Ecq Coverage

OBLIGATIONS
AND
CONTRACTS

ECQ coverage

OBLIGATIONS AND CONTRACTS C
2023
ECQ Coverage

TABLE OF CONTENTS

Part One: Conjunctive, Alternative, and Facultative Obligations …………………………………………………………………………….. Page 2
Part Two: Joint and Solidary Obligations …………………………………………………………………………….. Page 5
Part Three: Divisible and Indivisible Obligations …………………………………………………………………………….. Page 22
Part Four: Obligations with a Penal Clause …………………………………………………………………………….. Page 24
Part Five: Payment …………………………………………………………………………….. Page 27
Part Six: Consignation …………………………………………………………………………….. Page 41
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PART ONE: CONJUNCTIVE, ALTERNATIVE,

Example of Alternative Obligation: In a contract of sale, the seller
AND FACULTATIVE OBLIGATIONS sold a parcel of land to the buyer, with the buyer having the obligation to
pay the price either by paying 10 million pesos in cash or conveying a
Obligations may be classified depending on the number of objects or specific condominium unit to the seller. The buyer has an alternative
prestations. These are the following: obligation either to pay cash or to convey the condominium unit in
exchange for the land.
Conjunctive— when ALL prestations are required

Facultative Obligation - A facultative obligation requires the debtor
Alternative—when there are multiple prestations involved which are
all principal, and the lender can perform ONLY ONE of them to fulfill a single prestation with the debtor always having the option
to substitute the principal prestation with another.
Facultative—when there are multiple prestations, but some are
classified as principals and some are subsidiary
Example of a Facultative Obligation: In a contract of sale, the seller
sold a parcel of land to the buyer with the buyer having the obligation to
Conjunctive Obligation - A conjunctive obligation requires the pay the price of 10 million pesos AND at the buyer's sole discretion,
debtor to perform several prestations. The debtor extinguishes this convey a specific condominium unit to the seller. The buyer has a
obligation by performing ALL the prestations. facultative obligation. The payment of cash is the principal prestation
while the conveyance of the unit is the substitute prestation.

Example of Conjunctive Obligation: In a loan contract, the lender Distinctions between Alternative and Facultative Obligations
lent 1 million pesos to the borrower. With the borrower having the
obligation to pay the principal and interest thereon at the rate of 8% per Alternative and facultative obligations similarly involve multiple
annum one year after the release of the loan proceeds. The borrower has prestations and require the debtor to perform only one of them to
a conjunctive obligation to pay the principal and the accrued interest on extinguish the obligation. Alternative and facultative obligations differ as
the due date. follows:
Alternative Obligation - An alternative obligation requires the
debtor to perform only one of the several prestations. As a rule, the ALTERNATIVE As to the... FACULTATIVE
debtor has the right to choose the prestation to be fulfilled in an OBLIGATION OBLIGATION
alternative obligation.
Several principal BUT PRINCIPAL has a principal prestation
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alternative prestations and an accessory or RULES GOVERNING

substitute prestation. ALTERNATIVE OBLIGATIONS
- In an alternative obligation, the debtor has the right to choose
DOES NOT invalidate EFFECT OF The nullity of the
the prestation to be performed unless such right has been
the obligation. The NULLITY OF O NE principal prestation in a
obligation remains valid PRINCIPAL facultative obligation expressly granted to the creditor or a third person.
as long as there is one PRESTATION invalidates the
valid prestation. obligation even if the ILLUSTRATION #1
substitute prestation is For example, in a loan contract, the borrower may pay the obligation to
valid.
the lender either by paying cash or conveying a certain property agreed

upon by the parties. The borrower will have the right to choose.
The obligation remains EFFECT OF The impossibility of the The parties can agree that the lender will have the option of what
valid as long as there is IMPOSSIBILITY principal prestation prestation should be performed.
one valid prestation. OF PERFORMING extinguishes the
ONE obligation. If the If the creditor sues for specific performance and the debtor has the right
Only the impossibility PRESTATION substitute prestation is to choose, the creditor should demand, AND the court should order the
OF ALL prestations void, the obligation
debtor to perform any of the prestations. The debtor should
without the fault of the remains valid as long as
communicate his choice to the creditor. There is no prescribed form or
debtor extinguishes the the principal prestation is
obligation. valid. manner for the debtor’s selection of the prestation to be performed and
its communication to the creditor. The debtor may do so in writing or
The debtor generally has RIGHT TO Only the debtor can verbally or expressly or implicitly by performing one of the prestations.
the right to choose the CHOOSE THE choose the substitute
prestation to be fulfilled. PRESTATION prestation as it is meant ILLUSTRATION #2
to facilitate performance.
The parties may agree to Hence, the debtor can Arco v. Lim
grant the creditor the destroy the substitute - In Arco v. Lim, the Supreme Court explained that in an
right to choose. prestation with impunity, alternative obligation, there is more than one object and the
before substitution. fulfillment of one is sufficient.

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The choice of which prestation to fulfill is called the right of election. memorandum declared in clear terms that the delivery of petitioner
The right of election is extinguished when the party who may exercise Arco's finished products would be to a 3rd person thereby extinguishing
that election, categorically and unequivocally makes his choice known. the option to deliver the finished products of equivalent value to the
respondent.
The choice of the debtor must also be communicated to the creditor
who must receive notice of it. Since the object of this notice is to give the
LIMITATIONS ON DEBTOR'S RIGHT TO CHOOSE THE
creditor an opportunity to express his consent or to impugn the election
PRESTATION
made by the debtor. Only after said notice should the election take legal - Debtor cannot choose to perform part of one prestation and
effect WHEN consented by the creditor, or IF impugned by the latter, part of another. The debtor has to choose and perform one
when declared proper by a competent court. single and complete prestation.
- Debtor has to choose and perform one of the prestations
According to the factual findings of the trial court and the appellate upon terms and conditions as agreed upon by the parties.
court, the original contract between the parties was for respondent to Debtor cannot unilaterally impose any qualification, term,
deliver scrap paper worth P7,220,9608.31 to petitioner Arco Pulp and and condition of his choice.
Paper. The payment for this delivery became petitioner Arco's - The debtor cannot choose an impossible prestation among
obligation. By agreement, petitioner Arco as the debtor had either of the the presentations, otherwise, the debtor can render the
following options: obligation void at will.
- The debtor loses the right to choose if only one prestation is
1. Pay the price or practicable
2. Deliver finished products of the equivalent value.

The appellate court correctly identified the obligation between the When the debtor fails or refuses to choose a prestation, the creditor
parties as an alternative obligation, whereby petitioner Arco after may:
receiving the raw materials from respondents would either pay him the - ask the court to fix a period for the debtor to make a choice
price of the raw materials or in the alternative, deliver to him the finished - The debtor is considered to have waived his right to choose if
products of equivalent value. When petitioner Arco tendered a check to he continues to fail to make a choice, and the creditor may
respondent in partial payment for the scrap paper, they exercised their choose on the debtor’s behalf
option to pay the price. Respondent's receipt of the check and his
subsequent act depositing it constituted his notice of petitioner Arco's
option to pay. This choice was also shown by the terms of the
memorandum of agreement which was executed on the same day. The
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For example, the lenders may be given the right to choose the remedy
As soon as the debtor communicates his choice to the
that the lenders will exercise should a borrower default in the payment of
creditor, the obligation becomes a simple obligation to perform the
the debtor’s obligation under a loan contract. In the case of Mondragon
chosen prestation.
v. CA, the lenders were given by contract, for alternative remedies in case
of the borrower’s default. If the creditor has the right to choose but
If the creditor prevents the debtor from choosing any prestation, delays in selecting the prestation, the debtor shall not have to do
the debtor may resolve the contract with damages. The creditor's anything. The debtor will now be in default even if there is a fixed period
preemption of the debtor’s choice is deemed a substantial breach of the for performance.
obligation. The creditor should not impair the debtor’s right to choose.
The debtor may waive his right of action based not on the creditor's
action and opt to choose any other remaining prestation.

PART TWO: JOINT AND SOLIDARY
If the debtor causes the loss or impossibility of all prestations,
the creditor has a right to indemnity for damages. The indemnity shall be OBLIGATIONS
based on the value of the last prestation to disappear or become Joint and solidary obligations. Copyright and other rights reserved by
impossible. The creditor may also recover other damages based on the Atty. J. P. San Pedro.
debtor’s default or other acts of fraud, negligence, or other contravention
of the tenor of the obligation. If the debtor destroys all but one When there are two or more debtors or two or more creditors in an
prestation and the remaining prestation was lost due to a fortuitous obligation, it is necessary to determine the extent of the liability of the
event, the debtor will not be liable. By destroying the other prestations, debtors or the entitlement of the creditors, respectively. As a rule, the
the debtor converts the obligation into a simple one. Hence, the loss of liability of multiple debtors or the entitlement of multiple creditors in an
the chosen prestation through a fortuitous event extinguishes the obligation is only joint.
obligation.

JOINT OBLIGATION
The parties may expressly agree to grant the creditor the right to
- A joint obligation is one in which each debtor is liable only for a
choose the prestation to be performed by the debtors in an alternative
proportionate part of the debt and the creditor is entitled to demand
obligation. If the creditor has the right to choose, he should also
only a proportionate part of the credit from each debtor. Each debtor
communicate his choice to the debtor. The obligation becomes a simple
answers only for a part of the whole liability and to each eligibility
obligation as soon as the debtor receives such notice. The creditor can
belongs only a part of the correlative rights.
select the prestation in writing, orally, expressly or implicitly. For
example, when the creditor accepts the prestation offered by the debtor.
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In case of concurrence of two or more creditors, or two or more debtors
A.) An obligation of the parties based on a court judgement is only
in one and the same obligation, and in the absence of express and joint UNLESS the judgement provides solidary liability.
indubitable terms characterizing the obligation as solidary, the
presumption is that the obligation is only joint. It thus becomes When it is not provided in the judgement that the defendants are liable
incumbent upon the party alleging that the obligation is indeed solidary to pay jointly and severally a certain sum of money, none of them may
in character to prove such fact with the preponderance of evidence. be compelled to satisfy, in full, said judgement. In the same vein, the
entitlement of two successful plaintiffs against a defendant based on
The obligation will be solidary only when the obligation expressly so the court decision is also joint, absent a contrary indication in the
judgement. Each plaintiff is entitled to only half the amount awarded
states, or when the law or the nature of the obligation requires solidarity.
to them by the court. Each plaintiff cannot claim the full amount of

the award against the defendant, thereby collectively getting twice the
SOLIDARY OBLIGATION awarded amount.
- In a solidary obligation, each of the solidary debtors is liable for the
entire obligation, and each of the solidary creditors is entitled to B.) When a real estate developer assigns its receivables under various
demand the satisfaction of the whole obligation from any or all of the contracts to sell with different buyers to a creditor bank, the creditor
bank, by accepting the receivables, neither assumes the liability of, nor
debtors.
agrees to be solidarily liable with, the real estate developer with respect
to its obligation to the buyers under the contracts to sell.
For the rules on joint or solidary obligations to apply, there must be at
least two debtors or two creditors. C.) A party to a compromise agreement and its subsidiaries, affiliates,
and successors-in-interest are only jointly liable absent a clear language
in the agreement imposing a solidary obligation.
An obligation is jointas a default rule.
For example, a compromise agreement provided that the agreement
A s olidaryobligation cannot be inferred lightly, but exists only when: and the rights, obligations, and governance contained therein shall
1. expressly so stated accrue to the benefit of and be binding upon the plaintiffs,
2. the law or nature of the obligation requires it defendants, and their respective subsidiaries, affiliates, controlled and
related entities, successors, and assigns. Clearly, the compromise
agreement did not impose solidary liability on the parties’ subsidiaries,
EXAMPLES: affiliates, controlled and related entities, successors, and assigns, but
merely allowed them to benefit from its effects.
ILLUSTRATION #1: Examples of joint and solidary
obligations

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1. The obligation expressly so states or
LIABILITY OF PARTNERS TO THIRD PERSONS 2. The law or nature of the obligation requires solidarity

D.) The partners are only subsidiary and jointly liable for obligations of GR: Solidary liability is not presumed unless expressly stated or the law
the partnership, except when the law mandates solidary liability or the or nature of the obligation requires it.
partners agree to be bound solidarily.
PARTNERSHIP
Article 1816 of the CC governs the liability of the partners to third Ordinarily, the liability of the partners is not solidary. The joint liability
persons. The article also provides that the partners’ obligation to third of the partners is a defense that can be raised by a partner impleaded in a
persons with respect to the partnership’s liability is p ro rata or joint. complaint against a partnership.

Art. 1816. All partners, including industrial ones, shall be liable pro This means, only in exceptional circumstances shall the partners’ liability
rata with all their property and after all the partnership assets have be solidary in nature.
been exhausted, for the contracts which may be entered into in the
name and for the account of the partnership, under its signature and
by a person authorized to act for their partnership. However, any EXCEPTIONAL CONDITIONS TO JOINT LIABILITY
partner may enter into a separate obligation to perform a partnership
Articles 1822, 1823, and 1824 of the CC provide for these exceptional
contract.
conditions.

Art. 1207. The concurrence of two or more creditors or of two or
more debtors in one and the same obligation does not imply that each Art. 1822. Where, by any wrongful act or omission of any partner
one of the former has a right to demand, or that each one of the latter acting in the ordinary course of the business of the partnership or with
is bound to render, entire compliance with the prestations. There is a the authority of his co-partners, loss or injury is caused to any person,
solidary liability only when the obligation expressly so states, or when not being a partner in the partnership, or any penalty is incurred, the
the law or the nature of the obligation requires solidarity. partnership is liable therefor to the same extent as the partner so acting
or omitting to act.
JOINT LIABILITY
Art. 1823.The partnership is bound to make good the loss:
Liability for an obligation is joint when the debtor is liable only for a
(1) Where one partner acting within the scope of his apparent
proportional part of the debt. In contrast, a solidary liability makes a
authority receives money or property of a third person and
debtor liable for the payment of the entire debt. misapplies it; and
(2) Where the partnership in the course of its business receives
Similarly, Article 1207 does not presume solidary liability unless:
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money or property of a third person and the money or service contract that was not a party to such agreements. (As seen in
property so received is misapplied by any partner while it is in the case below)
the custody of the partnership.

MARSMAN DRYSDALE v. PHILIPPINE GEOANALYTICS

Art. 1824. All partners are liable solidarily with the partnership for Article 1207-1222
everything chargeable to the partnership under Articles 1822 and In the case of Marsman, the Supreme Court held that Philippine
1823. Geoanalytics service provider executed a technical service contract with
the joint venture and was never a party to the JVA. While the JVA clearly

spelled out the capital contributions of Marsman Drysdale (land) and
Article 1823 talks about situations of whether the partnership in the
Gotesco (cash), as well as the funding and financing mechanism for the
course of its business receives money or property of a third person and
project, the same could not be used to defeat the lawful claim of
the money or property so received is misapplied by any partner while it is
Philippine Geoanalytics against the two joint venture partners. The
in the custody of the partnership.
technical service contract clearly listed the joint venture Marsman and

Gotesco as the beneficial owner of the project and all billing invoices
E.) A judicial admission by a co-debtor of their loan obligation to the
indicated the consortium therein as the client.
creditor confirms only the existence of obligation. The solidary

liability of debtors cannot be inferred from said admission, absent any
evidence to the contrary in a proper case by the creditor. Even if debtors Art. 1207 and 1208. Presumes that obligation owing to Philippine
judicially admit solidary liability, said admission does not convert the Geoanalytics was joint between Marsman and Gotesco.
joint character of their obligation as appearing in their contract. For
what determines the nature of the obligation is the tenor of their In a joint obligation, the credit or debt shall be presumed to be divided
contract itself, not the admission of the parties. into as many shares as there are creditor or debtors - the credits or debt
being considered distinct from one another. Accordingly, any act or
omission of a creditor or debtor in a joint obligation will only affect
F.) An undertaking by various parties to another party is only joint,
unless the undertaking contains any express stipulation that parties debtor and creditor privy to such act or omission. (Example shown
agreed to bind themselves jointly and severally in their obligations to below)
the other party or any such term to that effect.

