving the Principal of the Obligation would deem
that the interests have been paid while the other Article provides that the Principal shall not deemed to be paid without
the interests themselves have been paid.
The Court resolves this conflict by providing that “ARTICLE 1176 should be treated as a general presumption
subject to the more specific presumption under ARTICLE 1253. ARTICLE 1176 is relevant on questions pertaining to
the effects and nature of obligations in general, while ARTICLE 1253 is specifically pertinent on questions
involving application of payments and extinguishment of obligations.”44

29.8.5. Place of Payment

ART. 1251 provides that “[p]ayment 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.”
In sum:
Trigger Effect / Place of Payment
When Stipulated In the Place Stipulated
When there is no Stipulation, and the Thing is Where the Thing was at the moment the Obligation was
Determinate constituted
In any other case (e.g. When there is no Stipulation and In the Domicile of the Debtor
the Thing is Indeterminate) - If the Debtor changes his Domicile in Bad Faith or
after incurring Delay, the Debtor must bear any
additional expenses necessary for Payment.

30. Application of Payments

43
Philippine Airlines vs. CA (G.R. No. 49188, January 30, 1990)
44
Marquez vs. Elisan Credit Corp. (G.R. No. 194642, April 6, 2015)
[32]
 According to Jurisprudence, “the rules contained in 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; his liability is confined to such obligation, and he is
entitled to have all payments made applied exclusively to said application and to no other.”

30.1. Who Makes the Choice

ART. 1252 provides that “[h]e 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.”
Note that the Debtor with various debts to the same Creditor “may” declare as to which debt the Payment is being
made to. Because of the Rule’s Directory nature, the Court has ruled that the Right of the Debtor to choose the
Application of the Payment is waivable. Jurisprudence provides that “[a] debtor, in making a voluntary payment, may
at the time of payment direct an application of it to whatever account he chooses, unless he has assigned or waived
that right. If the debtor does not do so, the right passes to the creditor, who may make such application as he
chooses. But if neither party has exercised its option, the court will apply the payment according to the justice and
equity of the case, taking into consideration all its circumstances.”45

30.2. In Case of Interest-Producing Debts

ART. 1253 provides that “[i]f the debt produces interest, payment of the principal shall not be deemed to have
been made until the interests have been covered.”
Jurisprudence provides that “in a contract involving installment payments with interest chargeable against the
remaining balance of the obligation, it is the duty of the creditor to inform the debtor of the amount of interest
that falls due and that he is applying the installment payments to cover said interest. Otherwise, the creditor
cannot apply the payments to the interest and then hold the debtor in default for non-payment of installments on the
principal.”46

30.3. Default Rule

ART. 1254 provides that “[w]hen the payment cannot be applied in accordance with the preceding rules, or if
application can not be inferred from other circumstances, the debt which is most onerous to the debtor, among
those due, shall be deemed to have been satisfied.
If the debts due are of the same nature and burden, the payment shall be applied to all of them
proportionately.”

31. Payment by Cession

ART. 1255 provides that “[t]he debtor may cede or assign his property to his creditors in payment of his debts. This
cession, unless there is stipulation to the contrary, shall only release the debtor from responsibility for the net
proceeds of the thing assigned. The agreements which, on the effect of the cession, are made between the debtor
and his creditors shall be governed by special laws.”
Jurisprudence provides that Payment by Cession in ART. 1255 “contemplates the existence of two or more
creditors and involves the assignment of all the debtor’s property.”47
Compared to Dation in Payment, Payment by Cession can only occur when there are two or more Creditors and
when the Debtor assigns all his Property. Additionally, Payment by Cession only releases the Debtor to the Net
Proceeds of the Thing assigned by Cession. On the other hand, Dation in Payment assigns ownership of only one or
some of the Debtor’s Property, in favor of one Creditor. Additionally, Dation in Payment results in the satisfaction of
the Debt of Money, not just according to the Net Proceeds of the Thing transferred.

32. Tender of Payment and Consignation

45
Premiere Development Bank vs. Central Surety (G.R. No. 176246, February 13, 2009)
46
Rapanut vs. CA (G.R. No. 109680, July 14, 1995)
47
DBP vs. CA (G.R. No. 118432, January 5, 1998)
[33]
 32.1. Definition
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.”48
Differentiated from Consignation, the Court has defined Tender of Payment as “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. Tender and consignation, where validly made, produces the effect
of payment and extinguishes the obligation.”49

32.2. Effect
If the Creditor refuses the Tender of Payment done by the Debtor, ART. 1256 PAR. 1 provides that “[i]f 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.”
Jurisprudence provides that “[i]n short, a refusal without just cause is not equivalent to payment; to have the effect
of payment and the consequent extinguishment of the obligation to pay, the law requires the companion acts of tender
of payment and consignation.”50
As for Consignation itself, ART. 1256 PAR. 2 provides that “[c]onsignation alone shall produce the same effect in
the following cases:
1. When the creditor is absent or unknown, or does not appear at the place of payment;
2. When he is incapacitated to receive the payment at the time it is due;
3. When, without just cause, he refuses to give a receipt;
4. When two or more persons claim the same right to collect;
5. When the title of the obligation has been lost.”
ART. 1260 PAR. 1 provides that “[o]nce the consignation has been duly made, the debtor may ask the judge to
order the cancellation of the obligation.”

32.3. Requirements
ART. 1257 provides that “[i]n order that the consignation of the thing due may release the obligor, it must first be
announced to the persons interested in the fulfillment of the obligation.
The consignation shall be ineffectual if it is not made strictly in consonance with the provisions which regulate
payment.”
ART. 1258 provides that “[c]onsignation shall be made by depositing the things due at the disposal of
judicial authority, before whom the tender of payment shall be proved, in a proper case, and the announcement of
the consignation in other cases.
The consignation having been made, the interested parties shall also be notified thereof.”
Jurisprudence provides for 5 Requisites for Consignation. “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);
5. That after the consignation had been made the person interested was notified thereof (ART. 1178, CIVIL
CODE).”51

32.4. Expenses
48
Meat Packing vs. Sandiganbayan (G.R. No. 103068, June 22, 2001)
49
Meat Packing vs. Sandiganbayan (G.R. No. 103068, June 22, 2001)
50
Sps. Cinco vs. CA (G.R. No. 151903, October 9, 2009)
51
Soco vs. Militante (G.R. No. L-58961, June 28, 1983)
[34]
 ART. 1259 provides that “[t]he expenses of consignation, when properly made, shall be charged against the
creditor.”

