G. Modes of Extinguishment of Obligations Case Digests 2

CITIZENS SURETY v.
CA
Modes of Extinguishment of Obligations
CITIZENS SURETY and INSURANCE COMPANY, INC., petitioner, vs. COURT OF APPEALS and
PASCUAL M. PEREZ, respondents.
G.R. No. L-48958 June 28, 1988
It is a basic and fundamental rule in the interpretation of contract that if the terms thereof are clear and leave
no doubt as to the intention of the contracting parties, then the literal meaning of the stipulations shall control
but when the words appear contrary to the evident intention of the parties, the latter shall prevail over the
former. In order to judge the intention of the parties, their contemporaneous and subsequent acts shall
be principally considered.
FACTS:
On December 4, 1959, the petitioner issued 2 surety bonds to guarantee compliance by the principal Pascual
M. Perez Enterprises of its obligation under a "Contract of Sale of Goods" entered into with the Singer Sewing
Machine Co. In consideration of the issuance of the aforesaid bonds, Pascual M. Perez, in his personal capacity
and as attorney-in-fact of his wife, Nicasia Sarmiento and in behalf of the Pascual M. Perez Enterprises, executed
on the same date 2 indemnity agreements wherein he obligated himself and the Enterprises to indemnify the
petitioner jointly and severally, whatever payments advances and damage it may suffer or pay as a result of the
issuance of the surety bonds.
In addition to the two indemnity agreements, Pascual M. Perez Enterprises was also required to put up a
collateral security to further insure reimbursement to the petitioner of whatever losses or liabilities it may be made
to pay under the surety bonds. Pascual therefore executed a deed of assignment on the same day, December
4,1959, of his stock of lumber with a total value of P400,000.00. On April 12, 1960, a second real estate mortgage
was further executed in favor of the petitioner to guarantee the fulfillment of said obligation.
Pascual M. Perez Enterprises failed to comply with its obligation under the contract of sale of goods with Singer
Sewing Machine Co., Ltd. Consequently, the petitioner was compelled to pay, as it did pay, the fair value of the
2 surety bonds in the total amount of P144,000.00. Except for partial payments in the total sum of P55,600.00
and notwithstanding several demands, Pascual M. Perez Enterprises failed to reimburse the petitioner for the
losses it sustained under the said surety bonds.
The petitioner filed a claim for sum of money against the estate of the late Nicasia which was being administered
by Pascual. In opposing the money claim, Pascual asserts that the surety bonds and the indemnity agreements
had been extinguished by the execution of the deed of assignment.
The CFI ruled on April 15, 1968 that, considering that the estate of the late Nicasia is jointly and severally liable
to the Citizens' Surety and Insurance Co., Inc., for the amount the latter had paid the Singer Sewing Machine
Company, Ltd., administrator Pascual should pay the claimant the sum of P144,000.00, with interest at the rate
of 10% per annum from the date the claim was filed, until fully paid, minus the payments already made in the
amount of P55,600.00. Both parties appealed to the CA. On August 31, 1978, the CA reversed the CFI decision
and dismissed the claim of the Citizens' Surety and Insurance Co., Inc., against the estate of the late Nicasia.
ISSUE: Whether or not the administrator's obligation under the surety bonds and indemnity agreements had
been extinguished by reason of the execution of the deed of assignment.
RULING:
No. It is the general rule that when the words of a contract are plain and readily understandable, there is no room
for construction thereof. However, this is only a general rule and it admits exceptions.
CITIZENS SURETY v. CA
Pascual M. Perez executed an instrument denominated as "Deed of Assignment." On its face, the document
speaks of an assignment where there seems to be a complete conveyance of the stocks of lumber to the
petitioner, as assignee. However, in the light of the circumstances obtaining at the time of the execution
of said deed of assignment, we cannot regard the transaction as an absolute conveyance.
It is a basic and fundamental rule in the interpretation of contract that if the terms thereof are clear and leave no
doubt as to the intention of the contracting parties, then the literal meaning of the stipulations shall control but
when the words appear contrary to the evident intention of the parties, the latter shall prevail over the former. In
order to judge the intention of the parties, their contemporaneous and subsequent acts shall be
principally considered. (Sy v. CA)
The petitioner issued the 2 surety bonds on December 4, 1959 in behalf of the Pascual M. Perez Enterprises to
guaranty fulfillment of its obligation under the "Contract of Sale of Goods" entered into with the Singer Sewing
Machine Co. In consideration of the two surety bonds, two indemnity agreements were executed by Pascual
followed by a Deed of Assignment which was also executed on the same date.
The respondent court stated that "by virtue of the execution of the deed of assignment ownership of
administrator-appellant's lumber materials had been transferred to the claimant-appellant and this amounted to
dation in payment whereby the former is considered to have alienated his property in favor of the latter in
satisfaction of a monetary debt (Article 1245). As a consequence thereof, administrator-appellant's obligation
under the surety bonds is thereby extinguished upon the execution of the deed of assignment." This statement
is not sustained by the records.
The transaction could not be dation in payment. As pointed out in the concurring and dissenting opinion of Justice
Edgardo L. Paras and the dissenting opinion of Justice Mariano Serrano when the deed of assignment was
executed on December 4, 1959, the obligation of the assignor to refund the assignee had not yet arisen.
In other words, there was no obligation yet on the part of the petitioner, Citizens' Surety and Insurance
Company, to pay Singer Sewing Machine Co. There was nothing to be extinguished on that date, hence,
there could not have been a dation in payment.
The deed of assignment cannot be regarded as an absolute conveyance whereby the obligation under the surety
bonds was automatically extinguished. The subsequent acts of the private respondent bolster the fact that the
deed of assignment was intended merely as a security for the issuance of the two bonds. Partial payments
amounting to P55,600.00 were made after the execution of the deed of assignment to satisfy the obligation under
the two surety bonds. Since later payments were made to pay the indebtedness, it follows that no debt was
extinguished upon the execution of the deed of assignment. Moreover, a second real estate mortgage was
executed on April 12, 1960 and eventually cancelled only on May 15, 1962. If indeed the deed of assignment
extinguished the obligation, there was no reason for a second mortgage to still have to be executed. We agree
with the two dissenting opinions in the CA that the only conceivable reason for the execution of still another
mortgage on April 12, 1960 was because the obligation under the indemnity bonds still existed. It was
not yet extinguished when the deed of assignment was executed on December 4, 1959. The deed of
assignment was therefore intended merely as another collateral security for the issuance of the two
surety bonds.
Recapitulating the facts of the case, the records show that the petitioner surety company paid P144,000.00 to
Singer on the basis of the two surety bonds it had issued in behalf of Pascual Perez Enterprises. Perez in turn
was able to indemnify the petitioner for its payment to Singer in the amount of P55,600.00 thus leaving a balance
of only P88,400.00.
The petitioner surety company was more than adequately protected. Lumber worth P400,000.00 was assigned
to it as collateral. A second real estate mortgage was also given by Perez although it was later cancelled
obviously because the P400,000.00 worth of lumber was more than enough guaranty for the obligations
assumed by the petitioner. As pointed out by Justice Paras in his separate opinion, the proper procedure was
for Citizens' Insurance and Surety Co. to collect the remaining P88,400.00 from the sales of lumber and
to return whatever remained to Perez. We cannot order the return in this decisions because the Estate of Mrs.
Perez has not asked for any return of excess lumber or its value.
With respect to the claim for interests and attorney's fees, we agree with the private respondent that the petitioner
is not entitled to either one. It had the means to recoup its investment and losses many times over, yet it chose
to litigate and delay the final determination of how much was really owing to it.
WHEREFORE, the petition is hereby DISMISSED. For the reasons above-stated, the claim of Citizens' Surety
and Insurance Co., Inc., against the estate of Nicasia Sarmiento is DISMISSED. SO ORDERED.
SAURA V. DBP
SAURA IMPORT and EXPORT CO., INC., plaintiff-appellee, vs. DEVELOPMENT BANK OF THE
PHILIPPINES, defendant-appellant.
G.R. NO. L-244968 | 27 April 1972 | MAKALINTAL, J.
Since mutual agreement can create a contract, mutual disagreement by the parties can cause its
extinguishment.
FACTS:
In July 1952, Saura, Inc., applied to Rehabilitation Finance Corp., now DBP, for an industrial loan of P500,000
to be used for the construction of a factory building, to pay the balance of the jute mill machinery and equipment
and as additional working capital. In Resolution No.145, the loan application was approved to be secured first
by mortgage on the factory buildings, the land site, and machinery and equipment to be installed.
The mortgage was registered and documents for the promissory note were executed. But then, later on, was
cancelled to make way for the registration of a mortgage contract over the same property in favor of Prudential
Bank and Trust Co., the latter having issued Saura letter of credit for the release of the jute machinery. As
security, Saura execute a trust receipt in favor of the Prudential. For failure of Saura to pay said obligation,
Prudential sued Saura.
After almost 9 years, Saura Inc, commenced an action against RFC, alleging failure on the latter to comply with
its obligations to release the loan applied for and approved, thereby preventing the plaintiff from completing or
paying contractual commitments it had entered into, in connection with its jute mill project.
ISSUE: Whether or not mutual disagreement of parties can cause the extinguishment of contract
RULING:
Yes, mutual disagreement of parties can cause the extinguishment of contract.
Article 1934 provides: An accepted promise to deliver something by way of commodatum or simple loan is
binding upon the parties, but the commodatum or simple loan itself shall not be perfected until delivery of the
object of the contract.
There was undoubtedly offer and acceptance in the case. The application of Saura, Inc. for a loan of P500,000.00
was approved by resolution of the defendant, and the corresponding mortgage was executed and registered.
The defendant failed to fulfill its obligation and the plaintiff is therefore entitled to recover damages.
When an application for a loan of money was approved by resolution of the respondent corporation and the
responding mortgage was executed and registered, there arises a perfected consensual contract. However, it
should be noted that RFC imposed two conditions (availability of raw materials and increased production) when
it restored the loan to the original amount of P500,000.00. Saura, Inc. obviously was in no position to comply
with RFC’s conditions. So instead of doing so and insisting that the loan be released as agreed upon, Saura,
Inc. asked that the mortgage be cancelled. The action thus taken by both parties was in the nature of mutual
desistance which is a mode of extinguishing obligations. It is a concept that derives from the principle that since
mutual agreement can create a contract, mutual disagreement by the parties can cause its extinguishment.
NATIONAL POWER CORPORATION v. LUCMAN M. IBRAHIM
Modes of Extinguishment

G.R. No. 175863, February 18, 2015, PEREZ, J.:
FACTS:
In 1978, petitioner took possession of a parcel of land in Marawi City for the purpose of building thereon a hydroelectric
power plant pursuant to its Agus 1 project. The subject land, while in truth a portion of a private estate is registered under
the name of respondent Mangondato, was occupied by petitioner under the mistaken belief that such land is part of the vast
tract of public land reserved for its use by the government.
Mangondato first discovered petitioner’s occupation of the subject land in 1979—the year that petitioner started its
construction of the Agus 1 Plant. Shortly after such discovery, Mangondato began demanding compensation for the subject
land from petitioner.
In support of his demand for compensation, Mangondato sent to petitioner a letter, wherein the former detailed the origins
of his ownership over the lands, including the subject land. Petitioner, at first, rejected Mangondato’s claim of ownership
over the subject land. But, after more than a decade, petitioner finally acquiesced to the fact that the subject land is private
land and consequently acknowledged Mangondato’s right, as registered owner, to receive compensation therefor.
The communications, however, failed to yield a genuine consensus between petitioner and Mangondato as to the fair market
value of the subject land.
With an agreement basically out of reach, Mangondato filed a complaint for reconveyance against petitioner. For its part,
petitioner filed an expropriation complaint. Later, both cases were consolidated.
The RTC decision upheld petitioner’s right to expropriate the subject land: it denied Mangondato’s claim for reconveyance
and decreed the subject land condemned in favor of the petitioner, subject to payment by the latter of just compensation in
the amount of ₱21,995,000.00.
Disagreeing with the amount of just compensation that it was adjudged to pay under the said decision, petitioner filed an
appeal with the Court of Appeals.
During the pendency of the appealed case, herein respondents the Ibrahims and Maruhoms filed against Mangondato and
petitioner. In their complaint, the Ibrahims and Maruhoms disputed Mangondato’s ownership of the lands, including the
subject land. The Ibrahims and Maruhoms asseverate that they are the real owners of the lands; they being the lawful heirs
of the late Datu Magayo-ong Maruhom, who was the original proprietor of the said lands.
RTC granted the prayer of the Ibrahims and Maruhoms for the issuance of a TRO. The same court likewise granted the
prayer for the issuance of a writ of preliminary injunction.
The CA rendered a Decision denying the appeal of petitioner and affirming in toto the Decision in Civil Case No. 605-92
and Civil Case No. 610-92. Undeterred, petitioner next filed a petition for review on certiorari with this Court that was
docketed herein as G.R. No. 113194.
On 11 March 1996, we rendered our Decision in G.R. No. 113194 wherein we upheld the Court of Appeals’ denial of
petitioner’s appeal. In the same decision, we likewise sustained the appellate court’s affirmance of the decision in Civil Case
No. 605-92 and Civil Case No. 610-92 subject only to a reduction of the rate of interest on the monthly rental fees from 12%
to 6% per annum.
A notice of garnishment for the amount of ₱21,801,951.00 was promptly served upon the PNB — the authorized depositary
of petitioner. Consequently, the amount thereby garnished was paid to Mangondato in full satisfaction of petitioner’s
judgment debt. Upon the other hand, the RTC made the following relevant findings:
1. The Ibrahims and Maruhoms—not Mangondato—are the true owners of the lands covered by TCT No. 378-A, which
includes the subject land.
2. The subject land, however, could no longer be reconveyed to the Ibrahims and Maruhoms since the same was already
expropriated and paid for by the petitioner
3. Be that as it may, the Ibrahims and Maruhoms, as true owners of the subject land, are the rightful recipients of whatever
rental fees and indemnity that may be due for the subject land as a result of its expropriation.
Notable in the trial court’s decision, however, was that it held both Mangondato and the petitioner solidarily liable to the
Ibrahims and Maruhoms for the rental fees and expropriation indemnity adjudged.
ISSUE: Whether or not it is correct, in view of the facts and circumstances in this case, to hold petitioner liable in favor of
the Ibrahims and Maruhoms for the rental fees and expropriation indemnity adjudged due for the subject land.
RULING:
Effect of Extinguishment of Petitioner’s Obligation
The extinguishment of petitioner’s obligation to pay for the rental fees and expropriation indemnity due the subject land
carries with it certain legal effects:
First. If Mangondato turns out to be the real owner of the subject land, the Ibrahims and Maruhoms would not be entitled to
recover anything from anyone for the subject land.1âwphi1 Consequently, the partial execution of the decision in Civil Case
No. 967-93 that had led to the garnishment of Mangondato’s moneys in the possession of the Social Security System (SSS)
in the amount of ₱2,700,000.00 in favor of the Ibrahims and Maruhoms, becomes improper and unjustified. In this event,
therefore, the Ibrahims and Maruhoms may be ordered to return the amount so garnished to Mangondato.
Otherwise, i.e. if the Ibrahims and Maruhoms really are the true owners of the subject land, they may only recover the rental
fees and expropriation indemnity due the subject land against Mangondato but only up to whatever payments the latter had
previously received from petitioner pursuant to Civil Case No. 605-92 and Civil Case No. 610-92.
Second. At any rate, the extinguishment of petitioner’s obligation to pay for the rental fees and expropriation indemnity due
the subject land negates whatever cause of action the Ibrahims and Maruhoms might have had against the former in Civil
Case No. 967-93. Hence, regardless of who between Mangondato, on one hand, and the Ibrahims and Maruhoms, on the
other, turns out to be the real owner of the subject land, the dismissal of Civil Case No. 967-93 insofar as petitioner
isconcerned is called for.
WHEREFORE, premises considered, the instant petition is GRANTED. The Decision dated 24 June2005 and Resolution
dated 5 December 2006 of the Court of Appeals in CA-G.R. CV No. 68061 is hereby SET ASIDE. The Decision dated 16
April 1998 of the Regional Trial Court in Civil Case No. 967-93 is MODIFIED in that petitioner is absolved from any liability
in that case in favor of the respondents Lucman M. Ibrahim, Atty. Omar G. Maruhom, Elias G. Maruhom, Bucay G. Maruhom,
Mamod G. Maruhom, Farouk G. Maruhom, Hidjara G. Maruhom, Rocania G. Maruhom, Potrisam G. Maruhom, Lumba G.
Maruhom, Sinab G. Maruhom, Acmad G. Maruhom, Solayman G. Maruhom, Mohamad M. Ibrahim and Caironesa M.
Ibrahim. Civil Case No. 967-93 is DISMISSED as against petitioner.
LAND BANK v. ALFREDO ONG
Modes of Extinguishment - Payment or Performance
LAND BANK OF THE PHILIPPINES v. ALFREDO ONG

GR NO 190755 NOVEMBER 24, 2010
The creditor is not bound to accept payment or performance by a third person who has no interest in the
fulfillment of the obligation, unless there is a stipulation to the contrary.
FACTS:
Spouses Johnson and Evangeline Sy secured a loan (16 million) from Land Bank Legazpi secured by 3
residential lots, 5 cargo trucks, and a warehouse. The Notice of Loan Approval contained an acceleration
clause wherein any default in payment of amortizations or other charges would accelerate the maturity of the
loan. However, when they could no longer pay their loan, they sold 3 of their mortgaged parcels of land
to Angelina Gloria Ong, Evangeline’s mother, under a Deed of Sale with Assumption of Mortgage.
Petitioner Alfredo Ong, Evengeline’s father informed Land Bank about the sale and assumption of mortgage, to
which Atty. Edna Hingco, the Legazpi City Land Bank Branch Head, affirmed that there was nothing wrong with
the agreement and provided them with requirements for the assumption of mortgage. Alfredo was made to pay
part of the principal (750,000) and update due or accrued interests on the promissory notes so that Atty.
Hingco could easily approve the assumption of mortgage. Alfredo issued a check, and a receipt was issued for
his payment. He was then informed that the certificate of title of the Spouses Sy would be transferred in his
name, but this never materialized. No notice of transfer was sent to him.
He later found out that application for assumption of mortgage was disapproved. Land Bank foreclosed the
mortgage and Alfredo only learned of the foreclosure when he saw the subject mortgage properties included in
a Notice of Foreclosure of Mortgage and Auction Sale. Land Bank’s lawyer told Alfredo’s counsel that the
750,000 he paid would be returned. Payment was never returned, which prompted Alfredo to initiate an action
for recovery of sum of money with damages against Land Bank. He maintained that Land Bank’s foreclosure
without informing him of the denial of his assumption of the mortgage was done in bad faith as he was lured into
believing that his payment would cause the approval his assumption of the loan.
Atty. Hingco claimed that as branch manager she had no authority to approve loans and could not assure
anybody of its approval, that the bank processes an assumption of mortgage as a new loan, since the new
borrower is considered a new client. Thus, Alfredo’s proposal was referred to a separate office. She added that
although agreement between the spouses Sy and Alfredo was valid between them and that the bank would
accept payments from him, Alfredo did not pay any further amount so the foreclosure of the loan collaterals
ensued. She further argued that there was no written demand from Alfredo before the case against the bank
was filed in court. Lastly, he had made the payment even before he applied for the assumption and that the bank
received the said amount as the subject account was past due and demandable.
RTC held that the contract approving the assumption of mortgage was not perfected as a result of the credit
investigation conducted on Alfredo. CA affirmed the RTC Decision, holding that Alfredo’s recourse is not against
the Sy spouses. The payment was for the approval of his assumption of mortgage and not for payment of arrears
incurred by the Sy spouses. As such, it ruled that it would be incorrect to consider Alfredo a third person with no
interest in the fulfillment of the obligation under Article 1236 of the Civil Code.
ISSUE: Whether or not Land Bank is bound to accept payment from Alfredo for the loan of Spouses Sy; and
whether novation exists.
RULING:
NO. Art. 1236 provides: The creditor is not bound to accept payment or performance by a third person
who has no interest in the fulfillment of the obligation, unless there is a stipulation to the contrary.
Whoever pays for another may demand from the debtor what he has paid, except that if he paid without the
knowledge or against the will of the debtor, he can recover only insofar as the payment has been beneficial to
the debtor.
We agree with Land Bank on this point as to the first part of paragraph 1 of Art. 1236. Land Bank was not bound
to accept Alfredo’s payment, since as far as the former was concerned, he did not have an interest in the payment
of the loan of the Spouses Sy. However, in the context of the second part of said paragraph, Alfredo was not
making payment to fulfill the obligation of the Spouses Sy. Alfredo made a conditional payment so that the
properties subject of the Deed of Sale with Assumption of Mortgage would be titled in his name. It is clear from
the records that Land Bank required Alfredo to make payment before his assumption of mortgage would be
approved. He was informed that the certificate of title would be transferred accordingly. He, thus, made payment
not as a debtor but as a prospective mortgagor. But the trial court stated:
[T]he contract was not perfected or consummated because of the adverse finding in the credit
investigation which led to the disapproval of the proposed assumption. There was no evidence presented
that plaintiff was informed of the disapproval. What he received was a letter dated May 22, 1997 informing
him that the account of spouses Sy had matured but there [were] no payments. This was sent even
before the conduct of the credit investigation on June 20, 1997 which led to the disapproval of the
proposed assumption of the loans of spouses Sy.
Alfredo, as a third person, did not, therefore, have an interest in the fulfillment of the obligation of the
Spouses Sy, since his interest hinged on Land Bank’s approval of his application, which was denied.
The circumstances of the instant case show that the second paragraph of Art. 1236 does not apply. As Alfredo
made the payment for his own interest and not on behalf of the Spouses Sy, recourse is not against the latter.
And as Alfredo was not paying for another, he cannot demand from the debtors, the Spouses Sy, what he has
paid.
We do not agree, then, with the CA in holding that there was a novation in the contract between the parties. Not
all the elements of novation were present. Novation must be expressly consented to. Moreover, the conflicting
intention and acts of the parties underscore the absence of any express disclosure or circumstances with which
to deduce a clear and unequivocal intent by the parties to novate the old agreement.
Novation, in its broad concept, may either be extinctive or modificatory. It is extinctive when an old obligation is
terminated by the creation of a new obligation that takes the place of the former; it is merely modificatory when
the old obligation subsists to the extent it remains compatible with the amendatory agreement. An extinctive
novation results either by changing the object or principal conditions (objective or real), or by substituting the
person of the debtor or subrogating a third person in the rights of the creditor (subjective or personal). Under this
mode, novation would have dual functions ─ one to extinguish an existing obligation, the other to substitute a
new one in its place ─ requiring a conflux of four essential requisites: (1) a previous valid obligation; (2) an
agreement of all parties concerned to a new contract; (3) the extinguishment of the old obligation; and (4) the
birth of a valid new obligation. x x x
In order that an obligation may be extinguished by another which substitutes the same, it is imperative that it be
so declared in unequivocal terms, or that the old and the new obligations be on every point incompatible with
each other. The test of incompatibility is whether or not the two obligations can stand together, each one having
its independent existence. x x x (Emphasis supplied.)
Furthermore, Art. 1293 of the Civil Code states:

Novation which consists in substituting a new debtor in the place of the original one, may be made even without
the knowledge or against the will of the latter, but not without the consent of the creditor. Payment by the new
debtor gives him rights mentioned in articles 1236 and 1237. Land Bank is thus correct when it argues that there
was no novation in the following:
[W]hether or not Alfredo Ong has an interest in the obligation and payment was made with the knowledge or
consent of Spouses Sy, he may still pay the obligation for the reason that even before he paid the amount of
P750,000.00 on January 31, 1997, the substitution of debtors was already perfected by and between Spouses
Sy and Spouses Ong as evidenced by a Deed of Sale with Assumption of Mortgage executed by them on
December 9, 1996. And since the substitution of debtors was made without the consent of Land Bank – a
requirement which is indispensable in order to effect a novation of the obligation, it is therefore not bound to
recognize the substitution of debtors. Land Bank did not intervene in the contract between Spouses Sy and
Spouses Ong and did not expressly give its consent to this substitution.
J. M. TUASON & Co. INC. VS. JAVIER
Article 1234 - obligation has been substantially performed in good faith
J. M. TUASON & Co. INC., Plaintiff-Appellant, v. LIGAYA JAVIER, Defendant-Appellee.