G.) The parties to a joint venture agreement are only jointly liable to a ILLUSTRATION #2: Joint Obligation
service provider that entered into a technical service contract with the Debtor 1 (D1) and Debtor 2 (D2) are jointly liable to pay Creditor 1
joint venture. The joint venture agreement of parties does not bind the (C1) and Creditor 2 (C2) P100,000 on a certain due date. In such
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cases, each debtor will be liable for P50,000 to be divided and paid to
each creditor or P25,000 per creditor. INDIVISIBLE OBLIGATIONS
The obligation is presumed joint even if the obligation is
A. If C1 demands payment from D1 on the due date, D1 is indivisible absent any circumstance indicating solidarity. An indivisible
obligated to pay C1 only P25,000. While D1 is liable to pay obligation cannot be performed in parts.
P50,000, only half of it will be payable to C1 as a joint
creditor. C1 can collect the other P25,000 from D2. As a rule, an obligation is indivisible following the rule on integrity or
B. If D1 does not pay upon demand by C1, D1 will be in default completeness of payment. In particular, obligations to give definite
only in respect to D1’s obligation to pay P25,000 to C1. As a things and those not susceptible of partial performance shall be deemed
creditor separate and distinct from C1, C2 does not benefit to be indivisible even though the object or service may be physically
from C1’s demand. C1’s demand on D1 does not place D2 in divisible. An obligation is indivisible if so provided by law or intended by
default with respect to D2’s obligation to C1. the parties.
C. C1’s demand to D1 interrupts the prescriptive period only to In case of a joint indivisible obligation with at least two creditors
C1’s action against D1. The demand neither affects D2 nor and two debtors, all the debtors necessarily have to perform in favor of all
benefits C2. the creditors. Hence, all creditors should demand all debtors to fulfill the
D. Assuming both C1 and C2 demanded payment from both obligation. If any of the debtors defaults in the performance of the
D1 and D2, but D1 was unable to pay due to insolvency, D1’s indivisible obligation, the obligation cannot be fulfilled and the creditors
obligation does not transfer to D2. The insolvency of D1 does recourse will only be an action for damages.
not increase the obligation of D2 to the creditors. Neither
does it grant any additional entitlements to the creditors JOINT AND DIVISIBLE OBLIGATION
against each other. A joint and divisible obligation gives rise to indemnities for damages
E. If D1 obtains, through an appropriate insolvency proceeding, from the time anyone one of the debtors does not comply with his
discharge for obligations including the amounts due C1 and undertaking. The action for damages will be divisible then and the
C2. Only D1 will have the benefit of said discharge. D2 creditor can sue each debtor with respect to his/her share. However, the
cannot invoke the discharge to resist collection efforts of the creditor can claim damages only from the defaulting debtor in light of
creditors. the joint liability of the debtors. The non-defaulting debtors do not
answer for the liability for damages of the defaulting debtor. The debtors

who may have been ready to fulfill their promises shall not contribute to
Any act or omission of a creditor or debtor in a joint obligation affects the indemnity beyond the corresponding portion of the price of the
only the debtor or creditor privy to such act or omission. thing or of the value of the service in which the obligation consists. Only
the collective acts of the creditors can prejudice their rights.
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b) the law requires solidary obligation; and
ILLUSTRATION #3: Indivisible Obligation c) the nature of the obligation requires solidarity.
In an indivisible obligation to deliver a specific car by debtor in favor of 2
creditors, a waiver in favor of the debtor will extinguish the obligation OBLIGATION EXPRESSLY STATES SOLIDARITY
only if done by both creditors. This does not mean, though, that an The parties to an obligation may stipulate the solidary obligation of the
individual act of the creditor can benefit the others. debtors or the solidary entitlement of the creditors.

The obligation is joint and thus any act or omission of the creditor or Examples are as follows:
debtor will only affect the debtor and the creditor pervades such act or
I LLUSTRATION #5: Contract of Loan
omission. Hence, a creditor does not benefit from the act of the other
In a contract of loan with several debtors, the debtors may agree
creditor. For example, the demand of one creditor on the debtor does not
that each of them shall pay or they shall individually pay the entire
place the debtor in default with respect to the other creditor, unless the
obligation upon demand by the creditor.
latter also makes a demand.
The terms “each” or “individually” indicate the solidary liability.

SOLIDARY OBLIGATION ILLUSTRATION #6: Compromise Agreement
In a solidary obligation, each of the solidary debtors is liable for the entire The defendants in a collection case entered into a compromise
obligation, and each of the solidary creditors is entitled to demand the agreement and agreed to be solidarily liable to the creditor by
satisfaction of the whole obligation from any or all of the debtors. undertaking to pay their obligation individually and jointly. The term
“individually” has the same meaning as collectively, separately,
ILLUSTRATION #4: Solidary Obligation distinctively, respectively or severally. An agreement, to be individually
If 2 debtors are solidarily liable to pay 1 million pesos to 2 solidary liable, undoubtedly creates a several obligation, and a several
creditors, any solidary creditor may demand on the due date the whole obligation is one by which one individual binds himself to perform the
payment from either or both of the debtors. On the other hand, the whole obligation.
solidary debtor receiving the demand is obligated to pay the full amount

of the creditor who made the demand.
ILLUSTRATION #7: Promissory Note

The terms joint and several to describe an obligation indicates
Solidarity exists between or among debtors or creditors only under the
solidarity. In a promissory note, the debtors may jointly and severally
following circumstances:
undertake to pay the credit of the amount due under the note on
a) the obligation expressly states solidarity;
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maturity date. An undertaking by the debtors to be jointly and ILLUSTRATION #10: Members of a Corporation
severally liable in an obligation means that the obligation is solidary. A director, officer, or stockholder of a corporation has a personality
distinct from the corporation and thus, the liability of the

corporation does not extend to the director, officer, or stockholder
ILLUSTRATION #8: Contract to Sell with Singular Terms unless the law provides otherwise. However, a director, officer, or
In a contract to sell, were referred to by the singular terms stockholder may contractually agree to assume personal and solidary
“seller” and “owner” and were deemed to have agreed to be liability with the corporation.
solidarily liable to the buyerin.

In AFP v. Sanvictores, the Supreme Court ruled that there is no
WHEN THE LAW MANDATES A SOLIDARY OBLIGATION
doubt that the nature of the obligation under the subject contract to
Second instance of the solidary obligation is when the law mandates a
sell was solidary. In the said contract, AFP and SBS were expressly
solidary obligation. Specific provisions of law may impose a solidary
referred to as the seller while Sanvictores was referred to as the buyer.
obligation. Examples are as follows:
Indeed, the contract to sell did not state sellers but seller. This could

only mean that the parties were considered as one seller in the contract.
As correctly pointed out by the administrative tribunals below and the ILLUSTRATION #11: Section 30 of the Revised Corporation
CA, there was no delineation as to their rights and obligations. Indeed, Code
there could be no other conclusion except that the parties came to the
contracting table with the intention to be bound jointly and severally. A corporation is invested by law with a personality separate and
distinct from that of the persons composing it as well as from that of

any other legal entity to which it may be related.
ILLUSTRATION #9: Promissory Note with singular “I”
A promissory note containing the words “I promise to pay” is Following this, obligations incurred by the corporation acting
signed by two or more persons, they are deemed to be jointly and through its directors, officers, employees are its sole liabilities and
severally liable. The fact that the singular pronoun is used indicates said personalities are GENERALLY not held personally liable
that the promise is individual as to each other, meaning that each of thereon.
the co-signers is deemed to have made an independent singular By way of EXCEPTION, a corporate director, a trustee, or
promise to pay the notes in full. an officer may be held solidarily liable with the corporation under
Section 30 of the Revised Corporation Code. Based on the above

provision, a director, trustee, or officer of a corporation may be made

solidarily liable with it for all damages suffered by the corporation, its

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stockholders, or members and other persons in any of the following
2. He must not receive value therefore; and
cases:
3. He must sign for the purpose of lending his name or credit
1. The director or trustee willfully and knowingly voted for or
to some other person.
assented to a patently unlawful corporate act
2. The director or trustee was guilty of gross negligence or bad
faith in directing corporate affairs and; An accommodation party lends his name to enable the
3. The director or trustee acquired personal or pecuniary accommodated party to obtain credit or to raise money. He receives
interest in conflict with his or her duties as director or trustee. no part of the consideration for the instrument but assumes liability to
the other party. The accommodation party is liable on the instrument

to a holder for value even though at the time of taking the instrument
ILLUSTRATION #12: Section 29 of the Negotiable knew him or her to be merely an accommodation party as if the
Instruments Law (Liability of an Accommodation Party) contract was not for accommodation.

An accommodation party to a promissory note is solidarily liable with The reason for Sec. 29 of the negotiable instruments law is
the principal debtor maker pursuant to Section 29 of the Negotiable explained as follows:
Instruments Law, which reads as follows:
An accommodation party is one who has signed the The basis for the liability under section 29 is the
instrument as maker, drawer or endorser without underlying relation between the accommodated party and
receiving value therefore, and for the purpose of lending the accommodation party which is one of principal and
his name to some other person. Such a person is liable on surety.
the instrument to a holder for value. Notwithstanding In a contract of surety, a person binds himself
such holder at the time of taking the instrument knew solidarily liable with the principal debtor of an obligation
him to be only an accommodation party. but through a suretyship agreement is in essence,
In Gonzales v. PCIB, the Supreme Court explained that an accessory or collateral to valid principal obligation. The
accommodation party is one who meets all the three requisites, surety liability of the creditor is immediate, primary, and
namely: absolute. He is directly and equally bound with the
principal.
Requisites of an Accommodation Party In a similar fashion, the accommodation party cum
1. He must be a party to the instrument signing as maker, surety in a negotiable instrument is deemed an original
drawer or endorser; promiser and debtor from the beginning. He is
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considered in law as the same party as the debtor in
D. The Labor Code of the Philippines imposes an indirect employer who
relation to whatever is adjudged touching the obligation
engages the services of an independent contractor a solidary obligation:
of the latter since their liabilities are so into worthiness to
1. In the payment of the wages of the contractor’s employees who
be inseparable.
rendered services pursuant to the contract between the indirect
employer and the contractor and or
ILLUSTRATION #13: Article 1824 with respect to Article 2. the contractor’s violation of the labor
1822 and 1823 of the Civil Code
The pertinent Labor Code provisions are as follows:
Art. 1824 of the Civil Code imposes a solidary liability on the partners Art. 106. Contractor or Subcontractor. Whenever an employer
and the partnership in respect to obligations of the partnership arising enters into a contract with another person for the performance of the
pursuant to Art. 1822 and 1823 of the Civil Code. former’s work, the employees of the contractor and of the latter’s
To wit, Article 1822states: subcontractor if any shall be paid in accordance to the provisions of this
Whereby wrongful act or omission of any partner acting in the ordinary Code. In the event that the contractor or subcontractor fails to pay the
course of the business of the partnership or with the authority of his wages of his employees in accordance with this Code, the employer shall
co-partners, loss or injury is caused to any person not being a partner in be jointly and severally liable with his contractor or subcontractor to
the partnership or any penalty is incurred, the partnership is liable such employees to the extent of the work performed under the contract
therefor to the same as extent to the partner acting or omitting to act. in the same manner and extent that he is liable to employees directly
employed by him. ( First two paragraphs of Art. 106 of the Labor Code)
In Article 1823, the partnership is bound to make good of the loss:
1. Where one partner acting within the scope of his apparent Art. 107. Indirect Employer
authority receives money or property the third person and The provisions of the immediately preceding Article shall likewise apply
misapplies it and to any person, partnership, association or corporation which, not being
2. Where the partnership in the course of its business receives an employer, contracts with an independent contractor for the
money or property of a third person and the money or performance of any work, task, job or project.
property is misapplied by any partner while it is in the
custody of the partnership Art. 109. Solidary Liability
The provisions of existing laws to the contrary notwithstanding, every
In Article 1824, All partners are liable solidary for the partnership for employer or indirect employer shall be held responsible with his
everything chargeable to the partnership under art 1822 and 1823. contractor or subcontractor for any violation of any provision of this
Code.
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Worcester v. Ocampo
For purposes of determining the extent of their civil liability under this
chapter, they shall be considered as direct employers under Art. 106. “x x x The difficulty in the contention of the appellants is that they fail to
The employer is solidary liable with the independent contractor or recognize that the basis of the present action is tort. They fail to
subcontractor with respect to the wages payable to the employees of the recognize the universal doctrine that each joint tortfeasor is not only
latter. The employer’s liability does extend to other liabilities not individually liable for the tort in which he participates, but is also
contemplated by said article. jointly liable with his tortfeasors. x x x”

For Example : an order to pay separation pay that is punitive and cannot General Rule: “x x x Joint tortfeasors are all the persons who command,
be enforced against an indirect employer unless the indirect employer instigate, promote, encourage, advise, countenance, cooperate in, aid or
conspired with the contractor or subcontractor in the illegal dismissal of abet the commission of a tort, or who approve of it after it is done, if
the employees. done for their benefit. They are each liable as principals, to the same
NATURE OF THE OBLIGATION REQUIRES SOLIDARITY extent and in the same manner as if they had performed the wrongful act
themselves. x x x ”
Examples are as follows:
A. The nature of an obligation arising from a quasi-delict or tort “Joint tortfeasors are jointly and severally liable for the tort which
requires solidarity to facilitate recovery by the injured party. The they commit. The persons injured may sue all of them or any number
law does not require the injured party to prove the extent of the liability less than all. Each is liable for the whole damages caused by all, and all
of each tortfeasor as a condition precedent for recovery. The extent of together are jointly liable for the whole damage. It is no defense for one
liability of each tortfeasor is left for the tortfeasors to prove against each sued alone, that the others who participated in the wrongful act are not
other. joined with him as defendants; nor is it any excuse for him that his
participation in the tort was insignificant as compared to that of the
In Lafarge v. Continental, the Supreme Court held obligations others x x x. ”
arising from tort are by their nature, always solidary.
“Joint tortfeasors are not liable pro rata. The damages can not be
We have assiduously maintained this legal principle as early as 1912 in apportioned among them, except among themselves. They cannot insist
Worcester v. Ocampoin which we held: upon an apportionment, for the purpose of each paying an aliquot part.
They are jointly and severally liable for the whole amount. x x x”

“A payment in full for the damage done, by one of the joint tortfeasors,
of course satisfies any claim which might exist against the others. There
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can be but satisfaction. The release of one of the joint tortfeasors by any excuse for him that his participation in the tort was
agreement generally operates to discharge all. x x x” insignificant as compared to that of the others.

“Of course, the court, during trial, may find that some of the alleged tort
ILLUSTRATION #14: Liability of Joint Tortfeasors
feasors are liable and that others are not liable. The courts may release 30 joint tortfeasors are not liable pro-rata. The damages cannot be
some for lack of evidence while condemning others of the alleged tort apportioned among them EXCEPT among themselves. They cannot
feasors. And this is true even though they are charged jointly and insist upon apportionment for the purpose of each paying an aliquot
severally.” part. They are jointly and severally liable for the whole amount.

Tortfeasors are not only individually liable for the tort in which he Also, a payment in full for the damages done by one of the joint
participates but is also jointly liable with his tortfeasors. tortfeasors satisfies any claim which might exist against the others that
can be both satisfactory.
General Rule: Joint tortfeasors are jointly and severally liable for The release of one tortfeasor by agreement, generally, operates to
the torts which they commit. discharge all.