32.5. Withdrawal
ART. 1260 PAR. 2 provides that “[b]efore 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.”
In the case of PABUGAIS VS. SAHIJWANI (G.R. NO. 156846, FEBRUARY 23, 2004), Pabugais owes Sahijwani Php
672,900.00. After attempting to Tender Payment to Sahijwani twice, with Sahijwani twice rejecting, Pabugais
consigned the Php 672,900.00. The Court of Appeals approved the Consignation. However, during the pendency of
the case, Pabugais’s Attorney died – Pabugais then attempted to withdraw the consigned money and use said money
to pay for his new Attorney’s Fees.
The Court first ruled that the Consignation was indeed valid. Pabugais proved that he had attempted to Tender
Payment and because he was denied, the subsequent Consignation was valid. However, Pabugais could no longer
Withdraw the Consignated amount. The Court first reiterated ART. 1260 PAR. 2, in which Withdrawal must be done
before the Creditor accepts the Consignation. The Court then ruled that “[t]he amount consigned with the trial court
can no longer be withdrawn by [Pabugais] because [Sahijwani’s] prayer in his answer that the amount consigned be
awarded to him is equivalent to an acceptance of the consignation, which has the effect of extinguishing petitioners
obligation.”
ART. 1261 provides that “[i]f, the consignation having been made, the creditor should authorize the debtor to
withdraw the same, he shall lose every preference which he may have over the thing. The co-debtors, guarantors and
sureties shall be released.”

II. Loss of the Thing Due

1. Definition
The closest that the New Civil Code has for a Definition of Loss of the Thing Due is found in ART. 1189 NO. 2,
which provides that:
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 of commerce, or disappears in such a way that its
existence is unknown or it cannot be recovered;”

33. When Loss Extinguishes

33.1. Delivery of a Determinate Thing
ART. 1262 PAR. 1 provides that “[a]n obligation which consists in the delivery of a determinate thing shall be
extinguished if it should be lost or destroyed without the fault of the debtor, and before he has incurred in
delay.”

33.2. Impossibility of Service

ART. 1266 provides that “[t]he debtor in obligations to do shall also be released when the prestation becomes
legally or physically impossible without the fault of the obligor.”
In the case of PNCC VS. CA (G.R. NO. 116896, MAY 5, 1997), Respondents Raymundo filed against PNCC for
PNCC’s refusal to pay rentals as stipulated in their Contract of Lease. PNCC was using Raymundo’s land for a Rock
Crushing Project. However, PNCC now claims that because of the Financial and Technical Difficulties brought about
by the EDSA People Power Revolution, PNCC can no longer finish the Project. Thus, PNCC hopes to be released
from this “impossible service” by virtue of ART. 1266.
The Court ruled against PNCC, stating that ART. 1266 cannot apply, “since it is applicable only to obligations “to
do,” and not obligations “to give.”” The Court provides that “[t]he obligation to pay rentals or deliver the thing in a
contract of lease falls within the prestation “to give”; hence, it is not covered within the scope of Article 1266.”

34. When Loss Does Not Extinguish

34.1. By Law or Stipulation
[35]
 ART. 1262 PAR. 2 provides that “[w]hen by law or stipulation, the obligor is liable even for fortuitous events, the
loss of the thing does not extinguish the obligation, and he shall be responsible for damages. The same rule applies
when the nature of the obligation requires the assumption of risk.”

34.2. Obligation to Deliver a Generic Thing

ART. 1263 provides that “[i]n an obligation to deliver a generic thing, the loss or destruction of anything of the
same kind does not extinguish the obligation.”
Note that Money is actually considered a Generic Thing. Jurisprudence provides that “[i]f the obligation is
generic in the sense that the object thereof is designated merely by its class or genus without any particular
designation or physical segregation from all others of the same class, the loss or destruction of anything of the same
kind even without the debtor's fault and before he has incurred in delay will not have the effect of extinguishing the
obligation. This rule is based on the principle that the genus of a thing can never perish. Genus nunquan perit.
An obligation to pay money is generic; therefore, it is not excused by fortuitous loss of any specific property of the
debtor.”52

34.3. Debt Proceeds from a Criminal Offense

ART. 1268 provides that “[w]hen the debt of a thing certain and determinate proceeds from a criminal offense, the
debtor shall not be exempted from the payment of its price, whatever may be the cause for the loss, unless the thing
having been offered by him to the person who should receive it, the latter refused without justification to accept it.”

35. Partial Loss

ART. 1264 provides that “[t]he courts shall determine whether, under the circumstances, the partial loss of the
object of the obligation is so important as to extinguish the obligation.”

36. Presumption of Fault

ART. 1265 provides that “[w]henever the thing is lost in the possession of the debtor, it shall be presumed that the
loss was due to his fault, unless there is proof to the contrary, and without prejudice to the provisions of ARTICLE 1165.
This presumption does not apply in case of earthquake, flood, storm, or other natural calamity.”
In the case of JIMMY CO VS. CA (G.R. NO. 124922, JUNE 22, 1998), Jimmy Co left his Nissan Pick-up Truck with
Respondent Broadway Motor Sales Corp. (BMSC) for repair. Jimmy Co paid for the repair, expecting it to finish by
July 21, 1990. However, by the time the date arrived, the repairs were still not finished. Delivery of the car to Jimmy
Co was pushed to July 24. Still, BMSC was not able to turn over the car to Jimmy Co – Apparently, the truck was
carnapped while it was being road tested. Now, Jimmy Co is filing a Suit for Damages against BMSC. For their
Defense, BMSC claims that the carnapping was a Fortuitous Event.
The Court ruled in favor of Jimmy Co. On the Defense of Fortuitous Event, the Court reiterated that “ARTICLE 1165
OF THE NEW CIVIL CODE makes an obligor who is guilty of delay responsible even for a fortuitous event until he has
effected the delivery. In this case, private respondent was already in delay as it was supposed to deliver petitioner’s
car three (3) days before it was lost.” Additionally, the Court provided that assuming that there was no delay, “still
working against private respondent is the legal presumption under ARTICLE 1265 that its possession of the thing at the
time it was lost was due to its fault. This presumption is Reasonable since he who has the custody and care of
the thing can easily explain the circumstances of the loss. The vehicle owner has no duty to show that the repair
shop was at fault. All that petitioner needs to prove, as claimant, is the simple fact that private respondent was in
possession of the vehicle at the time it was lost.”