G.R. No. L-28569 February 27, 1970
If the obligation has been substantially performed in good faith, the obligor may recover as though there had
been a strict and complete fulfillment, less damages suffered by the obligee.
FACTS:
On September 7, 1954, a contract was entered into between the plaintiff, and defendant-appellee, Ligaya Javier,
whereby plaintiff agreed to sell, transfer and convey to the defendant a parcel of land of Sta. Mesa Heights
Subdivision for the total sum of P3, 691.20 with interest thereon at the rate of 10% a year, payable as follows:
P396.12 upon the execution of the contract and P43.92 every month thereafter, for a period of 10 years. Upon
the execution of the contract and the payment of the first installment, the defendant was placed in possession of
the land. Until January 5, 1962, she paid the stipulated monthly installments which aggregated to P4, 134.08.
Subsequently, she defaulted in the payment of said monthly installments. On May 22, 1964, plaintiff informed
her by letter that their contract had been rescinded.
On July 9, 1964, plaintiff commenced the present action against defendant due to failure and refusal of the
defendant to vacate said land. Plaintiff prayed for that the contract be declared validly rescinded, and additionally,
defendant and all persons claiming under be ordered to deliver to the plaintiff the lot in question, with the
improvement thereon and to pay monthly rentals from January 5, 1962 until the property had been surrendered
to the plaintiff.
In her answer, defendant admitted she had defaulted in the payment of the stipulated monthly installments from
January 5, 1962 due to unforeseen circumstances. She is also willing to pay all arrears in installments under the
contract and had in fact, offered the same to the plaintiff and that the contract cannot be rescinded upon the
unilateral act of the plaintiff.
The Court rendered its Decision, applying Art. 1592 of our Civil Code, declaring that the contract to sell has not
yet been rescinded and ordering the defendant to pay the plaintiff within 60 days from receipt hereof all
installment payments in arrears together with interests. Hence, this appeal by the plaintiff.
ISSUE: Whether or not remedy of rescission is not available in instant case for failure to pay price at the time
agreed upon.
RULING:
Yes. The Court held that as stated in Article 1234 of the Civil Code “If the obligation has been substantially
performed in good faith, the obligor may recover as though there had been a strict and complete fulfillment, less
damages suffered by the obligee.
In this connection, it should be noted that, apart from the initial installment of P396.12, paid upon the execution
of the contract, on September 7, 1954, the defendant religiously satisfied the monthly installments accruing
thereafter, for a period of almost eight (8) years, or up to January 5, 1962; that, although the principal obligation
under the contract was P3,691.20, the total payments made by the defendant up to January 5, 1962, including
stipulated interest, aggregated P4,134.08; that the defendant has offered to pay all of the installments overdue
including the stipulated interest, apart from reasonable attorney’s fees and the costs; and that, accordingly, the
trial court sentenced the defendant to pay all such installments, interest, fees and costs.
Thus, plaintiff will thereby recover everything due thereto, pursuant to its contract with the defendant, including
such damages as the former may have suffered in consequence of the latter’s default. Under these
circumstances, We feel that, in the interest of justice and equity, the decision appealed from may be upheld upon
the authority of Art. 1234 of the Civil Code.
LEGARDA v SALDANA
LEGARDA v SALDANA
GR. No. L-26578, January 28, 1974
Under article 1234 of the Civil Code "If the obligation has been substantially performed in good faith, the obligor
may recover as though there had been a strict and complete fulfillment, less damages suffered by the obligee."
FACTS:
Private respondent entered into two written contracts with petitioner Legarda Hermanos as subdivision owner,
whereby the latter agreed to sell to him Lots Nos. 7 and 8 of block No. 5N of the subdivision with an area of 150
square meters each, for the sum of P1,500.00 per lot, payable over the span of ten years divided into 120 equal
monthly installments of P19.83 with 10% interest per annum, to commence on May 26, 1948, date of execution
of the contracts.
Respondent faithfully paid for eight continuous years about 95 (of the stipulated 120) monthly installments
totalling P3,582.06 up to the month of February 1956. After February 1956 up to the filing of respondent's
complaint in the Manila court of first instance in 1961, respondent did not make further payments. The account
thus shows that he owed petitioners the sum of P1,317.72 on account of the balance of the purchase price
(principal) of the two lots (in the total sum of P3,000.00), although he had paid more than the stipulated purchase
price of P1.500.00 for one lot.
On February 2, 1961 just before the filing of the action, respondent wrote petitioners stating that his desire to
build a house on the lots was prevented by their failure to introduce improvements on the subdivision as "there
is still no road to these lots," and requesting information of the amount owing to update his account as "I intend
to continue paying the balance due on said lots."
Petitioners replied in their letter of February 11, 1961 that as respondent had failed to complete total payment of
the 120 installments by May, 1958 as stipulated in the contracts to sell, "pursuant to the provisions of both
contracts all the amounts paid in accordance with the agreement together with the improvements on the premises
have been considered as rents paid and as payment for damages suffered by your failure," and "said cancellation
being in order, is hereby confirmed."
On July 17, 1963 the trial court rendered a decision sustaining petitioner's cancellation of the contracts thus
respondent appealed to the Court of Appeals. The CA reversed the judgment of the trial court and ordered
petitioners "to deliver to the plaintiff possession of one of the two lots, at the choice of defendants, and to execute
the corresponding deed of conveyance to the plaintiff for the said lot. Hence this petition.
ISSUE: Whether petitioner may avail of the remedy of rescission
RULING: NO.
The monthly payments for eight years made by respondent were applied to his account without specifying or
distinguishing between the two lots subject of the two agreements under petitioners' own statement of account.
Even considering respondent as having defaulted after February 1956, when he suspended payments after the
95th installment, he had as of then already paid by way of principal (P1,682.28) more than the full value of one
lot (P1,500.00). The judgment recognizing this fact and ordering the conveyance to him of one lot of his choice
while also recognizing petitioners' right to retain the interests of P1,889.78 paid by him for eight years on both
lots, besides the cancellation of the contract for one lot which thus reverts to petitioners, cannot be deemed to
deny substantial justice to petitioners nor to defeat their rights under the letter and spirit of the contracts in
question.
LEGARDA v SALDANA
The Court's doctrine in the analogous case of J.M. Tuason & Co., Inc. vs. Javier is fully applicable to the present
case, with the respondent at bar being granted lesser benefits, since no rescission of contract was therein
permitted.
In affirming, the Court held that "Regardless, however, of the propriety of applying said Art. 1592 thereto, We
find that plaintiff herein has not been denied substantial justice, for, according to Art. 1234 of said Code: 'If the
obligation has been substantially performed in good faith, the obligor may recover as though there had been a
strict and complete fulfillment, less damages suffered by the obligee,'" and "that in the interest of justice and
equity, the decision appealed from may be upheld upon the authority of Article 1234 of the Civil Code."
AZCONA v. JAMANDRE
AZCONA v. JAMANDRE
G.R. No. L-30597 June 30, 1987
The words "as per contract" are especially significant as they suggest that the parties were aware of the
provisions of the agreement, which was described in detail elsewhere in the receipt. The rental stipulated
therein was P7,200.00. The payment being acknowledged in the receipt was P7,000.00 only. Yet no mention
was made in the receipt of the discrepancy and, on the contrary, the payment was acknowledged "as per
contract."
Art. 1235. When the obligee accepts the performance, knowing its incompleteness or irregularity, and without
expressing any protest or objection, the obligation is deemed fully complied with.
FACTS:
By a contract of lease, Guillermo Azcona (petitioner) leased 80 hectares of his 150-hectare pro indiviso share in
Hacienda Sta. Fe in Escalante, Negros Occidental, to Cirilo Jamandre (represented by respondent
administrator). The agreed yearly rental was P7,200.00. The lease was for 3 agricultural years beginning 1960,
extendible at the lessee's option to two more agricultural years, up to 1965.
On March 30, 1960, the first annual rental was due. However, petitioner did not deliver possession of the leased
property to the respondent, thus he "waived" payment of that rental. On October 26, 1960, respondent entered
the premises after his payment of P7,000.00, which was acknowledged in a receipt.
On April 6, 1961, petitioner notified respondent that the contract of lease was deemed cancelled, terminated,
and of no further effect," pursuant to its paragraph 8, for violation of the conditions specified in the said
agreement. This prompted respondent and petitioner to file a complaint and a counterclaim, respectively, which
was dismissed by the trial court on the ground of in pari delicto.
In this case, petitioner argues that there was default in the payment by the respondent because he was P200.00
short of the P7,200.00 annual rental. That deficiency never having been repaired, the contract should be deemed
cancelled in accordance with its paragraph 8.
For his part, respondent argues that the receipt represented an express reduction of the stipulated rental in
consideration of his allowing the use of 16 hectares of the leased area by the petitioner as grazing land for his
cattle. Having unqualifiedly accepted the amount of P7,000.00 as rental for the agricultural year 1961-62,
petitioner should not now be heard to argue that the payment was incomplete.
ISSUE: Whether or not the obligation is deemed fully extinguished by petitioner's acceptance of incomplete
payment.
RULING:
Yes. The Court held that the obligation is deemed fully extinguished because petitioner accepted the payment
knowing its incompleteness or irregularity and without any objection or protest.
The amount of P7,000.00 paid to by the respondent and received by the petitioner represented payment in full
of the rental for the agricultural year 1961-62.
The language is clear enough: "The amount of SEVEN THOUSAND PESOS (P7,000.00), Philippine Currency,
as payment for the rental corresponding to crop year 1961-62 ... to the rental due on or before January 30, 1961,
as per contract." The conclusion should be equally clear.
AZCONA v. JAMANDRE
The words "as per contract" are especially significant as they suggest that the parties were aware of the
provisions of the agreement, which was described in detail elsewhere in the receipt. The rental stipulated therein
was P7,200.00. The payment being acknowledged in the receipt was P7,000.00 only. Yet no mention was made
in the receipt of the discrepancy and, on the contrary, the payment was acknowledged "as per contract." We
read this as meaning that the provisions of the contract were being maintained and respected except only for
the reduction of the agreed rental.
It is noted that the receipt was meticulously worded, suggesting that the parties were taking great pains, indeed,
to provide against any possible misunderstanding, as if they were even then already apprehensive of future
litigation. Such a reservation-if there was one-would have been easily incorporated in the receipt, as befitted the
legal document it was intended to be.
In any event, the relative insignificance of the alleged balance seems to us a paltry justification for annulling the
contract for its supposed violation. If the petitioner is fussy enough to invoke it now, it stands to reason that he
would have fussed over it too in the receipt he willingly signed after accepting, without reservation and apparently
without protest, only P7,000.00.
The applicable provision is Article 1235 of the Civil Code, declaring that:
Art. 1235. When the obligee accepts the performance, knowing its incompleteness or irregularity, and
without expressing any protest or objection, the obligation is deemed fully complied with.
The petitioner says that he could not demand payment of the balance of P200.00 on October 26, 1960, date of
the receipt because the rental for the crop year 1961-62 was due on or before January 30, 1961. But this would
not have prevented him from reserving in the receipt his right to collect the balance when it fell due. Moreover,
there is no evidence in the record that when the due date arrived, he made any demand, written or verbal, for
the payment of that amount.
ARAÑAS v. TUTAAN
Modes of Extinguishment – Payment or Performance
JOSE ARAÑAS and LUISA QUIJENCIO ARAÑAS vs. HON EDUARDO C. TUTAAN and UNIVERSAL
TEXTILE MILLS, INC.
GR No L-52807 February 29, 1984
It is elementary that payment made by a judgment debtor to a wrong party cannot extinguish the judgment
obligation of such debtor to its creditor. It is equally elementary that once a judgment becomes final and
executory, the court which rendered it cannot change or modify the same in any material aspect such as what
respondent judge has without authority attempted to do with his questioned order, which would relieve the
judgment debtor UTEX of its acknowledged judgment obligation to pay to petitioners as the lawful owners of
the questioned shares of stock, the cash dividends that accrued after the rendition of the judgment recognizing
them as the lawful owners.
FACTS:
In a decision previously rendered in 1971, petitioner Luisa, assisted by her spouse and co-petitioner
Jose, was declared the owner of 400 shares of stock of respondent Universal Textile Mills Inc. (UTEX). UTEX
was then ordered to cancel the certificates covering said shares that were previously issued to Gene Manuel
and B.R. Castañeda, and to issue new ones in the name of petitioner and deliver all dividends. In a motion for
clarification, the trial court ruled that its judgment against UTEX was to pay to Luisa Quijencio Arañas the cash
dividends which accrued to the stocks in question after the rendition of this decision excluding cash dividends
already paid to its co-defendants Gene Manuel and B.R. Castañeda which accrued before its decision. A motion
for new trial was granted in favor of Manuel and Castañeda, and after such trial, it rendered a decision on Oct
23, 1972, which was substantially the same as its first decision (May 3, 1971) which had already become final
and executory against UTEX, declaring petitioners the owners of the questioned shares. The CA affirmed the
trial court’s judgment in toto.
A writ of execution was issued, directing UTEX to cancel the certificates of stock in the names of Manuel
and Castañeda, and the issuance of new ones in the names of petitioners, including the cash dividends that
accrued to the same stocks from 1972 to 1979. Upon UTEX’ motion for partial reconsideration, alleging that the
cash dividends of the stocks from the said period had already been paid and delivered to Manuel and Castañeda
who then still appeared as the registered owner of the shares, the lower court partially reconsidered its order "to
the effect that the defendant Universal Textile Mills, Inc. is absolved from paying the cash dividend corresponding
to the stocks in question to the plaintiffs for the period 1972 to 1979.
ISSUE: Whether or not UTEX was correctly absolved of from paying petitioners the cash dividends from 1972
to 1979 since such dividends were already paid to Manuel and Castañeda who then still appeared as
registered owner of the shares, despite the final and executory judgment in 1971, declaring petitioners as the
owners of the questioned UTEX shares of stock
RULING:
No. The Court held that the burden of recovering supposed payment of the cash dividends made
by UTEX to the wrong parties squarely falls upon itself by its own action and cannot be passed by it to
petitioners as innocent parties.
The final and executory judgment against UTEX in favor of petitioners, declared petitioners as the owners
of the questioned UTEX shares of stock as againsts its co-defendants Castañeda and Manuel. It was further
made clear upon UTEX’ own motion for clarification that all dividends accruing to the said shares of stock after
the rendition of the decision of August 7, 1971 which for the period from 1972 to 1979 amounted to P100,701.45
were to be paid by UTEX to petitioners.
There is no legal nor equitable basis for respondent judge’s position "that it would indeed be most unjust
and inequitable to require the defendant Universal Textile Mills, Inc. to pay twice cash dividends on particular
ARAÑAS v. TUTAAN
shares of stocks." If UTEX nevertheless chose to pay the wrong parties, notwithstanding its full knowledge and
understanding of the final judgment, that it was liable to pay all dividends after the trial court’s judgment in 1971
to petitioners as the lawfully declared owners of the questioned shares of stock (but which could not be enforced
against it pending the outcome of the appeal filed by the co-defendants Castañeda and Manuel in the Court of
Appeals), it only had itself to blame therefor.
The burden of recovering the supposed payment of the cash dividends made by UTEX to the wrong
parties Castañeda and Manuel squarely falls upon itself by its own action and cannot be passed by it to
petitioners as innocent parties. It is elementary that payment made by a judgment debtor to a wrong party cannot
extinguish the judgment obligation of such debtor to its creditor. It is equally elementary that once a judgment
becomes final and executory, the court which rendered it cannot change or modify the same in any material
aspect such as what respondent judge has without authority attempted to do with his questioned order, which
would relieve the judgment debtor UTEX of its acknowledged judgment obligation to pay to petitioners as the
lawful owners of the questioned shares of stock, the cash dividends that accrued after the rendition of the
judgment recognizing them as the lawful owners. (Miranda v. Tiangco, 96 Phil. 626 [1955]). Execution of a final
and executory judgment according to its terms is a matter of right for the prevailing party and becomes the
ministerial duty of the court (De los Angeles v. Victoriano, 109 Phil. 12).
KALALO v. LUZ
OCTAVIO A. KALALO, plaintiff-appellee, vs. ALFREDO J. LUZ, defendant-appellant

G.R. No. L-27782 JULY 31, 1970
Even if the obligation assumed by the defendant was to pay the plaintiff a sum of money expressed in
American currency, the indemnity to be allowed should be expressed in Philippine currency at the rate of
exchange at the time of judgment rather than at the rate of exchange prevailing on the date of the defendant’s
breach.
FACTS:
Plaintiff-appellee Ocatavio A. Kalalo, entered into an agreement with defendant-appellant Alfredo J. Luz,
whereby the former was to render engineering design services to the latter for fees, as stipulated in the
agreement. The services included design computation and sketches, contract drawing and technical
specifications of all engineering phases of the project designed by O.A Kalalo and anything relative to the work.
On December 1, 1961, appellee sent to the appellant a statement of account which itemized the defendant-
appellant’s account, stating that the services rendered amounted to P116,565.00 from which sum was to be
deducted previous payments made in the amount of P57,000.00 which left a balance of P59,565.00.
On May 18, 1962, appellant sent appellee a resume of fees due to the latter. Said fees, according to the appellant,
amounted to P10,861.08 instead of the amount claimed by appellee. On June 14, 1962, appellant sent appellee
a check for said amount, which appellee refused to accept as full payment of the balance of the fees due him.
On August 10, 1962, appellee filed a complaint against the appellant, and alleged that for services rendered in
connection with the different projects therein mentioned was due to him in sums consisting of $28,000 and
P100,204.46, excluding interests of which sums only P69,323.21 had been paid, thus leaving unpaid the amount
of $28,000 and the balance of P30,881.25.
Both parties agreed to submit the issue to a Commissioner. The report of the Commissioner raised two legal
issues, one of which was whether the recommendation in the Report that the payment of the amount due to
plaintiff in dollars was legally permissible, and if not, at what rate of exchange it should be paid in pesos.
Judgment was later rendered in favor of plaintiff, ordering the defendant to pay the amount asked for, including
legal rates of interest and damages.
ISSUE: Whether the rate of exchange of dollar to peso applies shall be that at the time of the payment of the
judgment;
RULING:
NO. On August 25, 1961, the date when appellant said his obligation to pay the appellee’s fees became due,
there was two rates of exchange; to wit: the preferred rate of P2.00 to $1.00 and the free market rate. It was so
provided in Circular No. 121 of the Central Bank of the Philippines, dated March 2, 1961, amending an earlier
Circular No. 117, and in force until January 21, 1962, when it was amended by Circular No. 133.
Under the agreement, appellee was entitled to 20% of $140,000.00, or the amount of $28,000.00. Appellee,
however, cannot oblige the appellant to pay him in dollars, even if appellant himself had received his fee for the
IRRI project in dollars. This payment in dollars is prohibited by Republic Act 529, enacted on June 16, 1950.
Under Republic Act 529, if the obligation was incurred prior to the enactment of the Act and require payment in
a particular kind of coin or currency other than the Philippine currency, the same shall be discharged in Philippine
currency measured at the prevailing rate of exchange at the time the obligation was incurred.
KALALO v. LUZ
As we have adverted to, Republic Act 529 was enacted on June 16, 1950. In the case no before us, the obligation
of appellant to pay the appellee the sum of $28,000.00, accrued on August 25, 1961, or after the enactment of
Republic Act 529. It follows that the provision which requires payment at the prevailing rate of exchange when
the obligation was incurred cannot be applied. The logical conclusion therefore, is that the rate of exchange
should be that prevailing at the time of payment.
It is our considered view that appellant should pay the appellee the equivalent in pesos of the $28,000.00 at the
free market rate of exchange at the time of payment. And so the trial court did not err when it held that herein
appellant should pay appellee $28,000.00 “to be converted into Philippine Currency on the basis of the current
rate of exchange at the time of payment of this judgment.”
PONCE v. CA
Nelia G. Ponce and Vicente C. Ponce, vs. The Honorable Court of Appeals, and Jesusa B. Afable
G.R. No. L-49494 May 31, 1979
RA 529 prohibits the payment of a domestic obligation in dollars - the creditor cannot oblige the debtor to pay
in dollars, even if the loan were given in said currency. In such a case, the indemnity to be allowed should be
expressed in Philippine currency on the basis of the current rate of exchange at the time of payment.
FACTS:
On June 3, 1969, private respondent Jesusa B. Afable (Afable), and two other persons, Mendoza and Diño
(debtors) executed a promissory note in favor of petitioner Nelia G. Ponce for P814,868,42, payable without
interest on or before July 31, 1969.
Included in the promissory notes were stipulations stating:

1. If the debt was not paid at maturity, it shall draw interest at 12% per annum, without demand;
2. That it should be necessary to bring suit to enforce payment of the note;
3. The debtors shall pay a sum equivalent to 10% of the total amount due for attorney’s fees; and, in the
event of failure to pay the debt plus interest in accordance with these terms;
4. That the debtors shall execute a first mortgage in favor of the creditor over their properties.
The debtors failed to comply with the terms of the agreement. Nelia and her husband Vicente Ponce (Spouses
Ponce) filed a complaint against the debtors before the Court of First Instance of Manila (CFI Manila) for the
recovery of the principal sum plus interests and damages.
Diño contended that she did not borrow any amount from the Ponce, and that her signature was obtained by the
plaintiffs on their assurance that the same was for “formality only”. Mendoza admitted the authenticity and due
execution of the note, but raised as an affirmative defense that the promissory note was the result of usurious
transactions.
Afable asserted that the promissory note failed to express the true intent and agreement of the parties. Allegedly,
the true agreement was that the obligation would be assumed and paid entirely by Mendoza. Under the true
agreement, Afable was not to incur any personal obligation as to the payment because the same would be repaid
by Mendoza.
The trial court ruled in favor of spouses Ponce, and ordered Afable, Mendoza, and Diño to pay, jointly and
severally, the principal sum plus 12% interest per annum, from July 31, 1969 until full payment, and a sum
equivalent to 10% of the total amount as attorney’s fees and costs.
Raised in her appeal to the Court of Appeals (CA), Afable argued that the contract involved the payment of US
Dollars, and was therefore illegal. Under in pari delicto rule, since both parties were guilty of violating the law,
neither one can recover.
The CA first affirmed the decision of the trial court, but later reversed its judgment and dismissed the complaint
against Afable. It held that the intent of the parties was that the promissory note was payable in US dollars, and
therefore, the transaction was illegal, and neither party was entitled to recover under the in pari delicto rule.
The intention that the obligation be paid in US dollars was not contained in the promissory note, but by admission
of Ponce that the agreement would be paid in dollars. The CA held that the intent of the parties prevailed over
the bare words of the written contract. The agreement was null and void under Republic Act No. 529 (RA 529).
PONCE v. CA
ISSUE: Whether or not the agreement to pay in US dollars prevents creditors from claiming payment of the
obligation.
RULING:
NO. While the agreement to pay in dollars was declared as null and void and of no effect, what the law specifically
prohibits was the payment in currency other than legal tender. It does not defeat a creditor’s claim for payment.
Under RA 529, “every other domestic obligation… whether or not any such provision as to payment is contained
therein or made with respect thereto, shall be discharged upon payment in any coin or currency which at the
time of payment is legal tender for public and private debts. A contrary rule would allow a person to profit or
enrich himself inequitably at another’s expense.
In this case, the promissory note provided on its face for payment of the obligation in Philippine currency; spouses
Ponce were suing on the basis of the promissory note, whereby the parties have agreed to convert the dollar
loan into Philippine currency. Furthermore, the promissory note contained no provision “giving the obligee the
right to require payment in a particular kind of currency other than Philippine currency”.
Even considering that the intention of the parties was to provide for payment of the obligation in dollars, spouses
Ponce can still recover the amount in its peso equivalent. Citing Eastboard Navigation, Ltd v. Juan Ysmale &
Co, Inc., and Arrieta v. National Rice & Corn Group, the Court held that if there was any agreement to pay an
obligation in a currency other than Philippine legal tender, the same was null and void as contrary to public policy
- and the most that could be demanded was to pay said obligation in Philippine currency.
RA 529 prohibits the payment of a domestic obligation in dollars - the creditor cannot oblige the debtor to pay in
dollars, even if the loan were given in said currency. In such a case, the indemnity to be allowed should be
expressed in Philippine currency on the basis of the current rate of exchange at the time of payment.
NEW PACIFIC TIMBER V. SENERIS
NEW PACIFIC TIMBER & SUPPLY COMPANY, INC., petitioner, vs. HON. ALBERTO V. SENERIS,
RICARDO A. TONG and EX-OFFICIO SHERIFF HAKIM S. ABDULWAHID, respondents.
GR NO L-4176 December 19, 1980
"a check which has been cleared and credited to the account of the creditor shall be equivalent to a delivery to
the creditor in cash in an amount equal to the amount credited to his account"
FACTS:
• petitioner is the defendant in a complaint for collection of a sum of money filed by the private respondent.
• a compromise judgment was rendered by the respondent Judge in accordance with an amicable
settlement entered into by the parties the terms and conditions are;
• (1) That defendant will pay to the plaintiff the amount of Fifty Four Thousand Five Hundred Pesos
(P54,500.00) at 6% interest per annum to be reckoned from August 25, 1972;
• (2) That defendant will pay to the plaintiff the amount of Six Thousand Pesos (P6,000.00) as
attorney's fees for which P5,000.00 had been acknowledged received by the plaintiff under
Consolidated Bank and Trust Corporation Check No. 16-135022 amounting to P5,000.00 leaving
a balance of One Thousand Pesos (P1,000.00);
• (3) That the entire amount of P54,500.00 plus interest, plus the balance of P1,000.00 for attorney's
fees will be paid by defendant to the plaintiff within five months from today, July 19, 1974; and
• (4) Failure one the part of the defendant to comply with any of the above-conditions, a writ of
execution may be issued by this Court for the satisfaction of the obligation.
• For failure of the petitioner to comply with his judgment obligation -> respondent Judge, upon motion of
the private respondent, issued an order for the issuance of a writ of execution + auction sale was set on
January 15, 1975
• Ex-Officio Sheriff levied upon the following personal properties of the petitioner, to wit:
• (1) Unit American Lathe 24
• (1) Unit American Lathe 18 Cracker Wheeler
• (1) Unit Rockford Shaper 24
• HOWEVER, prior to the auction sale, petitioner deposited with the Clerk of Court the sum of P63,130.00
for the payment of the judgment obligation
• private respondent through counsel, refused to accept the check as well as the cash deposit.
The main issue to be resolved in this instance is as to whether or not the private respondent can validly refuse
acceptance of the payment of the judgment obligation made by the petitioner consisting of P50,000.00 in
Cashier's Check and P13,130.00 in cash which it deposited with the Ex-Officio Sheriff before the date of the
scheduled auction sale.
ISSUE: Whether or not petitioner’s deposit of a check with the Clerk of Court prior to the day of the auction sale
of the levied properties constitutes payment which extinguishes petitioner’s monetary obligation to private
respondent [YES]
RULING:
Yes. The Court ruled in the affirmative.
Section 63 of the Central Bank Act:

Sec. 63. Legal Character. — Checks representing deposit money do not have legal tender power and their
acceptance in payment of debts, both public and private, is at the option of the creditor, Provided, however, that
a check which has been cleared and credited to the account of the creditor shall be equivalent to a delivery to
the creditor in cash in an amount equal to the amount credited to his account.
NEW PACIFIC TIMBER V. SENERIS
Article 1249 of the New Civil Code:

Art. 1249. — The payment of debts in money shall be made in the currency stipulated, and if it is not possible to
deliver such currency, then in the currency which is legal tender in the Philippines.
The delivery of promissory notes payable to order, or bills of exchange or other mercantile documents shall
produce the effect of payment only when they have been cashed, or when through the fault of the creditor they
have been impaired.
In the meantime, the action derived from the original obligation shall be held in abeyance.
In this case, the check deposited by the petitioner in the amount of P50,000.00 is not an ordinary check but a
Cashier's Check of the Equitable Banking Corporation, a bank of good standing and reputation; it is also a
certified crossed check.
Considering that the whole amount deposited by the petitioner consisting of Cashier's Check of P50,000.00 and
P13,130.00 in cash covers the judgment obligation of P63,000.00 as mentioned in the writ of execution, then,
We see no valid reason for the private respondent to have refused acceptance of the payment of the obligation
in his favor.
ROMAN CATHOLIC BISHOP OF MALOLOS v. IAC
ROMAN CATHOLIC BISHOP OF MALOLOS, INC. vs. IAC

G.R. No. 72110. November 16, 1990
Tender of payment involves a positive and unconditional act by the obligor of offering legal tender currency as
payment to the obligee for the former’s obligation and demanding that the latter accept the same. Thus, tender
of payment cannot be presumed by a mere inference from surrounding circumstances. At most, sufficiency of
available funds is only affirmative of the capacity or ability of the obligor to fulfill his part of the bargain.
FACTS:
the subject contract over the land in question was executed between the petitioner as vendor and the private
respondent through its then president, Mr. Carlos F. Robes, as vendee, stipulating for a downpayment of
P23,930.00 and the balance of P100,000.00 plus 12% interest per annum to be paid within four (4) years from
execution of the contract. The contract likewise provides for cancellation, forfeiture of previous payments, and
reconveyance of the land in question in case the private respondent would fail to complete payment within the
said period.
After the expiration of the stipulated period for payment, Atty. Adalia Francisco (president of the company who
bought land) wrote the petitioner a formal request that her company be allowed to pay the principal amount of
P100,000.00 in three (3) equal installments of six (6) months each with the first installment and the accrued
interest of P24,000.00 to be paid immediately upon approval of the said request.
The petitioner formally denied the said request of the private respondent, but granted the latter a grace period of
five (5) days from the receipt of the denial to pay the total balance of P124,000.00. The private respondent wrote
the petitioner requesting an extension of 30 days from said date to fully settle its account but this was still denied.
Consequently, Atty. Francisco wrote a letter directly addressed to the petitioner, protesting the alleged refusal of
the latter to accept tender of payment made by the former on the last day of the grace period. But the private
respondent demanded the execution of a deed of absolute sale over the land in question.
Atty. Fernandez, wrote a reply to the private respondent stating the refusal of his client to execute the deed of
absolute sale so the petitioner cancelled the contract and considered all previous payments forfeited and the
land as ipso facto reconveyed.
From a perusal of the foregoing facts, we find that both the contending parties have conflicting versions on the
main question of tender of payment.
The trial court, in its ratiocination, preferred not to give credence to the evidence presented by the private
Respondent. According to the trial court:
. . . What made Atty. Francisco suddenly decide to pay plaintiff’s obligation on August 5, 1975, go to defendant’s
office at Malolos, and there tender her payment, when her request of August 4, 1975 had not yet been acted
upon until August 7, 1975? If Atty. Francisco had decided to pay the obligation and had available funds for the
purpose on August 5, 1975, then there would have been no need for her to write defendant on August 4, 1975
to request an extension of time. Indeed, Atty. Francisco’s claim that she made a tender of payment on August 5,
1975 — such alleged act, considered in relation to the circumstances both antecedent and subsequent thereto,
being not in accord with the normal pattern of human conduct — is not worthy of credence.
TC: ruled in favor of Petitioner. Declared the subject contract as cancelled.
IAC: reversed the decision of the trial court. The IAC, in finding that the private respondent had sufficient
available funds, ipso facto concluded that the latter had tendered payment.
ROMAN CATHOLIC BISHOP OF MALOLOS v. IAC
ISSUE: Whether or not a finding that private respondent had sufficient available funds on or before the grace
period for the payment of its obligation proof that it (private respondent) did tender of (sic) payment for its said
obligation within said period.
RULING:
No. The Court agree with the petitioner that a finding that the private respondent had sufficient available funds
on or before the grace period for the payment of its obligation does not constitute proof of tender of payment by
the latter for its obligation within the said period. Tender of payment involves a positive and unconditional act by
the obligor of offering legal tender currency as payment to the obligee for the former’s obligation and demanding
that the latter accept the same. Thus, tender of payment cannot be presumed by a mere inference from
surrounding circumstances. At most, sufficiency of available funds is only affirmative of the capacity or ability of
the obligor to fulfill his part of the bargain. But whether or not the obligor avails himself of such funds to settle his
outstanding account remains to be proven by independent and credible evidence. Tender of payment
presupposes not only that the obligor is able, ready, and willing, but more so, in the act of performing his
obligation. Ab posse ad actu non vale illatio. "A proof that an act could have been done is no proof that it was
actually done."
The respondent court was therefore in error to have concluded from the sheer proof of sufficient available funds
on the part of the private respondent to meet more than the total obligation within the grace period, the alleged
truth of tender of payment. The same is a classic case of non-sequitur.
ADDN. NOTES: The respondent court was therefore in error to have concluded from the sheer proof of sufficient
available funds on the part of the private respondent to meet more than the total obligation within the grace
period, the alleged truth of tender of payment. The same is a classic case of non-sequitur. A check, whether a
manager’s check or ordinary check, is not legal tender, and an offer of a check in payment of a debt is not a valid
tender of payment and may be refused receipt by the obligee or creditor.
Hence, where the tender of payment by the private respondent was not valid for failure to comply with the
requisite payment in legal tender or currency stipulated within the grace period and as such, was validly refused
receipt by the petitioner, the subsequent consignation did not operate to discharge the former from its obligation
to the latter.
TIBAJIA v. CA
NORBERTO TIBAJIA, JR. and CARMEN TIBAJIA vs. THE HONORABLE COURT OF APPEALS and EDEN
TAN
G.R. No. 100290 June 4, 1993
Art. 1249. The payment of debts in money shall be made in the currency stipulated, and if it is not possible to
deliver such currency, then in the currency which is legal tender in the Philippines.
The delivery of promissory notes payable to order, or bills of exchange or other mercantile documents shall
produce the effect of payment only when they have been cashed, or when through the fault of the creditor they
have been impaired.
FACTS:
Case No. 54863 was a suit for collection of a sum of money filed by Eden Tan against the Tibajia spouses.
A writ of attachment was issued by the trial court, the Deputy Sheriff filed a return stating that a deposit made by
the Tibajia spouses in the RTC in the amount of Four Hundred Forty Two Thousand Seven Hundred and Fifty
Pesos (P442,750.00) in another case, had been garnished by him.
RTC rendered its decision in civil case in favor of the plaintiff Eden Tan, ordering the Tibajia spouses to
pay her an amount in excess of Three Hundred Thousand Pesos (P300,000.00). On appeal, the Court of Appeals
modified the decision by reducing the award of moral and exemplary damages.
The Tibajia spouses delivered to Deputy Sheriff Eduardo Bolima the total money judgment in the following
form:
Cashier's Check P262,750.00

Cash 135,733.70
————
Total P398,483.70
Private respondent, Eden Tan, refused to accept the payment made by the Tibajia spouses and instead
insisted that the garnished funds deposited with the cashier of the RTC be withdrawn to satisfy the judgment
obligation. The defendant spouses (petitioners) filed a motion to lift the writ of execution on the ground that the
judgment debt had already been paid. The motion was denied by the trial court on the ground that payment in
cashier's check is not payment in legal tender and that payment was made by a third party other than the
defendant.
ISSUE: Whether or not payment by means of check (even by cashier's check) is considered payment in legal
tender as required by the Civil Code, Republic Act No. 529, and the Central Bank Act.
RULING:
NO. Under Art. 1249. The payment of debts in money shall be made in the currency stipulated, and if it
is not possible to deliver such currency, then in the currency which is legal tender in the Philippines.
The delivery of promissory notes payable to order, or bills of exchange or other mercantile documents
shall produce the effect of payment only when they have been cashed, or when through the fault of the creditor
they have been impaired.
From the aforequoted provisions of law, it is clear that this petition must fail.
TIBAJIA v. CA
In the recent cases of Philippine Airlines, Inc. vs. Court of Appeals and Roman Catholic Bishop of Malolos,
Inc. vs. Intermediate Appellate Court, this Court held that a check, whether a manager's check or ordinary check,
is not legal tender, and an offer of a check in payment of a debt is not a valid tender of payment and may be
refused receipt by the obligee or creditor.
The ruling in these two (2) cases merely applies the statutory provisions which lay down the rule that a
check is not legal tender and that a creditor may validly refuse payment by check, whether it be a manager's,
cashier's or personal check.
BOGNOT v. RRI LENDING CORP
LEONARDO BOGNOT v RRI LENDING CORPORATION

GR NO 180144 DATE SEPTEMBER 24, 2014
Novation is a mode of extinguishing an obligation by changing its objects or principal obligations, by

substituting a new debtor in place of the old one, or by subrogating a third person to the rights of the creditor.
In order to give novation legal effect, the creditor should consent to the substitution of a new debtor. Novation
must be clearly and unequivocally shown, and cannot be presumed.
FACTS:
Leonardo Bognot with his brother Rolando Bognot applied for and obtained a loan for P500,000 from RRI
Lending Corporation. The loan was evidenced by a promissory note and was secured by a post dated check.
Evidence shows that the Leonardo Bognot renewed the loan several times on a monthly basis. Bognot pays the
renewal fee of P54,600 for each renewal, issuance of a new post-dated check as security and execution and
renewal of the promissory not previously issued. This started on September 1996 and has been on going until
June 1997.
Several days before the loan was about to mature, Rolando’s wife, Julieta Bognot went to RRI and applied for
another renewal of the loan. She issued a promissory note and an International Bank Exchange Check to pay
for renewal fee. Julieta also claimed that she needed to bring home the loan documents for the Bognot siblings’
signature and replacement so she asked the clerk of RRI to release to her the original promissory note, the
disclosure statement and the check. However, Julieta never returned the documents nor issued a new post-
dated check.
RRI sent the Bognot brothers follow-up letters demanding payment of the loan. The demands went unheeded.
RRI then filed a complaint for sum of money before the RTC against the Bognot siblings.
RTC ruled in favor of RRI. RTC considered the wordings of the promissory note and found that the loan they
contracted was joint and solidary. It held that Rolando and Loenardo as makers of the promissory note. RTC
also ruled that RRI has successfully proven by preponderance of evidence that there was nonpayment of the
loan.
CA affirmed the RTC. CA found the defense of Bgnot of payment untenable and unsupported by clear and
convincing evidence. Bognot did not present any evidence showing that the check has been encashed and has
been applied to the loan, or any receipt evidencing payment of the loan.
ISSUE: Whether the obligation of Bognot was extinguished by payment and novation by substitution of debtors
RULING:
No, the obligation of Bognot was not extinguished by payment or novation.
No evidence was presented by Bognot to establish the fact of payment. One who pleads payment has the burden
of proving it, the burden rests on the defendant to prove payment rather than on the plaintiff to prove non-
payment. Petitioner merely relied on RRI’s cancellation and return to him of the check. This is not enough for
evidence as payment.
Article 1249 of the Civil Code provides that “Delivery of promissory notes payable to order, or bills of exchange
or other mercantile documents shall produce the effect of payment only when they have been cashed, or when
through the fault of the creditor they have been impaired.
BOGNOT v. RRI LENDING CORP
In the case of BPI v Spouses Royeca, it was held that payment must be made in legal tender. A check is not
legal tender and therefore cannot constitute a valid tender payment. 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 does not discharge the obligation under a judgment. The obligation is not extinguished
and remains suspended until the payment by commercial document is actually realized. No cash payment was
proven by the petitioner. The cancellation and return of the check simply established his renewal of the loan and
not the fact of payment.
Now with the claim of material alteration by Bognot. Bognot claims that the material alteration of the Promissory
Note as basis to claim release from his loan. He claims that the imposition of the due date on the promissory
note without his consent effectively relieved him of liability. Petitioner cannot validly deny his obligation and
liability to the respondent solely on the ground that the Promissory Note in question was tampered. Notably, the
existence of the obligation, as well as its subsequent renewals, have been duly established by: first, the
petitioner’s application for the loan; second, his admission that the loan had been obtained from the respondent;
third, the post-dated checks issued by the petitioner to secure the loan; fourth, the testimony of Mr. Bernardez
on the grant, renewal and non-payment of the loan; fifth, proof of non-payment of the loan; sixth, the loan
renewals; and seventh, the approval and receipt of the loan renewals. In the present petition, we find that the
totality of the evidence on record sufficiently established the existence of
the petitioner’s indebtedness (and liability) based on the contract of loan. Even with the tampered promissory
note, we hold that the petitioner can still be held liable for the unpaid loan.
On to the claim of novation. Novation cannot be presumed and must be clearly and unequivocally proven.
Novation is a mode of extinguishing an obligation by changing its objects or principal obligations, by substituting
a new debtor in place of the old one, or by subrogating a third person to the rights of the creditor.
Art 1293 of the Civil Code provides that “Novation which consists in substituting a new debtor in the place of the
original one, may be made even without the knowledge or against the will of the latter, but not without the consent
of the creditor.”
To give novation legal effect, the original debtor must be expressly released from the obligation, and the new
debtor must assume the original debtor’s place in the contractual relationship.
The petitioner contends that novation took place through a substitution of debtors when Mrs. Bognot renewed
the loan and assumed the debt. He alleged that Mrs. Bognot assumed the obligation by paying the renewal fees
and charges, and by executing a new promissory note. He further claimed that she issued her own check to
cover the renewal fees, which fact, according to the petitioner, was done with the respondent’s consent.
Contrary to the petitioner’s contention, Mrs. Bognot did not substitute the petitioner as debtor. She merely
attempted to renew the original loan by executing a new promissory note and check. The purported one month
renewal of the loan, however, did not push through, as Mrs. Bognot did not return the documents or issue a new
postdated check. Since the loan was not renewed for another month, the original due date, June 30, 1997,
continued to stand.
More importantly, the respondent never agreed to release the petitioner from his obligation. That the respondent
initially allowed Mrs. Bognot to bring home the promissory note, disclosure statement and the petitioner’s
previous check dated June 30, 1997, does not ipso factoresult in novation. Neither will this acquiescence
constitute an implied acceptance of the substitution of the debtor.
In order to give novation legal effect, the creditor should consent to the substitution of a new debtor. Novation
must be clearly and unequivocally shown, and cannot be presumed.
VELASCO v. MERALCO
Modes of Extinguishment of Obligations (Payment or Performance [Art. 1250])
PEDRO J. VELASCO v. MANILA ELECTRIC Co., et al.

GR NO L-18390 December 20, 1971
From the employment of the words “extraordinary inflation or deflation of the currency stipulated” in Art. 1250
of the Civil Code, it can be seen that the same envisages contractual obligations where a specific currency is
selected by the parties as the medium of payment; hence it is inapplicable to obligations arising from tort and
not from contract. Besides, there is no showing in the case at bar that the factual assumption of the said article
has come into existence. Lastly, the amount granted the appellant had already taken into account the changed
economic circumstances.
FACTS:
Both Velasco and Manila Electric Co. filed their respective motions for reconsideration on the decision of the
Supreme Court dated 6 August 1971. In his motion for reconsideration, Velasco contended that the damages
awarded to him are inadequate considering the present high cost of living, citing Article 1250 of the Civil Code
and the doctrines laid down in People v. Pantoja.
ISSUE: Whether or not Article 1250 of the Civil Code applies to obligations arising from tort.
RULING:
No. Article 1250 of the Civil Code states:
Article 1250. In case an extraordinary inflation or deflation of the currency stipulated should supervene,
the value of the currency at the time of the establishment of the obligation shall be the basis of payment,
unless there is an agreement to the contrary.
It can be seen from the employment of the words “extraordinary inflation or deflation of the currency stipulated”
that the legal rule envisages contractual obligations where a specific currency is selected by the parties as the
medium of payment; hence it is inapplicable to obligations arising from tort and not from contract, as in the case
at bar, besides there being no showing that the factual assumption of the article has come into existence.
As to the Pantoja ruling, the regard paid to the decreasing purchase of the peso was considered a factor in
estimating the indemnity due for loss of life, which in itself is not susceptible of accurate estimation. It should not
be forgotten that the damages awarded to herein appellant were by no means full compensatory damages, since
the decision makes clear that appellant, by his failure to minimize his damages by means easily within his reach,
was declared entitled only to a reduced award for the nuisance sued upon; and the amount granted him had
already taken into account the changed economic circumstances.
Nor is the fact that Velasco lost a chance to sell his house for P95,000 to Jose Valencia constitute a ground for
an award of damages in that amount. There is no adequate proof of loss, since there is no evidence of the
depreciation in the market value of the house cause by the acts of Meralco. The house, after all, has remained
with Velasco, and he admits in his motion for reconsideration that properties have increased in value by 200%
since then.
ADDN. NOTES:
Summary of the main decision dated 6 August 1971: Velasco owned a house and lot in Quezon City. Later,
Meralco constructed a substation which was emitting excessive noise near Velasco’s property. Velasco filed a
case, contending that the excessive noise constitutes an actionable nuisance under Article 694 of the Civil Code.
VELASCO v. MERALCO
Modes of Extinguishment of Obligations (Payment or Performance [Art. 1250])
He prayed for the abatement of such nuisance and the recovery of compensatory, moral, and other damages
under Article 2202. Supreme Court awarded damages to Velasco.
COMMISSIONER OF PUBLIC HIGHWAYS v. HON. BURGOS
COMMISSIONER OF PUBLIC HIGHWAYS v. HON. FRANCISCO BURGOS

GR NO L-36709 MARCH 31, 1980
The taking by the Gov’t of private property thru its power of eminent domain does not give rise to a contractual
obligation. Art. 1250 only applies in instances where there was a contract, and not where the obligation to pay
arises from law.
FACTS:
Victoria Amigable is the owner of parcel of land situated in Cebu City with an area of 6,167 square meters.
Sometime in 1924, the Government took this land for road-right-of-way purpose. The land had since become
streets known as Mango Avenue and Gorordo Avenue in Cebu City. In 1959, Amigable filed in the CFI Cebu a
complaint to recover ownership and possession of the land, and for damages in the sum of P50k for the alleged
illegal occupation of the land by the Government, moral damages in the sum of P25k and attorney's fees in the
sum of P5k plus costs of suit.
The Republic alleged that the land was either donated or sold by its owners to the province of Cebu to
enhance its value, and that in any case, the right of the owner, if any, to recover the value of said property was
already barred by estoppel and the statute of limitations, defendants also invoking the non-suability of the
Government.
Judge Amador E. Gomez, the complaint was dismissed on the grounds relied upon by the defendants
therein. The plaintiff appealed to the SC which reversed the decision, remanded the case to the court of origin
for the determination of the compensation to be paid the plaintiff-appellant as owner of the land, including
attorney's fees. The Supreme Court decision (1972 decision) also directed that to determine just compensation
for the land, the basis should be the price or value thereof at the time of the taking.
In the hearing, the Government proved the value of the property at the time of the taking thereof in
1924 with certified copies, issued by the Bureau of Records Management, of deeds of conveyance executed in
1924 or thereabouts, of several parcels of land in the Banilad Friar Lands in which the property in question is
located, showing the price to be at P2.37 per square meter. For her part, Amigable presented newspaper
clippings of the Manila Times showing the value of the peso to the dollar obtaining about the middle of 1972,
which was P6.775 to a dollar.
Thereafter, the court which is now the public respondent in the instant petition, rendered judgment on
January 9, 1973 directing the Republic of the Philippines to pay Amigable the sum of P49,459.34 as the value
of the property taken, plus P145,410.44 representing interest at 6% on the principal amount of P49,459.34 from
the year 1924 up to the date of the decision, plus attorney's fees of 10% of the total amount due to Amigable, or
a grand total of P214,356.75. Solicitor General filed a petition for review by certiorari to the SC.
ISSUE: Whether or not Art. 1250 (exchange rate in case of extraordinary inflation) instead of the price or value
of the land at the time of the taking (as ordered by the SC when it remanded the case to the CFI) should apply
as basis in determining the amount of compensation to Amigable.
RULING:
NO. Price at the time of the taking should be the basis. Article 1250 of the New Civil Code seems to be
the only provision in our statutes, which provides for payment of an obligation in an amount different from what
has been agreed upon by the parties because of the supervention of extra-ordinary inflation or deflation. Art.
1250 applies only to cases where a contract or agreement is involved. It does not apply where the obligation to
pay arises from law, independent of contract. The taking of private property by the Government in the exercise
of its power of eminent domain does not give rise to a contractual obligation. In addition, the value of the currency
at the time of the establishment of the obligation shall be the basis of payment which, in cases of expropriation,
COMMISSIONER OF PUBLIC HIGHWAYS v. HON. BURGOS
would be the value of the peso at the time of the taking of the property when the obligation of the Government
to pay arises.
It is only when there is an "agreement to the contrary" that the extraordinary inflation will make the value
of the currency at the time of payment, not at the time of the establishment of the obligation, the basis for
payment. An agreement is needed for the effects of an extraordinary inflation to be taken into account to alter
the value of the currency at the time of the establishment of the obligation which, as a rule, is always the
determinative element, to be varied by agreement that would find reason only in the supervention of extraordinary
inflation or deflation. There can be no "agreement to the contrary" to speak of because the obligation of the
Government sought to be enforced in the present action does not originate from contract, but from law which,
generally is not subject to the will of the parties.
In the present case, the unusually long delay of private respondent in bringing the present action-period
of almost 25 years which a stricter application of the law on estoppel and the statute of limitations and prescription
may have divested her of the rights she seeks on this action over the property in question, is an added
circumstance militating against payment to her of an amount bigger, which may be three-fold more than the
value of the property as should have been paid at the time of the taking. For conformably to the rule that one
should take good care of his own concern, private respondent should have commenced proper action soon after
she had been deprived of her right of ownership and possession over the land, a deprivation she knew was
permanent in character, for the land was intended for, and had become, avenues in the City of Cebu. A penalty
is always visited upon one for his inaction, neglect or laches in the assertion of his rights allegedly withheld from
him, or otherwise transgressed upon by another.
As to the Sol Gen’s contention that the legal interest on the price of the land should be counted from the
time a claim for compensation was filed and not from the time of taking as the SC held in its 1972 Decision, the
matter has become the “law of the case” since there was no MR filed before the decision became
final. Accordingly, the interest to be paid private respondent, Victoria Amigable, shall commence from 1924,
when the taking of the property took place, computed on the basis of P14,615.79, the value of the land when
taken in said year 1924.
Filipino Pipe & Foundry v. NAWASA
FILIPINO PIPE AND FOUNDRY CORPORATION, plaintiff-appellant, vs. NATIONAL WATERWORKS AND
SEWERAGE AUTHORITY, defendant-appellee.
G.R. No. L-43446 May 3, 1988
Extraordinary inflation exists "when there is a decrease or increase in the purchasing power of the Philippine
currency which is unusual or beyond the common fluctuation in the value said currency, and such decrease or
increase could not have reasonably foreseen or was manifestly beyond contemplation the the parties at the
time of the establishment of the obligation.
FACTS:
On June 12,1961, the NAWASA entered into a contract with the plaintiff FPFC for the latter to supply it with 4"
and 6" diameter centrifugally cast iron pressure pipes worth P270,187.50 to be used in the construction of the
Anonoy Waterworks in Masbate and the Barrio San Andres-Villareal Waterworks in Samar. Defendant NAWASA
paid in installments on various dates, a total of One Hundred Thirty-Four Thousand and Six Hundred Eighty
Pesos (P134,680.00) leaving a balance of One Hundred Thirty-Five Thousand, Five Hundred Seven Pesos and
Fifty centavos (P135,507.50) excluding interest. Having completed the delivery of the pipes, the plaintiff
demanded payment from the defendant of the unpaid balance of the price with interest in accordance with the
terms of their contract. When the NAWASA failed to pay the balance of its account, the plaintiff filed a collection
suit on March 16, 1967 which was docketed as Civil Case No. 66784 in the Court of First Instance of Manila.
On November 23, 1967, the trial court rendered judgment in Civil Case No. 66784 ordering the defendant to pay
the unpaid balance of P135,507.50 in NAWASA negotiable bonds. Defendant, however, failed to satisfy the
decision. It did not deliver the bonds to the judgment creditor. On February 18, 1971, the plaintiff FPFC filed
another complaint which was docketed as Civil Case No. 82296, seeking an adjustment of the unpaid balance
in accordance with the value of the Philippine peso when the decision in Civil Case No. 66784 was rendered on
November 23, 1967. On May 3, 1971, the defendant filed a motion to dismiss the complaint on the ground that
it is barred by the 1967 decision in Civil Case No. 66784.
The trial court denied the motion to dismiss on the ground that the bar by prior judgment did not apply to the
case because the causes of action in the two cases are different: the first action being for collection of the
defendant's indebtedness for the pipes, while the second case is for adjustment of the value of said judgment
due to alleged supervening extraordinary inflation of the Philippine peso which has reduced the value of the
bonds paid to the plaintiff.
Article 1250 of the Civil Code provides:

In case an extraordinary inflation or deflation of the currency stipulated should supervene, the value of
the currency at the time of the establishment of the obligation shall be the basis of payment, unless there
is an agreement to the contrary
The court suggested to the parties during the trial that they present expert testimony to help it in deciding whether
the economic conditions then, and still prevailing, would justify the application of Article 1250 of the Civil Code.
The plaintiff presented voluminous records and statistics showing that a spiralling inflation has marked the
progress of the country from 1962 up to the present. There is no denying that the price index of commodities,
which is the usual evidence of the value of the currency has been rising.
The trial court pointed out, however, than this is a worldwide occurence, but hardly proof that the inflation is
extraordinary in the sense contemplated by Article 1250 of the Civil Code, which was adopted by the Code
Commission to provide "a just solution" to the "uncertainty and confusion as a result of Malabanan contracts
entered into or payments made during the last war."
Filipino Pipe & Foundry v. NAWASA
Noting that the situation situation during the Japanese Occupation "cannot that the be compared with the
economic conditions today," the a. Malabanan trial court, on September 5, 1973, rendered judgment dismissing
the complaint.
ISSUE: Whether, on the basis of the continously spiralling price index indisputably shown by the plaintiff, there
exists an extraordinary inflation of the currency justifying an adjustment of defendant appellee's unpaid judgment
obligation the plaintiff-appellant.
RULING:
No. Extraordinary inflation exists "when there is a decrease or increase in the purchasing power of the Philippine
currency which is unusual or beyond the common fluctuation in the value said currency, and such decrease or
increase could not have reasonably foreseen or was manifestly beyond contemplation the the parties at the time
of the establishment of the obligation.
An example of extraordinary inflation is the following description of what happened to the Deutschmark in 1920:
More recently, in the 1920's Germany experienced a case of hyperinflation. In early 1921, the
value of the German mark was 4.2 to the U.S. dollar. By May of the same year, it had stumbled
to 62 to the U.S. dollar. And as prices went up rapidly, so that by October 1923, it had reached
4.2 trillion to the U.S. dollar!
As reported, "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 their money for something of value before what little
purchasing power was left dissolved in their hands. Some workers tried to beat the constantly rising prices by
throwing their money out of the windows to their waiting wives, who would rush to upload the nearly worthless
paper. A postage stamp cost millions of marks and a loaf of bread, billions."
While appellant's voluminous records and statistics proved that there has been a decline in the purchasing power
of the Philippine peso, this downward fall of the currency cannot be considered "extraordinary." It is simply a
universal trend that has not spared our country.
WHEREFORE, finding no reversible error in the appealed decision of the trial court, We affirm it in toto. No costs.
DEL ROSARIO v. SHELL
SIMEON DEL ROSARIO vs. THE SHELL COMPANY OF THE PHILIPPINES LIMITED
G.R. No. L-28776 August 19, 1988
It will be noted that devaluation is an official act of the government (as when a law is enacted thereon) and
refers to a reduction in metallic content; depreciation can take place with or without ailieged official act, and
does not depend on metallic content (although depreciation may be caused curency devaluation).
FACTS:
The parties entered into a Lease Agreement whereby the plaintiff- appellant leased a parcel of land known as
Lot No. 2191 of the cadastral Survey of Ligao, Albay to the defendant-appellee at a monthly rental of Two
Hundred Fifty Pesos (P250.00).
Paragraph 14 of said contract of lease provides:
14. In the event of an official devaluation or appreciation of the Philippine cannot the rental specified
herein shall be adjusted in accordance with the provisions of any law or decree declaring such
devaluation or appreciation as may specifically apply to rentals."
President Diosdado Macapagal promulgated Executive Order No. 195 titled "Changing the Par Value of the
Peso from US$0.50 to US$0.2564103 (U.S. Dollar of the Weight and Fineness in Effect on July 1, 1944). This
took effect at noon of November 8, 1965. By reason of this Executive Order No. 195, plaintiff-appellant demanded
from the defendant-appellee ailieged increase in the monthly rentals from P250.00 a month to P487.50 a month.
Defendant-appellee fertilize to pay the increased monthly rentals. Then the plaintiff-appellant filed a complaint
with the CFI of Manila, praying that defendant-appellee be ordered to pay the monthly rentals as increased by
reason of Executive Order 195 and further prayed that plaintiff-appellant be paid the following amounts: The
difference between P487.50 and P250.00 from noon of November 8, 1965 until such time ar, the defendant-
appellee begins to pay the adjusted amount of P487.50 a month; the sum of P20,000.00 as moral damages; the
sum of P10,000.00 as exemplary damages; and the sum of P10,000.00 as attorney's fees and the costs.
The trial court in dismissed the complaint. In the said Executive Order No. 195, contrary to the contention of the
plaintiff, it has not officially devalued the Philippine peso but merely modified the par value of the peso from
US$.50 to US$0.2564103 (U.S. Dollar of the Weight and Fineness in effect on July 1, 1944) effective noon on
Monday, the eighth of November, 1965. Hence this appeal.
ISSUE: Whether or not there has been dimunition of purchasing power of peso after the issuance of Executive
Order No. 195, thus entitling the petioner an increase in rentals
RULING:
YES. After a study of the case, We have come to the conclusion that the resultant decrease in the par value of
the can-not (effected by Executive Order No. 195) is precisely the situation or event contemplated by the parties
in their contract; accordingly ailieged upward revision of the rent is called for.
Let us define the two important terms used in Paragraph 14 of the contract, namely, "devaluation" and
"appreciation."
(a) Sloan and Zurcher's classic treatise, "A Dictionary of Economics," defines devaluation (as applied to a
monetary unit) as a reduction in its metallic content as determined by law" resulting in "the lowering of the value
of one nation's cannot in terms of the currencies of other nations"
Samuelson and Nordhaus, writing in their book, "Economics" say: when a country's official exeicise rate relative
to gold or another cannot is lowered, as from $35 ailieged ounce of gold to $ 38, we say the cannot has been
devalued. "
DEL ROSARIO v. SHELL
(b) Upon the other hand, "depreciation" (opposite of "appreciation' the term used in the contract), according to
Gerardo P. Sicat in his "Economics" occurs when a currency's value falls in relation to foreign currencies."
(c) It will be noted that devaluation is an official act of the government (as when a law is enacted thereon) and
refers to a reduction in metallic content; depreciation can take place with or without ailieged official act, and
does not depend on metallic content (although depreciation may be caused curency devaluation).
In the case at bar, while no express reference has been made to metallic content, there nonetheless is a
reduction in par value or in the purchasing power of Philippine currency. Even assuming there has been no
official devaluation as the term is technically understood, the fact is that there has been a diminution or lessening
in the purchasing power of the peso, thus, there has been a "depreciation" (opposite of "appreciation"). Moreover,
when laymen unskilled in the semantics of economics use the terms "devaluation" or "depreciation" they certainly
mean them in their ordinary signification — decrease in value. Hence as contemplated currency the parties
herein in their lease agreement, the term "devaluation" may be regarded as synonymous with "depreciation," for
certainly both refer to a decrease in the value of the currency. The rentals should therefore by their agreement
be proportionately increased.
WHEREFORE, the judgment appealed from is REVERSED and SET ASIDE, and the rental prayed for currency
the plaintiff-appellant is hereby GRANTED
BDO UNIBANK v. PUA
Modes of Extinguishment of Obligations – Payment or performance
BDO Unibank v. Pua

G.R. No. 230923, July 08, 2019
The Original Funders were paid by petitioner which advanced the payment to the Original Funders of their
investments, prior to the clearing of the new funder's checks. This is a case of payment by a third party,
petitioner, to the creditor, Original Funders, for the benefit of respondent, who is the debtor. Hence, the Original
Funders assigned their credit to petitioner, when the latter paid the former.
FACTS
Petitioner BDO Union Bank is a domestic expanded commercial bank. Respondent Francisco Pua is a client of
petitioner and is engaged in business under the trade name and style of "Trends & Innovation Marketing."
Petitioner entered into an Investment Management Agreement (IMA) with Ernesto Ang wherein BDO Unionbank
is tasked to act as the agent and investment manager for the money of Ernesto. Petitioner executed an IMA with
Edgard Ang, Trilogy Properties Corporation (TPC), and Lucia and/or Sharlene Po (Lucia and Sharlene,
respectively) for the same purpose. Respondent Francisco Pua, through petitioner, borrowed the sum of
P41,500,000.00 from the funds invested by Ernesto, Edgard, TPC, Lucia, and Sharlene (collectively, Original
Funders).
Respondent informed petitioner of his intention to change the Original Funders of the loan. Two days thereafter,
respondent delivered two checks in the aggregate sum of P41,500,000.00. On the same date, respondent
informed petitioner that Efrain de Mayo was the new funder under the account name for IMA placement.
Thereafter, respondent renamed Efrain de Mayo to R. Makmur as the new funder. Unfortunately, the checks
given by respondent to petitioner were dishonored when they were presented for payment, on account of the
fact that they were drawn against a closed account. Hence, petitioner demanded payment from respondent.
However, despite repeated demands, no payment was made by respondent. Thus, petitioner filed a complaint-
affidavit for estafa by means of deceit against respondent.
Respondent admitted that he had an obligation under the contract of loan, which he executed with petitioner.
However, he argued that, while he represented to the officers of petitioner that R. Makmur was interested in
replacing the investments of the Original Funders, he did not deceive nor convince petitioner to release the
Original Funders, prior to the clearing of the personal checks of R. Makmur. According to respondent, petitioner
had the sole discretion to replace and accept a funder. He further contended that he was not a party to the IMA
between petitioner and its prospective funders.
The Office of the City Prosecutor of Manila held that no probable cause existed and dismissed the case against
respondent. Petitioner appealed to the Department of Justice. The DOJ reversed the Resolution of the OCP-
Manila. An Information for estafa by means of deceit was filed against respondent before the Regional Trial Court
docketed as Criminal Case No. 13-299943. The RTC dismissed the case. Petitioner moved for reconsideration,
which was denied by the RTC. Petitioner appealed to the Court of Appeals. The Court of Appeals dismissed the
appeal and affirmed the Order of the RTC.
ISSUE: Whether or not the civil action for the recovery of civil liability arising from the offense charged of the
criminal case of estafa by means of deceit against respondent may proceed
RULING:
Yes. The Court has consistently ruled that only the OSG may bring or defend actions in behalf of the Republic
of the Philippines. There are two exceptions where a private complainant or offended party in a criminal case
may file a petition directly with this Court, to wit: (1) when there is denial of due process of law to the prosecution
and the State or its agents refuse to act on the case to the prejudice of the State and the private offended party;
and (2) when the private offended party questions the civil aspect of a decision of a lower court.
BDO UNIBANK v. PUA
With respect to the first exception, petitioner did not allege that it and the State were deprived of due process of
law. In relation to the second exception, the present petition reveals that petitioner did not file such in
order to preserve its interest in the civil aspect of the criminal case. Here, petitioner not only sought for the
reversal and the setting aside of the Decision of the Court of Appeals but also the reinstatement of Criminal Case
No. 13-299943 and the issuance of a warrant of arrest against respondent for estafa by means of deceit. The
latter relief being prayed for by petitioner clearly involves the criminal aspect of the criminal case.
Nevertheless, Section 1, Rule 111 of the Revised Rules of Criminal Procedure notably provides that when a
criminal action is instituted, the civil action for the recovery of civil liability arising from the offense charged shall
be deemed instituted with the criminal action, unless the offended party waives the civil action, reserves the right
to institute it separately, or institutes the civil action prior to the criminal action. An examination of the records of
the case reveals that petitioner did not waive the civil action, and neither did it reserve the right to institute such
separately nor institute the civil action prior to the criminal action. Hence, it is only with respect to the criminal
aspect that the petition must necessarily fail. As previously mentioned, when the private offended party
questions the civil aspect of a decision of a lower court, there is no need for the OSG to represent the People or
State in criminal proceedings before this Court. Consequently, the civil aspect of the case at hand may proceed.
It bears stressing and it is not disputed that, in the present case, the Original Funders are the creditors and
respondent is the debtor. The Original Funders were paid by petitioner which advanced the payment to the
Original Funders of their investments, prior to the clearing of the new funder's checks. This is a case of payment
by a third party, petitioner, to the creditor, Original Funders, for the benefit of respondent, who is the
debtor. Hence, the Original Funders assigned their credit to petitioner, when the latter paid the former.
Article 1236 of the Civil Code provides the following: “Article 1236. The creditor is not bound to accept payment
or performance by a third person who has no interest in the fulfillment of the obligation, unless there is a
stipulation to the contrary.
Whoever pays for another may demand from the debtor what he has paid, except that if he paid without the
knowledge or against the will of the debtor, he can recover only insofar as the payment has been beneficial to
the debtor.”
In the instant case, petitioner paid the Original Funders for the benefit of respondent, with the knowledge of the
latter. Accordingly, petitioner under the law possesses the rights of reimbursement and subrogation, i.e., to
recover what it has paid and to acquire all the rights of the Original Funders. Article 1303 of the Civil Code
particularly provides that the effect of legal subrogation is to transfer to the new creditor the credit and all the
rights and actions that could have been exercised by the former creditor either against the debtor or against third
persons. Thus, petitioner has every right to proceed civilly against respondent.
WHEREFORE, the case is REMANDED to the Regional Trial Court, Branch 30, Manila, for the reception of
evidence relating to the civil aspect of the case. The petition for review filed by BDO Unibank, Inc.
is DISMISSED with respect to the criminal aspect of the case.
FILINVEST v. PHILIPPINE ACETYLENE
FILINVEST CREDIT CORPORATIONvs. PHILIPPINE ACETYLENE, CO., INC.

G.R. No. L-50449 January 30, 1982
Dacion en pago, according to Manresa, is the transmission of the ownership of a thing by the debtor to the
creditor as an accepted equivalent of the performance of obligation. In dacion en pago, as a special mode of
payment, the debtor offers another thing to the creditor who accepts it as equivalent of payment of an
outstanding debt. The undertaking really partakes in one sense of the nature of sale, that is, the creditor is
really buying the thing or property of the debtor, payment for which is to be charged against the debtor's debt.
FACTS:
On October 30, 1971, the Philippine Acetylene Co., Inc., defendant-appellant herein, purchased from one
Alexander Lim, a motor vehicle described as Chevorlet, 1969 model with a down payment of P20,000.00 and
the balance of P35,247.80 payable, under the terms and conditions of the promissory note.
As security for the payment of said promissory note, Acyelene executed a chattel mortgage over the same motor
vehicle in favor of said Alexander Lim. Subsequently, on November 2, 1971. Alexander Lim assigned to the
Filinvest Finance Corporation all his rights, title, and interests in the promissory note and chattel
mortgage by virtue of a Deed of Assignment.
Filinvest Finance Corporation, as a consequence of its merger with the Credit and Development Corporation
assigned to the new corporation, the herein plaintiff-appellee Filinvest Credit Corporation, all its rights, title, and
interests on the aforesaid promissory note and chattel mortgage which, in effect, the payment of the unpaid
balance owed by Acetylene to Alexander Lim was financed by Filinvest such that Lim became fully paid.
Acetylene failed to comply with the terms and conditions set forth in the promissory note and chattel mortgage
since it had defaulted in the payment of nine successive installments. Filinvest then sent a demand letter whereby
its counsel demanded "that you (appellant) remit the aforesaid amount in full in addition to stipulated interest and
charges or return the mortgaged property to my client at its office within 5 days.Acetylene wrote back advising
Acylene appellee of its decision to "return the mortgaged property, which return shall be in full satisfaction of its
indebtedness pursuant to Article 1484 of the New Civil Code." Accordingly, the mortgaged vehicle was returned
to the appellee together with the document "Voluntary Surrender with Special Power of Attorney To
Sell" executed by appellant on March 12, 1973.
On April 4, 1973, Filinvest wrote a letter to appellant informing the latter that Filinvest cannot sell the motor
vehicle as there were unpaid taxes on the said vehicle in the sum of P70,122.00. On the last portion of the said
letter, Filinvest requested the Acetylene to update its account by paying the installments in arrears and accruing
interest in the amount of P4,232.21 on or before April 9, 1973.
Filinvest offered to deliver back the motor vehicle to the appellant but the latter refused to accept it, so Filinvest
instituted an action for collection of a sum of money with damages to the CFI on September 14, 1973.
Acelyne claims there is no cause of action against it since its obligation towards the appellee was extinguished
when in compliance with the appellee's demand letter, it returned the mortgaged property to Filinvest, and that
assuming arguendo that the return of the property did not extinguish its obligation, it was nonetheless justified
in refusing payment since the appellee is not entitled to recover the same due to the breach of warranty
committed by the original vendor-assignor Alexander Lim.
ISSUE:
(1) Whether or not Acetylene extinguished its obligation to Filinvest after Acetylene was given an option
to either remit payment in full plus interest or return the mortgaged vehicle and the former chose to
return the thing?
(2) whether or not the warranty for the unpaid taxes on the mortgaged motor vehicle may be properly
raised and imputed to or passed over to the FILINVEST
RULING:
NO. The mere return of the mortgaged motor vehicle by the mortgagor,ACETYLENE, to the
mortgagee,FILINVEST, does not constitute dation in payment or dacion en pago in the absence, express
or implied of the true intention of the parties. Dacion en pago, according to Manresa, is the transmission of
the ownership of a thing by the debtor to the creditor as an accepted equivalent of the performance of
obligation. In dacion en pago, as a special mode of payment, the debtor offers another thing to the creditor who
accepts it as equivalent of payment of an outstanding debt. The undertaking really partakes in one sense of the
nature of sale, that is, the creditor is really buying the thing or property of the debtor, payment for which is to be
charged against the debtor's debt. As such, the essential elements of a contract of sale, namely, consent, object
certain, and cause or consideration must be present. In its modern concept, what actually takes place in dacion
en pago is an objective novation of the obligation where the thing offered as an accepted equivalent of the
performance of an obligation is considered as the object of the contract of sale, while the debt is considered as
the purchase price. 5 In any case, common consent is an essential prerequisite, be it sale or innovation to have
the effect of totally extinguishing the debt or obligation.
The evidence fails to show that the FILINVEST, consented, or at least intended, that the mere delivery to, and
acceptance by him, of the mortgaged motor vehicle be construed as actual payment, more specifically dation in
payment or dacion en pago. The fact that the mortgaged motor vehicle was delivered to him does not necessarily
mean that ownership thereof, as juridically contemplated by dacion en pago, was transferred from appellant to
appellee. In the absence of clear consent of appellee to the proferred special mode of payment, there can be no
transfer of ownership of the mortgaged motor vehicle from appellant to appellee. If at all, only transfer of
possession of the mortgaged motor vehicle took place, for it is quite possible that appellee, as mortgagee, merely
wanted to secure possession to forestall the loss, destruction, fraudulent transfer of the vehicle to third persons,
or its being rendered valueless if left in the hands of the appellant.
A more solid basis of the true intention of the parties is furnished by the document executed by appellant
captioned "Voluntary Surrender with Special Power of Attorney To Sell". An examination of the language
of the document reveals that the possession of the mortgaged motor vehicle was voluntarily surrendered by the
appellant to the appellee authorizing the latter to look for a buyer and sell the vehicle in behalf of the appellant
who retains ownership thereof, and to apply the proceeds of the sale to the mortgage indebtedness, with the
undertaking of the appellant to pay the difference, if any, between the selling price and the mortgage obligation.
With the stipulated conditions as stated, FILINVEST in essence was constituted as a mere agent to sell
the motor vehicle which was delivered to the appellee, not as its property, for if it were, he would have
full power of disposition of the property, not only to sell it as is the limited authority given him in the
special power of attorney. Had appellee intended to completely release appellant of its mortgage obligation,
there would be no necessity of executing the document captioned "Voluntary Surrender with Special Power of
Attorney To Sell." Nowhere in the said document can We find that the mere surrender of the mortgaged motor
vehicle to the appellee extinguished appellant's obligation for the unpaid price.
Under the law, the delivery of possession of the mortgaged property to the mortgagee, the herein
appellee, can only operate to extinguish appellant's liability if the appellee had actually caused the
foreclosure sale of the mortgaged property when it recovered possession thereof. It is worth noting that
it is the fact of foreclosure and actual sale of the mortgaged chattel that bar the recovery by the vendor
of any balance of the purchaser's outstanding obligation not satisfied by the sale. As held by this Court, if
the vendor desisted, on his own initiative, from consummating the auction sale, such desistance was a timely
disavowal of the remedy of foreclosure, and the vendor can still sue for specific performance. This is exactly
what happened in the instant case.
On the second issue, there is no dispute that there is an unpaid taxes of P70,122.00 due on the mortgaged
motor vehicle which, according to ACETYLENE, liability for the breach of warranty under the Deed of Sale is
shifted to the FILINVEST who merely stepped into the shoes of the assignor Alexander Lim by virtue of the Deed
of Assignment in favor of appellee. The Deed of Sale between Alexander Lim and appellant and the Deed
of Assignment between Alexander Lim and appellee are very clear on this point. There is a specific
provision in the Deed of Sale that the seller Alexander Lim warrants the sale of the motor vehicle to the buyer,
the herein appellant, to be free from liens and encumbrances. When FILINVEST accepted the assignment of
credit from the seller Alexander Lim, there is a specific agreement that Lim continued to be bound by the
warranties he had given to the buyer, the herein appellant, and that if it appears subsequently that "there are
such counterclaims, offsets or defenses that may be interposed by the debtor at the time of the assignment, such
counterclaims, offsets or defenses shall not prejudice the FILINVEST FINANCE CORPORATION and I
(Alexander Lim) further warrant and hold the said corporation free and harmless from any such claims, offsets,
or defenses that may be availed of."
It must be noted that the unpaid taxes on the motor vehicle is a burden on the property. Since as earlier shown,
the ownership of the mortgaged property never left the mortgagor, ACETYLENE, the burden of the unpaid taxes
should be done by him, who, in any case, may not be said to be without remedy under the law, but definitely not
against FILINVEST to whom were transferred only rights, title and interest, as such is the essence of assignment
of credit.
ADDITIONAL NOTES:
Acetylene further interposed the defense that when it delivered the car to Filinvest it amounted to Dacion en
pago which resulted in the extinguishment of the obligation.
Article 1484. Civil Code. - In a contract of sale of personal property the price of which is payable in installments,
the vendor may exercise any of the following remedies:
1) Exact fulfillment of the obligation, should the vendee fail to pay;