Who are Joint Tortfeasors? They are the persons who command, Of course, the court during trial may find that some of the alleged
instigate, promote, encourage, advise, countenance, cooperate in tortfeasors are liable and that others are not liable. So, the Court may
aid, or abet the commission of a tort or who approve of it after release some for lack of evidence while condemning others of the
it is done, or if done for their benefit, they are each liable as alleged tortfeasors. This is true even though they are charged jointly
principals to the same extent and in the same manner as if they had and severally.
performed the wrongful act themselves.
GUILTY OF TORTIOUS FRAUD. The parties who acted in concert
Because joint tortfeasors are jointly and severally liable for the torts with the debtor to frustrate the creditor’s effort to collect his receivables
which they commit: from the debtor are guilty of tortious fraud. They are solidarily liable to
- The persons injured may sue all of them or any number less than the creditor.
all. Each is liable for the whole damage caused by all, and all
together they are jointly liable for the whole damage. CIVIL LIABILITY IN CRIMES. Co-conspirators who committed a
- It is NO defense for one that the others who participated in the crime are solidarily liable to pay the civil liability to the offended party.
wrongful act are not joined with him as defendants NOR is it
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The nature of the civil liability of the co-conspirators in a crime
ILLUSTRATION #15: Solidary Obligation with Different
requires solidarity to punish and expedite the compensation of the Terms and Conditions
offended party. The nature of the obligation of the A and B borrowed Php 1 Million from C and D. A and B jointly and
co-conspirators in the commission of the crime requires solidarity severally promised to pay the obligation to C and or D. Hence A and B
and each debtor may be compelled to pay the entire obligation as a are solidarily debtors and C and D are solidarily creditors.
co-conspirator. Hence, the civil liability of the accused is similar to that
of a joint tortfeasor under the rules of the civil law. However, A promised to pay on the 30th June 2020 while B promised
to pay on demand. D subsequently condoned the Php 200,000
JOINT TORTFEASORS. Again, joint tortfeasors are those who portion of the loan in favor of A, and C demands payment from B on
command, instigate, promote, encourage, advice, countenance, the 9th March 2020. In such case, B should pay Php 400,000 to C.
cooperate in aid or abet the commission of a tort or who approve of it
after it is done, or if done for their benefit, they are each liable as First, the obligation was reduced by virtue of the condonation by D of
principals to the same extent and in the same manner as if they had Php 200,000. The condonation binds C but D will have to account
performed the wrongful act themselves. for the amounts thereof to C. Second, B should pay only half to give
Joint tortfeasors are jointly and severally liable for the torts which effect to the term benefitting A. At the very least, the term suspends
they commit. the demandability of A’s share.
They are those who cooperate in a commission of a thought or who
approve of it after it is done, if done for their benefit. Other examples of Solidary Obligation wherein the debtors and creditors
Also referred to as those who act together in committing wrong or are subject to different terms and conditions are as follows:
whose acts, if independent of each other, unite in causing a single
injury under Article 2194 of the Civil Code. They are solidarily
ILLUSTRATION #16: Solidary Obligation based on Tort
liable for the resulting damage. In other words, joint tortfeasors are
The plaintiff may hold various defendants solidarily liable based on
each liable as principals for the same extent and the same manner as if
tort even if the plaintiff presumes other causes of actions against each
they had performed the wrongful act themselves. Solidarity may exist
of them.
even if the debtors and creditors are subject to different terms and

conditions. In which case, performance by the concerned debtor of
In Lafarge, the Supreme Court held that the fact that the liability
the obligation will be subject to the special terms and conditions.
sought against Continental Cement for specific performance and tort,
while what’s sought against the individual respondents is based solely
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RULES IN CASE OF ACTIVE SOLIDARITY:
on tort DOES NOT negate the solidary nature of their liability for
a) between the solidary creditors or debtor/sand
tortious acts alleged in the counterclaims.
b) between or among the solidary creditors

ILLUSTRATION #17: Solidary Obligation with Different A) As between the solidary creditors or debtor/s the rules in
Terms and Conditions case of active solidarity are as follows:
A sale by a company of its two separate businesses to different parties
does not prevent the solidary obligations of the buyers IF the buyers 1. A debtor may pay the obligation to any solidary
expressly agreed in the purchase contract to be solidarily liable to the creditor.
selling company. Even if the businesses were split between the two
buyers, the buyers will still be solidarily liable for the payment of the For example, if a debtor owes 1 million pesos
price to the seller based on their solidary undertaking. to two solidary creditors, the debtor may pay the
obligation to any or both of the creditors on the due
date.
ILLUSTRATION #__: Solidary Obligation in a Criminal Case
Based on the varying roles of the principal and accused in the 2. If a creditor judicially or extra-judicially demands
commission of the crime, a judgment of conviction in a criminal case payment, the debtor should pay said creditor.
may hold the principal and accomplice solidarily liable to pay the civil
indemnity to the offended party but limits the solidary liability of the The demanding solidary creditor is tacitly the
accomplice only to a certain percentage of the total amount of the representative or agent of the other creditors. In case of
indemnity. several extra-judicial demands by the solidary creditors,
the debtor should pay to the creditor whose demand

the debtor receives first. If the debtor partially pays the
A solidary obligation may be active, passive or mixed. obligation to a solidary creditor and another creditor
A. An act of solidarity allows each creditor to demand subsequently demands payment, the debtor is only
performance liable to pay the balance to the demanding creditor. If
B. A passive solidarity requires each debtor to perform the whole the solidarity is mixed, the other debtors who do not
obligation receive the demand may still pay the other creditors.
C. Mixed solidarity is solidarity on the part of both creditors and
debtors

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3. Any creditor may extinguish the debtor's novation, compensation, remission, or confusion is
obligation by novation, compensation, remission liable to the other creditors for their respective shares.
or confusion.

ILLUSTRATION #18:
A solidary creditor must agree to a novation, A and B are solidary creditors entitled to collect 1 million pesos from
compensation, remission or confusion to release the the debtor. In a separate contract, A owes the debtor 1 million pesos.
debtor from the obligation to any and all solidary By law or by agreement with the debtor, A may offset the debtor’s
creditors. A release and quitclaim by a solidary creditor liability with A’s liability to the debtor. A’s act will bind B but A will
in favor of the debtor binds the other solidary creditors have to pay B’s one-half share in the obligation.
and extinguishes the obligation.
2. A solidary creditor cannot assign his right to a third party
4. A judgment against a solidary creditor can be set without the consent of the other creditors.
up against the other creditors in subsequent
actions unless it is based on a cause personal to the The dated rationale of this rule is the presumed mutual agency or
parties to the prior action. representation of the solidary creditors based on personal qualifications
of each creditor. Accordingly, a solidary creditor does not have to obtain
B) As between or among the solidary creditors the rules are as the consent of the others if the assignment is in favor of a co-creditor.
follows:
3. A creditor who collects the debt should account for it and
1. The rule is mutual representation or agency. Each give the other creditors their respective shares.
solidary creditor may do whatever may be useful
or beneficial to the others.
RULES IN CASE OF PASSIVE SOLIDARITY AS BETWEEN THE
For example: a solidary creditor’s demand on the debtor DEBTORS AND THE CREDITOR/S:
interrupts the period of prescription to file an action
against the debtor and places the debtor in default with The rules are as follows:
respect to all solidary creditors. Each solidary creditor
may also commit prejudicial acts and bind the other 1. Any solidary debtor may pay and extinguish the
creditors subject to the payment by the former of the obligation
latter’s shares adversely affected by the prejudicial acts.
A creditor who has extinguished the obligation by
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For example, the loss or impossibility of prestation without fault or delay
ILLUSTRATION #19: Compromise Agreement
If the creditor sued the solidary debtors and the parties entered into a on the part of any debtor extinguishes the obligation. If any solidary
compromise agreement to settle the creditor’s complaint, the payment debtor caused the loss or impossibility or incurs in delay prior to such
to the creditor of any solidary debtor of the amount due under the loss or impossibility, all solidary debtors are liable for the loss or default.
compromise agreement shall extinguish the cause of action or
entitlement of the creditor against all the solidary debtors. A creditor’s demand on a solidary debtor places all solidary debtors in
default in the payment of the obligation and interrupts the period to file
an action based on the obligation. Of course, the act of or against the
Any creditor can demand payment or performance of the obligation solidary debtors will bind the others only if the solidary obligation
from any or all debtors simultaneously or successively as long as the subsists. If the solidary obligation had been extinguished, for example, by
obligation is unpaid or unfulfilled. The choice to determine against prescription, the debtor can no longer act for and on behalf of the others
whom the collection is enforced belongs to the creditor until the because the extinction of the obligation terminated the mutual agency
obligation is fully satisfied. between and among the solidary debtors.

If different solidary debtors offer to pay, the creditor has the option on 3. In a proper case, the solidary debtor may set up the following
which offer to accept to obtain payment. For example, if one of two defenses:
solidary debtors dies, the creditor has the option whether to proceed
solely against the surviving debtor or take action against the estate of the a. Defenses derived from the nature of the obligation such as
deceased debtor. This is exemplified by the case of Boston v. Court of nonexistence, nullity, unenforceability, and extinction of the
Appeals. obligation or any ground invalidating the original prescription
such as prescription and res judicata.
ILLUSTRATION #20: Promissory Note
A promissory note signed by a solidary debtor made in favor of the b. Defenses personal to himself.
creditor. The creditor may simultaneously proceed against the co For example, a solidary debtor may set up by way of compensation his
debtors or co-makers who agreed to be jointly and severally liable own claim against the creditor.
under the promissory note.
c. Defenses personal to other debtors to the extent of the

obligation of the debtors having such personal defenses.
2. Any act of or against the solidary debtor binds the others
However, a solidary debtor cannot invoke the defenses or benefits

conferred by law only on a specific codebtor. For example, Sec. 18 of RA
10142, a court can stay or suspend an order that shields a debtor under
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rehabilitation against actions of creditors does not extend to the The solidary debtor must have paid the obligation before he could
enforcement of claims against sureties and other persons solidary liable seek reimbursement from the other debtors. The right of
with the debtor. Sureties whose liabilities are solidary cannot, therefore, reimbursement to the paying debtor and the corresponding liability of
claim protection from the rehabilitation court - they are not being the the co-debtors to reimburse will only arise if the solidary debtor who is
financially distressed corporation that may be restored. Not to mention made to answer for an obligation actually delivers payment to the
that the rehabilitation court has no jurisdiction over them. Art. 1216 of creditor.
the Civil Code clearly is not on their side.
Payment which means not only the delivery of money but also the
RULES AMONG SOLIDARY DEBTORS performance in any of the manner of the obligation is the operative fact
which will entitle either of the solidary debtors to seek reimbursement
1. The solidary debtor who paid or performed the obligation can claim for the share which corresponds to each of the other debtors.
reimbursement from the other solidary debtors with their respective

shares with interest for payment of debt already due. If a debtor cannot

pay his share due to insolvency, the other solidary debtor shall pay the
insolvent debtor’s share in proportion to their respective debts. GENERAL RULE:
The paying debtor may recover only the proportionate share of the
other solidary debtors.
ILLUSTRATION of RULE 1: Claiming of Reimbursement

For example, 3 solidary debtors owed Php 150,000 to the creditor. A
EXCEPTION:
solidary debtor paid the Php 150,000 on the due date upon demand
The law or the agreement of the parties provides otherwise.
from the creditor. Assuming the solidary debtors have equal shares in
the obligation, the paying debtor can get reimbursement of Php
50,000 each from the other two debtors. 2. If the creditor completely remits a debt upon the instance of a solidary
debtor such debtor cannot obtain reimbursement from the other
If one of the debtors obliged to reimburse the paying debtor is solidary debtors. If the creditor omits the share only of a specific solidary
insolvent, the paying debtor and the other debtor will pay the share of debtor, such debtor should still reimburse the other debtor who may
the insolvent debtor or Php 25,000 each. Hence, the paying debtor have paid the debt before the remission.
can recover Php 75,000 from the other debtor who is not insolvent,
that is his share of Php 50,000 in the obligation and his proportionate 3. The paying solidary debtor cannot get reimbursement if the payment
payment of the insolvent debtor’s share in the amount of Php 25,000. was made after obligation prescribes or becomes illegal. If the obligation
already ceased to exist due to prescription or legal impossibility, the

solidary debtors could not have been compelled to pay and thus are not
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obligated to reimburse one who paid the creditor. If at all, the recourse
of the paying debtor will be against the creditor.

ILLUSTRATIONS OF THE EXCEPTION: Debtor may recover
more than the proportionate share of other solidary debtors.

a. A company that engages the services of a security agency is solidarily
liable with the Security Agency in the payment of the wages of the
security guards assigned by the latter to the former. If a wage order of
the DOLE directs the security agency to adjust the wages of its security
guards, the security agency may get full reimbursement of the
adjustment actually paid to the security guards from the company.

b. Whilst solidarily liable to the principal debtor accommodated party
in the payment of an obligation under a promissory note. An
accommodation party who pays the obligation may obtain full
reimbursement from the principal debtor accommodated party.

c. A surety who has a solidary liability with the principal debtor is
entitled to full indemnity from the principal debtor under Articles
2066 and 2067 of the Civil Code or as may have been agreed upon by
the principal debtor and the surety.

4. In case of loss or impossibility of the prestation due to the fault of a
solidary debtor or after a solidary debtor incurs in delay, such debtor shall
be liable to the other debtors for damages arising from such fault or
default.

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the prestation, and the physical possibility of performance in parts of
PART THREE: DIVISIBLE AND the prestation.
INDIVISIBLE OBLIGATIONS

In the 2016 case of Lamb v. Kodak, the Supreme Court considered a
An obligation may be divisible or indivisible.
contract for the sale and delivery of the three pieces of equipment as a

single transaction. The Court explained that the seller’s obligation was to
DIVISIBLE OBLIGATIONS
deliver all products purchased under a package and in turn the buyer’s
An obligation is divisible if the prestation is to be performed in parts.
obligation was to pay for the total purchase price payable in installments,
For example, payment in installments of the purchase price of a property
by the buyer. The debtor can validly perform the obligation in parts and
The Court considered the following circumstances to show the intention
the creditor cannot demand a single complete performance.
of the parties to bind themselves to an indivisible obligation:

1. There was only one contract covering all three units of the
INDIVISIBLE OBLIGATIONS
equipment and their accessories
An obligation is indivisible when it cannot be validly performed in parts,
2. The contract specified only one purpose for the buyer which
whatever it may be the nature of the thing which is the object thereof.
was to obtain the three different units from three different
The indivisibility refers to the prestation and not to the object thereof.
outlets
The indivisibility of the contract does not refer to the number of
3. The 19% multiple order discount and the no down payment
obligors. An obigation’s divisibility does not depend on the divisibility of
term stated was applied to all there units, and
the thing which is the object of the obligation or on the number of
4. The contract referred to the equipment package as its subject.
debtors. The obligation may be indivisible even if the subject matter of

the obligation is divisible.
In another case, the Supreme Court considered an insurance contract

indivisible even if it had a divisible object that is a certain number of logs.
The Court held that whether a contract is entire or severable is a question
ILLUSTRATION #1 of intention to be determined by the language employed by the parties.
For example, in a payment of a sum of money or delivery of specific The policy in question shows that the subject-matter insured was the
units of materials, the divisibility of the obligation will depend entire shipment of 2000 cubic meters of Apitong logs. The fact that the
primarily on the intention of the parties, the applicable law governing logs were loaded on two different barges did not make the contract
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several and divisible as to the items insured. The logs on the two barges performance in parts of the prestation, as an exception to the rule on the
were not separately valued or separately insured. Only one premium was integrity of payment. An obligation to do is indivisible unless the parties
paid for the entire shipment, making for only one cause or consideration. agree on the execution of the work based on certain units of measure,
for example, days of work or percentage of completion of works based on
a specific metric. An obligation not to do is indivisible unless the parties
Should the debtor refuse to perform his part of a joint indivisible
agree otherwise, if the character of the prestation allows divisibility. As
obligation, the obligation becomes a divisible obligation for the
explained in the discussion of joint and solidary obligations, an
indemnity of damages.
indivisible obligation with multiple debtors and/or multiple creditors is

presumed joint unless the obligation expressly so states or when the law
The insurance contract must, therefore, be considered indivisible. As a
or the nature of the obligation requires solidarity.
rule, an obligation is indivisible and the debtor cannot perform the

prestation in parts.
Should the debtor refuse to perform his part of a joint indivisible
obligation, the obligation becomes a divisible obligation for the
Rules on the Indivisibility of Obligations: indemnity of damages. The debtor’s default will necessarily prevent the
a. First, the rule on the integrity of payment requires the debtor fulfillment of the obligation that is indivisible upon conversion of the
to completely fulfill the prestation. To pay an obligation, the indivisible obligation to a divisible obligation for damages. The creditor
debtor should completely deliver the thing subject of an can enforce against each joint debtor their respective liabilities or
obligation to give, render the service subject of an obligation participation in the obligation as follows:
to do, and refrain from doing the prohibited act in an
obligation not to do. Unless there is an express stipulation to
How the creditor can enforce liabilities against joint debtors:
that effect, the creditor cannot be compelled partially to
1. The creditor can hold liable a joint debtor who was ready,
receive the prestations in which the obligation consists.
willing, and able to perform his part of the indivisible
Neither may the debtor be required to make partial payments.
obligation only to the extent of his share in the price or
b. Second, by default, any obligation, whether to give, to do or
value of the thing or service which is the object of the
not to do, is indivisible.
obligation. The creditor cannot recover damages from the
non-defaulting debtor based on the act or omission of the
An obligation to give definite things and those which are not susceptible defaulting debtor resulting in the breach of the obligation.
of partial performance shall be deemed to be indivisible. Even if the The obligation, being joint, the non-defaulting debtor does
object of the obligation is physically divisible, the obligation will be not answer for liability of the defaulting debtor.
indivisible unless the parties stipulate or the law authorizes the debtors
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A penal clause entitles the creditor to demand the debtor’s payment of
2. The creditor can hold liable the defaulting joint debtor for his
the indemnity without need of proof of the creditor’s actual damages. It
share in the price of value of the thing or service, which is the
is an exception by stipulation of the parties to the general rule on the
object of the obligation and damages, based on his default or
recovery of actual or compensatory damages that a creditor is entitled to
breach of obligation. The non-defaulting joint debtor may
an adequate compensation only for such pecuniary suffered by him as he
also recover damages from the defaulting debtor.
has duly proved.

In summary, a joint debtor’s default converts an indivisible obligation to As an exception to the general rule on the recovery of losses and damages,
a divisible obligation for damages. a penal clause must be specifically set forth in the obligation. The
New Civil Code refers to penalties stipulated in the contracts and not to
penalties embodied in a judgement. Being a mere accessory undertaking,
the debtor cannot pay the penalty in lieu of the principal obligation.
PART FOUR: OBLIGATIONS WITH A
PENAL CLAUSE ILLUSTRATION #1: Payment of Penalty in a Contract of Sale
For example, in a contract of sale, the seller cannot pay the penalty

instead of conveying the property to the buyer, unless the seller
A penal clause is an accessory undertaking to assume greater liability in
reserves the right to pay the penalty in lieu of the performance of the
case of breach. It is attached to an obligation in order to ensure
obligation. Moreover, the nullity of the penalty as an accessory
performance and it has a double function.
undertaking does not affect the principal obligation.

Functions of a Penal Clause
1) To provide full liquidated damages; and Obligation invalidates the penalty except when:
2) To strengthen the coercive force of the obligation by the threat of 1. The penalty is undertaken by a third person as part of a
greater responsibility in the event of breach. guaranty of an unenforceable, voidable or natural obligation;
or

2. The nullity of the principal obligation is the suspensive
The obligor will then be bound to pay the stipulated indemnity without
condition that gives rise to the penalty.
the necessity of proof of the existence and the measure of damages caused
by the breach. The obligation must clearly ordain the penalty.

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A penalty is different from monetary interest or conventional interest damages and the payment of interests in case of non-compliance. If there
agreed upon by the parties in writing pursuant to Art. 1956 of the Civil is no stipulation to the contrary, the creditor cannot recover from the
Code. debtor any damages other than the penalty in the absence of an
agreement to the contrary.

MONETARY INTEREST The creditor may recover damages on top of the penalty in the
- Payment by the debtor to the creditor for the use or following cases:
forbearance of money.
1. When there is a stipulation to the contrary.

2. When the debtor is sued for refusal to pay the agreed
The parties may validly stipulate in a contract the debtor’s obligation to
penalty.
pay monetary interest on the amount due and pay a separate penalty in
3. When the debtor is guilty of fraud.
case of default. For example, compensatory interest or a fixed amount.

In these cases, the purpose of the penalty is obviously to punish the
Classification of Penalties
debtor for the breach. Hence, the creditor can recover from the
1. subsidiary or alternative
debtor not only the penalty but also the damages resulting from the
a. The penalty replaces the principal obligation in case
non-fulfillment of the principal obligation as part of the contract
of nonperformance
between the parties.
2. joint or cumulative
a. The penalty is in addition to principal obligation in
The penal clause has the force of law between the contracting parties
the absence of a contrary agreement by the parties.
and should be complied with in good faith. The parties may agree on
the penal clause as long as it is not contrary to law, morals, good
THE PENALTY IS ONLY SUBSIDIARY OR ALTERNATIVE customs, public order, or public policy. Although the court may not
The creditor can demand from the debtor either the performance of at liberty ignore the freedom of the parties to agree on such terms
the principal obligation or payment of the penalty. If the creditor opts and conditions as they see fit which contravene neither law nor
for specific performance which becomes impossible, the creditor can morals, good customs, public order, or public policy, the stipulated
demand from the debtor, the payment of the penalty unless the parties penalty, nevertheless, may be equitably reduced by the courts if it is
agree otherwise. The debtor does not have the option of choosing iniquitous or if the principal obligation has been partly or irregularly
whether to perform the obligation or to pay the penalty in obligations complied with under Article 1229 of the Civil Code.
with a penal clause. The penalty shall substitute the indemnity for
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The court may reduce the penalty in any of the following the standing and relationship of the parties, and the like. The
instances: application of which by and large is addressed to the sound
1) The debtor has partially or irregularly performed the discretion of the court.
obligation

2) The penalty is iniquitous or unconscionable

(1) The debtor has partially or irregularly performed the obligation. In
ILLUSTRATION #3: The court reduced the penalty charged.
case of partial or irregular performance, the court should determine
In Rizal Commercial Banking Corporation vs. CA, just an example,
whether the parties fixed the penalty as a means of reparation or
the court has tempered the penalty charges after taking into account
punishment. If it is purely punitive or fixed by the parties without regard
the debtor's pitiful situation and its offer to settle the entire obligation
to anticipated damages in case of breach, the court should strictly impose
with a creditor bank.
the penalty. If the penalty’s purpose is reparation, the court can reduce it
based on partial or irregular performance.
The stipulated unconscionable or iniquitous penalty may be reduced
(2) The penalty is iniquitous or unconscionable. Whether the penalty is when a partial or irregular performance is made by the debtor. The
purely punitive or for reparation, the court can reduce it if it is iniquitous stipulated penalty might even be deleted such as when there has been
or unconscionable. substantial performance in good faith by the obligor when the penalty
clause itself suffers from fatal infirmity or when exceptional
circumstances so exist as to warrant it.

ILLUSTRATION #2: Determination of unreasonable or
iniquitous penalty. ILLUSTRATION #4: Unconscionable Penalty(15,000 /day
For example, a penalty of excessive amount or a penalty which is penalty)
grossly disproportionate to the damages suffered by the creditor. The In the assigned case of Filinvest v. Court of Appeals, the Supreme
question of whether a penalty is reasonable or iniquitous can be Court considered excessive and thus reduced by more than half a
partly subjective and partly objective. Its resolution will depend on penalty of P15,000.00 per day of delay which was imposed on the
such factors as but not necessarily confined to the type, extent, contractor and which had an aggregate amount equal to 32% of the
and purpose of the penalty, the nature of the obligation, the contract price payable to the contractor by the owner of the project.
The Court considered that the contractor had completed almost 95%
mode of breach and its consequences, the supervening realities,
of the project.
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ILLUSTRATION #5: Unconscionable Penalty ( 25% of total
ILLUSTRATION #8: Unconscionable Penalty (10% of the rentals
payable as attorney’s fees)
for the remaining term of the lease)
The Court considered attorney’s fees equal to 25% of the
In the previously assigned case, Pryce v. Pagcor did not enforce a
total amount payable by a credit card holder to the credit card
penalty clause in a lease contract requiring the lessee to pay the rental
company as excessive, however it considered reasonable the
corresponding to the remaining term of the lease should the lessor
12% per annum finance charge and 12% per annum financed terminate the contract based on the lessee’s default or breach.
late payment charge on the unpaid principal amount without
said charges. The lessee, Philippine Amusement and Gaming Corporation,
was unable to continue the lease due to public protests, legal cases and a
directive of the Office of the President of the Philippines. Considering
ILLUSTRATION #6: Unconscionable Penalty
T
he court held that the 3% additional monthly interest payable these circumstances, the Court deemed the forfeiture of the advance
by the debtor under a credit line agreement as exorbitant. It also rental deposits sufficient penalty for the lessee’s breach. The amount of
reduced the liquidated damages from 20% of the total amount due to the deposit was less than 10% of the rentals that would have been paid as
10% and the attorney’s fees from 25% to 5% penalty for the remaining term of the lease.

ILLUSTRATION #7: Unconscionable Penalty (10,000/day
penalty)
PART FIVE: PAYMENT

The court did not completely impose on the contractor a penalty EXTINGUISHING AN OBLIGATION
of P10,000 per day of delay when doing so would subject the
Art. 1231. Obligations are extinguished:
contractor to a penalty exceeding the contract price payable by the
1. By payment or performance;
project owner- the contractor in reducing the penalty the court
2. By the loss of the thing due;
considered the contribution of the project owner to the delay of the 3. By the condonation or remission of the debt;
completion of the project 4. By the confusion or merger of the rights of creditor and
debtor;
5. By compensation;
6. By novation.
Other causes of extinguishment of obligations, such as annulment,
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rescission, fulfillment of a resolutory condition, and prescription, are condition that the easement cannot be used
governed elsewhere in this Code. (Art. 631).

The modes of extinguishing an obligation under Article 1231 are not PAYMENT
exclusive. The Civil Code provides other means of extinguishing an As a mode of extinguishing an obligation, payment means the fulfillment
obligation. of the prestation due under the obligation. It is not limited to the
delivery of money but includes the performance of any obligation to
OTHER MODES OF EXTINGUISHING AN OBLIGATION give, to do, or not to do. A valid payment requires the fulfillment of
1. Waiver of Rights certain requisites to the person paying, the person paid, the prestation
- a creditor may extinguish an obligation by waiving paid, and the manner, time, place, and other particulars of payment.
his rights thereunder
- Rights may be waived unless the waiver is contrary to REQUIREMENTS FOR A VALID PAYMENT
law, public order, public policy, morals or good
customs, or prejudicial to a third person with a right 1. Integrity or completeness of payment
recognized by law (Art. 6). - The debtor must completely fulfill the prestation. One of
2. Obligations with a Resolutory Term the essential ingredients of payment as a mode extinguishing
- a debtor's obligation subject to a resolutory term is obligations is integrity; that is, the payment must be complete
immediately demandable by the creditor, but or full.
terminates upon expiration of the term (Art. 1193). 2. Identity of payment
3. Specific Causes of Extinction under the Civil Code - The debtor must perform exactly the prestation due. The
- These are additional causes of extinction of certain debtor of a thing cannot compel the creditor to receive a
obligations in addition to the ones enumerated in different one, although the latter may be of the same value as
Art. 1231: or more valuable than which is due.
i. a usufruct may be extinguished among

others by the death of the usufructuary
unless a contrary intention clearly appears ILLUSTRATION #1: INVALID PAYMENT
(Art. 603). An agent received from the owner two diamond rings worth P100,000
ii. an easement may be extinguished among each, for a total of P200,000. The agent acknowledged in separate
others by non-user for 10 years or when receipts that she held the rings for sale on commission, and she would
either or both the estates fall into such return the unsold rings upon demand by the owner.
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not forestall the maturity of the obligation and preclude the resort by the
The agent neither sold nor returned the rings to the owner upon
creditor to the legal remedies against the debtor in default, including
demand by the owner. The agent offered to pay in installments the
going after the security for the obligation such as foreclosing the real
price of the two rings or as an alternative, pay P100,000 for one ring,
estate mortgage.
and place the other with another ring.

Can the agent compel the owner to accept the alternative payment
The rule of integrity of payment favors the creditor. The creditor has the
schemes?
option whether to accept a partial payment. While Art. 1248 of the Civil
The owner is not bound to receive either offer of the agent.
Code states that creditors cannot be compelled to accept partial
First, the offer violates the rule on integrity of payment. The agent
payments, it does not prohibit them from accepting such payments.
cannot pay in installments, neither can it return only one of the unsold

rings. The owner is entitled to complete payment. The agent should
either pay in full the price of two rings, or return the rings if both EXCEPTIONS TO THE RULE ON INTEGRITY OF PAYMENT
unsold. (ART. 1234 AND ART. 1235)
Second, the offer to give a substitue ring violates the rule on identity of 1. The debtor’s substantial performance in good faith of the obligation;
payment. 2. The creditor’s waiver of the irregular or incomplete performance of
the obligation.

The agent cannot force the owner to accept a replacement ring. Under
Article 1234. If the obligation has been substantially performed in good
Art. 1240 for the debtor of the thing cannot compel the creditor
faith, the obligor may recover as though there had been a strict and
to receive a different one; although the latter may be of the same value
complete fulfillment, less damages suffered by the obligee.
as or more valuable than that which is due.
Article 1235. When the obligee accepts the performance, knowing its
INTEGRITY OF PAYMENT
incompleteness or irregularity, and without expressing any protest or
The rule on the integrity of payment requires the debtors payment to be
objection the obligation is deemed fully complied with.
complete. To extinguish the obligation, the thing or service in which the

obligation consists should be completely delivered or rendered by the
1. SUBSTANTIAL PERFORMANCE IN GOOD FAITH
debtor, unless there is an express stipulation to that effect. The creditor
[Art. 1234]
cannot be compelled partially to receive the prestation in which the
Substantial Performance means slight or unimportant deviation from
obligation consists; neither may the debtor be required to make partial
the obligation. Good Faith means that the debtor must not have wilfully
payments.
departed from the obligation.

A debtor’s partial payment upon receipt of the creditor’s demand neither
INTERNATIONAL HOTEL v. JOAQUIN
extinguishes the obligation nor prevents default. Partial payment does
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Arts. 1234-1235
Here, the Court discussed the requirement that the debtor should fulfill By reason of the inconsequential nature of the breach or omission, the
to invoke substantial performance as an exception to the rule on integrity law deems the performance as substantial, making it the obligee’s duty to
of payment. pay. The compulsion of the payment is predicated on the substantial
benefit derived by the obligee from the partial performance. Although
In said case, the Court held that the debtors could not claim substantial compelled to pay, the obligee is nonetheless entitled to an allowance for
performance because the debtors did not fulfill their primary obligation the sum required to remedy emissions or defects, and to complete the
of obtaining financing for the creditors hotel project. The Court work agreed upon.
explained that in order for there to be a substantial performance of an
obligation, there must have been an attempt in good faith to perform, Conversely, the principle of substantial performance is inappropriate
without any willful or intentional departure therefrom. when the incomplete performance constitutes the material breach of the
contract. A contractual breach is material if it will adversely affect
The deviation from the obligation must be slight and the omission or the nature of the obligation that the obligor promised to deliver the
defect must be technical and unimportant, and must not pervade the benefits that the obligee expects to receive after full compliance, and the
whole or be so material that the object which the parties intended to extent that the non performance defeated the purposes of the contract.
accomplish in a particular matter is not attained. The nonperformance of Accordingly, for the principle embodied in Article 1234 to apply, the
the material part of the contract will prevent the performance from failure of Joaquin and heirs to comply with their commitments should
amounting to a substantial compliance. not defeat the ultimate purpose of the contract.