37. Unforeseen Difficulty

ART. 1267 provides that “[w]hen 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.”
In the past, application of ART. 1267 has been connected to the Principle of Rebus Sic Stantibus, wherein
“[u]nder this theory, the parties stipulate in the light of certain prevailing conditions, and once these conditions cease
to exist, the contract also ceases to exist.”53

52
Gaisano Cagayan, Inc. vs. Insurance Company of North America (G.R. No. 147839, June 8, 2006)
53
PNCC vs. CA (G.R. No. 116896, May 5, 1997)
[36]
 Now, the Principle of Rebus Sic Stantibus is no longer considered when applying ART. 1267. “The parties to the
contract must be presumed to have assumed the risks of unfavorable developments. It is therefore only in absolutely
exceptional changes of circumstances that equity demands assistance for the debtor.”54
Now, Jurisprudence provides for 4 Requisites of Unforeseen Difficulty, which would trigger the application of
ART. 1267:
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. It must not be due to the act of any of the parties; and
4. The contract is for a future prestation.”55
Note that the effect of applying ART. 1267 would be to RELEASE the Debtor from the Obligation – It does not give
courts the authority to modify said Obligation. In the case of OCCEÑA VS. CA (G.R. NO. L-44349, OCTOBER 29, 1976),
Tropical Homes, Inc. (THI) sought to have the courts modify its Subdivision Contract with Landowners Occeña. Their
Subdivision Contract stipulates that THI may develop Occeña’s land and sell subdivisions thereon – In return, THI
must pay 40% of its cash receipts to Occeña. THI now claims that due to the rising prices of oil, THI is no longer able
to develop the land owned by Occeña. Thus, THI asks that the courts modify the share (40% of cash receipts) that it
must pay to Occeña.
The Court ruled in favor of Occeña, in that the courts cannot modify the Contract between Occeña and THI. The
Court reiterated that “[t]he cited article does not grant the courts this 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. Respondent's complaint for
modification of contract manifestly has no basis in law and therefore states no cause of action. Under the particular
allegations of respondent's complaint and the circumstances therein averred, the courts cannot even in equity grant
the relief sought.”
However, the case of NAGA TELEPHONE VS. CA (G.R. NO. 107112, FEBRUARY 24, 1994) seemingly contradicts the
ruling in OCCEÑA VS. CA.
[The facts of NAGA TELEPHONE VS. CA are found in SECTION TWO: CLASSIFICATION OF OBLIGATIONS – II. Conditional
Obligations – 2. Kinds of Conditional Obligations – 2.2. Potestative, Casual or Mixed]
In this case, the Court after finding that CASURECO II’s Obligation, which is to let NATELCO install telephone
lines on CASURECO II’s electric light posts, had unforeseen difficulties, the Court decided to release both parties from
their Obligations. “However, our disposition of the present controversy does not end here. We have to take into
account the possible consequences of merely releasing the parties therefrom: petitioners will remove the
telephone wires/cables in the posts of private respondent, resulting in disruption of their service to the public;
while private respondent, in consonance with the contract will return all the telephone units to petitioners, causing
prejudice to its business. We shall not allow such eventuality. Rather, we require, as ordered by the trial court:
1) Petitioners (NATELCO) to pay private respondent (CASURECO II) for the use of its posts in Naga City and in
the towns of Milaor, Canaman, Magarao and Pili, Camarines Sur and in other places where petitioners use
private respondent's posts, the sum of ten (P10.00) pesos per post, per month, beginning January, 1989; and
2) Private respondent to pay petitioner the monthly dues of all its telephones at the same rate being paid by the
public beginning January, 1989.
The peculiar circumstances of the present case, as distinguished further from the Occeña case, necessitates
exercise of our equity jurisdiction.”
In short, rather than merely releasing the Parties from their respective Obligations, the Court first released them,
then created NEW Obligations for the Parties to comply with.

38. Creditor’s Rights

ART. 1269 provides that “[t]he obligation having been extinguished by the loss of the thing, the creditor shall have
all the rights of action which the debtor may have against third persons by reason of the loss.”

III. Condonation or Remission of Debt

54
PNCC vs. CA (G.R. No. 116896, May 5, 1997)
55
Tagaytay Realty Co., Inc. vs. Gacutan (G.R. No. 160033, July 1, 2015)
[37]
1. Nature & Requisites
ART. 1270 provides that “[c]ondonation or remission is essentially gratuitous, and requires the acceptance by
the obligor. It may be made expressly or impliedly.
One and the other kind shall be subject to the rules which govern inofficious donations. Express
condonation shall, furthermore, comply with the forms of donation.”
Note that ART. 1270 PAR. 2 provides that Express Condonation must also comply with the Forms of Donations.
The Forms of Donations are governed by ART. 748 (on Donation of Movables) and ART. 749 (on Donation of
Immovables):
ART. 748 – “The donation of a movable may be made orally or in writing.
An oral donation requires the simultaneous delivery of the thing or of the document representing the
right donated.
If the value of the personal property donated exceeds five thousand pesos, the donation and the
acceptance shall be made in writing, otherwise, the donation shall be void.”
ART. 749 – “In order that the donation of an immovable may be valid, it must be made in a public
document, specifying therein the property donated and the value of the charges which the donee must
satisfy.
The acceptance may be made in the same deed of donation or in a separate public document, but it
shall not take effect unless it is done during the lifetime of the donor.
If the acceptance is made in a separate instrument, the donor shall be notified thereof in an authentic
form, and this step shall be noted in both instruments.”