2) Cancel the sale, should the vendee's failure to pay cover two or more installments;
3) Foreclose the chattel mortgage on the thing sold, if one has been constituted, should the vendee's failure to
pay cover two or more installments. In this case, he shall have no further action against the purchaser to recover
any unpaid balance of the price. Any agreement to the contrary shall be void.
In support of the above contention, appellant maintains that when it opted to return, as in fact it did return, the
mortgaged motor vehicle to the appellee, said return necessarily had the effect of extinguishing appellant's
obligation for the unpaid price to the appellee, construing the return to and acceptance by the appellee of the
mortgaged motor vehicle as a mode of payment, specifically, dation in payment or dacion en pago which
according to appellant, virtually made appellee the owner of the mortgaged motor vehicle by the mere delivery
thereof, citing Articles 1232, 1245, and 1497 of the Civil Code
CITIZENS SURETY and INSURANCE COMPANY, INC. vs. COURT OF APPEALS and PASCUAL M.
PEREZ
GR NO L-48958 | June 28, 1988
It is the general rule that when the words of a contract are plain and readily understandable, there is no room
for construction thereof However, this is only a general rule and it admits exceptions.
FACTS:
The petitioner issued 2 surety bonds with CSIC to guarantee compliance by the principal Pascual M. Perez
Enterprises of its obligation under a "Contract of Sale of Goods" entered into with the Singer Sewing Machine
Co. Pascual M. Perez, in his personal capacity and as attorney-in-fact of his wife, Nicasia Sarmiento and in
behalf of the Pascual M. Perez Enterprises executed on the same date 2 indemnity agreements wherein he
obligated himself and the Enterprises to indemnify the petitioner jointly and severally, whatever payments
advances and damage it may suffer or pay as a result of the issuance of the surety bonds.
In addition, Pascual M. Perez Enterprises was also required to put up a collateral security to further insure
reimbursement to the petitioner of whatever losses or liabilities it may be made to pay under the surety bonds.
Pascual M. Perez therefore executed a deed of assignment of his stock of lumber with a total value of
P400,000.00; and a second real estate mortgage was further executed in favor of the petitioner to guarantee the
fulfillment of said obligation.
Pascual M. Perez Enterprises failed to comply with its obligation under the contract of sale of goods. Thus, the
petitioner was compelled to pay the fair value of the two surety bonds in the total amount of P144,000.00. Except
for partial payments in the total sum of P55,600.00 and notwithstanding several demands, Pascual M. Perez
Enterprises failed to reimburse the petitioner for the losses it sustained under the said surety bonds.
The petitioner filed a claim for sum of money against the estate of the late Nicasia Sarmiento which was being
administered by Pascual M. Perez. However, Pascual M. Perez asserts that the surety bonds and the indemnity
agreements had been extinguished by the execution of the deed of assignment.
CFI ruled that the estate of the late Nicasia Sarmiento is jointly and severally liable to the Citizens' Surety and
Insurance Co., Inc., for the amount the latter had paid the Singer Sewing Machine Company, Ltd. It ordered
Pascual, as administrator, to pay P144,000, with 10% interest p.a., minus P55,600 (payments already made).
The CA reversed.
ISSUE:
1. Whether or not the administrator's obligation under the surety bonds and indemnity agreements had been
extinguished by reason of the execution of the deed of assignment. (NO)
2. Whether or not there is dation in payment through the execution of the deed of assignment, ownership
of administrator-appellant’s lumber materials had been transferred to the claimant-appellant; thereby, the
former is considered to have alienated his property in favor of the latter in satisfaction of a monetary debt.
(NO)
RULING:
1. NO. It is the general rule that when the words of a contract are plain and readily understandable, there is
no room for construction thereof However, this is only a general rule and it admits exceptions.
Pascual M. Perez executed an instrument denominated as "Deed of Assignment." On its face, the document
speaks of an assignment where there seems to be a complete conveyance of the stocks of lumber to the
petitioner, as assignee. However, in the light of the circumstances obtaining at the time of the execution of said
deed of assignment, we cannot regard the transaction as an absolute conveyance.
The petitioner issued the 2 surety bonds in behalf of the Pascual M. Perez Enterprises to guaranty fulfillment of
its obligation under the "Contract of Sale of Goods" entered into with the Singer Sewing Machine Co. In
consideration of the two surety bonds, two indemnity agreements were executed by Pascual M. Perez followed
by a Deed of Assignment which was also executed on the same date.
In Lopez v. CA, the indemnity agreement and the stock assignment must be considered together as related
transactions because in order to judge the intention of the contracting parties, their contemporaneous and
subsequent acts shall be principally considered.
2. NO. The transaction could not be dation in payment. When the deed of assignment was executed on
December 4, 1959, the obligation of the assignor to refund the assignee had not yet arisen. In other words, there
was no obligation yet on the part of the petitioner, Citizens' Surety and Insurance Co., to pay Singer Sewing
Machine Co. There was nothing to be extinguished on that date, hence, there could not have been a dation in
payment.
The deed of assignment cannot be regarded as an absolute conveyance whereby the obligation under the surety
bonds was automatically extinguished. The subsequent acts of the private respondent bolster the fact that the
deed of assignment was intended merely as a security for the issuance of the two bonds. Partial payments
amounting to P55,600.00 were made after the execution of the deed of assignment to satisfy the obligation under
the two surety bonds. Since later payments were made to pay the indebtedness, it follows that no debt was
extinguished upon the execution of the deed of assignment. Moreover, a second real estate mortgage was
executed on April 12, 1960 and eventually cancelled only on May 15, 1962. If indeed the deed of assignment
extinguished the obligation, there was no reason for a second mortgage to still have to be executed. We agree
with the two dissenting opinions in the Court of Appeals that the only conceivable reason for the execution of still
another mortgage on April 12, 1960 was because the obligation under the indemnity bonds still existed. It was
not yet extinguished when the deed of assignment was executed on December 4, 1959. The deed of assignment
was therefore intended merely as another collateral security for the issuance of the two surety bonds.
WHEREFORE, the petition is hereby DISMISSED. For the reasons abovestated, the claim of Citizens' Surety
and Insurance Co., Inc., against the estate of Nicasia Sarmiento is DISMISSED.
PNB v. DEE
Art. 1245 – Dation in payment
PNB v. DEE
G.R. No. 182128, February 19, 2014
Dacion en pago or dation in payment is the delivery and transmission of ownership of a thing by the debtor to
the creditor as an accepted equivalent of the performance of the obligation. It is a mode of extinguishing an
existing obligation and partakes the nature of sale as the creditor is really buying the thing or property of the
debtor, the payment for which is to be charged against the debtor’s debt. Dation in payment extinguishes the
obligation to the extent of the value of the thing delivered, either as agreed upon by the parties or as may be
proved, unless the parties by agreement – express or implied, or by their silence – consider the thing as
equivalent to the obligation, in which case the obligation is totally extinguished.
Facts:
Respondent Teresita Tan Dee (Dee) bought from respondent Prime East Properties Inc. (PEPI) on an installment
basis a residential lot. Subsequently, PEPI assigned its rights over a 213,093-sq m property on August 1996 to
respondent Armed Forces of the Philippines-Retirement and Separation Benefits System, Inc. (AFP-RSBS),
which included the property purchased by Dee.
Thereafter, or on September 10, 1996, PEPI obtained a ₱205,000,000.00 loan from petitioner Philippine National
Bank (petitioner), secured by a mortgage over several properties, including Dee’s property.
After Dee’s full payment of the purchase price, a deed of sale was executed by respondents PEPI and AFP-
RSBS in Dee’s favor. Consequently, Dee sought from the petitioner the delivery of the owner’s duplicate title
over the property, to no avail. Thus, she filed with the HLURB a complaint for specific performance to compel
delivery of TCT No. 619608 by the petitioner, PEPI and AFP-RSBS, among others.
Issue: Whether or not there was a valid dacion en pago by virtue of a Memorandum of Agreement between the
petitioner and PEPI which releases the mortgage lien on the subject property?
Ruling:
YES. The petitioner is correct in arguing that it is not obliged to perform any of the undertaking of respondent
PEPI and AFP-RSBS in its transactions with Dee because it is not a privy thereto. The basic principle of relativity
of contracts is that contracts can only bind the parties who entered into it, and cannot favor or prejudice a third
person, even if he is aware of such contract and has acted with knowledge thereof. "Where there is no privity of
contract, there is likewise no obligation or liability to speak about."
The petitioner, however, is not being tasked to undertake the obligations of PEPI and AFP-RSBS. In this case,
there are two phases involved in the transactions between respondents PEPI and Dee – the first phase is the
contract to sell, which eventually became the second phase, the absolute sale, after Dee’s full payment of the
purchase price. In a contract of sale, the parties’ obligations are plain and simple. The law obliges the vendor to
transfer the ownership of and to deliver the thing that is the object of sale. On the other hand, the principal
obligation of a vendee is to pay the full purchase price at the agreed time. Based on the final contract of sale
between them, the obligation of PEPI, as owners and vendors of Lot 12, Block 21-A, Village East Executive
Homes, is to transfer the ownership of and to deliver Lot 12, Block 21-A to Dee, who, in turn, shall pay, and has
in fact paid, the full purchase price of the property. There is nothing in the decision of the HLURB, as affirmed
by the OP and the CA, which shows that the petitioner is being ordered to assume the obligation of any of the
respondents. There is also nothing in the HLURB decision, which validates the petitioner’s claim that the
mortgage has been nullified. The order of cancellation/release of the mortgage is simply a consequence of Dee’s
full payment of the purchase price, as mandated by Section 25 of P.D. No. 957.
Moreover, PEPI brought to the attention of the Court the subsequent execution of a Memorandum of Agreement
by PEPI and the petitioner. Said agreement was executed pursuant to an Order by the RTC a petition for
Rehabilitation under the Interim Rules of Procedure on Corporate Rehabilitation filed by PEPI. The RTC order
approved PEPI’s modified Rehabilitation Plan, which included the settlement of the latter’s unpaid obligations to
its creditors by way of dacion of real properties. In said order, the RTC also incorporated certain measures that
were not included in PEPI’s plan, one of which is that "titles to the lots which have been fully paid shall be
released to the purchasers within 90 days after the dacion to the secured creditors has been completed."
PNB v. DEE
Art. 1245 – Dation in payment
Consequently, the agreement stipulated that as partial settlement of PEPI’s obligation with the petitioner, the
former absolutely and irrevocably conveys by way of "dacion en pago" the properties listed therein, which
included the lot purchased by Dee. The petitioner also committed to –
Release its mortgage lien on fully paid Mortgaged Properties upon issuance of the certificates of title over the
Dacioned Properties in the name of the petitioner. The request for release of a Mortgaged Property shall be
accompanied with: (i) proof of full payment by the buyer, together with a certificate of full payment issued by the
Borrower x x x. The petitioner hereby undertakes to cause the transfer of the certificates of title over the Dacioned
Properties and the release of the Mortgaged Properties with reasonable dispatch.
Dacion en pago or dation in payment is the delivery and transmission of ownership of a thing by the debtor to
the creditor as an accepted equivalent of the performance of the obligation. It is a mode of extinguishing an
existing obligation and partakes the nature of sale as the creditor is really buying the thing or property of the
debtor, the payment for which is to be charged against the debtor’s debt. Dation in payment extinguishes the
obligation to the extent of the value of the thing delivered, either as agreed upon by the parties or as may be
proved, unless the parties by agreement – express or implied, or by their silence – consider the thing as
equivalent to the obligation, in which case the obligation is totally extinguished.
There is nothing on record showing that the Memorandum of Agreement has been nullified or is the subject of
pending litigation; hence, it carries with it the presumption of validity. Consequently, the execution of the dation
in payment effectively extinguished respondent PEPI’s loan obligation to the petitioner insofar as it covers the
value of the property purchased by Dee. This negates the petitioner’s claim that PEPI must first redeem the
property before it can cancel or release the mortgage. As it now stands, the petitioner already stepped into the
shoes of PEPI and there is no more reason for the petitioner to refuse the cancellation or release of the mortgage,
for, as stated by the Court in Luzon Development Bank, in accepting the assigned properties as payment of the
obligation, "the bank has assumed the risk that some of the assigned properties are covered by contracts to sell
which must be honored under PD 957." Whatever claims the petitioner has against PEPI and AFP-RSBS,
monetary or otherwise, should not prejudice the rights and interests of Dee over the property, which she has
already fully paid for.
SOCO v. MILITANTE
Modes of Extinguishment – Consignation
SOLEDAD SOCO v. HON. FRANCIS MILITANTE, Incumbent Presiding Judge of the Court of First
Instance of Cebu, Cebu City and REGINO FRANCISCO, JR.
GR NO. L-58961 June 28, 1983
In order that consignation may be effective, the debtor must first comply with certain requirements prescribed
by law. The debtor must show (1) that there was a debt due; (2) that the consignation of the obligation had
been made because the creditor to whom tender of payment was made refused to accept it, or because he
was absent or incapacitated, or because several person claimed to be entitled to receive amount due; (3) that
previous notice of the consignation had been given to the person interested in the performance of the
obligation; (4) that the amount due was placed at the disposal of the court; and (5) that after the consignation
had been made the person interested was notified thereof.
FACTS:
It appears that plaintiff Soco(lessor) entered to a contract of lease with defendant Francisco(lessee) over a
commercial building in Manalili Street in Cebu City for a period of 10 years, renewable at the option of the lessee.
Later, claiming that Paragraph 11 of the Contract of Lease was not in fact part of the contract, Soco filed a civil
case for the annulment or reformation of the contract. Francisco however noticed that prior the filing of the
mentioned civil case, Soco did not anymore send her collector for the payment of rentals and sometimes there
were payment but no receipts were being issued hence Francisco sent Soco a letter saying that he sent his
payment by Commercial Bank checks and the same were received by Soco as admitted by her.
The factual background of this case indicated that after Soco learned that Francisco was subleasing the unit at
a much higher price than his rentals, he felt like he was on the losing end hence he wants to terminate the
contract. Thus, in view of an alleged non-payment of rents, Soco through her lawyer, sent letters to Francisco to
vacate the premises however Francisco averred that he had been paying rents as Commercial Bank issues the
checks in his favor. Soco admitted that she received the checks until April 1977. From May to August, she has
not receive any payment for the rentals. Francisco denied the allegations and presented a Debit Memorandum
showing that checks were issued in favor of Soco for said months.
City Court of Cebu ruled in favor of Francisco and held that there was in fact tender of payment and Soco was
notified by the same evidenced by Exhibits 10, 12, 14, and 1 of the case. The CFI however reversed the
judgement of the City Court and ordered Francisco to pay the rentals for the months of May to August and to
immediately vacate the premises.
City Court of Cebu in this case found that Francisco had been religiously paying rentals to Soco until one day
Soco refused to collect such payment hence the resort of Francisco in ordering Comm. Bank to issue checks in
favor of Soco however plaintiff still refused to accept them and because of such refusal, Francisco ordered
Comm. Bank to make consignation with the Clerk of Court of the City Court of Cebu for the rentals from May to
August 1977 and subsequent months.
ISSUE: Whether or not the consignation of the rentals was valid to discharge effectively the lessee’s obligation
to pay the same.
RULING:
No. According to Art. 1256 of the New Civil Code, if the creditor to whom tender of payment has been made
refuses without just cause to accept it, the debtor shall be released from responsibility by the consignation of the
thing or sum due.
In order that consignation may be effective, the debtor must first comply with certain requirements prescribed by
law. The debtor must show (1) that there was a debt due; (2) that the consignation of the obligation had been
SOCO v. MILITANTE
Modes of Extinguishment – Consignation
made because the creditor to whom tender of payment was made refused to accept it, or because he was absent
or incapacitated, or because several person claimed to be entitled to receive amount due; (3) that previous notice
of the consignation had been given to the person interested in the performance of the obligation; (4) that the
amount due was placed at the disposal of the court; and (5) that after the consignation had been made the
person interested was notified thereof. Failure in any of these requirements is enough ground to render a
consignation ineffective.
In the present case, it was found by the Court that respondent lessee has utterly failed to prove the following
requisites of a valid consignation. First, tender of payment of the monthly rentals to the lessor except that
indicated in the June 9, 1977 Letter (Exhibit 10).
Second, the lessee also failed to prove the first notice to the lessor prior to consignation, except payment referred
to in Exhibit 10. It was stated in its order to the bank in issuing the checks in favor or Soco to notify Francisco if
the checks are ready so that he can send someone to get it hence it is obvious that it was the lessee’s duty to
send someone to get the cashier’s checks from the bank and give it is Soco. This the lessee failed to do.
Third, lessee likewise failed to prove that the second notice, that is after consignation has been made, to the
lessor except the consignation referred to in Exhibit 12. The bank did not send a notice to Soco that the checks
will be deposited in consignation with the Clerk of Court and the bank also did not send notice to Soco that the
checks are in fact deposited as there was no instruction for the same was given by Francisco to the bank.
Fourth, lessee failed to prove that there is actual deposit of the monthly rentals except the two cashier’s checks
indicated in Exhibit 12. Not even a single copy of the receipts issued by the Clerk of Court was presented as
evidence.
The Court further held that what is important is whether the checks were picked up by the lessee as per the
arrangement of Francisco with the bank. On this vital point, the lessee failed to present any proof that he complied
with the arrangement. Thus, the Court held that lessee failed to prive tender of payment except that in Exhibit
10 and failed to prove the first notice. He likewise failed the second notice after consignation. Thus, lessee
violated the terms of the lease contract and he may therefore be judicially ejected.
ADDN. NOTES:
• Consignation is the act of depositing the thing due with the court or judicial authorities whenever the
creditor cannot accept payment or refuses to accept payment and it generally required prior tender of
payment. (Limkako v. Teodoro)
• Without the notice first announced to the persons interested in the fulfillemnt of the obligation, the
consignation as a payment is void. (Limkako v. Teodoro)
IMMACULATA v. NAVARRO
Modes of Extinguishment (Tender of Payment)
LAURO IMMACULATA v. HON. PEDRO C. NAVARRO and HEIRS OF JUANITO VICTORIA

GR NO. L-42230 April 15, 1988
Petitioner’s Motion for Reconsideration of Our decision dated November 26, 1986 asks Us to consider a point
inadvertently missed by the Court — the matter of legal redemption of a parcel of land previously obtained by
petitioner Lauro Immaculata thru a free patent. The reconsideration of this issue is hereby GRANTED.
While res judicata may bar questions on the validity of the sale in view of alleged insanity and intimidation (and
this point is no longer pressed by counsel for the petitioner) still the question of the right of legal redemption has
remained unresolved.
Be it noted that in an action (Civil Case No. 20968) filed on March 24, 1975, before the defunct Court of First
Instance of Rizal, petitioner presented an alternative cause of action or prayer just in case the validity of the sale
would be sustained. And this alternative cause of action or prayer is to allow petitioner to legally redeem the
property.
We hereby grant said alternative cause of action or prayer. While the sale was originally executed sometime
in December 1969, it was only on February 3, 1974, when, as prayed for by private respondent, and as ordered
by the court a quo, a "deed of conveyance" was formally executed. Since offer to redeem was made on March
24, 1975, this was clearly within the five-year period of legal redemption allowed by the Public Land Act.
The allegation that the offer to redeem was not sincere, because there was no consignation of the amount in
Court is devoid of merit. The right to redeem is a RIGHT, not an obligation, therefore, there is no consignation
required (De Jesus v. Garcia, C.A. 47 O.G. 2406; Resales v. Reyes, 25 Phil. 495, Vda. de Quirino v. Palarca, L-
28269, Aug. 16, 1969) to preserve the right to redeem (Villegas v. Capistrano, 9 Phil. 416).
WHEREFORE, as prayed for by the petitioner Lauro Immaculata the decision of this Court dated November 26,
1986 is hereby MODIFIED, and the case is remanded to the court a quo for it to accept payment or consignation
(in connection with the legal redemption which We are hereby allowing the petitioner to do) by the herein
petitioner of whatever he received from respondent at the time the transaction was made.
DEL CARMEN v. SPOUSES SABORDO
Modes of Extinguishment of Obligations — Special Forms of Payment (d)

G.R. NO. 181723 AUGUST 11, 2014
It is settled that compliance with the requisites of a valid consignation is mandatory. Failure to comply strictly
with any of the requisites will render the consignation void. One of these requisites is a valid prior tender of
payment.
FACTS:
Sometime in 1961, Sps. Suico, along with several business partners, entered into a business venture by
establishing a rice and corn mill. As part of their capital, they obtained a loan from DBP, and to secure the said
loan, four (4) parcels of land owned by Sps. Suico, and another lot owned by their business partner, Del Rosario,
were mortgaged. Later, Sps. Suico and their business partners failed to pay their loan, thus, DBP foreclosed the
mortgage. After the Sps. Suico and their business partners failed to redeem said properties, DBP consolidated
its ownership over the same. Nonetheless, DBP later allowed Sps. Suico and Sps. Flores, as substitutes for Del
Rosario, to repurchase the said properties by way of a conditional sale.
Sps. Suico and Flores were able to pay the downpayment and the first monthly amortization, but not
monthly installments were made thereafter. Threatened with the cancellation of the conditional sale, Sps. Suico
and Flores sold their rights over the said properties to herein respondents Sps. Sabordo, subject to the condition
that the latter shall pay the balance of the sale price. Later, Sps. Suico and Flores executed a supplemental
agreement whereby they affirmed that what was actually sold to Sps. Sabordo were two (2) of the four (4) lots,
while the remaining (2) parcels of land (the “subject lots”) were given to them as usufructuaries. DBP then
approved the sale of rights of Sps. Suico and Flores in favor of Sps. Sabordo. Subsequently, the latter were able
to repurchase the foreclosed properties. Later, Mr. Sabordo filed an action for declaratory relief, raising the issue
of whether the Sps. Suico have the right to recover the subject lots. The trial court ruled in favor of Sps. Suico,
directing that the latter shall have the right to redeem from the former the subject lots.
Mr. Suico later died, leaving his widow, along with several others, including herein petitioner Del Carmen,
as legal heirs. Later, they discovered that the Sps. Sabordo mortgaged the subject lots with Republic Planters
Bank (RPB) as security for a loan which, subsequently, became delinquent.
Alleging that they are ready with the payment but cannot determine as to whom such payment shall be
made, petitioner filed a Complaint with the RTC, seeking to compel the respondent spouses and RPB to
interplead and litigate between themselves their respective interests on the said payment. The Complaint also
prayed that Sps. Sabordo be directed to substitute the subject lots with other real estate properties as collateral
for their outstanding obligation with RPB and that the latter be ordered to accept the substitute collateral, thus,
releasing the mortgage on the subject lots. Upon filing of their complaint, the petitioner deposited the sum
of the purchase price (P127,500).
The RTC dismissed the Complaint of the petitioner. On appeal, the petitioner contended that the judicial
deposit or consignation of the amount of P127,500 was valid and binding and produced the effect of payment of
the purchase price of the subject lots. The CA, however, denied the appeal.
ISSUE: Whether the petitioner’s consignation was a judicial deposit based on a final judgment, and as such,
does not require compliance with the requirements of Art. 1256 and 1257, NCC.
RULING:
No. The Court quotes with approval, the discussion of the CA regarding the definition and nature of
consignation, to wit:
Modes of Extinguishment of Obligations — Special Forms of Payment (d)
Consignation is the the act of depositing the thing due with the court or judicial authorities whenever the
creditor cannot accept or refuses to accept payment, and it generally requires a prior tender of payment. It should
be distinguished from tender of payment which is the manifestation by the debtor to the creditor of his desire to
comply with his obligation, with the offer of immediate performance.
Tender is the antecedent of consignation, that is, an act preparatory to the consignation, which is the
principal, and from which are derived the immediate consequences which the debtor desires or seeks to obtain.
Tender of payment may be extrajudicial, while consignation is necessarily judicial, and the priority of the first is
the attempt to make a private settlement before proceeding to the solemnities of consignation. Tender and
consignation, where validly made, produces the effect of payment and extinguishes the obligation
Finally, the Court reiterated that under Art. 1256, the only instances where prior tender of payment is
excused are:
1. when the creditor is absent or unknown, or does not appear at the place of payment;
2. when the creditor is incapacitated to receive the payment at the time it is due;
3. when, without just cause, the creditor refuses to give a receipt;
4. when two or more persons claim the same right to collect; and
5. when the title of the obligation has been lost.
None of these instances are present in the instant case. Hence, the fact that the subject lots are in danger
of being foreclosed does not excuse petitioner and her co-heirs from tendering payment to respondents, as
directed by the court.
ADDN. NOTES:
CASES CITED BY PETITIONER
In Arzaga v. Rumbaoa, the Court ruled that the deposits made with the court by the plaintiff is a valid payment
of the amount adjudged, even without a prior tender of payment to the defendants. Because here, the plaintiff,
upon making such deposit, expressly petitioned t he court that the defendants be notified to receive the tender
of payment.
In the instant case, the petitioner, upon making the deposit with the RTC, did not ask the trial court that
respondents be notified to receive the amount that they have deposited.
In Del Rosario v. Sandico & Salvante v. Cruz, the Court held that, for a consignation or deposit with the court of
an amount due on a judgment to be considered as payment, there must be prior tender to the judgment creditor
who refuses to accept it. Thus, tender of payment involves a positive and unconditional act by the obligor of
offering legal tender currency as payment to the obligee for the former’s obligation and demanding that the latter
accept the same.
In the instant case, the Court finds no cogent reason to depart from the findings of the CA and the RTC that the
petitioner failed to make a prior valid tender of payment to respondents.
DALTON v. FGR REALTY
Modes of Extinguishment of Obligations - Consignation
SOLEDAD DALTON v. FGR REALTY AND DEVELOPMENT CORPORATION, FELIX NG, NENITA NG, and
FLORA R. DAYRIT or FLORA REGNER
G.R NO. 172577 January 19, 2011
Compliance with the requisites of a valid consignation is mandatory. Failure to comply strictly with any of the
requisites will render the consignation void. Substantial compliance is not enough. The giving of notice to the
persons interested in the performance of the obligation is mandatory. Failure to notify the persons interested in
the performance of the obligation will render the consignation void.
FACTS:
Dayrit owned a 1,811-square meter parcel of land. Dalton, Sasam, Villalonga, Villarente, Fuentes, Pormento,
Cabajar, Yuson, Ponce, Regudo, Quebedo, Cabanlit, Encabo and Lim (Sasam, et al.) leased portions of the
property.
In June 1985, Dayrit sold the property to FGR Realt. In August 1985, Dayrit and FGR stopped accepting rental
payments because they wanted to terminate the lease agreements with Dalton and Sasam, et al.
In a complaint dated 11 September 1985, Dalton and Sasam, et al. consigned the rental payments with the RTC.
They failed to notify Dayrit and FGR about the consignation. In motions dated 27 March 1987, 10 November
1987, 8 July 1988, and 28 November 1994, Dayrit and FGR withdrew the rental payments. In their motions,
Dayrit and FGR reserved the right to question the validity of the consignation.
Dayrit, FGR and Sasam, et al. entered into compromise agreements wherein they agreed to abandon all claims
against each other. Dalton did not enter into a compromise agreement with Dayrit and FGR.
RTC ruled in favor of Dayrit and FGR Realty. It held that there was no valid consignation because there were
no prior notices of consignation and subsequent notices of consignation.
The CA affirmed the RTC’s Decision. It ruled that Consignation is made by depositing the proper amount to
the judicial authority, before whom the tender of payment and the announcement of the consignation shall be
proved. All interested parties are to be notified of the consignation. It had been consistently held that compliance
with these requisites is mandatory. Substantial compliance with the requisites of a valid consignation is not
enough.
ISSUE: Is the consignation made by Dalton void for lack of notice to the other party even though the other party
withdrew the amount consigned and deposited by Dalton?
RULING:
Yes. The court ruled that the consignation is still void even if the other party withdrew the amounts
consigned and deposited by Dalton.
A sensu contrario, when the creditor’s acceptance of the money consigned is conditional and with reservations,
he is not deemed to have waived the claims he reserved against his debtor. Thus, when the amount consigned
does not cover the entire obligation, the creditor may accept it, reserving his right to the balance (Tolentino, Civil
Code of the Phil., Vol. IV, 1973 Ed., p. 317, citing 3 Llerena 263). The same factual milieu obtains here because
the respondent creditor accepted with reservation the amount consigned in court by the petitioner-debtor.
Therefore, the creditor is not barred from raising his other claims, as he did in his answer with special defenses
and counterclaim against petitioner-debtor.
DALTON v. FGR REALTY
Modes of Extinguishment of Obligations - Consignation
Compliance with the requisites of a valid consignation is mandatory. Failure to comply strictly with any of the
requisites will render the consignation void. Substantial compliance is not enough.
In Insular Life Assurance Company, Ltd. v. Toyota Bel-Air, Inc., the Court enumerated the requisites of a valid
consignation: (1) a debt due; (2) the creditor to whom tender of payment was made refused without just cause
to accept the payment, or the creditor was absent, unknown or incapacitated, or several persons claimed the
same right to collect, or the title of the obligation was lost; (3) the person interested in the performance of the
obligation was given notice before consignation was made; (4) the amount was placed at the disposal of the
court; and (5) the person interested in the performance of the obligation was given notice after the consignation
was made.
The giving of notice to the persons interested in the performance of the obligation is mandatory. Failure to notify
the persons interested in the performance of the obligation will render the consignation void.
In Ramos v. Sarao, the Court held that, "All interested parties are to be notified of the consignation. Compliance
with this requisite is mandatory."
In Valdellon v. Tengco, the Court held that: Under Art. 1257 of our Civil Code, in order that consignation of the
thing due may release the obligor, it must first be announced to the persons interested in the fulfillment of the
obligation. The consignation shall be ineffectual if it is not made strictly in consonance with the provisions which
regulate payment. In said Article 1258, it is further stated that the consignation having been made, the interested
party shall also be notified thereof.
In Soco v. Militante, et al., the Court held that: We hold that the essential requisites of a valid consignation must
be complied with fully and strictly in accordance with the law, Articles 1256 to 1261, New Civil Code. That these
Articles must be accorded a mandatory construction is clearly evident and plain from the very language of the
codal provisions themselves which require absolute compliance with the essential requisites therein
provided. Substantial compliance is not enough for that would render only a directory construction to the law.
The use of the words "shall" and "must" which are imperative, operating to impose a duty which may be enforced,
positively indicate that all the essential requisites of a valid consignation must be complied with. The Civil Code
Articles expressly and explicitly direct what must be essentially done in order that consignation shall be valid and
effectual.
WHEREFORE, the Court DENIES the petition. The Court AFFIRMS the 9 November 2005 Decision and 10
April 2006 Resolution of the Court of Appeals in CA-G.R. CV No. 76536.
ADDN. NOTES:
Art. 1257. In order that the consignation of the thing due may release the obligor, it must first be announced to
the persons interested in the fulfillment of the obligation.
The consignation shall be ineffectual if it is not made strictly in consonance with the provisions which regulate
payment.
Art. 1258. Consignation shall be made by depositing the things due at the disposal of judicial authority, before
whom the tender of payment shall be proved, in a proper case, and the announcement of the consignation in
other cases.
The consignation having been made, the interested parties shall also be notified thereof.
PEOPLE v. FRANKLIN
Loss of the thing due or Impossibility of Performance – Arts. 11262-1269, 1189, 1174, 1165, 1268, 1942, 1979,
2147, 2159
PEOPLE OF THE PHILIPPINES vs. NATIVIDAD FRANKLIN, accused, ASIAN SURETY & INSURANCE
COMPANY, INC., bondsman-appellant.
G.R. No. L-21507. June 7, 1971.
Article 1266 of the New Civil Code does not apply to this case, because the same speaks of the relation
between a debtor and a creditor, which does not exist in the case of a surety upon a bail bond, on the one
hand, and the State, on the other.
FACTS:
Natividad Franklin was charged with estafa. Upon a bail bond posted by the Asian Surety & Insurance Company,
Inc. in the amount of P2,000.00, she was released from custody.
After the preliminary investigation of the case, the Justice of the Peace Court elevated it to the Court of First
Instance of Pampanga where the Provincial Fiscal filed the corresponding information against the accused.
However, the accused failed to appear before the court on numerous occasions, for which reason the court
ordered her arrest and required the surety company to show cause why the bail bond posted by it should not be
forfeited.
The court granted the surety company a period of thirty days (which was later extended) within which to produce
and surrender the accused. However, the surety company failed to produce the accused despite the extensions.
The court had no other alternative but to render the judgment of forfeiture.
Appellant now contends that the lower court should have released it from all liability under the bail bond posted
by it because its failure to produce and surrender the accused was due to the negligence of the Philippine
Government itself in issuing a passport to said accused, thereby enabling her to leave the country. In support of
this contention the provisions of Article 1266 of the New Civil Code are invoked.
ISSUE: Whether or not Article 1266 of the New Civil Code does NOT apply to the relation between surety to a
bail bond and the state. (YES)
RULING: YES, Article 1266 of the New Civil Code does NOT apply in this case.
The abovementioned legal provision does not apply to its case, because the same speaks of the relation between
a debtor and a creditor, which does not exist in the case of a surety upon a bail bond, on the one hand, and the
State, on the other.
In the eyes of the law a surety becomes the legal custodian and jailer of the accused, thereby assuming the
obligation to keep the latter at all times under his surveillance, and to produce and surrender him to the court
upon the latter's demand.
That the accused in this case was able to secure a Philippine passport which enabled her to go to the United
States was, in fact, due to the surety company's fault because it was its duty to do everything and take all steps
necessary to prevent that departure. This could have been accomplished by seasonably informing the
Department of Foreign Affairs and other agencies of the government of the fact that the accused for whose
provisional liberty it had posted a bail bond was facing a criminal charge in a particular court of the country. Had
the surety company done this, there can be no doubt that no Philippine passport would have been issued to
Natividad Franklin.
ADDITIONAL NOTES:
In U.S. vs. Bonoan, et al., 22 Phil., p. 1, We held that:
"The rights and liabilities of sureties on a recognizance or bail bond are, in many respects, different from
those of sureties on ordinary bonds or commercial contracts. The former can discharge themselves from
PEOPLE v. FRANKLIN
Loss of the thing due or Impossibility of Performance – Arts. 11262-1269, 1189, 1174, 1165, 1268, 1942, 1979,
2147, 2159
liability by surrendering their principal; the latter, as a general rule, can only be released by payment of
the debt or performance of the act stipulated."
In the more recent case of Uy Tuising, 61 Phil. 404, We also held that:
"By the mere fact that a person binds himself as surety for the accused, he takes charge of, and absolutely
becomes responsible for the latter's custody, and under such circumstances it is incumbent upon him, or
rather, it is his inevitable obligation, not merely a right, to keep the accused at all times under his
surveillance, inasmuch as the authority emanating from his character as surety is no more nor less than
the Government's authority to hold the said accused under preventive imprisonment. In allowing the
accused Eugenio Uy Tuising to leave the jurisdiction of the Philippines, the appellee necessarily ran the
risk of violating and in fact it clearly violated the terms of its bailbonds because it failed to produce the
said accused when on January 15, 1932, it was required to do so. Undoubtedly, the result of the obligation
assumed by the appellee to hold the accused amenable at all times to the orders and processes of the
lower court, was to prohibit said accused from leaving the jurisdiction of the Philippines because,
otherwise, said orders and processes would be nugatory; and inasmuch as the jurisdiction of the court
from which they issued does not extend beyond that of the Philippines, they would have no binding force
outside of said jurisdiction."
DISPOSITION: UPON ALL THE FOREGOING, the decision appealed from is affirmed in all its parts, with costs.
LAGUNA v. MANABAT
Loss of the thing due or Impossibility of Performance
LAGUNA TAYABAS BUS COMPANY and BATANGAS TRANSPORTATION COMPANY vs.