The party claiming substantial performance must show that he has There can be no substantial performance if the debtor acted in bad faith.
attempted in good faith to perform his contract, but has through A debtor who deliberately suspended payments to the creditor without
oversight, misunderstanding, or any excusable neglect, fails to completely the creditor’s consent in violation of a contract cannot claim the benefit
perform in certain negligible respects, for which the other party may be of Article 1234 of the Civil Code as the debtor acted with dolo or bad
adequately indemnified by an allowance and deduction from the faith. Even if the debtor substantially performed the obligation in good
contract price or by an award of damages. faith, the debtor may still be liable for damages despite substantial
But a party who knowingly or willfully fails to perform his contract, in performance. For example: For negligence or delay, this is consistent with
any respect or omits to perform a material part of it, cannot be the rule that the debtor who commits an act of fraud, negligence, default,
permitted, under the protection of this rule, to compel the other party. or other contravention of the tenor of the obligation shall be liable for
The trend of more recent decisions is to hold that the percentage of damages.
omitted or irregular performance may, and of itself, be sufficient to show
that there had not been a substantial performance.
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2. WAIVER OF AN IRREGULAR OR INCOMPLETE
per contract. The wording of the receipt constituted an acceptance of
PERFORMANCE BY CREDITOR [Art. 1235]
the incomplete payment, as the fulfillment of the required prestation.
The second exception to the rule on integrity of payment is the creditor’s
2) The creditor waives the irregularity of the debtor’s
waiver of irregular or incomplete performance of the obligation. For the
payment when the creditor accepts delayed payments by the debtor
exception to apply, the creditor must accept the defective performance
without any protest, objection, or reservation.
with actual knowledge of its incompleteness or irregularity. Receipt of
3) The seller waives his right to collect additional charges from
payment does not necessarily mean acceptance.
the buyer when the seller accepts installment payments from the buyer

without any protest of irregularity of the payments or a specific
The verb ‘accepts’ as used in Article 1235 means to take a satisfactory or
demand for said charges.
sufficient, or to give assent to, or to agree or accede to an incomplete or
4) In the assigned case of Manila International v. Ding
irregular performance.
Vellayo, the lessor was deemed to have waived the incomplete

performance by the lessee when the lessor did not register any protest
From Hard Notes: You have to distinguish between an acceptance and a
or objection to the alleged incompleteness of or irregularity in the
receipt. So, let say, there is a receipt, “Received x amount.” That may be
performance by the lessee of its obligation to build and develop
equivocal. So for good measure, the creditor states, “Received x amount
improvements on the leased property.
in partial payment for…” Which means the creditor makes a reservation
for the full payment. The worst a creditor can do is state, “Received x
amount in fulfillment of a contract,” because that will be considered a IDENTITY OF PAYMENT
waiver. It shows that the creditor knows it is incomplete but still The rule on identity of payment requires the debtor to pay the exact
accepted it as if it were payment. prestation due the creditor. The debtor cannot force a creditor to receive
Take note the requisites of a waiver: a prestation different from the one mandated by the obligation, even if
(1) Existence of a valid right; and the other prestation is more valuable than the one that is due.
(2) Information from the parties
ILLUSTRATION #3: EXAMPLES OF IDENTITY OF
ILLUSTRATION #2: EXAMPLES OF A CREDITOR’S PAYMENT
ACCEPTANCE OF AN IRREGULAR OR INCOMPLETE 1) An airline company cannot force an upgrade to first-class
PAYMENT of a passenger in business class.
1) After receiving an incomplete payment from the lessee, the 2) A creditor may validly reject a payment in kind by the
lessor issued a receipt stating that the payment was for the rental due as debtor of a monetary obligation.

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Who has the burden of proof of a proper payment? ILLUSTRATION #6: SALE OF CAR WITH NO
The debtor has the burden of proof of a proper payment. STIPULATION OF PAYMENT IN CONTRACT
For example, the seller is obligated to deliver a specific car to the buyer

on the given due date pursuant to a contract of sale.
ILLUSTRATION #4: PROPER PAYMENT In the absence of a stipulation in the contract of sale of the place of the
For example, a debtor can prove the payment of a monetary obligation delivery, the delivery shall be where the car may be at the time of the
by the check issued to and encashed by the creditor. An execution of the contract of sale. In any other case, the debtor pays in
acknowledgement receipt signed by the creditor or a waiver executed the place of his domicile.
by the creditor in exchange for the full payment.

DOMICILE OF A NATURAL PERSON
Where does the debtor pay? -is his or her place of habitual residence.
The debtor pays in the place designated in the obligation.
DOMICILE OF A JURIDICAL PERSON
In Hard Notes: The default rule will depend on what kind of obligation -in the absence of a special provision of law, is the place where
you are dealing with. If it’s a monetary obligation, the default rule will be its legal representation is established or where it exercises its
the domicile of the debtor. So, if you are the creditor, it is in your best principal functions.
interest to stipulate the place of payment. Or if it is an obligation to give
a determinate thing, then you have to know where the thing is or was
ILLUSTRATION #7: COLLECTION OF PAYMENT
during the time of the constitution of the obligation.
For example, in the absence of a contrary agreement, a lender should

collect the amount due and payable by an individual borrower at his or
ILLUSTRATION #5: STIPULATION OF PAYMENT her residence. The debtor generally shoulders the extra judicial
For example, the loan contract between the lender and the borrower expenses of payment. These expenses do not include expenses of the
may provide that the borrower shall pay the amount due on maturity creditor in collecting the debt at the debtor’s domicile. If the debtor
date at the office of the lender without need of any notice or demand changes his domicile in bad faith or incurs in delay, he shoulders the
from the lender. additional expenses of payment resulting therefrom. The Rules of
If there is no such stipulation, and the obligation is to deliver a Court govern judicial costs.
determinate thing, the debtor should pay at the place where the thing

might be at the time of constitution of the obligation.

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Who should pay the obligation? pays to the wrong person, he assumes the loss and burden of
As a rule, the debtor himself should pay the creditor. A recovering the erroneous payment.
creditor can refuse payment by a third person. A valid A debtor should pay to a capacitated creditor. If the creditor
payment requires the paying debtor or third person to have is incapacitate to administer his property, the debtor should
the capacity to alienate his property without prejudice to Art. pay to his legal representative or by consignation. If the
1427. If a creditor accepts payment from a third person, the debtor pays to an incapacitated creditor, the payment is valid
obligation is extinguished. only if the creditor retains or benefits from the payment.

The following rules govern the rights of the third person: BENEFIT
1. He can recover the payment from the debtor. means intelligent, judicious, and reasonable use of the
2. If he pays without the knowledge or against the will of the payment for purposes useful or necessary to the creditor. For
debtor, he can recover only to the extent the payment example - use which his legal representative would or could
benefited the debtor and subject to defenses which the debtor have made.
has against the creditor. He does not assume the rights of the

creditor by subrogation.
3. If he does not intend to get reimbursement, the payment is a A debtor cannot validly pay the creditor when the court
donation requiring the debtor’s acceptance. With or without orders him to retain the debt.
the acceptance, the payment is valid to the creditor.
ILLUSTRATION #8 : Benefit Example
From Hard Notes: Subrogation is “when the third party, by paying the The court ordered the attachment or garnishment of said payment. If
creditor, with the knowledge or consent of the debtor, will acquire the the debtor pays to a third person, the payment is valid to the extent of
right of the creditor. the creditor’s benefit.

To whom should the payment be made?
Such benefit is presumed in the following instances:
A valid payment requires the debtor to pay to the creditor or
1. The third person later requires the credits
his authorized representative or assignee. A debtor’s payment
2. The creditor ratifies the payment
in good faith to the holder of credit is also valid. If the debtor
3. The creditor's conduct led the debtor to believe that a person
has authority to accept payment.
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The buyer paid the seller P100,000 pursuant to a contract of sale. The

seller assigned the receivable to a third party without notice to the
buyer. If the buyer paid the seller after the assignment of the receivable
but without receiving notice of said assignment, the payment will be
ILLUSTRATION #9 : The Third Person Later Requires the valid.
Credits
The creditor paid the P100,000 due and payable to the debtor to a
third party. If the debtor subsequently assigns the receivable to said ILLUSTRATION #12 : The debtor pays in good faith to the
third party, the payment is deemed to have benefited the creditor who possessor of the credits
would then be the third party. The debtor pays the debt payable to the bearer of the promissory note
payable to bearer.

ILLUSTRATION #10: The Creditor’s Conduct Led The
Debtor to Believe that a Person Has Authority to Accept ILLUSTRATION #13: The creditor’s fault caused the payment
Payment to a third person
The debtor regularly paid amounts due to the creditor to the creditor’s The creditor’s actions or omissions led the debtor to pay the wrong
residence through the creditor’s domestic help with the acquiescence person.
of the creditor. The creditor would be estopped from later assailing the

authority of the domestic help to accept the payment.

How should payment of a monetary obligation be made?
Payment to a Third Person Releases the Debtor in the - In an obligation to pay money, for example, a payment of a
Following Instances: loan obligation or a payment of the price of the property sold,
1. The debtor pays the creditor after assignment of the credit, the debtor should pay in the currency that is legal tender in
without notice to the debtor the Philippines.
2. The debtor pays in good faith to the possessor of the credits What constitutes legal tender?
3. The creditor’s fault caused the payment to a third person - Under Sec. 52 of Republic Act No. 7653, all notes and coins
issued by the Bangko Sentral should be fully guaranteed by
the government of the Republic of the Philippines and shall
ILLUSTRATION #11 : The debtor pays the creditor after
be legal tender in the Philippines for all debts, both public
assignment of the credit without instances
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own account. Checks, including cashier’s or manager’s checks, are not
and private, provided however, that unless otherwise fixed by
legal tender.
their monetary board, coins shall be legal tender in amounts

not exceeding 50 pesos for denominations of 25 centavos and
above, and in amounts not exceeding 20 pesos for Section 60 of Republic Act 7653 states that checks representing
denominations of 10 centavos or less. demand deposits do not have legal tender power in their acceptance in
the payment of debts.

Both public and private is of the option of the debtor provided however
BSP Circular No. 537 adjusted the legal tender power of coins
that a check which has been cleared and credited to the account of the
as follows:
creditor shall be equivalent to the delivery to the creditor of cash in an
1. 1 peso, 5 peso and, 10 peso coins are legal tender up to 1,000
amount equal to the amount credited to his account. In the assigned case
pesos
of Tibajia v. CA, the SC held that a check whether a manager’s or
2. 1 centavo, 5 centavo, 10 centavo, and 25 centavo coins are
ordinary check is not legal tender and an offer of a check in payment of
legal tender up to 100 pesos.
the debtee is not a valid tender of payment and may be refused receipt by
the obligee or creditor.
Hence, a creditor legally can refuse payment of coins exceeding the legal
tender thresholds. For example, a debtor tenders payment of 100,000 In the 2011 case of Hally v. Printwell the court held that a check is not
pesos to the creditor in coins. The payment is not valid and the creditor a legal tender and therefore cannot constitute a valid tender of payment.
can reject the payment, which is practically cumbersome to handle. Since a negotiable instrument is only a substitute for money and not
money, the delivery of such an instrument does not by itself operate as
payment. Mere delivery of checks do not discharge the obligation under a
Of course, the parties may stipulate the currency in which the monetary
judgement. The obligation is not extinguished and remains suspended
obligation should be paid. With the repeal of the Uniform Currency
until the payment by commercial document is actually realized.
Act, the parties can stipulate payment in any currency. If the parties

agreed on the currency to be paid, the debtor shall pay in the currency
However, the Supreme Court considered payment by manager’s or
stipulated. And if it is not possible to deliver such currency, then in the
cashier’s check a valid payment in a number of cases. In the assigned
currency which is legal tender in the Philippines.
case of New Pacific, the Court held that it is a well known and accepted

practice in the business sector that a cashier’s check is deemed as cash.
Is a cashier’s or manager’s check issued by a Philippine bank legal tender?
Moreover, since the said check had been certified by the drawee bank, the
A cashier’s or a manager’s check is a check drawn by a bank against its
funds represented by the check are transferred from the credit of the
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maker to that of the payee or holder. And for all intents and purposes, Inflation is the decrease in the purchasing power of the currency based
the latter becomes the depositor of the drawee bank, with rights and on a certain index, usually the consumer price index, as defined by the
duties of one in such a situation where a check is certified by the bank on Philippine Statistic Authority. The consumer price index is an indicator
which it is drawn. The certification is equivalent to acceptance. Said of the change in the average retail price of a fixed basket of goods and
certification implies that the check is drawn upon sufficient funds in the services commonly purchased by households relative to a base year.
hands of the drawee, that they have been set apart for its satisfaction, that
they shall be so applied whenever the check is presented for payment. It is ILLUSTRATION#14: Inflation Example
an understanding that the check is good and shall continue to be good, A hypothetical example will be 100 M pesos could buy you a basket of
and that this agreement is as binding on the bank as its notes in goods on year 1. On year 2, you will need 105 M pesos to buy the same
circulation, a certificate of deposit payable to the order of the depositor, basket of goods. In such case, the inflation rate is 5%.
or any other obligation it can assume. The object of certifying a check as

regards to both parties is to enable the holder to use it as money when the
On the other hand, deflation is the increase in the purchasing power of
holder procures the check to be certified. The check operates as an
the currency based on a given index. Deflation occurs when the inflation
assignment of a part of the funds to the creditors.
rate falls below zero.

EXTRAORDINARY INFLATION AND
EXTRAORDINARY DEFLATION ILLUSTRATION#15: Deflation Example
For example, 100 pesos could buy you a basket of goods on year 1. On

year 2, you will need 98 pesos to buy the same basket of goods. In such
Art. 1250. In case an extraordinary inflation or deflation of the case, the deflation rate is 2% or an inflation rate of -2%.
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. As will be explained later, Art. 1250 contemplates an exceptionally
abnormal inflation or deflation. To better understand Art. 1250, one

has to appreciate the time value of money, that is the same amount of
Art. 1250 provides that in case of extraordinary inflation or money now is more valuable than the same amount sometime in the
deflation of the stipulated currency of payment, the value of the future.
currency at the time of the establishment of the obligation shall
be the basis of payment unless the parties agree otherwise.
ILLUSTRATION#16: Purpose of Charging Interest
For example, a lender lending a borrower 1 million pesos payable one
year after without any interest is actually lending at a loss. The lender is
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foregoing the present use of money without any compensation. Based on the definition, what constitutes extraordinary inflation or
Therefore, that is the reason why a lender usually charges interest. The deflation, Article 1250 is pretty much a dead l aw.
borrower’s payment of interest compensates the lender for the use of

money and the possible depreciation of the value of the principal.
Q: Why is Article 1250 practically a dead law?
First, jurisprudence established a very strict standard for extraordinary
inflation and correspondingly, extraordinary deflation. Philippine
ILLUSTRATIONS #17: EXTRAORDINARY DEFLATION
jurisprudence set the rapid deterioration of the Deutsche/German mark
To further illustrate, assume that when the lender lent Php 1 million
in the 1920s as the benchmark. The Supreme Court held, in the 1920s,
to the borrower, Php 1 million could purchase a one-hectare
Germany experienced a case of hyperinflation. In early 1921, the value of
agricultural land in a certain province. Prior to the payment date, the
the German mark was 4.2 to the US dollar. By May of the same year, it
value of the peso will likely depreciate so that the Php 1 million on
had stumbled 262 to the US dollar and as prices went up rapidly so that
the due date cannot purchase the same agricultural land; rather, a
by October 1923, it had reached 4.2 trillion to the US dollar. As reported
buyer of said land will need Php 1,100,000 to purchase it.
prices were going up every week then every day then every hour. Women

were paid several times a day so that they could rush out and exchange
If we use the land as the gauge of the pesos value, Php1,100,000 on the
their money for something of value before what little purchasing power
payment date is the equivalent of Php1,000,000 on the date of release
was left dissolved in their hands. Some workers tried to beat the
of the loan proceeds.
constantly rising prices by throwing their money out of the windows to

their waiting wives who would rush to unload the nearly worthless
Accordingly, the lender should charge interest of at least 10% per year
paper. A postage stamp could cost millions of marks and a loaf of bread
or Php100,000 to compensate the lender for the borrower’s use of the
billions.
money for a year.