39. Implied Renunciation

ART. 1271 provides that “[t]he 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.”
This Article creates a Presumption: If a private document evidencing the credit is delivered from the Creditor to the
Debtor, then it is implied that the Creditor has renounced whatever action said Creditor had against the Debtor. The
Court provides that “[t]he presumption created by the Art. 1271 of the Civil Code is not conclusive but merely prima
facie. If there be no evidence to the contrary, the presumption stands. Conversely, the presumption loses its legal
efficacy in the face of proof or evidence to the contrary.”56
Additionally, “Article 1271 of the Civil Code raises a presumption, not of payment, but of the renunciation of the
credit where more convincing evidence would be required than what normally would be called for to prove payment.
The rationale for allowing the presumption of renunciation in the delivery of a private instrument is that, unlike that of a
public instrument, there could be just one copy of the evidence of credit. Where several originals are made out of a
private document, the intendment of the law would thus be to refer to the delivery only of the “original” original rather
than to the original duplicate of which the debtor would normally retain a copy.”57
ART. 1272 provides that “[w]henever 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.”

40. Renunciation of Accessory Obligations

ART. 1273 provides that “[t]he renunciation of the principal debt shall extinguish the accessory obligations; but the
waiver of the latter shall leave the former in force.”
ART. 1274 provides that “[i]t 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.”

IV. Confusion or Merger of Rights

56
Trans-Pacific vs. CA (G.R. No. 109172, August 19, 1994)
57
Trans-Pacific vs. CA (G.R. No. 109172, August 19, 1994)
[38]
 ART. 1275 provides that “[t]he obligation is extinguished from the time the characters of creditor and debtor are
merged in the same person.”
Note that the person must become the Debtor and Creditor of the same Obligation. For example, in the case of
VALMONTE VS. CA (G.R. NO. L-41621, FEBRUARY 18, 1999), Petitioner Pastora Valmonte sold to her father Co-
Petitioner Joaquin Valmonte a plot of land that is Mortgaged to Respondent Philippine National Bank (PNB). Said land
was subject to 2 Mortgages – The 1st Mortgage worth Php 16,000.00 and the 2nd worth Php 5,000.00. Both Mortgages
are in favor PNB. The Deed of Sale between Pastora and Valmonte states that:
“These lands are at present mortgaged to the Philippine National Bank, and this obligation shall be the
subject of future arrangement between the vendor (Pastora) and vendee (Joaquin) herein on the one
hand and the Philippine National Bank on the other before this deed of Sale shall be operative.”
Pastora was unable to pay for the 2nd Mortgage worth Php 5,000.00, so PNB had the land auctioned. In the
auction, PNB itself was the sole bidder, and so PNB bought the land. Pastora and Joaquin Valmonte would try to buy
back the land. However, PNB eventually sold the land to a certain Artemio Valenton. Now, Pastora and Joaquin
Valmonte claims that they were unjustly deprived of the land.
The Court ruled in favor of PNB. First, the Court provided the 3 Elements of Merger:
1. “The merger of the characters of the creditor and debtor must be in the same person;
2. It must take place in the person of either the principal creditor or the principal debtor; and
3. It must be complete and definite.”
The Court then ruled that “the merger took place in the person of PNB, the principal creditor in the case.
The merger was brought about when during the auction sale, PNB purchased the properties on which it had
another subsisting mortgage credit. This court is bound by the finding of respondent court that the two loans
referred to are separate and distinct and the mere allegation by petitioners that said loans constitute a single
indivisible obligation should be stricken off as the said allegation is not supported by evidence. In effect, the
mortgage for the P16,000.00 loan was deemed extinguished.”
ART. 1276 provides that “[m]erger 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.”
ART. 1277 provides that “[c]onfusion does not extinguish a joint obligation except as regards the share
corresponding to the creditor or debtor in whom the two characters concur.”

V. Compensation
1. General Rules
40.1. Definition
Compensation is “a mode of extinguishing to the concurrent amount the obligations of persons who in their
own right and as principals are reciprocally debtors and creditors of each other.”58
The qualification that the “principals are reciprocally debtors and creditors of each other” is found in ART. 1278,
which provides that “[c]ompensation shall take place when two persons, in their own right, are creditors and debtors of
each other.”
Because Compensation extinguishes the concurrent amount respectively of the principals, ART. 1281 provides
that “[c]ompensation may be total or partial. When the two debts are of the same amount, there is a total
compensation.”
ART. 1286 provides that “[c]ompensation takes place by operation of law, even though the debts may be payable
at different places, but there shall be an indemnity for expenses of exchange or transportation to the place of
payment.”
The case of BANGKO SENTRAL VS. COA (G.R. NO. 168964, JANUARY 23, 2006) provides for an instance wherein
Compensation DOES NOT take place due to Operation of Law. In this case, BSP Property Supply Officer Valenzuela
was expecting to receive Php 291,555.00 upon his retirement as a Retirement Benefit. However, BSP refused to
release the money because of the unaccounted properties during Valenzuela’s time as Property Supply Officer, which
amounted to Php 1,007,263.59. BSP deemed that Valenzuela’s Retirement Benefit would compensate for the
unaccounted properties, citing SEC. 21, CHAP. 4, SUBTITLE B, BOOK V OF THE REVISED ADMINISTRATIVE CODE OF 1987:
58
BPI vs. CA (G.R. No. 142731, June 8, 2006)
[39]
 “SEC. 21. Retention of Money for Satisfaction of Indebtedness to the Government. – When any
person is indebted to any government agency, the Commission may direct the proper officer to withhold
the payment of any money due such person or his estate to be applied in satisfaction of his
indebtedness.”
The Court ruled in favor of Valenzuela. The Court first noted that SEC. 21, CHAP. 4, SUBTITLE B, BOOK V OF THE
REVISED ADMINISTRATIVE CODE OF 1987 originated from SECTION 624 OF THE REVISED ADMINISTRATIVE CODE OF 1917.
The provision contained that the word “indebtedness”, and the Court has previously construed that “the
“indebtedness” contemplated therein pertains to one that is acknowledged by the employee or one that is
adjudged by the court. Absent any of these two circumstances, no compensation under ARTICLE 1278 of the Civil
Code may be had…” Thus, because Valenzuela never acknowledged his debt to BSP for the unaccounted properties,
nor has it been adjudged by a Court that he must be indebted, by operation of SEC. 21, BSP cannot withhold
Valenzuela’s Retirement Benefit.