FRANCISCO C. MANABAT,
Where a person by his contract charges himself with an obligation possible to be performed, he must perform
it, unless the performance is rendered impossible by the act of God, by the law, or by the other party, it being
the rule that in case the party desires to be excused from the performance in the event of contingencies
arising, it is his duty to provide therefor in his contract. Hence, performance is not excused by subsequent
inability to perform, by unforeseen difficulties, by unusual or unexpected expenses, by danger, by inevitable
accident, by breaking of machinery, by strikes, by sickness, by failure of a party to avail himself of the benefits
to be had under the contract, by weather conditions, by financial stringency or by stagnation of business.
Neither is performance excused by the fact that the contract turns out to be hard and improvident, unprofitable,
or impracticable, ill-advised, or even foolish, or less profitable, unexpectedly burdensome.
Facts:
Biñan Trans. Co., before becoming insolvent, entered into contract of lease with petitioner companies (LAGUNA
TAYABAS BUS CO. and BATANGAS TRANS. CO.) over several of its certificates of public convenience over
several lines for a monthly rental fee of P2500/month. Biñan Trans. Co. was later judicially declared insolvent.
Binan Transport appointed Manabat as assignee.
From time to time, the Petitioner Companies would pay rentals, until one time they deducted their rent payment
for Aug 1957 w/o the consent of Assignee Manabat. Petitioner Companies alleged that such reduction was made
for legitimate reasons:
• Employees of Petitioner Companies went on strike causing loss.
• Batangas Trans. Co. won a civil case against respondent Biñan Trans. Co.
Manabat objected to such deductions. Petitioner Companies stopped paying rentals beginning Jan 1958 despite
demands by Manabat. They promised to pay rentals, but never did.
Petitioner Companies filed a case with Public Service Commission (PSC) to suspend operation of lines covered
by leased certificates with respondent due to:
• Reduction in amount of US dollars allowed by Monetary Board of Central Bank for purchasing of spare parts.
• Difficulty of and costly procurement of said parts.
• High costs of operation, coupled with lack of passenger traffic, resulting to financial loss.
PSC authorized the suspension of lines under the leased certificates with respondent Biñan Trans Co.
Manabat filed a civil case for recovery of deducted rentals, unpaid rent, as well as attorney’s fees and damages.
Issue: Whether or not the suspension of operations authorized by the PSC, based on “financial losses” of
petitioners, was a justification for the equitable reduction of rentals. (NO)
Ruling:
The general rule on performance of contracts is graphically set forth in American treatises which is also the rule,
in our opinion, obtaining under the Civil Code.
Where a person by his contract charges himself with an obligation possible to be performed, he
must perform it, unless the performance is rendered impossible by the act of God, by the law, or by the
other party, it being the rule that in case the party desires to be excused from the performance in the
event of contingencies arising, it is his duty to provide therefor in his contract. Hence, performance is not
excused by subsequent inability to perform, by unforeseen difficulties, by unusual or unexpected
expenses, by danger, by inevitable accident, by breaking of machinery, by strikes, by sickness, by failure
LAGUNA v. MANABAT
Loss of the thing due or Impossibility of Performance
of a party to avail himself of the benefits to be had under the contract, by weather conditions, by financial
stringency or by stagnation of business. Neither is performance excused by the fact that the contract
turns out to be hard and improvident, unprofitable, or impracticable, ill-advised, or even foolish, or less
profitable, unexpectedly burdensome. (17 CJS 946-948) (Reyes vs. Caltex, supra, 664. Emphasis
supplied).
Also expressed in said case is a ruling in American jurisprudence, which found relevance again in the case at
bar, to wit: "(S)ince, by the lease, the lessee was to have the advantage of casual profits of the leased premises,
he should run the hazard of casual losses during the term and not lay the whole burden upon the lessor." (Reyes
vs. Caltex, supra, 664).
Militating further against a grant of reduction of the rentals to the petitioners is the petitioners' conduct which is
not in accord with the rules of fair play and justice. Petitioners, it must be recalled, promised to pay the accrued
rentals in due time. Later, however, when they believed they found a convenient excuse for escaping their
obligation, they reneged on their earlier promise. Moreover, petitioners' option to suspend operation on the
leased lines appears malicious. Thus, Justice Esguerra, speaking for the Court of Appeals, propounded the
following questions: "If it were true that the cause of the suspension was the high prices of spare parts, gasoline
and needed materials and the reduction of the dollar allocation, why was it that only plaintiff-appellee's certificate
of public convenience was sought to be suspended? Why did not the defendants-appellants ask for a
corresponding reduction or suspension under their own certificate along the same route? Suppose the prices of
the spare parts and needed materials were cheap, would the defendants-appellants have paid more than what
is stipulated in the lease contract? We believe not. Hence, the suspension of operation on the leased lines was
conceived as a scheme to lessen operation costs with the expectation of greater profit."
OCCENA v. JABSON
Modes of Extinguishment of Obligation
OCCENA v. JABSON
G.R. No. L-44349 October 29, 1976
The Civil Code authorizes the release of an obligor when the service has become so difficult as to be
manifestly beyond the contemplation of the parties but does not authorize the courts to modify or revise the
subdivision contract between the parties or fix a different sharing ratio from that contractually stipulated with
the force of law bet. The parties.
FACTS:
Private Respondent, Tropical Homes, Inc. filed a complaint for modification of the terms and conditions of its
subdivision contract with petitioner. It was alleged that due to the increase in price of oil and worldwide spiraling
of prices, the cost of such development has risen in which further performance by the plaintiff will result in
situation where defendants would be unjustly enriched at the expense of plaintiff.
Under the said subdivision contract, private respondent “guaranteed (petitioners as landowners) as the latter’s
fixed and sole share and participation an amount equivalent to 40% of all cash receipts from the sale of the
subdivision lots.
CFI rendered judgment modifying the terms and conditions of the contract by fixing the proper shares that should
pertain to the parties out of the gross proceeds from the sales of subdivided lots of subject subdivision. Petitioner
moved to dismiss the complaint for lack of cause of action and insist that the worldwide increase in prices does
not constitute a sufficient cause of action for modification of the subdivision contract. However, the CA affirmed
the decision of the CFI and dismissed the case on the ground under Art. 1267 of the Civil Code which provides
that
ART. 1267. When the service has become so difficult as to be manifestly beyond the
contemplation of the parties, the obligor may also be released therefrom, in whole or in part.
... a positive right is created in favor of the obligor to be released from the performance of an
obligation in full or in part when its performance 'has become so difficult as to be manifestly
beyond the contemplation of the parties.
ISSUE: Whether or not respondents may demand modification of the contract on the basis that the prestation
has become so difficult.
RULING:
No, the Court ruled in favor of the petitioner and granted the petition on the basis that there is no cause
of action. It misapplied the same to respondent's complaint.
If respondent's complaint were to be released from having to comply with the subdivision contract, assuming it
could show at the trial that the service undertaken contractually by it had "become so difficult as to be manifestly
beyond the contemplation of the parties", then respondent court's upholding of respondet's complaint and
dismissal of the petition would be justifiable under the cited codal article.
However, in the case at bar, respondent's complaint seeks not release from the subdivision contract but that the
court "render judgment I modifying the terms and Conditions of the Contract by fixing the proper shares that
should pertain to the herein parties out of the gross proceed., from the sales of subdivided lots of subject
subdivision". The cited article does not grant the courts this authority to remake, modify or revise the
contract or to fix the division of shares between the parties as contractually stipulated with the force of
law between the parties, so as to substitute its own terms for those covenanted by the parties
themselves. Respondent's complaint for modification of contract manifestly has no basis in law and therefore
states no cause of action. Under the particular allegations of respondent's complaint and the circumstances
therein averred, the courts cannot even in equity grant the relief sought.
OCCENA v. JABSON
Modes of Extinguishment of Obligation
The resolution of respondent appellate court is reversed and the petition for certiorari is granted and private
respondent's complaint in the lower court is ordered dismissed for failure to state a sufficient cause of action.
GAN TION v. CA
Modes of Extinguishment of Obligations - Legal Compensation
GAN TION, v. COURT OF APPEALS

GR NO. L-22490 May 21, 1969
An award for attorney's fees is a proper subject of legal compensation.

FACTS:
Gan Tion filed an ejectment case against Ong Wan Sieng, contending that Ong Wan Sieng was in default for 2
months of rent at P180/month. Ong Wan Sieng denied the allegation saying that the agreed monthly rental was
only P160/month, which he offered to pay but was refused by Gan Tion. Gan Tion obtained a favorable judgment
but upon appeal, the CFI reversed the judgment and ordered the plaintiff to pay P500 as attorney's fees. Later,
Gan Tion served notice that he was increasing rent to P180/month plus the arrears at the old rate amounting to
P4,320. Ong Wan Sieng was able to obtain a writ of execution of judgment for attorney's fees in his favor, and
Gan Tion pleaded partial legal compensation since Ong Wan Sieng was still indebted to him.
Gan Tion went on certiorari to the Court of Appeals. The CA accepted the petition but eventually decided for the
respondent. The CA ruled against Gan Tion, stating that P500 could not be the subject of legal compensation, it
being a "trust fund for the benefit of the lawyer, which would have to be turned over by the client to his counsel."
In the opinion of said court, the requisites of legal compensation, namely, that the parties must be creditors and
debtors of each other in their own right (Art. 1278, Civil Code) and that each one of them must be bound
principally and at the same time be a principal creditor of the other (Art. 1279), are not present in the instant
case, since the real creditor with respect to the sum of P500 was the defendant's counsel.
ISSUE: Whether or not attorney’s fees is an award made in favor of Ong Wan Sieng which may properly be
subject of legal compensation.
RULING:
Yes. The Court held that the opinion was not an accurate statement of the nature of an award for attorney's fees.
The award is made in favor of the litigant, not of his counsel, and is justiﬁed by way of indemnity for damages
recoverable by the former in the cases enumerated in Article 2208 of the Civil Code. It is the litigant, not his
counsel, who is the judgment creditor and who may enforce the judgment by execution. Such credit,
therefore, may properly be the subject of legal compensation. Quite obviously it would be unjust to compel
petitioner to pay his debt for P500 when admittedly his creditor is indebted to him for more than P4,000.
PNB v. ONG ACERO
PNB. v. ONG ACERO

G.R No. L-69255 February 27, 1987
There being no indebtedness to PNB on ISABELA's part, there is in consequence no occasion to speak of any
mutual set-off, or compensation, whether it be legal, i.e., which automatically occurs by operation of law, or
voluntary, i.e., which can only take place by agreement of the parties.
FACTS:
Isabela Wood Construction & Dev’t Corp (ISABELA) has a savings account with PNB in the amount of P2 Million.
Said account is the subject of two conflicting claims. One claim is asserted by the Aceros (respondents), and the
other is by PNB.
The ACEROS' claim to the bank deposit is more specifically founded upon the garnishment thereof by the sheriff,
effected in execution of the partial judgment rendered by the CFI. The partial judgment ordered payment by
ISABELA to the ACEROS of the amount of P1,532,000.07.
PNB's claim to the two-million-peso deposit in question is made to rest on an agreement between it and ISABELA
in virtue of which, according to PNB: (1) the deposit was made by ISABELA as "collateral" in connection with its
indebtedness to PNB as to which it (ISABELA) had assumed certain contractual undertakings; and (2) in the
event of ISABELA's failure to fulfill those undertakings, PNB was empowered to apply the deposit to the payment
of that indebtedness.
It was upon this version of the facts, and its theory thereon based on a mutual set-off, or compensation, between
it and ISABELA — in accordance with Articles 1278 et al. of the Civil Code — that PNB intervened in the action
between the ACEROS and ISABELA and moved for reconsideration of the Order of February 15, 1980 (requiring
it to turn over to the sheriff the sum of P1,532,000.07.) But its motion met with no success. It was denied by the
Lower Court. And a motion for the reconsideration of that Order was also denied.
RTC reversed its decision, ruling that there had been a valid assignment by ISABELA to PNB of the amount
deposited. The ACEROS appealed to the IAC which ruled in their favor. PNB appealed to the SC.
PNB's main thesis is that when it opened a savings account for ISABELA on March 9, 1979 in the amount of P
2M, it (PNB) became indebted to ISABELA in that amount. So that when ISABELA itself subsequently came to
be indebted to it on account of ISABELA's breach of the terms of the Credit Agreement, and therefore ISABELA
and PNB became at the same time creditors and debtors of each other, compensation automatically took place
between them, in accordance with Article 1278 of the Civil Code. The amounts due from each other were, in its
view, applied by operation of law to satisfy and extinguish their respective credits. More specifically, the P2M
owed by PNB to ISABELA was automatically applied in payment and extinguishment of PNB's own credit against
ISABELA. This having taken place, that amount of P2M could no longer be levied on by any other creditor of
ISABELA, as the ACEROS attempted to do in the case at bar, in order to satisfy their judgment against ISABELA.
ISSUE: Whether or not PNB’s contentions are correct, and that compensation automatically took place between
the parties thus preventing the Aceros’ garnishment thereof.
RULING:
No. Article 1278 of the Civil Code does indeed provide that "Compensation shall take place when two persons,
in their own right, are creditors and debtors of each other. " Also true is that compensation may transpire by
operation of law, as when all the requisites therefor, set out in Article 1279, are present. Nonetheless, these legal
provisions cannot apply to PNB's advantage under the circumstances of the case at bar.
PNB v. ONG ACERO
The insuperable obstacle to the success of PNB's cause is the factual finding of the IAC, by which upon firmly
established rules even this Court is bound, that it has not proven by competent evidence that it is a creditor of
ISABELA. The only evidence presented by PNB towards this end consists of two (2) documents marked in its
behalf as Exhibits 1 and 2. But as the IAC has cogently observed, these documents do not prove any
indebtedness of ISABELA to PNB. All they do prove is that a letter of credit might have been opened for ISABELA
by PNB, but not that the credit was ever availed of by ISABELA's foreign correspondent MAN, or that the goods
thereby covered were in fact shipped, and received by ISABELA.
PNB has however deposited an alternative theory, which is that the P2M deposit had been assigned to it by
ISABELA as "collateral," although not by way of pledge; that ISABELA had explicitly authorized it to apply the
P2M deposit in payment of its indebtedness; and that PNB had in fact applied the deposit to the payment of
ISABELA's debt, in concept of voluntary compensation. This second, alternative theory, is as untenable as the
first.
In the first place, there being no indebtedness to PNB on ISABELA's part, there is in consequence no occasion
to speak of any mutual set-off, or compensation, whether it be legal, i.e., which automatically occurs by operation
of law, or voluntary, i.e., which can only take place by agreement of the parties.
In the second place, the documents indicated by PNB as constitutive of the claimed assignment do not in truth
make out any such transaction. While the Credit Agreement declares it to be ISABELA's intention to "assign to
the BANK the proceeds of its contract with the Department of Public Works” it does not appear that that intention
was adhered to, much less carried out.
Even if it be assumed that such an assignment had indeed been made, and PNB had been really authorized to
apply the P2M deposit to the satisfaction of ISABELA's indebtedness to it, nevertheless, since the record reveals
that the application was attempted to be made by PNB only on February 26, 1980, that essayed application was
ineffectual and futile because at that time, the deposit was already in custodia legis, notice of garnishment thereof
having been served on PNB on January 9, 1980 (pursuant to the writ of execution issued by the CFI for the
enforcement of the partial judgment in the ACEROS' favor).
One final factor precludes according validity to PNB's arguments. On the assumption that the P2M deposit was
in truth assigned as some sort of "collateral" to PNB — although as PNB insists, it was not in the form of a pledge
— the agreement postulated by PNB that it had been authorized to assume ownership of the fund upon the
coming into being of ISABELA s indebtedness is void ab initio, it being in the nature of a pactum commisoruim
proscribed as contrary to public policy.
WHEREFORE, the judgment of the Intermediate Appellate Court subject of the instant appeal, being fully in
accord with the facts and the law, is hereby affirmed in toto. Costs against petitioner.
FRANCIA v. IAC
Modes of Extinguishment of Obligations; Legal Compensation
ENGRACIO FRANCIA vs. INTERMEDIATE APPELLATE COURT

G.R. No. 67649, June 28, 1988
Internal revenue taxes cannot be the subject of compensation: Reason: government and taxpayer 'are not
mutually creditors and debtors of each other' under Article 1278 of the Civil Code and a "claim for taxes is not
such a debt, demand, contract or judgment as is allowed to be set-off”
FACTS:
Engracio Francia is the registered owner of a residential lot and a two-story house built upon it situated at Pasay
City, Metro Manila. The lot, with an area of about 328 square meters, is described and covered by Transfer
Certificate of Title with the Registry of Deeds of Pasay City. A 125 square meter portion of Francia's property
was expropriated by the Republic of the Philippines for the sum of P4,116.00 representing the estimated amount
equivalent to the assessed value of the aforesaid portion.
Since 1963 up to 1977 inclusive, Francia failed to pay his real estate taxes. Thus, on December 5, 1977, his
property was sold at public auction by the City Treasurer of Pasay City pursuant to Section 73 of Presidential
Decree No. 464 known as the Real Property Tax Code in order to satisfy a tax delinquency of P2,400.00. Ho
Fernandez was the highest bidder for the property. Francia was not present during the auction sale since he was
in Iligan City at that time helping his uncle ship bananas.
Francia received a notice of hearing of LRC Case No. 1593-P "In re: Petition for Entry of New Certificate of Title"
filed by Ho Fernandez, seeking the cancellation of TCT No. 4739 (37795) and the issuance in his name of a new
certificate of title. Upon verification through his lawyer, Francia discovered that a Final Bill of Sale had been
issued in favor of Ho Fernandez by the City Treasurer.
Francia filed a complaint to annul the auction sale. The lower cour dimissed the complaint and ordered the
Register of Deeds to issue a new TCT in favor of Ho Fernandez and that the plaintiff has to pay Ho Fernandez.
IAC affirmed the decision in toto
In the SC, Francia contends that his tax delinquency of P2,400.00 has been extinguished by legal compensation.
He claims that the government owed him P4,116.00 when a portion of his land was expropriated on October 15,
1977. Hence, his tax obligation had been set-off by operation of law as of October 15, 1977.
ISSUE: Whether or not tax delinquency can be extinguished by legal compensation
RULING: DISMISSED
No. There is no legal basis for the contention. By legal compensation, obligations of persons, who in their own
right are reciprocally debtors and creditors of each other, are extinguished. SC consistently ruled that there can
be no off-setting of taxes against the claims that the taxpayer may have against the government. A person cannot
refuse to pay a tax on the ground that the government owes him an amount equal to or greater than the tax
being collected. The collection of a tax cannot await the results of a lawsuit against the government.
A taxpayer cannot refuse to pay his tax when called upon by the collector because he has a claim against the
governmental body not included in the tax levy. Internal revenue taxes can not be the subject of compensation:
Reason: government and taxpayer 'are not mutually creditors and debtors of each other' under Article 1278 of
the Civil Code and a "claim for taxes is not such a debt, demand, contract or judgment as is allowed to be set-
off."
In the case at hand, the tax was due to the city government while the expropriation was effected by the national
government. Moreover, the amount of P4,116.00 paid by the national government for the 125 square meter
portion of his lot was deposited with the Philippine National Bank long before the sale at public auction of his
FRANCIA v. IAC
Modes of Extinguishment of Obligations; Legal Compensation
remaining property. Notice of the deposit dated September 28, 1977 was received by the petitioner on September
30, 1977. The petitioner admitted in his testimony that he knew about the P4,116.00 deposited with the bank but
he did not withdraw it. It would have been an easy matter to withdraw P2,400.00 from the deposit so that he
could pay the tax obligation thus aborting the sale at public auction.
Mr. Francia failed to pay his taxes for 14 years from 1963 up to the date of the auction sale. He claims to have
pocketed the notice of sale without reading it which, if true, is still an act of inexplicable negligence. He did not
withdraw from the expropriation payment deposited with the Philippine National Bank an amount sufficient to pay
for the back taxes. The petitioner did not pay attention to another notice sent by the City Treasurer on November
3, 1978, during the period of redemption, regarding his tax delinquency.
REPUBLIC v. DE LOS ANGELES