Second, for extraordinary inflation or deflation to effect an obligation the
Under Article 1250, if an extraordinary inflation or deflation occurs following requisites must be proven:
between the constitution of the monetary obligation and its payment,
the value of the stipulated currency at the time of the constitution of the
Requisites for extraordinary inflation or deflation to affect
obligation shall be the basis of the payment.
obligation

1) An official declaration of the Bangko Sentral ng Pilipinas
HOW RELEVANT IS ARTICLE 1250? (BSP) of an extraordinary inflation or deflation;
2) the obligation is contractual in nature; and
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3) the parties expressly agreed to take into consideration the A debtor owes a creditor under two separate promissory notes with
effects of the extraordinary inflation or deflation the following due and demandable amounts:
(1) P100,000 including the accrued interest rate of 3% per
annum
Application of Payment
Application of payment is the designation of the debt which is being (2) another P100,000 including the accrued interest rate of 6%
paid by the debtor with several obligations of the same kind in favor of per annum.
the creditor.
If the debtor tenders payment of P100,000 to the creditor, the debtor
The rules on application of payment are set forth in Articles 1252, 1253, can direct the creditor to apply the payment of the P100,000 including
and 1254 of the Civil Code. The Civil Code applies only if the debtor accrued interest of the higher interest rate of 6% per annum. If the
has several obligations of the same kind to the creditor. These obligations creditor fails to apply the payments directed by the debtor, the creditor
should be due and demandable unless the parties agree or the party who incurs in delay or in mora accipiendi. The debtor will not be subject to
has the benefit of the term suspending the demandability of the any penalty charge based on default but must validly consign the
obligation consents. payment in court to complete the payment.

The rules on application of payment ought to be applied in the
What if the P100,000 including an accrued interest rate of 6% per
following order: the debtor shall choose how the creditor should
annum is not yet due? May the debtor compel the creditor to
apply the payment subject always to the rights of the creditor,
apply the payment of said debt in such case?
the debtor may identify the debt that should be paid,

PROVIDED that the debtor fulfills the requirements of a valid
The debtor cannot force the creditor to apply the payment to said debt
payment.
that is not yet due. Unless there is a contrary stipulation, the term for the
said debt is for the benefit of both parties. Unless the creditor waives the
benefit of the term, the debtor cannot choose to apply the payment to
said debt that is not yet due.
ILLUSTRATION #18: APPLICATION OF PAYMENT
ILLUSTRATION #19: APPLICATION OF PAYMENT

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must be promptly exercised lest such right passes to the creditor. The
A debtor owes a creditor under two separate promissory notes the
debtor's right to apply payment is not mandatory. This is clear form the
following amounts:
use of the word rather than word “shall” in the provision which reads “he
who has various debts of the same kind in favor of one and the same
(1) P100,000 including accrued interest rate of 3% per annum creditor may declare at the time of making the payment to which of the
same must be applied”. Indeed the debtor’s right to apply payment has
(2) P200,000 earning interest at the rate of 6% per annum. been considered merely directory and not mandatory.

If the debtor tenders payment of P100,000 to the creditor, the debtor Following the Court’s earlier pronouncement that the ordinary
cannot compel the creditor to apply a part of the payment to the acceptation of the terms may be resorted to as guides in ascertaining the
mandatory or directory character of statutory provisions.
P200,000 debt turning interest at the rate of 6% per annum. T
he
debtor cannot do so because the payment will violate the rule on
integrity or completeness of payment.
Article 1252 gives the right to the debtor to choose which of several
obligations to apply a particular payment that he tenders to the creditor.
2. The debtor does not exercise the right at the time of payment, the But likewise granted in the same provision is the right of the creditor to
creditor can apply the payment but with the consent of the debtor. apply such payment in case the debtor fails to direct its application. This
is obvious in Article 1252, paragraph 2 viz.: if the debtor accepts from
the creditor a receipt in which an application of payment is made,
ILLUSTRATION #20: BY ISSUING A RECEIPT the former cannot complain of the same.
If the debtor accepts from the creditor a receipt in which an

application of the payment is made, the former cannot complain to
the same, unless there is a cause for invalidating the contract. It is the directory nature of this right and the subsidiary right of the
Accordingly, the debtor may contest the application of payment by creditor to apply payments when the debtor does not elect to do so that
the creditor if the debtor's consent was vitiated by mistake, violence, makes this right like any other rights waivable.
fraud, intimidation or similar acts. The right of the debtor to apply Rights may be waived unless the waiver is contrary to law, public order,
payment is merely directory and must be promptly exercised. public policy, morals, or good customs or prejudicial to a third person
Otherwise, the debtor may be deemed to have waived such right and with a right recognized by law.
the creditor can choose how to apply the payment.
A debtor in making a voluntary payment may, at the time of
In the case of Tan v. China Bank, the Supreme Court held that the payment, direct an application of it to whatever account he
right of the debtor to apply payment is merely directory in nature and chooses unless he has assigned or waived that right. If the debtor
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does not do so, the right passes to the creditor who may make the
application for the debtor. But if neither party has exercised its option, Moreover, the dation in payment should be in writing to fulfill the
the Court will apply the payment according to the justice and equity of formal requirement for enforceability of a sale of a real property. A
the case taking into consideration all its circumstances. dation in payment extinguishes the obligation to the extent of the value
of the thing delivered as the parties may agree upon or approve, unless
Third, if neither the debtor nor the creditor exercised the right to apply the parties expressly or implicitly agreed or by their silence consider the
the payment in the order provided above, the application of payments thing to be the equivalent, and so extinguishes it.
shall be made by operation of law as follows:
A. If the debts are interest bearing obligations, the payment is CESSION
applied first to the accrued interests including conventional or monetary - contractual agreement whereby the debtor cedes or transfers
and penal interests. possession and control of all his properties or assets to his
B. After covering all accrued interests, the excess shall be applied creditors and authorizes them to liquidate said property or assets
and apply their proceeds to pay the debtor’s obligations. As a
to the principal of the most onerous debt.
contractual arrangement, the creditor necessarily must accept or
agree to the cession, as contemplated under Art. 1255 of the
If the debts are of the same nature and burden, the interest shall apply to Civil Code

all of them proportionately
DACION EN PAGO Cession does not convey ownership of the debtor’s assets to the
- the debtor’s delivery and conveyance of a thing to the creditor as creditors, it grants the creditors only the right to sell or liquidate the
an accepted equivalent of the performance of an obligation. It is assets and apply the proceeds in payment of the obligations.
actually a novation by change of the object
ILLUSTRATION#21: DACION EN PAGO
with the agreement of the lender, a borrower may pay a 5M loan
obligation by conveying a certain condominium unit. The debtor Cession will not result in the extinction of all the debts unless
conveying a condominium unit in payment of a 5M loan obligation the debtors and creditors agree otherwise. Unlike in Dacion En Payment,
provides the implied warranties by operation of law, that is a warranty no implicit agreement by the debtor and creditor to extinguish
against eviction and hidden defects obligations may be inferred in cession. Unless the debtor and creditors
agree otherwise, the debtor does not get any additional benefit in cession.
The debtor’s obligations will be extinguished only to the extent of the
Dation in payment of a monetary obligation is governed by the Law
proceeds of the liquidation of the debtor’s assets by the creditors; hence
on Sales.
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the debtor would be better off in availing of the remedies under laws dacion en payment, the debtor conveys ownership of a property
protecting a debtor in financial distress. to the creditor in payment of a debt.
(b) In cession, the obligations are extinguished only to the extent of
the proceeds in the absence of a contrary agreement between the
ILLUSTRATION #22: INSOLVENT DEBTOR FILING FOR
ACTION TO BE DISCHARGED OF HIS OBLIGATIONS debtor and the creditor. In dacion en payment, the obligation is
For example, an insolvent individual debtor, that is an individual extinguished to the extent of the value of the thing delivered as
whose assets are insufficient to cover all liabilities, may file an action to the parties may agree upon or prove unless the parties expressly
be discharged from all his obligations pursuant to the Financial or implicitly agree to the complete extinction of the obligation.
Rehabilitation and Insolvency Act. Said action would require the (c) Cession covers all assets of the debtor, while dacion en payment
insolvent individual debtor to cede all his assets as a usually involves some but not all assets of the debtor.
requirement of the action but will in exchange get a complete (d) As contemplated by law, cession is in favor of all creditors of the
extinction of all his liabilities without need of getting the debtor while dacion en payment is between the debtor and a
consent of the creditors. specific creditor or creditors.

Cession and Dacion En Payment Distinguished

Cession is different from Dacion En Payment as follows:
(a) In cession, the debtor authorizes only the creditors to sell all the PART SIX: CONSIGNATION
debtors assets and apply the proceeds in payment of the debt. In
CONSIGNATION
(5) When the title of the obligation has been lost.
Art. 1256.If the creditor to whom tender of payment has been made
refuses without just cause to accept it, the debtor shall be released from
Consignation is the debtor's deposit of the object of the obligation with
responsibility by the consignation of the thing or sum due.
the competent court through the appropriate judicial action after the

Consignation alone shall produce the same effect in the following creditor has refused the debtor's tender of payment or under
cases: circumstances rendering tender of payment to the creditor impracticable
(1) When the creditor is absent or unknown, or does not appear at the or inadvisable.
place of payment;
(2) When he is incapacitated to receive the payment at the time it is A valid consignation extinguishes an obligation. When a creditor
due; refused the debtor's tender of payment or when tender of payment
(3) When, without just cause, he refuses to give a receipt; is excused, the law allows the debtor's consignation of the thing or the
(4) When two or more persons claim the same right to collect;
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sum due in court to complete the payment. Tender and consignation
of the obligation of the consignation prior thereto; ( there
have the effect of payment. must be first or prior notice)
4. The debtor places the amount or thing due at the disposal of
As by consignation, the thing due is deposited and placed at the disposal the court; and
of the judicial authorities for the creditor to collect. Consignation is the 5. After the consignation has been made, the persons interested
act of depositing the thing due with the court or judicial authorities are notified thereof.
whenever the creditor cannot accept or refuses to accept payment. It
generally requires a prior tender of payment. TENDER OF PAYMENT
Tender of payment is the manifestation by the debtor to the creditor of
WHEN CONSIGNATION ALONE IS SUFFICIENT his desire to comply with his obligation with the offer of immediate
Under Article 1256 of the Civil Code, consignation alone is sufficient compliance. It does not extinguish an obligation, unless the creditor
even withouttender of payment in any of the following instances: accepts the tendered payment.
1. When the creditor is absent or unknown or does not appear at - In other words, tender of payment is the definitive act
the place of payment; offering the credit to what is due to him or her together
2. When he is incapacitated to receive the payment at the time it with the demand that the creditor accept the same.
is due; - More importantly, there must be a fusion of intent, ability and
3. When, without just cause, he refuses to give a receipt; capability to make good such offer which must be absolute and
4. When two or more persons claim the same right to collect; must cover the amount due. Practically speaking, tender of
and; payment is the debtor’s showing and handling the actual
5. When the title of the obligation has been lost. payment to the creditor. Short of this, there is no valid tender of
payment. For example, our letter stating the debtors willingness
In these instances, tender of payment is impracticable or inadvisable. and readiness to pay without being accompanied by the
payment is not tender of payment.
For consignation to be valid, the debtor must strictly comply with the

following mandatory requirements under the law.
COMPARISON OF TENDER OF PAYMENT AND
REQUIREMENTS OF A VALID CONSIGNATION CONSIGNATION
1. There is a debt due; Tender of payment must be distinguished from consignation. Tender is
2. The debtor has made valid tender of payment that the the antecedent of consignation. The act preparatory to the consignation
creditor unjustifiably rejects or tender of payment is excused which is the principle, and from which are derived the immediate
under Article 1256;
consequences which the debtor desires or seeks to obtain. Tender of
3. The debtor notifies the persons interested in the performance
payment may be extrajudicial while consignation is necessarily judicial.
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And the priority of the first is the attempt to make a private settlement
before proceeding ro the solemnities of consignation. 1) A Vendee’s tender of payment within the period stated in the contract
of conditional sale preserves his right thereunder.
This distinction of payment and consignation is illustrated in the
assigned case of State Investment House, Inc. v CA (G.R. No. 2)In the assigned case of Legaspi v Court of Appeals (G.R. No.
90676). In said case, the debtor tendered payment which the creditor L-45510), a vendor with a right to repurchase preserves said right when
unjustifiably rejected but the debtor did not follow through with the vendor tendered payment to the vendee within the period to
consignation. The court held that the debtor did not default in light of repurchase.
the tender of payment, and so was not liable to pay the penalty based on
- Consignation is not required to preserve the right to repurchase
default. The creditor was in Mora Accipiendi, however, the debtor
as a mere tender of payment is enough, if made on time, as the
continued to be liable to pay the principal and the stipulated interest
basis for an action to compel a vendee to resell the property.
thereon because there was no valid payment through consignation.
- In Hard Notes: Tender of payment within the period would

be sufficient to preserve the right to repurchase as per
In Hard Notes: In a loan, for example - the obligation is to pay principal
contract. What is crucial would be the tender of payment
plus interest, and penalty. The penalty is based on default. That is the
within the repurchase peruod.
general rule. In this case of State Investment, when borrower tendered
payment, but lender refuses to accept payment, there was no default to
In certain cases, the right may be preserved even without the tender of
trigger the penalty. However, since there was no consignation, the
payment. In the assigned case of Hulganza v CA (G.R. No.
obligation was not yet extinguished. Therefore, the principal should be
L-56196),, a judicial action to redeem preserves the right of redemption
paid as well as the interest. Tender of payment is not payment. To
even without tender of payment or consignation.
complete payment, if refused by creditor, there should be consignation.
- In Hard Notes: No tender of payment even within the period to
PRESERVATION OF RIGHT OR ENTITLEMENT OF A redeem a property pursuant to Public Land Act. Within that
PERSON period, instead of tender of payment, what the person entitled
While mere tender of payment does not extinguish an obligation, it may to redeem did was to file an action in court. No tender of
be sufficient to p reserve a right or entitlement of a person. payment, but instead, an action to compel the owner to allow
redemption. SC said: action was enough to preserve the right to
Although tender of payment per se does not extinguish an obligation, it redeem. In fact, tender of payment was not needed.
is sufficient to preserve a legal right in certain instances. These instances
involve an exercise of a right or privilege and not payment of an The assigned case of Heirs of Bacus v CA (G.R. No. 127695)
obligation. Examples are: illustrates an instance where neither tender of payment, nor consignation
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is necessary to preserve a right. The case involves an Option Contract
Art. 1256 enumerates the exclusive instances when the debtor need
that is a contract whereby the holder of the option had the right to
not tender payment due to the impossibility or inadvisability of such
purchase the property at a given price within the stipulated period.
action. The debtor must prove prior tender of payment or an
exception from said requirement for a valid consignation.
The court held that in an option contract, mere notice of an intent to
exercise the option is sufficient to preserve the option. There is no need
to tender payment or consign said payment. In the 2014 case of Del Carmen, the Supreme Court reiterated the
exclusivity of instances excusing tender of payment as a requisite for
The court explained: obligations under an option to buy are reciprocal consignation as follows.
obligations. The performance of one obligation is conditioned on the
simultaneous fulfilment of the other obligation. In other words, in an
EXCEPTIONS FROM PRIOR TENDER OF PAYMENT
option to buy, the payment of the purchase price by the creditor is
Under art 1256, the only instances where prior tender of payment is
contingent upon the execution and delivery of a deed of sale by the
excused are:
debtor. In this case, when the option holders opted to buy the property,
1. When the creditor is absent or unknown or does not appear at
their obligation was to advise the owners of their decision and their
the place of payment;
readiness to pay the price. They were not yet obliged to make actual
2. When the creditor is incapacitated to receive the payment at
payment. Only upon the owners actual execution and delivery of the
the time it is due;
deed of the sale were the option owners required to pay. As early as
3. When without just cause, the creditor refuses to give receipt;
stated, the latter was contingent upon the former.
4. When two or more persons claim the same right to collect;
In Knights v Court of Appeals, we held that notice of the creditors and
decision to exercise his option to buy need not be coupled with actual 5. When the title of the obligation has been lost.
payment of the price, so long as this is delivered to the owner of the None of these instances are present in the instance case. Hence, the fact
property upon performance of his part of the agreement. Consequently, that the subject lots are in danger of being foreclosed does not excuse
since the obligation was not yet due, consignation in court of the petitioner and her co-heirs from tendering payment to respondents as
purchase price was not yet required. directed by the court.