40.2. Kinds
“Legal compensation takes place by operation of law when all the requisites are present, as opposed to
conventional compensation which takes place when the parties agree to compensate their mutual obligations even
in the absence of some requisites.”59

40.2.1. Legal Compensation

The 5 Requisites of Legal Compensation are found in ART. 1279, which provides that “[i]n 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.”
Additionally, ART. 1290 provides that “[w]hen 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.”
The case of SILAHIS MARKETING VS. IAC (G.R. NO. 74027, DECEMBER 7, 1989) discusses what may be considered
a Liquidated and Demandable Obligation as per ART. 1279 NO. 4. In this case, De Leon was engaged in business
with Silahis Marketing, in which De Leon sold to Silahis Marketing some merchandise worth Php 22,213.75.
Unfortunately, Silahis Marketing was not able to pay, and so De Leon filed a complaint at the Intermediate Appelate
Court (IAC). For its Defense, Silahis Marketing admitted to non-payment, but they claim that their Obligation to De
Leon must be Compensated. Apparently, De Leon and Silahis Marketing were both in business with Dole PH, Inc. –
De Leon would sell Sprockets to Dole PH, Inc. by transferring the Sprockets to Silahis Marketing, who would deal
directly with Dole PH, Inc.. Silahis Marketing now claims that there was an instance wherein De Leon sold directly to
Dole PH, Inc., which was outside their usual business practice. The Sprockets that De Leon sold at that time was
worth Php 110,000.00, and so Silahis Marketing expects to receive a 20% Commission from De Leon, which would be
at Php 22,000.00. Thus, Silahis Marketing claims that the Php 22,000.00 it should have received from De Leon should
now Partially Compensate its Obligation to Pay De Leon Php 22,213.75.
The Court ruled against Silahis Marketing. The Court reiterated that “ARTICLE 1279 requires, among others, that in
order that legal compensation shall take place, “the two debts be due” and “they be liquidated and demandable.”
Compensation is not proper where the claim of the person asserting the set-off against the other is not clear nor
liquidated; compensation cannot extend to unliquidated, disputed claim existing from breach of contract.” The Court
ruled that “whether private respondent is liable to pay the petitioner a 20% margin or commission on the subject sale
to Dole Philippines, Inc. is vigorously disputed. This circumstance prevents legal compensation from taking place.”

40.2.2. Conventional Compensation

59
BPI vs. CA (G.R. No. 142731, June 8, 2006)
[40]
 ART. 1282 provides that “[t]he parties may agree upon the compensation of debts which are not yet due.”
The 2 Requisites of Conventional Compensation are provided by Jurisprudence, which are:
1. “That each of the parties can dispose of the credit he seeks to compensate; and
2. That they agree to the mutual extinguishment of their credits.”60

40.3. Order of Compensation

ART. 1289 provides that “[i]f a person should have against him several debts which are susceptible of
compensation, the rules on the application of payments shall apply to the order of the compensation.”
Said Rules on Application of Payments was discussed in SECTION 4: EXTINGUISHMENT OF OBLIGATIONS – I.
Payment or Performance – 2. Application of Payments.

41. Specific Scenarios

41.1. When Applicable
41.1.1. In Favor of Guarantor
ART. 1280 provides that “[n]otwithstanding the provisions of the preceding article, the guarantor may set up
compensation as regards what the creditor may owe the principal debtor.”

41.1.2. In Claim for Damages

ART. 1283 provides that “[i]f one of the parties to a suit over an obligation has a claim for damages against the
other, the former may set it off by proving his right to said damages and the amount thereof.”

41.1.3. Rescissible or Voidable Debts

ART. 1284 provides that “[w]hen one or both debts are rescissible or voidable, they may be compensated against
each other before they are judicially rescinded or avoided.”

41.1.4. Assignment Before Compensation

ART. 1285 provides that “[t]he debtor who has consented to the assignment of rights made by a creditor in favor of
a third person, cannot set up against the assignee the compensation which would pertain to him against the assignor,
unless the assignor was notified by the debtor at the time he gave his consent, that he reserved his right to the
compensation.
If the creditor communicated the cession to him but the debtor did not consent thereto, the latter may set up the
compensation of debts previous to the cession, but not of subsequent ones.
If the assignment is made without the knowledge of the debtor, he may set up the compensation of all credits prior
to the same and also later ones until he had knowledge of the assignment.”
In the case of PEREZ VS. CA (G.R. NO. L-56101, FEBRUARY 20, 1984), MEVER Films, Inc. (MEVER Films)
obtained a loan from CONGENERIC Development & Finance Corp. (CONGENERIC), issuing a Promissory Note in
favor of CONGENERIC. Meanwhile, CONGENERIC obtains a loan from Petitioner Perez and transfers the Promissory
Note from MEVER Films to Perez. Note that when CONGENERIC transferred the Promissory Note to Perez, MEVER
Films has not yet fully paid the amount stated in the Promissory Note. In a separate case, other Creditors of
CONGENERIC sued CONGENERIC for non-payment – as a Debtor to CONGENERIC, MEVER Films was issued a
Garnishment, meaning that MEVER Films would have to pay for CONGENERIC’s debts. Because of CONGENERIC’s
inability to pay, Petitioner Perez pursued MEVER Films for CONGENERIC’s remaining debt to Perez. Now, MEVER
Films claims that because they did not know that their debt to CONGENERIC was assigned to a 3 rd Person (Perez),
then ART. 1285 PAR. 3 should apply – All debts prior to the assignment and also later ones up until they (MEVER
Films) had knowledge of such assignment must be deemed Compensated.
The Court ruled against MEVER Films, noting that the Promissory Note that MEVER Films first issued to
CONGENERIC, which represented MEVER Films’s debt, is considered a Money Market Device. The Court stated that
“[t]he impersonal character of the money market device overlooks the individuals or entities concerned. The issuer of
a commercial paper in the money market necessarily knows in advance that it would be expeditiously
transacted and transferred to any investor/lender without need of notice to said issuer. In practice, no

60
United Planters vs. CA (G.R. No. 126890, April 2, 2009)
[41]
notification is given to the borrower or issuer of commercial paper of the sale or transfer to the investor.” In short, by
virtue of MEVER Films issuing a Money Market Device like the Promissory Notes, MEVER Films has knowledge that
their Credit (or debt) could be transferred to another Creditor at any time. Thus, ART. 1285 PAR. 1, NOT ART. 1285
PAR. 3 applies, and MEVER Films cannot set up Compensation against Perez.