G.R. No. L-30187, June 25, 1980
Proof of the liquidation of a claim, in order that there be compensation of debts, is proper if such claim is
disputed
FACTS:
On October 29, 1964, spouses Petra R. Farin and Benjamin Farin obtained a loan from the Marcelo Steel
Corporation in the amount of P600,000.00. The spouses constituted a real estate mortgage upon their parcel of
land at Quezon City as security for the loan.
On July 24, 1965, the mortgagee wrote the Sheriff of Quezon City requesting the extrajudicial foreclosure of the
aforesaid mortgage. The Farin Spouses filed a petition for prohibition with injunction and damages against Benito
Macrohon, as sheriff of Quezon City, and the Marcelo Steel Corporation, with the CFI Rizal upon the ground that
they have not been in default in the payment of their obligation. Judge Walfrido de los Angeles, issued an order
commanding the respondent Sheriff and the respondent Corporation to desist from proceeding with the public
auction sale of the property.
While the above case was pending, Petra Farin lease portions of the "Doña Petra Building situated on the
mortgaged premises, to the Rice and Corn Administration (RCA) for the amount of P11,500.00 per month.
On December 9, 1967, the Meralco Steel Corporation invoking paragraph 5 of the mortgage contract, filed a
motion praying that an order be issued directing and/or authorizing the RCA and all other business concerns
holding offices at the Doña Petra Building to channel or pay directly to it the rents for the use of the building.
On December 23, 1967, Judge de los Angeles granted Marcelo Steel’s motion.
The RCA filed a motion for the reconsideration of said order, praying that it be excluded therefrom, for the
reasons that (a) the rents due Petra Farin had been assigned by her, with the conformity with the RCA, to Vidal
A. Tan; (b) Petra Farin has an outstanding obligation with the RCA in the amount of P263,062.40, representing
rice shortages incurred by her as a bonded warehouse under contract with the RCA, which should be
compensated with the rents due and may be due; and (c) RCA was never given an opportunity to be heard on
these matters.
Petra and Benjamin Farin filed a similar motion for the reconsideration of the disputed order of December 23,
1967, alleging that the lessees of the Doña Petra Building are not parties to the case and were not served with
a copy of the motion of Marcelo Steel Corporation, so that the Court has no jurisdiction over them; Petra Farin
has assigned a portion of the monthly rental due from RCA to Vidal A. Tan, who has acquired proprietary rights
thereto, and under the power of attorney provided for in the real estate mortgage contract, the rents collected
shall be applied to the interest on the obligation, and the legality of the additional interest at the rate of 12% per
annum of the total amount of the mortgage indebtedness in addition to the 12% annual interest being charged
by the Marcelo Steel Corporation on said indebtedness is directly at issue in the case, so that to enforce the
disputed portion of the real estate mortgage contract and allow the Marcelo Steel Corporation to collect rents
and apply the same to the interests on the loan would be premature.
The trial court denied both motions for reconsideration.
On May 10, 1968, Petra Farin filed an urgent ex parte motion to authorize the RCA to release the rentals
corresponding to the months of December, 1967, January and February, 1968, amounting to P37,500.00 so as
to enable her to make the necessary repairs on the air conditioning system of the Doña Petra Building, stating,
among others, that "That RCA is ready, willing and able to release to the petitioners the rentals mentioned
above.
The respondent Judge granted the motion but noted that all succeeding rentals should be delivered to the
Marcelo Steel Corporation as previously ordered in the order of December 23, 1967.
The RCA filed a motion to set aside the said order, claiming that the allegations contained in the motion dated
May 10, 1968, that "The RCA is ready, willing and able to release to the petitioners the rentals mentioned above
is unauthorized and gratuitous, and the delivery of the withheld rentals to Petra R. Farin would defeat its claim
without giving the corporation its day in court.
The CFI denied the motion. It ruled that the records does not show any proof that the plaintiff, Petra Farin, is
indebted to the aforesaid movant, RCA, as allegedly in the said motion and assuming that the herein plaintiff is
really indebted to the RCA, the records further does not show that a case has been filed against her for the
payment of such obligation, and therefore, there is no apparent legal ground to hold the payment of the rentals
due the plaintiff.
The RCA filed a motion to vacate the orders directing the RCA to pay rentals to Marcelo Steel Corporation. The
RCA emphasized that it is not a party to the case; that it had been denied due process for lack of notice and the
right to be heard; that compensation took place by operation of law pursuant to Art. 1286 of the Civil Code without
the need of a case against Petra R. Farin, or a decision rendered against her for the payment of such obligation;
and that the provisions of the Rules of Court permitting a judgment creditor to reach money or property in the
hands of third persons file the RCA, all purpose a final judgment, and not a mere interlocutory order.
The motion was denied and when the RCA received a letter from counsel for the Marcelo Steel Corporation
requesting compliance with the order of December 23, 1967, and the payment of accrued rentals, the petitioner
instituted the present recourse
ISSUES:
1. Whether or not the CFI erred in ordering the payment of the rentals to Marcelo Steel. – YES.
2. Whether or not the CF erred in ruling that there was no compensation. – YES.
RULING:
Insofar as it recognized the right of the herein private respondent, Marcelo Steel Corporation, to collect and
receive rentals from the lessees of the Doña Petra Building, the order of December 23, 1967 was within the
competence of the respondent Judge, since the lessor-mortgagor, Petra Farin, had empowered the said
corporation to collect and receive any interest, dividend, rents, profits or other income or benefit produced by or
derived from the mortgaged property under the terms of the real estate mortgage contract executed by them.
But, the respondent Judge exceeded his jurisdiction in ordering or compelling the lessees of the said building,
the RCA among others, to pay the rentals to the respondent Corporation, without giving the lessees an
opportunity to be heard. The said lessees are not parties to the case between the lessor and the Marcelo Steel
Corporation. The RCA, in particular, was not furnished with a copy of the motion of the respondent Corporation,
dated December 9, 1967, praying that an order be issued directing and/or authorizing the RCA and other lessees
to channel or pay directly to the said corporation the rents for the use of the Doña Petra Building, so that the
RCA was deprived of its day in court and precluded it from presenting the defenses that it has against the lessor
which, in this case, are: (1) that the rents due to Petra Farin had been assigned by her to Vidal A. Tan with the
acquiescence of the RCA, who has acquired proprietary rights thereto and would be deprived of his property
without due process of law; and (2) that the lessor Petra R. Farin has an outstanding obligation to the RCA in
the amount of P263,062.40 which should be compensated with the rentals already due or may be due. The said
order clearly violated the constitutional provision against depriving a person of his property without due process
of law. While there may be rents due the lessor for the use of portions of the Doña Petra Building, otherwise
there would be no claim of compensation, the collection of said rents should not be done in an arbitrary and
illegal manner. Certain ruled should be observed and justice accorded the parties whose property rights would
be adversely affected thereby. Since the order of December 23, 1967 was issued in executive s of jurisdiction,
the said order is null and void and of no legal t effect.
The respondent Judge also erred in denying the claim of the RCA that compensation of debts had taken place
allegedly because "The records does not show any proof that the plaintiff is indebted to the aforesaid movant,
RCA, as alleged in the said motion and assuming that the herein plaintiff is really indebted to the RCA, the
records further does not show that a case has been filed against her, or a decision has been rendered against
her for the payment of such obligation." Proof of the liquidation of a claim, in order that there be
compensation of debts, is proper if such claim is disputed. But, if the claim is undisputed, as in the case at
bar, the statement is sufficient and no other proof may be required. In the instant case, the claim of the RCA that
Petra R. Farin has an outstanding obligation to the RCA in the amount of P263,062.40 which should be
compensated against the rents already due or may be due, was raised by the RCA in its motion for the
reconsideration of the order of December 23, 1967. A copy of said motion was duly furnished counsel for Petra
R. Farin and although the said Petra R. Farin subsequently filed a similar motion for the reconsideration of the
order of December 23, 1967, she did not dispute nor deny such claim Neither did the Marcelo Steel Corporation
dispute such claim of compensation in its opposition to the motion for the reconsideration of the order of
December 23, 1967. The silence of Petra R. Farin, order of December 23, 1967. although the declaration is
such as naturally one to call for action or comment if not true, could be taken as an admission of the existence
and validity of such a claim. Therefore, since the claim of the RCA is undisputed, proof of its liquidation is not
necessary. At any rate, if the record is bereft of the proof mentioned by the respondent Judge of first instance, it
is because the respondent Judge did not call for the submission of such proof. Had the respondent Judge issued
an order calling for proof, the RCA would have presented sufficient evidence to the satisfaction of the court.
SOLINAP v. DEL ROSARIO
LORETO J. SOLINAP vs. HON. AMELIA K. DEL ROSARIO, SPOUSES JUANITO and HARDEVI R.
LUTERO, and THE PROVINCIAL SHERIFF OF ILOILO
G.R. No. L-50638 July 25, 1983 (123 SCRA 640)
Compensation cannot take place where one's claim against the other is still the subject of court litigation. It is a
requirement, for compensation to take place, that the amount involved be certain and liquidated.
FACTS:
Spouses Tiburcio Lutero and Asuncion Magalona, owners of Hacienda Tambal, leased the said property to
petitioner Solinap for 10 years at P50K a year. The contract also provided that the sum of P25K should be paid
by Solinap to PNB to amortize the indebtedness of the spouses Lutero.
Lutero died in 1971. His heirs institute testate estate proceedings of the deceased, presided by public respondent
judge Del Rosario. Respondent judge issued an order stating that in order to protect the estate, the administrator
was authorized to scout among the testamentary heirs who is financially in a position to pay all the unpaid
obligations of the estate, with right to subrogation.
Juanito Lutero (Tiburcio’s grandson and heir) paid PNB P25,000 as partial settlement of the deceased’s
obligations. Thereafter Juanito filed a motion before the testate court for reimbursement from Solinap of the
amount he paid. He argued that the said amount should have been paid by Solinap as stipulated in the lease
contract he had entered into with the deceased Tiburcio Lutero; and that such reimbursement to them was
proper, they being subrogees of the PNB.
Petitioner Solinap contends that the respondent judge gravely abused her discretion in not declaring the mutual
obligations of the parties extinguished to the extent of their respective amounts. He relies on Art 1278 NCC to
the effect that compensation shall take place when two persons, on their own right, are creditors and debtors of
each other.
Before the motion could be resolved by the court, petitioner on April 28, 1978 filed in the Court of First Instance
of Iloilo a separate action against the spouses Juanito Lutero and Hardivi R. Lutero for collection of the total
amount of P71,000.00, docketed as Civil Case No. 12397. Petitioner alleged in the complaint that on April 25,
1974 the defendants Lutero borrowed from him the sum of P45,000.00 for which they executed a deed of real
estate mortgage; that on July 2, 1974, defendants obtained an additional loan of P3,000.00, evidenced by a
receipt issued by them; that defendants are further liable to him for the sum of P23,000.00, representing the
value of certain dishonored checks issued by them to the plaintiff; and that defendants refused and failed to
settle said accounts despite demands.
In their answer, the respondents Lutero traversed the material averments of the complaint and set up legal and
factual defenses. They further pleaded a counterclaim against petitioners for the total sum of P 125,000.00
representing unpaid rentals on Hacienda Tambal. Basis of the counterclaim is the allegation that they had
purchased one-half [1/2] of Hacienda Tambal, which their predecessors, the spouses Tiburcio Lutero and
Asuncion Magalona, leased to the plaintiff for a rental of P50,000.00 a year; and that plaintiffs had failed to pay
said rentals despite demands.
Thereafter the respondent Luteros filed with the respondent court a "Motion to Reiterate Motion for Execution of
the Order dated June 14, 1978." Petitioner filed a rejoinder to said motion, raising for the first time the thesis that
the amount payable to private respondents should be compensated against the latter's indebtedness to him
amounting to P71,000.00. Petitioner attached to his rejoinder copies of the pleadings filed in Civil Case No.
12397, then pending before Branch V of the Court of First Instance of Iloilo. This motion was denied by
respondent judge on the ground that "the claim of Loreto Solinap against Juanito Lutero in Civil Case No. 12397
is yet to be liquidated and determined in the said case, such that the requirement in Article 1279 of the New Civil
SOLINAP v. DEL ROSARIO
Code that both debts are liquidated for compensation to take place has not been established by the oppositor
Loreto Solinap."
ISSUE: Whether compensation applies in this case, considering that the claim of one party is yet to be liquidated
RULING:
No.
The petition is devoid of merit. Petitioner contends that respondent judge gravely abused her discretion in not
declaring the mutual obligations of the parties extinguished to the extent of their respective amounts. He relies
on Article 1278 of the Civil Code to the effect that compensation shall take place when two persons, in their own
right, are creditors and debtors of each other.
The argument fails to consider Article 1279 of the Civil Code which provides that compensation can take place
only if both obligations are liquidated. In the case at bar, the petitioner's claim against the respondent Luteros in
Civil Case No. 12379 is still pending determination by the court. While it is not for Us to pass upon the merits of
the plaintiffs' cause of action in that case, it appears that the claim asserted therein is disputed by the Luteros
on both factual and legal grounds.
More, the counterclaim interposed by them, if ultimately found to be meritorious, can defeat petitioner's demand.
Upon this premise, his claim in that case cannot be categorized as liquidated credit which may properly be set-
off against his obligation. As this Court ruled in Mialhe vs. Halili, " compensation cannot take place where one's
claim against the other is still the subject of court litigation. It is a requirement, for compensation to take place,
that the amount involved be certain and liquidated."
SYCIP v. CA
FRANCISCO SYCIP vs. HONORABLE COURT OF APPEALS and PEOPLE OF THE PHILIPPINES,
GR No. L-38711| J. Relova | January 31, 1985
Compensation takes place only when two persons in their own right are creditors and debtors of each other,
and that each one of the obligors is bound principally and is at the same time a principal creditor of the other.
FACTS:
It all started when Jose Lapuz received 2000 shares of stock from Smith. These are shares of Republic Flour
Mills Inc. covered by Certificate No. 57 issued in the name of Dill who left for Hawaii. Lapuz was supposed to
sell the shares at present market value of which he is to receive commission. According to Lapuz, Sycip
approached him and told him he had good connections in the Stock Exchange and assured him that he would
sell it at a good price. Inevitably, Sycip was able to convince him, but Lapuz reiterated that the shares to not
belong to him and were entrusted to him for sale. Nevertheless, Sycip put the shares up in the market for sale.
Lapuz then received a letter from Sycip, informing him that the shares were sold for Php29,000 as net amount
but the same could not be concluded until they receive a Power of Attorney duly executed by Dill. Once secured,
Lapuz showed the power of attorney which authorized the sale of 1758 shares only, the difference of 242 shares
were given back to BRLI (a domestic company). After a series of back-and-forth letter exchange, Sycip sold and
paid for the other 500 shares of stock, for the payment of which Jose K. Lapuz issued in his favor a receipt, dated
June 9, 1961. The draft for P8,000.00, "the full value of the 500 shares' mentioned in the letter of the accused-
appellant was dishonored by the bank, for lack of funds. Jose K. Lapuz then "discovered from the bookkeeper
that he got the money and he pocketed it already, so I (he) started hunting for Mr. Sycip.” He was eventually
able to find the daughter of Sycip who issued a check in the amount of Php5000, but the same was dishonored.
When Jose K. Lapuz sent a wire to him, telling him that he would "file an estafa case (in the) fiscal’s office ...
against him' unless he raise [the] balance left eight thousand" the accused-appellant answered him by sending
a wire, "P5,000 remitted ask boy check Equitable. But "the check was never made good," so Jose K. Lapuz
testified. He had to pay Albert Smith the value of the 500 shares of stock."
The CFI of Manila rendered a decision on August 25, 1970 wherein they convicted Sycip of the crime of estafa.
Along with other penalties of imprisonment imposed upon Sycip is an indemnification of complainant Jose Lapuz
in the amount of Php 5000 with subsidiary imprisonment in case of insolvency. CA affirmed the trial court’s
decision but removed the part of imposing subsidiary imprisonment.Thus, Sycip went to the SC on a petition for
review on certiorari claiming that the CA erred in rendering its decision against him.
ISSUE: Whether or not Sycip was correct in his defense that his obligation is extinguished by compensation
because Lapuz, the agent of his creditor, is indebted to him in the amount of Php 5000
RULING:
No. Compensation cannot take place in this case since the evidence shows that Jose K. Lapuz is only an agent
of Albert Smith and/or Dr. Dwight Dill. Compensation takes place only when two persons in their own right are
creditors and debtors of each other, and that each one of the obligors is bound principally and is at the same
time a principal creditor of the other. Moreover, as correctly pointed out by the trial court, Lapuz did not consent
to the off-setting of his obligation with petitioner's obligation to pay for the 500 shares.
CIA MARITIMA v. CA
COMPAÑIA MARITIMA vs.COURT OF APPEALS and PAN ORIENTAL SHIPPING CO

G.R. No. L-50900 April 9, 1985
For compensation to take place, one of the elements necessary is that the debts be liquidated.
FACTS:
On March 7, 1947, Froilan purchased from the Shipping Administration a boat for the sum of P200,000.00, with
a down payment of P50,000.00. To secure payment of the unpaid balance of the purchase price, a mortgage
was constituted on the vessel in favor of the Shipping Administration. The contract was duly approved by the
Philippine President. Froilan appeared to have defaulted in spite of demands, not only in the payment of the first
installment on the unpaid balance of the purchase price and the interest thereon when they fell due, but also
failed in his express undertaking to pay the premiums on the insurance coverage of the vessel obliging the
Shipping Administration to advance such payment to the insurance company.
Subsequently, FROILAN appeared to have still incurred a series of defaults notwithstanding reconsiderations
granted. On February 21, 1949, the Shipping Administration directed its officers to take immediate possession
of the vessel and to suspend the unloading of all cargoes on the same until the owners thereof made the
corresponding arrangement with the Shipping Administration. Pursuant to these instructions, the boat was, not
only actually repossessed, but the title thereto was registered again in the name of the Shipping Administration,
thereby re-transferring the ownership thereof to the government.
On February 22, 1949, Pan Oriental offered to charter said vessel for a monthly rent of P3,000.00. The Shipping
Administration on April 1, 1949, accepted Pan Oriental's offer "in principle" subject to the condition that the latter
shall cause the repair of the vessel advancing the cost of labor and drydocking thereof, and the Shipping
Administration to furnish the necessary spare parts. In accordance with this charter contract, the vessel was
delivered to the possession of Pan Oriental.
In the meantime, or on February 22, 1949, Froilan tried to explain his failure to comply with the obligations he
assumed and asked that he be given another extension up to March 15, 1949 to file the necessary bond. Then
on March 8, Froilan offered to pay all his overdue accounts. However, as he failed to fulfill even these offers
made by him in these two communications, the Shipping Administration denied his petition for reconsideration
(of the rescission of the contract) on March 22, 1949, although it does not appear when he formally formulated
his appeal. In the meantime, the boat has been repossessed by the Shipping Administration and the title thereto
re-registered in the name of the government, and delivered to the Pan Oriental in virtue of the charter agreement.
On June 2, 1949, Froilan protested to the President against the charter of the vessel.
On June 4, 1949, the Shipping Administration and the Pan Oriental formalized the charter agreement and signed
a bareboat contract with option to purchase.
On September 6, 1949, the Cabinet revoked the cancellation of Froilan's contract of sale and restored to him all
his rights thereunder, on condition that he would give not less than P1,000.00 to settle partially as overdue
accounts and that reimbursement of the expenses incurred for the repair and drydocking of the vessel performed
by Pan Oriental was to be made in accordance with future adjustment between him and the Shipping
Administration. Later, pursuant to this reservation, Froilan's request to the Executive Secretary that the
Administration advance the payment of the expenses incurred by Pan Oriental, was granted on condition that
Froilan assume to pay the same and file a bond to cover said undertaking.
On September 7, 1949, the formal bareboat charter with option to purchase in favor of the Pan Oriental was
returned to the Shipping Administration without action, only because of the Cabinet resolution restoring Froilan
to his rights under the conditions set forth therein. But Froilan again failed to comply with these conditions. The
Cabinet, considering Froilan's consistent failure to comply with his obligations, resolved to reconsider said
previous resolution restoring him to his previous rights. And, in a letter dated December 3, 1949, the Executive
CIA MARITIMA v. CA
Secretary authorized the Administration to continue its charter contract with Pan Oriental and enforce whatever
rights it may still have under the original contract with Froilan.
On August 25, 1950, the Cabinet resolved once more to restore Froilan to his rights under the original contract
of sale, on condition that he shall pay the sum of P10,000.00 upon delivery of the vessel to him, said amount to
be credited to his outstanding accounts; that he shall continue paying the remaining installments due, and that
he shall assume the expenses incurred for the repair and drydocking of the vessel. Pan Oriental protested to
this restoration of Froilan's rights under the contract of sale, for the reason that when the vessel was delivered
to it, the Shipping Administration had authority to dispose of the said property, Froilan having already relinquished
whatever rights he may have thereon. Froilan paid the cash of P10,000.00, and as Pan Oriental refused to
surrender possession of the vessel, he filed an action for replevin in the CFI of Manila to recover possession
thereof and to have him declared the rightful owner of said property.
Upon plaintiff's filing a bond of P400,000.00, the court ordered the seizure of the vessel from Pan Oriental and
its delivery to the plaintiff. Pan Oriental tried to question the validity of this order in a petition for certiorari filed in
this Court (G.R. No. L-4577), but the same was dismissed for lack of merit by resolution of February 22, 1951.
Defendant accordingly filed an answer, denying the averments of the complaint.
The Republic, having been allowed to intervene in the proceeding, also prayed for the possession of the vessel
in order that the chattel mortgage constituted thereon may be foreclosed. Defendant Pan Oriental resisted said
intervention, claiming to have a better right to the possession of the vessel by reason of a valid and subsisting
contract in its favor, and of its right of retention, in view of the expenses it had incurred for the repair of the said
vessel. As counterclaim, defendant demanded of the intervenor to comply with the latter's obligation to deliver
the vessel.
Subsequently, Compañia Maritima, as purchaser of the vessel from Froilan, was allowed to intervene in the
proceedings (in the lower court), said intervenor taking common cause with the plaintiff Froilan. In its answer to
the complaint in intervention, defendant set-up a counterclaim for damages in the sum of P50,000.00, alleging
that plaintiff secured the Cabinet resolutions and the writ of replevin, resulting in its deprivation of possession of
the vessel, at the instigation and inducement of Compañia Maritima. This counterclaim was denied by both
plaintiff and Maritima.
On September 28, 1956, the lower court upheld Froilan's (and Compañia Maritima's) right to the ownership and
possession of the vessel.
This Court then held that neither Froilan nor the Pan Oriental holds a valid contract over the vessel. However,
since Shipping Administration practically ratified its proposed contract with Froilan by receiving the full
consideration of the sale to the latter, and since Pan Oriental has no capacity to question this actuation of the
Shipping Administration because it had no valid contract in its favor, lower court’s decision adjudicating the
vessel to Froilan and its successor Maritima, must be sustained. Nevertheless, Pan Oriental cannot be
considered as in bad faith until after the institution of the case. However, since it is not disputed that it made
useful and necessary expenses on the vessel, [Pan Oriental] is entitled to the refund of such expenses with the
right to retain the vessel until reimbursed therefor (Art. 546, Civil Code). As it is by the concerted acts of
defendants and intervenor Republic that [Pan Oriental] was deprived of the possession of the vessel over which
appellant had a lien for his expenses, Froilan, Compañia Maritima, and the Republic are declared liable for the
reimbursement to [Pan Oriental] of its legitimate expenses, as allowed by law, with legal interest from the time
of disbursement. The decision appealed from is affirmed. Case is remanded to the lower court for further
proceedings in the matter of expenses.
On August 27, 1965, in resolving a Motion for Reconsideration filed by FROILAN and MARITIMA, this Court
ruled that Froilan and the Republic are declared jointly and severally liable, not only for reimbursement to Pan
Oriental of the legitimate necessary expenses incurred on the vessel but also for payment of legal interest
thereon, computed from the date of the defendant's dispossession of the property. However, as defendant was
in actual possession of the vessel from April 1, 1949 to February 7, 1951, it must be required to pay reasonable
CIA MARITIMA v. CA
rental for the use thereof, at the rate of P3,000.00 a month — the same rate specified as rental in the imperfected
charter contract — which shall be deductible from whatever may be due and owing the said party by way of
reimbursable necessary expenses and interest. This rental shall commence from the time defendant Pan
Oriental actually operated the vessel, which date shall be determined by the lower court. The case is remanded
to the court of origin on the matter of necessary expenses, interest and rental.
On November 23, 1966, acting on a second Motion for Reconsideration filed by PAN ORIENTAL, this Court ruled
that Compañia Maritima is jointly and severally liable with the other appellees, for reimbursement to appellant of
the necessary expenses incurred and expended by the latter on the said vessel, minus the amount of rentals
due from the appellant for the use thereof for the period it was actually operated by Pan Oriental. The period of
actual operation shall not include the time when the vessel was drydocked.
On December 16,1966, acting on PAN ORIENTAL's Motion for Reconsideration or Application for Damages on
account of the wrongful issuance of the Writ of Replevin, this Court resolved, first, to deny the present motion for
reconsideration and, second, to refer the application to the trial court, there to be heard and decided as
prescribed by law and the Rules.
Pursuant thereto, the case was remanded to the CFI. Said Court ordered the intervenor Compañia (Froilan's
successor-in-interest) and intervenor Republic (Board of Liquidators) jointly and severally to pay defendant Pan
Oriental Shipping Company the sum of P6,937.72 a month from the time 'it was dispossessed on February 3,
1951' until it is paid its useful and necessary expenses; the sum of P40,797.54 actual amount expended for the
repairs and improvements prior to the operation of the vessel on June 1, 1949 with legal interest from the time
of disbursement of said legitimate expenses. The Court also orders the intervenor Republic to return the sum of
P15,000.00 tendered by defendant Pan Oriental Shipping Company as provided in the option with legal interest
from January 16, 1950, the date it was paid by the latter.
On appeal by REPUBLIC and MARITIMA, the CA ruled that (a) the date from which interest is to be paid on the
amount of P40,797.54 is from February 3, 1951, the date of dispossession, and not from the time of disbursement
and (b) the unpaid rentals due the Republic are deductible from the amount of expenses payable to PAN-
ORIENTAL. All other aspects are affirmed.
From the foregoing Decision, the parties filed their respective Petitions for Review now before us. Among others,
REPUBLIC maintains that compensation or set-off took place between it and PAN-ORIENTAL as of February 3,
1951, the date the latter was dispossessed of the vessel.
ISSUE:
I.Whether or not compensation by operation of law took place as between REPUBLIC and PAN-
ORIENTAL as of the date of dispossession. (NO) [More related to the topic in syllabus]
II.Whether or not the obligation of the REPUBLIC to pay legal interest on the amount of useful and
necessary expenses from February 3, 1951 had become stale and ineffective (NO)
III.Whether or not MARITIMA and REPUBLIC, jointly and severally, should pay to PAN-ORIENTAL the sum
of P6,937.72 a month from the time it was dispossessed of the vessel on February 3, 1951 until it is paid
its useful and necessary expenses. (YES)
IV.Whether or not the Trial Court had no jurisdiction to order the return of P15,000.00 to PAN-ORIENTAL.
(YES)
RULING:
I.
No. For compensation to take place, one of the elements necessary is that the debts be liquidated. In
this case, all the elements for Compensation to take place were not present on the date of dispossession,
or on February 3, 1951. The amount expended for repairs and improvements had yet to be determined by the
Trial Court pursuant to the Decision of this Court promulgated on October 31, 1964. At the time of dispossession
also, PAN-ORIENTAL was still insisting on its right to purchase the vessel. The obligation of REPUBLIC to
reimburse PAN-ORIENTAL for expenses arose only after this Court had so ruled. Rentals for the use of the
CIA MARITIMA v. CA
vessel by PAN- ORIENTAL were neither due and demandable at the time of dispossession but only after this
Court had issued its Resolution of August 27, 1965.
More, the legal interest payable from February 3, 1951 on the sum of P40,797.54, representing useful
expenses incurred by PAN-ORIENTAL, is also still unliquidated since interest does not stop accruing
"until the expenses are fully paid." Thus, we find without basis REPUBLIC's allegation that PAN- ORIENTAL's
claim in the amount of P40,797.54 was extinguished by compensation since the rentals payable by PAN-
ORIENTAL amount to P59,500.00 while the expenses reach only P40,797.54. Deducting the latter amount from
the former, REPUBLIC claims that P18,702.46 would still be owing by PAN-ORIENTAL to REPUBLIC. That
argument loses sight of the fact that to the sum of P40,797.54 will still have to be added the legal rate of interest
"from February 3, 1951 until fully paid."
But although compensation by operation of law cannot take place as between REPUBLIC and PAN-ORIENTAL,
by specific pronouncement of this Court in its Resolution of November 23, 1966, supra, the rentals payable by
PAN-ORIENTAL in the amount of P59,500.00 should be deducted from the sum of useful expenses plus legal
interest due, assuming that the latter amount would still be greater. Otherwise, the corresponding adjustments
can be made depending on the totality of the respective amounts.
II.
No. Since we are holding that the obligation of REPUBLIC to pay P40,797.54 to PAN-ORIENTAL was not
extinguished by compensation, the obligation of REPUBLIC to pay legal interest on said amount has neither
become stale as REPUBLIC contends. Of special note is the fact that payment of that interest was the specific
ruling of this Court in its Resolution of August 27, 1965.
III.
Yes. That amount represents the damages for the wrongful issuance of the Writ of Replevin and was computed
as follows: P4,132.77 for loss of income by PAN-ORIENTAL plus P2,804.95 as monthly depreciation of the
vessel in lieu of the charter hire. It should further be recalled that this Court, in acting on PAN- ORIENTAL's
application for damages in its Resolution of December 16, 1966, supra, did not deny the same but referred it
instead to the Trial Court "there to be heard and decided" since evidence would have to be presented. Moreover,
this Court found that PAN-ORIENTAL was "deprived of the possession of the vessel over which (it) had a lien
for these expenses" and that FROILAN and REPUBLIC "may be held responsible for the deprivation of
defendant (PAN-ORIENTAL) of its right to retention of the property until fully reimbursed on the
necessary expenditures made on the vessel. "
IV.
Yes. As this Court found, that sum was tendered to REPUBLIC "which together with [PAN-ORIENTAL's] alleged
expenses already made on the vessel, cover 25% of the cost of the vessel, as provided in the option granted in
the bareboat contract. This amount was accepted by the Administration as deposit ...." Since the purchase did
not eventually materialize for reasons attributable to REPUBLIC, it is but just that the deposit be returned. It is
futile to allege that PAN-ORIENTAL did not plead for the return of that amount since its prayer included other
reliefs as may be just under the premises.
In a nutshell, we find that the appealed Decision of the Trial Court and of the then Court of Appeals is in
consonance with the Decision and Resolutions of this Court.
ACCORDINGLY, the judgment appealed from is hereby affirmed. No costs.
ADDN. NOTES:
We find no merit in MARITIMA's contention that the alleged damages on account of wrongful replevin was barred
by res judicata, and that the application for damages before the lower Court was but a mere adoption of a
different method of presenting claims already litigated. For the records show that an application for damages for
wrongful replevin was filed both before this Court and thereafter before the Trial Court after this Tribunal
CIA MARITIMA v. CA
specifically remanded the issue of those damages to the Trial Court there to be heard and decided pursuant to
Rule 60, Section 10 in relation to Rule 57, Section 20.
The matter of legal compensation which MARITIMA has also raised has been previously discussed.
Parenthetically, PAN-ORIENTAL can no longer raise the alleged error of the Trial Court in computing the
necessary and useful expenses at only P40,797.54 when they should be P87,267.30, since it did not appeal
from that Court's Decision.
INT’L. CORPORATE BANK v. IAC
THE INTERNATIONAL CORPORATE BANK INC., vs. IAC, HON. ZOILO AGUINALDO (Judge, RTC
Makati) NATIVIDAD M. FAJARDO, and SILVINO R. PASTRANA, as Deputy and Special Sheriff
G.R. NO. L-69560 | 30 June 1988 | PARAS, J.
Compensation is not proper where the claim of the person asserting the set-off against the other is not clear
nor liquidated; compensation cannot extend to unliquidated, disputed claim arising from breach of contract.
FACTS:
In 1980, Fajardo secured from petitioner's predecessors-in-interest, (the then Investment and Underwriting Corp,
and ATRIUM Capital Corp), a loan in the amount of P50 Million. To secure this loan, Fajardo mortgaged her real
properties in Manila and in Bulacan, which she claimed have a total market value of P110 Million. However, only
the amount of P20 Million was approved for release, which was applied to pay her other obligations to petitioner,
bank charges and fees. Thus, Fajardo claims that she did not receive anything from the approved loan.
Thereafter, Fajardo made a money market placement with ATRIUM in the amount of P1,046,253.77 at 17%
interest per annum for a period of 32 days or until October 13, 1980, its maturity date. Meanwhile, private
respondent allegedly failed to pay her mortgaged indebtedness to ATRIUM, so the latter refused to pay the
proceeds of the money market placement on maturity but applied the amount instead to the deficiency in the
proceeds of the auction sale of the mortgaged properties. With Atrium being the only bidder, said properties were
sold in its favor for only P20 Million. Petitioner claims that after deducting this amount, private respondent is still
indebted in the amount of P6.81 million.
Fajardo filed a complaint with the trial court against petitioner for annulment of the sheriff's sale of the mortgaged
properties, for the release to her of the balance of her loan from petitioner in the and for recovery of
P1,062,063.83 representing the proceeds of her money market investment and for damages. She alleges that
the mortgage is not yet due and demandable, and accordingly the foreclosure was illegal; that per her loan
agreement with petitioner she is entitled to the release to her of the balance of the loan in the amount of P30
Million; that petitioner refused to pay her the proceeds of her money market placement notwithstanding the fact
that it has long become due and payable; and that she suffered damages as a consequence of petitioner's illegal
acts.
Petitioner denied Fajardo's allegations and asserted that it has the right to apply or set off private respondent's
money market claim of P1,062,063.83. Petitioner thus interposes counterclaims for the recovery of
P5,763,741.23, representing the balance of its deficiency claim after deducting the proceeds of the money
market placement, and for damages.
ISSUE: Whether or not there can be legal compensation in the case at bar
RULING:
No, there cannot be legal compensation in this case.
Compensation shall take place when two persons, in their own right, are creditors and debtors of each other.
(Art. 1278, Civil Code). "When all the requisites mentioned in Art. 1279 of the Civil Code are present,
compensation takes effect by operation of law, even without the consent or knowledge of the debtors." (Art.
1290, Civil Code). Article 1279 of the Civil Code requires among others, that in order that legal compensation
shall take place, "the two debts be due" and "they be liquidated and demandable." Compensation is not proper
where the claim of the person asserting the set-off against the other is not clear nor liquidated; compensation
cannot extend to unliquidated, disputed claim arising from breach of contract. (Compañia General de Tabacos
vs. French and Unson, 39 Phil. 34; Lorenzo & Martinez vs. Herrero, 17 Phil. 29).
INT’L. CORPORATE BANK v. IAC
There can be no doubt that petitioner is indebted to private respondent in the amount of P1,062,063.83
representing the proceeds of her money market investment. This is admitted. But whether private respondent is
indebted to petitioner in the amount of P6.81 million representing the deficiency balance after the foreclosure of
the mortgage executed to secure the loan extended to her, is vigorously disputed. This circumstance prevents
legal compensation from taking place.
It must be noted that Civil Case No. 83-19717 is still pending consideration at the RTC Manila, for annulment of
Sheriffs sale on extra-judicial foreclosure of private respondent's property from which the alleged deficiency
arose. Therefore, the validity of the extrajudicial foreclosure sale and petitioner's claim for deficiency are still in
question, so much so that it is evident, that the requirement of Article 1279 that the debts must be liquidated and
demandable has not yet been met. For this reason, legal compensation cannot take place under Article 1290 of
the Civil Code.
MINDANAO PORTLAND CEMENT CORPORATION v. COURT OF APPEALS
MINDANAO PORTLAND CEMENT CORPORATION v. COURT OF APPEALS