As mentioned previously, tender of payment is a prerequisite of
The requirements of consignation are mandatory.
consignation.
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REQUIREMENTS FOR A VALID CONSIGNATION 5. After the consignation, the debtor notifies the creditor of
A valid consignation requires the debtor to comply with all legal such fact. For example: By causing the service of summons
requirements, to wit: and copy of the complaint on the defendant creditor. This
1. There is a debt due. notice allows the creditor to withdraw the payment and
a. For example, consignation is not proper as required if prevent his suffering the risk and deterioration, depreciation,
a party has the right to cancel the contract by the or loss of the deposited thing or amount due to lack of
paying the other party a certain amount. The knowledge of the consignation.
amount payable is not a debt, but a consideration for
The law mandates the debtor’s strict compliance with requirements of a
the exercise of the right.
valid consignation because the creditor bears the expenses of a proper
2. The debtor consigns the obligation because the creditor
consignation.
unjustifiably refuses tender of payment or other causes

mentioned in Art. 1256. For example, the creditor is absent or
The debtor’s compliance with the requisites of consignation affords the
incapacitated or several persons claim to be entitled to receive
creditor the opportunity to stop the accrual of said expenses by accepting
the amount due.
the offered payment. For example, upon the tender of payment or after
receiving the first or second notice from the debtor.
A creditor can refuse the tender of payment if it does not meet the legal
or contractual requisites of a valid payment. For example, unconditional
When does consignation extinguishes an obligation:
payment or identity or integrity of payment.
1. Upon the creditor’s acceptance of the consignation; or

2. If the creditor objects, upon judicial declaration of its validity
3. The debtor previously notifies the creditor of the intended and legality.
consignation. The purpose of the notice is to give the creditor

an opportunity to reconsider his unjustified refusal and to
The effects of consignation retroacts to the time the debtor deposits or
accept payment thereby avoiding consignation and the
places the thing or payment at the disposal of the court. For example, no
subsequent litigation.
interest accrues after the consignation.

Before the creditor’s acceptance of the consignation or the judicial
4. The debtor places the amount or thing due at the disposal of
declaration of its validity and legality, the debtor, at his own expense, can
the court. The object of consignation may be personal
unilaterally withdraw the thing or amount deposited in court.
property and real property.

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In an obligation to give a generic thing, there can be no loss extinguishing
Under Art. 1260 the debtor may withdraw as a matter of right
the obligation unless the parties previously delimited the generic thing, in
the thing or amount deposited on consignation in the following
which case it becomes determinate, or the entire class becomes legally or
instances:
physically impossible to deliver.
1. Before the creditor has accepted the consignation; OR
2. Before a judicial declaration that the consideration has been
properly made. LOSS IN OBLIGATION TO DO
After the creditor’s acceptance of the consignation or the judicial In an obligation to do, loss of the prestation means legal or physical
declaration of its validity and legality, the debtor may withdraw the impossibility of performing the required act. Loss of the object
consigned payment only with the consent of the creditor. In which extinguishes the obligation only if the debtor is without fault and not in
case, the obligation subsists but the creditor loses any preferential right default. For example, the loss was due to a fortuitous event. The debtor
over the thing or amount withdrawn. and the creditor, however, may have a cause of action against the persons
causing the loss.
As a practical matter, the creditor should accept the consignation to

prevent the debtor’s withdrawal of the thing or amount deposited in
In reciprocal obligations, the debtor, with regard to the lost object,
court. If the creditor has issues with the consignation, the creditor may
bears the loss and must return anything received from the creditor. In
accept the consignation with reservations or qualifications: for
case of partial loss, when the debtor is without fault or not in default, the
example, as to the completeness of the consigned payment or the validity
court determines if loss is important and so, extinguishes the obligation.
of the consignation.
The intent of the parties determines the importance of the loss.

LOSS OF THE THING DUE
The law disputably presumes the fault of the debtor if the thing was lost
Loss of the thing or object of the obligation refers to legal or physical
in his possession The debtor, having possession and control over the
impossibility of performing the prestation after constitution of the
object at the time of loss, the law disputably presumes that the loss was
obligation.
due to the debtor’s fault or negligence. The debtor will have the burden

of proving otherwise.
LOSS IN OBLIGATION TO GIVE A DETERMINATE THING

In an obligation to give a determinate thing, a thing is lost if it perishes,
goes out of commerce, or disappears in such a way that its existence is LOSS THROUGH FORTUITOUS EVENT DOES NOT
unknown or cannot be recovered. In short, it becomes legally or EXTINGUISH AN OBLIGATION UNDER THE
physically impossible to deliver. FOLLOWING CIRCUMSTANCES:

LOSS IN OBLIGATION TO GIVE A GENERIC THING 1. Express provision of law;
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becomes so difficult to be manifestly beyond the contemplation of the
2. Express stipulation of the parties;
parties, the obligor may ask the court to release him from the obligation
3. Nature of obligation requires the assumption of risks;
pursuant to Art. 1267.
4. Debtor is negligent, at fault, or in default;

5. Debtor promises to deliver the same thing to two or more
different parties; and The requisites to release the debtor from the obligation
6. Debtor’s obligation to deliver a determinate thing arises from pursuant to Article 1267:
a criminal act except in case of Mora Accipiendi.
1. At the time of the execution of the contract, the parties could
not have foreseen the events or change in circumstances;
DOCTRINE OF UNFORESEEN EVENTS 2. The event or change in circumstances make the performance
Art. 1267.When the service has become so difficult as to be of the contract extremely difficult but not impossible;
manifestly beyond the contemplation of the parties, the obligor may 3. It is not due to the act of any party; and
also be released therefrom, in whole or in part. 4. The contract is for a future prestation.

Article 1267 enunciates the doctrine of unforeseen events and is not. The future prestation excludes speculative transactions because in said
An absolute application of the principle rebus sic stantibus which would transactions, the creditor and debtor are necessarily uncertain of what the
endanger the security of contractual relations. The parties to the contract future circumstances will be. Article 1267 is not limited to obligations to
must be presumed to have assumed the risks of unfavorable do. The term “service” in Article 1267 refers to the performance of the
developments. It is, therefore, only in absolutely exceptional changes obligation and, thus, the article applies to an obligation to give or an
of circumstances that equity demands assistance for the debtor under obligation not to do.
Article 1267.
Article 1267 is very difficult for a debtor to successfully invoke
Article 1267 of the Civil Code allows a contracting party to be released considering that when they enter into a contract, the parties are supposed
from performing an obligation based on the change of the contractual to have discounted and assumed the risk of any change in circumstances
circumstances beyond the contemplation of the parties. The parties and, thus, are bound by their respective undertakings. Allowing a party
stipulate in light of certain prevailing conditions and once these to wiggle out of his or her contract due to a change in circumstances will
conditions cease to exist, the contract also ceases to exist. Considering undermine the obligatory force of a contract. This difficulty of
practical needs and the demands of equity and good faith, the successfully claiming the benefit or Article 1267 is explained in the
disappearance of the basis of a contract gives rise to a right to relief in assigned case of Poon v. Prime Savings Bank (G.R. 183794) as
favor of the party prejudiced. If the performance of the obligation follows.
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3. It must not be due to the act of any of the parties;
POON v. PRIME SAVINGS BANK
4. The contract is for future prestation.
As an alternative justification for its premature termination of the
contract, respondent lessee invokes the doctrine of unforeseen events
under Article 1267 of the Civil Code which provides: The difficulty of performance should be such that the party seeking to be
- when the service has become so difficult as to be manifestly released from the contractual obligation would be placed at a
beyond the contemplation of the parties, the obligor may also be disadvantaged by the unforeseen event. Mere inconvenience,
released therefrom in whole or in part. unexpected impediments, increased expenses, or even pecuniary inability
- The theory of rebus sic stantibus in public international law is to fulfill an engagement will not relieve an obligor from an undertaking
often cited as the basis of the above article. Under this theory, that he has knowingly and freely contracted.
the parties stipulate in light of certain prevailing conditions and
the theory can be made to apply when these conditions cease to The law speaks of service. This term should be understood as referring to
exist. The court, however, has once cautioned that Article the performance of an obligation or a prestation. A prestation is an
1267 is not an absolute application of the principle rebus object of a contract that is the conduct to give, to do, or not to do,
sic stantibus, otherwise it would endanger the security of required of the parties.
contractual relations. After all, parties to a contract are
presumed to have assumed the risks of unfavorable POON V PRIME SAVINGS BANK (G.R. NO. 183794)
developments. Articles 1262-1269
In a reciprocal contract such as the lease in this case, one obligation of the
respondent lessee (the bank, in this case) was to pay the agreed rent for
It is only in absolutely exceptional changes of circumstance therefore, the the whole contract period. It would be hard-pressed to complete the lease
equity demands assistance for the debtor. Tagaytay Realty & terms since it was already out of business. So, the bank only paid 3 ½
Company Inc. v. Gacutan (not in the syllabus) lays down the years out of the 10-year contract period. Without a doubt, the second
requisites for the application of Article 1267 as follows: and the fourth requisites mentioned above are present in this case. First
and third requisites, however, are lacking. It must be noted that the lease
REQUISITES FOR THE APPLICATION OF ARTICLE 1267: agreement was for 10 years as shown by the unrebutted testimony of
1. The event or change in circumstance could not have been Jaime Poon given during trial. The parties had actually considered the
foreseen at the time of the execution of the contract; possibility of deterioration or loss of respondent’s business within that
2. It makes the performance of the contract extremely difficult period.
but not impossible; - Clearly, the closure of respondent’s business was not an
unforeseen event as the lease was long-term. It was not lost on
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the parties that such an eventuality might occur as it was in fact renounced is in litigation or dispute and in exchange of some concession
covered by the terms of their contract. Besides, as we have which the creditor receives.
previously discussed, the event was not independent of the
respondent's will.

Art. 1271. The delivery of a private document evidencing a credit,
In the assigned case of Naga Telephone v Court of Appeals (G.R.
made voluntarily by the creditor to the debtor, implies the
No. 107112), the electric company successfully invoked Article 1267 in
renunciation of the action which the former had against the latter
respect to its obligation under its exchange deal with the telephone
company. Instead of releasing the electric company from the obligation,
however, the Supreme Court invoked its equity jurisdiction and Although Article 1271 of the Civil Code provides for a legal
maintained the exchange deal between the telephone and electric presumption of renunciation of action, in cases where a private
companies so as not to disrupt telephone services to the public and the document evidencing a credit was voluntarily returned by the creditor to
respective businesses of the parties. the debtor, this presumption is merely prima facie and is not conclusive,
the presumption losses efficacy when faced with evidence to the
CONDONATION OR REMISSION OF DEBT (Arts. 1270-1274) contrary.

Article 1271 of the Civil Code raises a presumption - not of payment,
Condonation or remission of debt is defined as a mode of
but of the renunciation of the credit where more convincing evidence
extinguishing an obligation is:
would be required than what would normally be called for to prove
- Defined as an act of liberality by virtue of which without
receiving any equivalent, the creditor renounces the payment. The rationale for allowing the presumption of renunciation in
enforcement of the obligation, which is extinguished in its the delivery of the private instrument is that, unlike that of a public
entirety or in that part or aspect of the same to which the instrument, there could be just one copy of the evidence of credit where
remission refers. several originals are made out of a private document. The intentment of
the law would thus be to refer to the delivery only of the original rather
It is an essential characteristic of remission that it be gratuitous that than to the original duplicate of which the debtor would normally retain
there is no equivalent received for the benefit given. Once such an a copy. It would thus be absurd if Article 1271 were to be applied
equivalent exists, the nature of the act changes. It may become dation in differently.
payment when the creditor receives a thing different from that
stipulated, or novation, when the object or principal conditions of the CONFUSION OR A MERGER
obligation should be changed, or compromised when the matter
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Confusion or merger is the extinction of an obligation when one the heirs of the character of creditor and debtor of the same
person becomes the creditor and debtor of the same obligation. obligation.

COMPENSATION
ILLUSTRATION #1: Confusion or Merger
For example, a maker issued a negotiable bearer a promissory note to Compensation is the m ode of extinguishing to the concurrent
payee. After several transactions, the maker was able to acquire or amount the obligation of persons who in their own right and as
purchase the promissory note. With the maker having in his possession principals are reciprocally debtors and creditors of each other.
the note, the obligation under said note is extinguished because the

maker is both the debtor and the creditor - that is, the one obliged to

pay as the maker of the note and the one entitled to payment as the
Compensation or off-setting of liabilities are as follows:
possessor or bearer of the note.
CLASSIFICATION OF COMPENSATION

1. Legal Compensation
Other Examples of Confusion or Merger
a. Legal compensation takes place by operation of law
ILLUSTRATION #2: Examples of Confusion or Merger when all the requisites are present, provided that a
relevant party invokes it for the purpose of
1. An agricultural leasehold relation is terminated upon merger extinguishing an obligation.
of the characters of the lessor and the lessee - that is, the tenant 2. Conventional Compensation
becomes the owner of the land. a. Also known as compensation by agreement of the
parties. This takes place when the parties agree to
2. Merger extinguishes a senior mortgage constituted on a compensate their mutual obligations even in the
property when the mortgagee who holds both the senior and absence of some requisites of legal compensation.
junior mortgages acquires the mortgaged property in a 3. Facultative Compensation
foreclosure of the junior mortgage. a. This takes place when the party who has the benefit
of the missing requisite of legal compensation opts to
3. During litigation, the complainant-creditor and the waive said requisite.
respondent-debtor died and were substituted by the same For example, legal compensation cannot take place
heirs. Since the heirs of the creditor and debtor are the same, because the debt payable to one party is not yet due.
the obligation sued upon was extinguished by the merger in In such a case, compensation may place, at the
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option of the party obligated to pay the debt not yet 4. They be liquidated and demandable; and
due by waiving the benefit of the term. 5. Over neither of them there be any retention or controversy,
4. Judicial Compensation commenced by third persons and communicated in due time
a. Judicial compensation takes place by order of the to the debtor.
court in a proper case.

The case of Mondragon v. Sola (G.R. No. 174882) illustrates a
ILLUSTRATION #3: Judicial Compensation proper case of legal compensation.