41.2. When Not Applicable

41.2.1. In Case of Civil Liability Arising from a Penal Offense
ART. 1288 provides that “[n]either shall there be compensation if one of the debts consists in civil liability arising
from a penal offense.”
Jurisprudence provides that “[t]he raison d'etre for this is that, "if one of the debts consists in civil liability arising
from a penal offense, compensation would be improper and inadvisable because the satisfaction of such obligation is
imperative."”61

VI. Novation
1. The Concept of Novation
Novation is generally defined as “the extinguishment of an obligation by the substitution or change of the
obligation by a subsequent one which terminates the first, either by changing the object or principal conditions, or by
substituting the person of the debtor, or subrogating a third person in the rights of the creditor.”62
This is provided for in ART. 1291, which states that “[o]bligations may be modified by:
1. Changing their object or principal conditions;
2. Substituting the person of the debtor;
3. Subrogating a third person in the rights of the creditor.”
However, this definition of Novation is somewhat restrictive, as Novation can also differ in how much it changes
the Obligation. To this, there are 2 Kinds of Novation – Extinctive and Partial/Modificatory Novation.
- Extinctive Novation occurs “when an old obligation is terminated by the creation of a new obligation that
takes the place of the former.”63
- Partial/Modificatory Novation occurs “when the old obligation subsists to the extent it remains
compatible with the amendatory agreement.”64

41.3. Objective or Real

ART. 1291 PAR. 1 provides that “[o]bligations may be modified by:
1. Changing their object or principal conditions;”
Such provision provides for what is called Objective/Real Novation.
In the case of CALIFORNIA BUS LINES, INC. VS. STATE INVESTMENT HOUSE, INC. (G.R. NO. 147950, DECEMBER 11,
2003), Delta Motors Corp. (Delta) obtained a loan from State Investment House, Inc. (SIHI) worth Php 25,000,000.00.
Meanwhile, California Bus Lines (California) bought 35 Buses from Delta – for payment, the 35 Buses were attached
Chattel Mortgages which are represented by 16 Promissory Notes executed by California, each worth Php
2,000,000.00 to be paid for in 60 Monthly Installments. Unfortunately, California could not pay for the Promissory
Notes efficiently, and so Delta and California entered into a Restructuring Agreement in which California will now pay
Delta through Daily Installments instead of Monthly.
Of the 16 Promissory Notes that Delta obtained from California, Delta sold 5 Promissory Notes to SIHI to pay off
their loan. Thus, SIHI pursued California, since it is California’s Obligation to pay for the Promissory Notes. However,
California claims that when California and Delta entered into the Restructuring Agreement, the Obligation was
substantially changed. By changing the schedule of payment from Monthly to Daily, the Promissory Notes were
essentially merged, and so SIHI can no longer enforce the Promissory Notes against California.
The Court ruled against California. The Court provides that “[w]ith respect to obligations to pay a sum of money,
this Court has consistently applied the well-settled rule that the obligation is not novated by an instrument that
61
Metrobank vs. Tonda (G.R. No. 134436, August 16, 2000)
62
California Bus Lines, Inc. vs. State Investment House, Inc. (G.R. No. 147950, December 11, 2003)
63
California Bus Lines, Inc. vs. State Investment House, Inc. (G.R. No. 147950, December 11, 2003)
64
California Bus Lines, Inc. vs. State Investment House, Inc. (G.R. No. 147950, December 11, 2003)
[42]
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.” The Restructuring
Agreement between Delta and California DID NOT express in unequivocal terms that the Agreement would Novate
the old Obligation to pay for the 5 Promissory Notes. The Restructuring Agreement merely ratified the Obligations set
by the Promissory Notes – It may have changed the schedule as to when California must pay, but essentially the
Object remained the same. In both the 5 Promissory Notes and the Restructuring Agreement, California’s Obligation
was still to pay for a sum of money, and so the Court ruled that California must pay such.
In the case of ONG VS. BOGÑALBAL (G.R. NO. 149140, SEPTEMBER 12, 2006), Ong entered into a contract with
Bogñalbal – Bogñalbal will construct a Boutique for Ong which Ong will pay for in a series of Monthly Statements.
When Bogñalbal asked for the 4th Monthly Statement, Ong refused – Ong was unsatisfied with how the floor was done
and would only pay once it was fixed. According to Ong, Bogñalbal then agreed to collect the 4 th Monthly Statement
once the floor was finished. Ong now claims that this agreement from Bogñalbal must be considered as a Partial
Novation, and so her Obligation to Pay Bogñalbal has not yet become due and demandable.
The Court ruled against Ong. First, the Court provides that “the term “principal conditions” in ARTICLE 1291 should
be construed to include a change in the “period” to comply with the obligation. Such a change in the period would
only be a partial novation, since the period merely affects the performance, not the creation of the obligation.”
Although Bogñalbal’s agreement to delay the collection of the 4 th Monthly Statement may seem like a Partial Novation,
the Court ruled that in fact, no Novation ever occurred. This is because “[n]ovation is never presumed. Unless it is
clearly shown either by express agreement of the parties or by acts of equivalent import, this defense will never be
allowed.” The Court goes on to say that “[t]he evidence preponderates in favor of respondent Bogñalbal that there had
been no novation of the contract. At best, what was proven was a grudging accommodation on the part of respondent
Bogñalbal to continue working on the project despite petitioner Ong’s failure to pay the fourth progress billing.”
In the case of MILLAR VS. CA (G.R. NO. L-29981, APRIL 30, 1971), Millar filed a case against Gabriel and obtained
a favorable Judgement against him. The Judgement ordered Gabriel to pay Millar Php 1,746.98, and because Gabriel
was unable to pay immediately, Millar filed for a Writ of Execution to seize Gabriel’s Jeep. Gabriel pleaded with Millar
to let him Mortgage his Jeep to Millar instead, so as to give Gabriel time to pay the Php 1,746.98. Millar accepted, and
a Chattel Mortgage over Gabriel’s Jeep was executed. Time passed and Gabriel was still unable to pay. Thus, relying
on the Judgement against Gabriel, Millar filed for a Writ of Execution again. However, Gabriel claims that the Php
1,746.98 he was ordered to pay has already been paid for by the Chattel Mortgage. Thus, Gabriel claims that there
was an Implied Extinctive Novation of the Judgement when the Chattel Mortgage was executed.
The Court ruled in favor of Millar. The Court provides that “[w]here the new obligation merely 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.” Changes such as paying through 2
Installments (as stipulated in the Chattel Mortgage) rather than just 1 Payment (as ordered by the Judgement) is not
so substantial as to consider it as Implied Novation. Additionally, that the Judgement orders the payment of Php
1,746.98 whereas the Chattel Mortgage stipulates the payment of a lesser amount of Php 1,700.00 is not substantial
either. Millar explains that before the Chattel Mortgage was created, Gabriel has already submitted Partial Payments
to him – the Chattel Mortgage merely reflects the remaining amount that Gabriel has not yet paid.

41.4. Subjective or Personal

ART. 1291 PAR. 2 & 3 provides that “[o]bligations may be modified by:
2. Substituting the person of the debtor;
3. Subrogating a third person in the rights of the creditor.”
In substituting the person of the debtor, “it is not enough that the juridical relation between the parties to the
original contract is extended to a third person. It is essential that the old debtor be released from the obligation,
and the third person or new debtor take his place in the new relation. If the old debtor is not released, no novation
occurs and the third person who has assumed the obligation of the debtor becomes merely a co-debtor or surety or a
co-surety.”65

42. Requisites

65
Conchingyan vs. RB Surety (G.R. No. L-47369, June 30, 1987)
[43]
 In Extinctive Novation, there are 4 Requisites:
1. “A previous valid obligation;
2. An agreement of all parties concerned to a new contract;
3. The extinguishment of the old obligation; and
4. The birth of a new valid obligation.”66
Additionally, ART. 1292 provides that “[i]n order that an obligation may be extinguished by another which
substitute the same, it is imperative that it be so declared in unequivocal terms, or that the old and the new
obligations be on every point incompatible with each other.”
In Partial Novation, what simply needs to be established is that “the change brought about by any subsequent
agreement is merely incidental to the main obligation (e.g., a change in interest rates or an extension of time to pay);
in this instance, the new agreement will not have the effect of extinguishing the first but would merely supplement it or
supplant some but not all of its provisions.”67
An example for Partial Novation is found in the case of RILLO VS. CA (G.R. NO. 125347, JUNE 19, 1997), Corb
Realty and Rillo entered into a Contract to Sell. Corb Realty agreed to sell a Condo Unit to Rillo for a total of Php
150,000.00 – Half of the Php 150K upon execution of their Agreement and the other half thru 12 Monthly Installments.
Unfortunately, Rillo defaulted on 3 Monthly Installments. Rather than have Rillo vacate, Corb Realty entered into a
Compromise Agreement with Rillo. The Compromise Agreement stipulates that Rillo must pay Php 50,000.00 +
Interest. Again, Rillo defaulted in his Obligation, so now, Corb Realty filed a complaint to have Rillo pay Php
150,000.00, which was the amount stipulated in the Contract to Sell. For his Defense, Rillo claims that the
Compromise Agreement has Novated the Contract to Sell. Thus, Rillo should only pay Php.50,000.00 + Interest rather
than the aforementioned Php 150,000.00.
The Court ruled against Rillo. The Court ruled that “the parties executed their May 12, 1989 “Compromise
Agreement” precisely to give life to their “Contract to Sell.” It merely clarified the total sum owed by Petitioner Rillo to
private Respondent Corb Realty with the view that the former would find it easier to comply with his obligations under
the Contract to Sell. In fine, the “compromise agreement” can stand together with the Contract to Sell.” Because the
Compromise Agreement can stand together with the Contract to Sell, no Extinctive Novation occurred, only Partial.

43. Expromision and Delegacion

There are 2 Modes of Substituting the Person of the Debtor – Expromision and Delegacion.
- In Expromision, “the initiative for the change does not come from – and may even be made without the
knowledge of – the debtor, since it consists of a third person’s assumption of the obligation. As such, it
logically requires the consent of the third person and the creditor.”68
This is exemplified in ART. 1293, which provides that “[n]ovation 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.”
In case the New Debtor was insolvent or was not able to fulfill the obligation, ART. 1294 provides that “[i]f
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.”
- 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.”69
ART. 1295 provides that “[t]he 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.”
Regardless, even though Expromision and Delegacion differ from where the initiative for substituting the person of
the debtor originates, “[b]oth modes of substitution by the debtor require the consent of the creditor.”70