An example for judicial compensation will be the situation
contemplated by Art. 1192 of the Civil Code. If both parties default
or breach their respective prestations in a reciprocal obligation, the
court shall equitably offset their individual liabilities, provided that the LEGAL COMPENSATION
court can establish the first infractor. The party claiming a tempering 1st Requisite: Each obligor should be bound principally as creditor and
of his liability or an offset of the damages has the burden of proving debtor of the other. Legal compensation presupposes at least two
that the other party also committed a violation of the obligation. transactions or contracts between the same parties.

As stated above, legal compensation takes place by operation of law as ILLUSTRATION #4: Mutual Debtor and Creditor
long as all requisites thereof are present and the proper party invokes it. For example, in a loan contract, A owes B 100,000 pesos. In a separate
contract of sale, B owes 100,000 pesos as the unpaid price of the
Legal Compensation requires the concurrence of the following property sold by A to B. In these contracts, A and B are both principal
conditions: creditors and debtors of each other.
REQUISITES OF LEGAL COMPENSATION
1. Each obligor be bound principally and that he be at the same ILLUSTRATION #4: Bound Principally as Creditor and
time a principal creditor of the other; Debtor of Other
2. Both debts consist in 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; The case of Insular Investment also illustrates this requirement:
3. The two debts be due; each debtor should be bound principally as creditor and debtor
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of the other. Accordingly, there can be no legal compensation if the have against the government. A person cannot refuse to pay a tax on
debtor is only an agent or representative in the other transaction or the ground that the government owes him an amount equal to or
acts in a different capacity such as a guarantor or a mortgagee. greater than the tax being collected. The collection of taxes cannot
await the results of a lawsuit against the government. The government
and the taxpayer are not creditors and debtors of each other. Debts are
In the earlier example of A and B, if B acted only as an agent of C who due to the government in its corporate capacitywhile taxes are due
was the disclosed real buyer in the contract of sale, there can be no legal to the government in its s overeign capacity. A claim for taxes is not a
compensation. B is not a principal debtor in the contract of sale. Even if debt, demand, contract, or judgment as is allowed to be set-off.
each party is a creditor and debtor of the other, a party cannot invoke
legal compensation if he is a debtor in an obligation arising from a In Hard Notes: The requisite of legal compensation relevant to this
deposit or commodatum, legal support due by gratuitous title except case is that there must be a n amount due. Tax is not a debt. It is an
support in arrears and civil liability based on a penal offense. However, exercise of sovereign capacity. United Airlines in this case said that
the creditor in these instances can invoke legal compensation. what the CTA did was an offsetting, but one cannot do offsetting
In Hard Notes: Legal basis for such is Article 1287 and 1288 as per with taxes because a tax is not a debt. Nevertheless, the government
obligations that cannot be compensated. won in this case. T he SC said that there can be no offsetting.
- Article 1287: Deposit, Commodatum, and claim for support However, SC resolved all the issues together. Taxpayer owed the
due by gratuitous title government a huge amount so there can be no refund on his part.
- Article 1288: Civil liability arising from a penal offense What actually happened was an e nforcement of the law - that is,
before you can get a refund, you have to satisfy all tax
2nd Requisite: The second requisite of legal compensation is both debts requirements.
should be in money or if a fungible thing should be of the same kind and
quality. Hence, there can be no legal compensation of an obligation to 3rd Requisite: The third requisite of legal compensation is both debts
pay money on the one hand and an obligation to supply goods on the should be due. A debt is due if it is a pure obligation or it is not subject to
other hand, even if both prestation of equal value. a term or a condition.

ILLUSTRATION #5: 4th Requisite: The fourth requisite of legal compensation is both debts
should be demandable. There must be no legal impediment for the
As explained in United Airlines Inc. v. CIR (G.R. 179788), there relevant party to exact performance. For example, the debt is not subject
can be no upsetting of taxes against the claims that the taxpayer may to any legal defenses such as prescription, unenforceability, and court
orders of attachment and injunction.
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HELD: A mount of 71k should be set off against petitioner’s unpaid
5th Requisite: The fifth requisite is both debts should be liquidated. A
obligation of 735K, leaving a balance of 663K.
debt is liquidated if its amount is determinate or determinable by
mere mathematical computation and its existence is acknowledged by the
concerned parties. A distinction must be made between a debt and a mere claim:
DEBT or CLAIM
The case of First United Constructors Corp v Bayanihan
Automotive Corp (GR No. 178788) shows an example of a liquidated A DEBT is an amount actually ascertained. A debt is a claim which
debt proven by the creditor and factually confirmed by the trial court has been formally passed upon by the courts or quasi-judicial bodies to
during the proceedings and affirmed by the Court of Appeals. which it can, in law, be submitted and has been declared to be a debt.

From Hard Notes for the case of F irst United: This liquidated debt A CLAIM, on the other hand, is a debt in embryo. It is mere evidence
amounts to around 71K - the repairs of the truck owed by the seller to of a debt and must pass through the process prescribed by law before it
the buyer. SC said that there was already determination of the lower develops into what is properly called a debt. Absent, however, any
courts of the price, which is 71k, and that was already liquidated and such categorical admission by an obligor or final adjudication, no
due. FUCC was able to establish the cost of the repair and this was compensation or offset can take place between a debt and a claim.
ascertained by the lower courts. Unless admitted by a debtor himself, the conclusion that he is in truth
indebted to another cannot be definitely and finally pronounced, no
This could be offset already against the X amount. All the requisites matter how convinced he may be from the examination of the
are present. The only issue is, was there a liquidated other debt? Or is pertinent records of the validity of that conclusion.
there another debt that is liquidated?
The indebtedness must be one that is admitted by the alleged debtor or
If it were only a claim, meaning uproven and not established in pronounced by final judgment of a competent court or tribunal. The
another proceeding, there can be no offsetting because: first, there is case of Lao v Special Plans, Inc. (G.R. No. 164791) shows an
no debt (only a claim), and second, even if there is a debt, it is example of a mere claim that cannot be used for compensation.
unliquidated. I n this case, there was already a determination of the
amount; therefore, the amount is effectively liquidated and
compensation can occur. A claim, therefore, is not a debt that may be used by the claimant for
the purpose of compensation unless the claim has been determined as
a liquidated with its amount in time of payment fixed by the courts or
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quasi-judicial bodies or acknowledged by the debtor as an obligation
or liability. If any of the requisites of legal compensation is missing, a party may
invoke conventional (compensation), for example, obligations not yet

due or of different kinds - facultative. For example, an obligation
From C2022 Oblicon JSP Transcript:
subject to term may be offset at the option of the debtor who has the
The issue here is whether the amount sought to be compensated is
benefit of the term or judicial compensation.
already liquidated. To liquidate, the lessee has to submit proof. And it is
the court that would have to pass upon the validity of the proof. It
cannot be done unilaterally by the lessee, unless the parties agree that it The case of United Planters Sugar Milling Co., Inc. v. CA (G.R.
can be unilaterally done by the lessee in the case of a dispute; ultimately, 126890) illustrates conventional compensation or offsetting of liabilities
it will be a court decision. by contract of the concerned parties.

In the case of First United, the legal compensation was accepted because The only requisites of conventional compensation are: (1) each of the
there was already a determination of the amount of debt due made by the parties can dispose of the credit he seeks to compensate and (2) that
lower court. they agree to the mutual extinguishment of their credits.

The last requisite of legal compensation is there is no retention or In case of an assignment of right that may be subject to legal
controversy on either debt. compensation, a party may invoke compensation depending on whether
said party has knowledge of or consented to the assignment of right or
obligation in which said party is the debtor. If the creditor assigns a
A retention or controversy is a legal restriction for the debtor to pay
creditor obligation without the knowledge of the debtor, the debtor may
the debt and thus, prevents legal compensation.
set up the compensation of debts prior to the assignment until notice of
the assignment.
ILLUSTRATION #6: Requisite of retention or controversy
If the debtor receives notice of the assignment of the credit by the
One the parties to the supposed compensation is prohibited by a court creditor, the debtor may either consent to or object of the assignment. If
from disposing of any asset including payment of money through a the debtor consents to the assignment, the debtor will waive the right to
stay or suspension order in an insolvency proceeding or an attachment claim compensation as against the assigned credit. If the debtor objects to
or an injunction is issued against said party. In said example, the debt the assignment, the debtor may set up compensation of debts prior to the
of the parties is subject to a retention or controversy. notice of the assignment. The debtor cannot prevent the assignment of
credit as it does not require the debtor’s consent.
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instruments, parties ought to know that these instruments could be
Note the case of Perez vs CA G.R. L-56101 involving Article 1285
negotiated or traded. There was implied consent.
on compensation in respect to the credit assigned by the creditor.
Under Article 1285, the debtor who has consented to the assignment of
rights made by a creditor in favor of a third person cannot set up against NOVATION (Art. 1291)
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 Art. 1291: Obligations may be modified by:
his consent that he reserved his right to the compensation. 1. Changing their objet or principal conditions;
2. Substituting the person of the debtor
In the assigned case of Perez, the issuer of the negotiable promissory note 3. Subrogating a third person in the rights of the creditor
or commercial paper is deemed to have consented to the assignment of

rights made by a creditor in favor of a 3rd person and so, cannot set up
legal compensation against the assignor. An issuer of a negotiable, NOVATIONS
commercial, or financial paper assumes knowing full well that it may be Novation is the extinguishment of an obligation by the substitution or
negotiated or transferred successively to different person(s) in the due the change of the obligation by a subsequent one which extinguished
course of business. or modifies the first - either by:
The nature of the negotiable paper necessarily informs the assurer in - changing the object or principal conditions or by substituting
another in place of the debtor or
advance that the negotiable paper will be expeditiously transacted and
- by subrogation a third person in the rights of the creditor.
transferred to any investor or lender without need of notice to the issuer
by issuing a negotiable paper. Therefore, the issuer is deemed to have
consented to the assignment of the credit by the creditor and cannot REQUISITES OF A NOVATION
invoke legal compensation with respect to the debt based on the Accordingly, novation requires the following:
commercial or financial instruments. 1. An old valid obligation;
2. A new valid obligation; and
In Hard Notes: 3. New obligations extinguished or modifies the old
GR: If there is assignment, this will be effective from the moment of obligation in terms of object and all subjects
notice or when the party consents.
EXC:[See Perez v CA ruling]: Novation may be classified depending on the effect of the new obligation
The court applied consent of assignment from the nature of on the old obligation as follows:
transaction and underlying instruments. In dealing with financial 1. EXTINCTIVE: It can be extinctive.
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An extinctive novation has the twin effects of: give rise to penal responsibility as when the money loaned is made to
a. First, extinguishing an existing obligation; and appear as a deposit or other similar disguise is resorted to.
b. Second, creating a new one instead.

ILLUSTRATION #8: Criminal liability for estafa
This kind of novation, the extinctive novation, presupposes a The criminal liability for estafa already committed is not affected by
confluence of 4 essential requisites: the subsequent novation of contract for it is a public offense which
1) A previous valid obligation must be prosecuted and punished by the State.
2) An agreement of all parties concerned to a new contract

3) The extinguishment of the old obligation
4) The birth of the valid new obligation Classification of Novation depending on the element of the
obligation affected:

1. Objective or Real Novation :novation through a change of
2. MODIFICATORY
the object or principal conditions of an existing obligation.
Novation can be modificatory. Novation is merely modificatory where
a. Example : Dacion en payment - Property is conveyed
the change brought about by any subsequent agreement is merely
in lieu of payment of money.
incidental to the main obligation.
2. Subjective or Personal Novation : change of either the
For example is the change in interest rates or extension of time to pay.
person of the debtor or of the creditor.

a. Personal or subjective novation is the change of the
ILLUSTRATION #7: Change in interest rates or extension of debtor or the creditor.
time to pay 3. Mixed Novation : n ovation that is both objective and
In this instance, the new agreement will not have the effect of subjective novation.
extinguishing the first but would merely supplement it or supplant

some, but not all of its provisions.
Substitution of a debtor may be:

1. Delegacion - substitution of a debtor at the instance of the
Novation is a mode of extinguishing a civil obligation. It is not a means
original debtor; or
to extinguish a criminal liability. Novation is not one of the means
2. Expromision - substitution of a debtor without the consent or
recognized by the Penal Code, whereby criminal liability can be
knowledge of the original debtor.
extinguished. Hence, the role of novation may only be to either prevent
the rise of criminal liability or to cast doubt on the true nature of the
original petition, whether or not it was such that its breach would not
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Novation resulting in the change of the creditor’s subrogation.In
the rights under the third party mortgage. If the principal debtor does
subrogation, another person acquires the rights and entitlements of the
not pay or indemnify the guarantor, the guarantor may exercise all
creditor, including those under security arrangements.
rights of the creditor to exact payments, including foreclosure of the

mortgage.
Classifications of Subrogation:

1. Conventional - by agreement of the parties
2. Legal - by operation of law Novation is made effective either expressly or impliedly. It is never
presumed.

When is Legal Subrogation Presumed?
1. A creditor pays a preferred creditor even without the debtor's Novation will only occur when:
knowledge. 1. Express agreement of the parties
2. A third party pays with the express or implied consent of the The parties should clearly agree to extinguish the old
debtor; and obligation by the new one
3. A person interested in the fulfillment of the principal 2. Utter incompatibility of the old and new obligation
obligation pays even without the debtor’s knowledge. The old and new obligation should be repugnant to
each other and cannot be reconciled as one

obligation.
ILLUSTRATION #9: A creditor pays a preferred creditor even

without the debtors knowledge
An unsecured creditor of a debtor pays another creditor of the debtor Consent in Novation:
who holds a mortgage as a security. GENERAL RULE: All parties to the old and new obligation should
consent to the novation.

ILLUSTRATION #10: A person interested pays even without
EXCEPTION:
the debtor’s knowledge
1. Legal subrogation through the payment by a creditor of a
A guarantor is a person interested in the payment of the guaranteed
preferred creditor or the payment by a person interested in the
principal obligation of the debtor to the creditor, assuming that the
fulfillment of an obligation. The debtor’s consent is not
same obligation is secured by a real estate mortgage given by a third
required in these instances of legal subrogation.
party. If the guarantor pays the principal obligation on due date, the
2. Expromision wherein the original debtor's consent is not
guarantor will be subrogated and the rights of the creditor, including
required.
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A party who did not consent to the novation shall not be bound or
affected thereby unless the law provides otherwise.

A debtor who was replaced without his knowledge or consent is

not liable for the insolvency or default of the new debtor.

Accessory obligations which were attached to the old obligation

extinguished by novation may subsist insofar as they may benefit third

persons who did not consent to the novation. Assignment of credit,

which is not novation, does not require the consent of the debtor.

The distinction between novation and assignment of credit was

explained in the case of Licaros v. Gatmaitan (G.R. No. 142838). In

the case of Licaros, the Court considered the Memorandum of

Agreement (MOA) as a novation contract, or more specifically,
conventional subrogation that requires the consent of the old and new
creditors and the debtor. The necessity of the debtor’s consent to the
conventional subrogation was evident from the “whereas” clause and the
conformed portion of the MOA. Without the debtor’s consent, the
MOA was ineffective and the old creditor cannot collect from the new
creditor the amounts payable pursuant to the contract. If the old and
new creditors dispensed with the necessity of the debtor’s consent, the
MOA would have been an assignment of credit, entitling the old
creditor from collecting the payment from the new creditor, with or
without the debtor’s consent.

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OBLIGATIONS

PART ONE: CONJUNCTIVE, ALTERNATIVE,

alternative prestations and an accessory or RULES GOVERNING

The buyer paid the seller P100,000 pursuant to a contract of sale. The

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OBLIGATIONS

PART ONE: ​CONJUNCTIVE, ALTERNATIVE,

alternative prestations and an accessory or RULES GOVERNING

The buyer paid the seller P100,000 pursuant to a contract of sale. The

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PART ONE: CONJUNCTIVE, ALTERNATIVE,