66
Tomimbang vs. Tomimbang (G.R. No. 165116, August 4, 2009)
67
Tomimbang vs. Tomimbang (G.R. No. 165116, August 4, 2009)
68
Garcia vs. Llamas (G.R. No. 154127, December 8, 2003)
69
Garcia vs. Llamas (G.R. No. 154127, December 8, 2003)
70
Garcia vs. Llamas (G.R. No. 154127, December 8, 2003)
[44]
 In the case of BPI VS. DOMINGO (G.R. NO. 169407, MARCH 25, 2015), the Spouses Domingo executed a
Promissory Note in favor of Makati Auto Center for the purchase of a 1993 Mazda 323. The Promissory Note
executed by the Spouses was secured by a Chattel Mortgage over the purchased Mazda payable over 48 Months.
Makati Auto Center would assign its Rights over the Chattel Mortgage over to Far East Bank. Soon after, Far East
Bank merged with BPI. Unfortunately, the Spouses defaulted on 21-Months’ worth of pay, and so BPI filed a
Complaint for Replevin & Damages. The Spouses claim that they sold the car to a certain Carmelita Gonzales, making
her the new Debtor. The Spouses consider this as Novation by Expromision, and so BPI must seek payment from
Gonzales instead.
The Court ruled in favor of BPI, reiterating that the General Rule that “since novation implies a waiver of the right
the creditor had before the novation, such waiver must be express.” The Court does note that “the existence of the
creditor’s consent may also be inferred from the creditor’s acts, but such acts still need to be “a clear and
unmistakable expression of [the creditor’s] consent.”” The Court noted that the Promissory Note was still in the name
of the Spouses, NOT of Gonzales – BPI could not have possibly objected to the Novation because they were unaware
of such. That BPI filed against the Spouses shows that do not in fact consent to the Novation. Thus, the Spouses must
pay BPI the default, although Gonzales, as the new owner of the Mazda, may be considered a Co-Debtor who must
also pay for the default.

44. Effect on Accessory Obligations

ART. 1296 provides that “[w]hen the principal obligation is extinguished in consequence of a novation, accessory
obligations may subsist only insofar as they may benefit third persons who did not give their consent.”

45. Void Obligations

In the even that the new Obligation is void, ART. 1297 provides that “[i]f the new obligation is void, the original one
shall subsist, unless the parties intended that the former relation should be extinguished in any event.”
On the other hand, if the original Obligation was void, ART. 1298 provides that “[t]he novation is void if the original
obligation was void, except when annulment may be claimed only by the debtor or when ratification validates acts
which are voidable.”

46. Conditional Obligations

ART. 1299 provides that “[i]f 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.”

47. Subrogation
47.1. Kinds of Subrogation
There are 2 Kinds of Subrogation of a 3rd Person in the Rights of the Creditor – Conventional Subrogation
and Legal Subrogation.
ART. 1300 provides that “[s]ubrogation 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.”
- Conventional Subrogation “is that which takes place by agreement of parties.”71
ART. 1301 provides that “[c]onventional subrogation of a third person requires the consent of the original
parties and of the third person.”
- Legal Subrogation “is that which takes place without agreement but by operation of law because of certain
acts.”72
ART. 1302 provides that “[i]t is presumed that there is legal subrogation:
1. When a creditor pays another creditor who is preferred, even without the debtor's knowledge;
2. When a third person, not interested in the obligation, pays with the express or tacit approval of the
debtor;
3. When, even without the knowledge of the debtor, a person interested in the fulfillment of the
obligation pays, without prejudice to the effects of confusion as to the latter's share.”
71
Ledonio vs. Capitol Development Corp. (G.R. No. 149040, July 4, 2007)
72
Ledonio vs. Capitol Development Corp. (G.R. No. 149040, July 4, 2007)
[45]
 47.2. Effect of Subrogation
ART. 1303 provides that “[s]ubrogation transfers to the persons subrogated the credit with all the rights
thereto appertaining, either against the debtor or against third person, be they guarantors or possessors of
mortgages, subject to stipulation in a conventional subrogation.”

47.3. Partial Subrogation

ART. 1304 provides that “[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.”

[46]
 SECTION 5: NATURAL OBLIGATIONS
1. Definition
ART. 1423 provides that “[n]atural obligations, not being based on positive law but on equity and natural law, do
not grant a right of action to enforce their performance, but after voluntary fulfillment by the obligor, they
authorize the retention of what has been delivered or rendered by reason thereof.”
It cannot be stressed enough – Natural Obligations DO NOT grant a right of action to enforce their performance.
For example, in the case of ANSAY VS. BOARD OF DIRECTORS (G.R. NO. L-13667, APRIL 29, 1960), Ansay & other
employees of the National Development Company tried to compel its Board of Directors to give them Christmas
Bonuses. By the employees’ own admission, the Christmas Bonuses are considered Natural Obligations, based on
Moral Grounds. The Court provides that “an element of natural obligation before it can be cognizable by the
court is voluntary fulfillment by the obligor. Certainly retention can be ordered but only after there has been
voluntary performance. But here there has been no voluntary performance. In fact, the court cannot order the
performance.” Thus, the Court did not grant the Christmas Bonuses to the employees.

48. Kinds
48.1. Performance After Prescription
ART. 1424 provides that “[w]hen a right to sue upon a civil obligation has lapsed by extinctive prescription,
the obligor who voluntarily performs the contract cannot recover what he has delivered or the value of the
service he has rendered.”
ART. 1425 provides that “[w]hen without the knowledge or against the will of the debtor, a third person pays a debt
which the obligor is not legally bound to pay because the action thereon has prescribed, but the debtor later voluntarily
reimburses the third person, the obligor cannot recover what he has paid.”

48.2. Contracts of Minors

ART. 1426 provides that “[w]hen a minor between eighteen and twenty-one years of age who has entered into a
contract without the consent of the parent or guardian, after the annulment of the contract voluntarily returns the whole
thing or price received, notwithstanding the fact that he has not been benefited thereby, there is no right to demand
the thing or price thus returned.”
ART. 1427 provides that “[w]hen a minor between eighteen and twenty-one 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.”

48.3. Performance By Winning Party

ART. 1428 provides that “[w]hen, after an action to enforce a civil obligation has failed the defendant voluntarily
performs the obligation, he cannot demand the return of what he has delivered or the payment of the value of the
service he has rendered.”

48.4. Payment Beyond Inheritance

ART. 1429 provides that “[w]hen a testate or intestate heir voluntarily pays a debt of the decedent exceeding the
value of the property which he received by will or by the law of intestacy from the estate of the deceased, the payment
is valid and cannot be rescinded by the payer.”

48.5. Payment of Void Legacy

ART. 1430 provides that “[w]hen a will is declared void because it has not been executed in accordance with the
formalities required by law, but one of the intestate heirs, after the settlement of the debts of the deceased, pays a
legacy in compliance with a clause in the defective will, the payment is effective and irrevocable.”

[47]