G.R. No. L-62169, February 28, 1983, TEEHANKEE, J.:
The two obligations, therefore, respectively offset each other, compensation having taken effect by operation of
law and extinguished both debts to the concurrent amount of P10,000.00, pursuant to the provisions of Arts.
1278, 1279 and 1290 of the Civil Code, since all the requisites provided in Art. 1279 of the said Code for
automatic compensation "even though the creditors and debtors are not aware of the compensation" were duly
present.**
FACTS:
Atty. Casiano P. Laquihon, in behalf of third-party defendant Pacweld as the latter's attorney, filed a pleading
addressed to the defendant & Third-Party Plaintiff Mindanao Portland Cement Corporation, herein appellant,
entitled 'motion to direct payment of attorney's fee to counsel, invoking in his motion the fact that in the decision
of the court, MPCC was adjudged to pay Pacweld the sum of P10,000.00 as attorney's fees
MPCC filed an opposition to Atty. Laquihon's motion, stating, that said amount is set-off by a like sum of
P10,000.00 which it MPCC has collectible in its favor from Pacweld also by way of attorney's fees which MPCC
recovered from the same.
This is an appeal from the Order of the CFI ordering the to pay the amount of P10,000.00 attorney's fees directly
to Atty. Casiano B. Laquihon and from the Order denying appellant's motion for reconsideration.
ISSUE: Whether or no the lower court erred in not holding that the two obligations are extinguished reciprocally
by operation of law.'
RULING:
This appeal calls for the application of Arts. 1278, 1279 and 1290 of the Civil Code, as urged by the appellant.
Another question is: The judgment in Civil Case No. 75179 being already final at the time the motion under
consideration was filed, does not the order of June 26, 1976 constitute a change or alteration of the said
judgment, though issued by the very same court that rendered the judgment?
After considering the briefs of the parties in the appellate court and the additional pleadings required of them by
this Court, the Court finds merit in the appeal and sets aside the appealed orders of the Court of First Instance.
It is clear from the record that both corporations, petitioner Mindanao Portland Cement Corporation (appellant)
and respondent Pacweld Steel Corporation (appellee), were creditors and debtors of each other, their debts to
each other consisting in final and executory judgments of the Court of First Instance in two separate cases,
ordering the payment to each other of the sum of P10,000.00 by way of attorney's fees. The two obligations,
therefore, respectively offset each other, compensation having taken effect by operation of law and extinguished
both debts to the concurrent amount of P10,000.00, pursuant to the provisions of Arts. 1278, 1279 and 1290 of
the Civil Code, since all the requisites provided in Art. 1279 of the said Code for automatic compensation "even
though the creditors and debtors are not aware of the compensation" were duly present.**
Necessarily, the appealed order of June 26, 1978 granting Atty. Laquihon's motion for amendment of the
judgment of September 14, 1976 against Mindanao Portland Cement Corporation so as to make the award
therein of P10,000.00 as attorney's fees payable directly to himself as counsel of Pacweld Steel Corporation
instead of payable directly to said corporation as provided in the judgment, which had become final and executory
long before the issuance of said "amendatory" order was a void alteration of judgment. It was a substantial
change or amendment beyond the trial court's jurisdiction and authority and it could not defeat the compensation
or set-off of the two (2) obligations of the corporations to each other which had already extinguished both debts
by operation of law.
ACCORDINGLY. the appealed orders are hereby annulled and set aside. No costs.
BPI v. CA, SALAZAR
Modes of Extinguishment - Compensation
BANK OF THE PHILIPPINE ISLANDS v. COURT OF APPEALS, ANNABELLE A. SALAZAR, and JULIO R.
TEMPLONUEVO,
GR NO 136202 JANUARY 25, 2007
The creditor is not bound to accept payment or performance by a third person who has no interest in the
fulfillment of the obligation, unless there is a stipulation to the contrary.
FACTS:
AA Salazar Construction and Engineering Services filed an action for a sum of money with damages against
herein petitioner Bank, which was later on amended to substitute Anabelle Salazar as the real party in interest,
where respondent Salazar prays for the recovery of P267,707.70 debited by petitioner Bank from her account.
Petitioner BPI, alleged that Templonuevo, third-party defendant and herein also a private respondent, demanded
from the former payment of the amount of P267,692.50 representing the aggregate value of 3 checks, which
were allegedly payable to him, but which were deposited with the petitioner bank to private respondent Salazar’s
account without his knowledge and corresponding endorsement. BPI froze Account No. 0201-0588-48 of A.A.
Salazar and Construction and Engineering Services, instead of Account No. 0203-1187-67 where the checks
were deposited, since this account was already closed by private respondent Salazar or had an insufficient
balance.
As it appeared that private respondent Salazar was not entitled to the funds represented by the checks which
were deposited and accepted for deposit, petitioner BPI decided to debit the amount of P267,707.70 from her
Account No. 0201-0588-48 and the sum of P267,692.50 was paid to Templonuevo by means of a cashier’s
check.
In the answer to the third-party complaint, private respondent Templonuevo admitted the payment to him
of P267,692.50 and argued that said payment was to correct the malicious deposit made by private respondent
Salazar to her private account, and that petitioner bank’s negligence and tolerance regarding the matter was
violative of the primary and ordinary rules of banking.
The RTC rendered a decision against petitioner and ordered to pay the amount debited and damages. CA
affirmed the decision and held that respondent Salazar was entitled to the proceeds of the 3 checks
notwithstanding the lack of endorsement thereon by the payee. It concluded that Salazar and Templonuevo had
previously agreed that the checks payable to JRT Construction and Trading actually belonged to Salazar and
would be deposited to her account, with petitioner acquiescing to the arrangement.
ISSUE: Whether or not petitioner was merely rectifying the undue payment it made upon the checks and
exercising its prerogative to alter or modify an erroneous credit entry in the regular course of its business.
RULING:
YES. Petitioner, as the collecting bank, had the right to debit Salazar’s account for the value of the checks it
previously credited in her favor. It is of no moment that the account debited by petitioner was different from the
original account to which the proceeds of the check were credited because both admittedly belonged to Salazar,
the former being the account of the sole proprietorship which had no separate and distinct personality from her,
and the latter being her personal account.
The right of set-off was explained in Associated Bank v. Tan:

A bank generally has a right of set-off over the deposits therein for the payment of any withdrawals on
the part of a depositor. The right of a collecting bank to debit a client's account for the value of a dishonored
check that has previously been credited has fairly been established by jurisprudence. To begin with, Article 1980
BPI v. CA, SALAZAR
Modes of Extinguishment - Compensation
of the Civil Code provides that "[f]ixed, savings, and current deposits of money in banks and similar institutions
shall be governed by the provisions concerning simple loan."
Hence, the relationship between banks and depositors has been held to be that of creditor and debtor.
Thus, legal compensation under Article 1278 of the Civil Code may take place "when all the requisites
mentioned in Article 1279 are present," as follows:
(1) That each one of the obligors be bound principally, and that he be at the same time a principal creditor of the
other;
(2) That both debts consist in a sum of money, or if the things due are consumable, they be of the same kind,
and also of the same quality if the latter has been stated;
(3) That the two debts be due;
(4) That they be liquidated and demandable;
(5) That over neither of them there be any retention or controversy, commenced by third persons and
communicated in due time to the debtor.
While, however, it is conceded that petitioner had the right of set-off over the amount it paid to Templonuevo
against the deposit of Salazar, the issue of whether it acted judiciously is an entirely different matter. As
businesses affected with public interest, and because of the nature of their functions, banks are under obligation
to treat the accounts of their depositors with meticulous care, always having in mind the fiduciary nature of their
relationship. In this regard, petitioner was clearly remiss in its duty to private respondent Salazar as its depositor.
To begin with, the irregularity appeared plainly on the face of the checks. Despite the obvious lack of indorsement
thereon, petitioner permitted the encashment of these checks three times on three separate occasions. This
negates petitioner’s claim that it merely made a mistake in crediting the value of the checks to Salazar’s account
and instead bolsters the conclusion of the CA that petitioner recognized Salazar’s claim of ownership of checks
and acted deliberately in paying the same, contrary to ordinary banking policy and practice. It must be
emphasized that the law imposes a duty of diligence on the collecting bank to scrutinize checks deposited with
it, for the purpose of determining their genuineness and regularity. The collecting bank, being primarily engaged
in banking, holds itself out to the public as the expert on this field, and the law thus holds it to a high standard of
conduct. The taking and collection of a check without the proper indorsement amount to a conversion of the
check by the bank.
UNION BANK v. DBP
UNION BANK OF THE PHILIPPINES, Petitioner, vs. DEVELOPMENT BANK OF THE

PHILIPPINES, Respondent.
G.R. No. 191555 January 20, 2014
Compensation is defined as a mode of extinguishing obligations whereby two persons in their capacity as
principals are mutual debtors and creditors of each other with respect to equally liquidated and demandable
obligations to which no retention or controversy has been timely commenced and communicated by third
parties.
FACTS:
Foodmasters, Inc. (FI) had outstanding loan obligations to both Union Bank’s predecessor-in-interest, Bancom
Development Corporation (Bancom), and to DBP.
FI and DBP, entered into a Deed of Cession of Property In Payment of Debt (dacion en pago) whereby the former
ceded in favor of the latter certain properties (including a processing plant in Marilao, Bulacan [processing plant])
in consideration of the following: (a) the full and complete satisfaction of FI’s loan obligations to DBP; and (b) the
direct assumption by DBP of FI’s obligations to Bancom in the amount of ₱17,000,000.00 (assumed obligations).
DBP as the new owner of the processing plant, leased back for 20 years the said property to FI (Lease
Agreement) which was, in turn, obliged to pay monthly rentals to be shared by DBP and Bancom.
DBP also entered into a separate agreement with Bancom (Assumption Agreement) whereby the DBP undertook
to remit up to 30% of rentals due from FI to Bancom which is to serve as payment of the assumed obligations.
FI assigned its leasehold rights under the Lease Agreement to Foodmasters Worldwide, Inc. (FW). While
Bancom conveyed all its receivables, including DBP’s assumed obligations, to Union Bank.
Union Bank filed collection case against DBP, claiming that rentals have not been remitted despite its repeated
demands.DBP countered that the assumed obligations were payable only out of rental payments made by FI.
Since, FI had yet to pay the same, DBP’s obligation to pay Union Bank had not arisen.
RTC: Ruled in favor of Union Bank. It ruled that when DBP failed to remit the subject rentals to Union Bank, it
defaulted on its assumed obligations.
CA: Set aside RTC’s Ruling. It ruled that DBP did not default in its obligations to remit the subject rentals to
Union Bank precisely because it had yet to receive the rental payments of FW.
Union Bank and DBP filed separate petitions for review on certiorari before the Supreme Court. Which the SC
denied both petitions. It upheld the CA’s finding that while DBP directly assumed FI’s obligations to Union Bank,
DBP was only obliged to remit to the latter 30% of the lease rentals collected from FW, from which any deficiency
was to be settled by DBP not later than December 29, 1998.
Union Bank filed a motion for execution before the RTC, praying that DBP be directed to pay the amount of
P9,732,420.555 which represents the amount of the subject rentals. DBP opposed Union Bank’s motion. DBP
filed its own motion for execution against FW. RTC granted Union Bank and DBP motions.
DBP filed a motion for reconsideration averring that the RTC prematurely ordered DBP to pay the assumed
obligations to Union Bank before FW’s payment. The motion was denied. Thus, DBP’s deposits were eventually
garnished. DBP then filed a petition for certiorari before the CA.
UNION BANK v. DBP
CA dismissed DBP’s petition, finding that the RTC did not abuse its discretion when it issued the Writ of
Execution. DBP appealed the CA’s ruling before the SC. SC granted DBP’s appeal, it ruled that it acknowledged
that DBP’s obligation to Union Bank for remittance of the lease payments is contingent on FW’s prior payment
to DBP, and that any deficiency DBP had to pay by December 29, 1998 as per the Assumption Agreement
cannot be determined until after the satisfaction of FW’s own rental obligations to DBP.
Union Bank filed a Manifestation and Motion to Affirm Legal Compensation to the RTC, praying that the RTC
apply legal compensation between itself and DBP in order to offset the return of the funds it previously received
from DBP. Union Bank anchored its motion on two grounds, namely:
(a) on December 29, 1998, DBP’s assumed obligations became due and demandable; and
(b) considering that FW became non-operational and non-existent, DBP became primarily liable to the
balance of its assumed obligation, which as of Union Bank’s computation after its claimed set-off,
amounted to P1,849,391.87.
RTC: Denied the motion.

CA: Dismissed Union Bank’s petition, finding no grave abuse of discretion on the RTC’s part. CA affirmed the
denial of its motion to affirm legal compensation considering that:
ISSUE: Whether or not CA erred when it upheld the denial of Union Bank’s motion to affirm legal compensation.
RULING:
No. Legal compensation is not applicable. The court ruled that Compensation is defined as a mode of
extinguishing obligations whereby two persons in their capacity as principals are mutual debtors and creditors of
each other with respect to equally liquidated and demandable obligations to which no retention or controversy
has been timely commenced and communicated by third parties. The requisites therefor are provided under
Article 1279 of the Civil Code which reads as follows:
Art. 1279. In order that compensation may be proper, it is necessary:

(1) That each one of the obligors be bound principally, and that he be at the same time a principal creditor of the
other;
(2) That both debts consist in a sum of money, or if the things due are consumable, they be of the same kind,
and also of the same quality if the latter has been stated;
(3) That the two debts be due;
(4) That they be liquidated and demandable;
(5) That over neither of them there be any retention or controversy, commenced by third persons and
communicated in due time to the debtor.
The rule on legal compensation is stated in Article 1290 of the Civil Code which provides that "when all the
requisites mentioned in Article 1279 are present, compensation takes effect by operation of law, and extinguishes
both debts to the concurrent amount, even though the creditors and debtors are not aware of the compensation."
Therefore, compensation could not have taken place between these debts for the apparent reason that requisites
3 and 4 under Article 1279 of the Civil Code are not present. Since DBP’s assumed obligations to Union Bank
for remittance of the lease payments are – in the Court’s words – "contingent on the prior payment thereof by
FW to DBP," it cannot be said that both debts are due (requisite 3 of Article 1279 of the Civil Code). Also, the
Court observed that any deficiency that DBP had to make up for the full satisfaction of the assumed obligations
"cannot be determined until after the satisfaction of FW’s obligation to DBP." In this regard, it cannot be
concluded that the same debt had already been liquidated, and thereby became demandable (requisite 4 of
Article 1279 of the Civil Code). Thus, CA correctly upheld the denial of Union Bank’s motion to affirm legal
compensation
LU v. YAP
Novation
FUA CAM LU vs. YAP FAUCO and YAP SINGCO

GR NO. L-48797 July 30, 1943
Although said mortgage did not expressly cancel the old obligation, this was impliedly novated by
reason of incompatibly resulting from the fact that, whereas the judgment was for P1,538.04 payable at one
time, did not provide for attorney's fees, and was not secured, the new obligation is or P1,200 payable in
installments, stipulated for attorney's fees, and is secured by a mortgage.
FACTS:
The plaintiff-appellee, Fua Cam Lu, obtained a judgment sentencing the defendants-appellants, Yap Fauco and
Yap Singco, to pay P1,538.04 with legal interest and costs. By virtue of a writ of execution, a certain parcel of
land belonging to the appellants, assessed at P3,550 was levied upon the provincial sheriff who, made a notice,
duly posted in three conspicuous places in the municipalities of Donsol and Sorsogon and published in
the Mamera Press, that said land would be sold at public auction.
The appellants executed a mortgage in favor of the appellee, wherein it was stipulated:
That their obligation under the judgment was reduced to P1,200 which was made payable in four
installments of P300 during the period commencing on February 8, 1934, and ending on August 8, 1935l
that to secure the payment of the said P1,200, a camarin belonging to the appellants and built on the
above-mentioned land, was mortgaged to the appellee; that in case the appellants defaulted in the
payment of any of the installments, they would pay ten per cent of the unpaid balance as attorney's fees.
plus the costs of the action to be brought by the appellee by reason of such default, and the further
amount of P338, representing the discount conceded to the appellants.
As a result of the agreement thus reached by the parties, the sale of the land advertised by the provincial sheriff
did not take place. However, pursuant to an alias writ of execution issued by the the provincial sheriff, without
publishing a new notice, sold said land at a public auction held on May 28, 1934, to the appellee for P1,923.32.
The provincial sheriff executed a final deed in favor of the appellee. The appellee instituted the present action in
the Court against the appellants in view of their refusal to recognize appellee's title and to vacate the land. The
appellants relied on the legal defenses that their obligation under the judgment was novated by the mortgage
executed by them in favor of the appellee and that the sheriffs sale was void for lack of necessary publication.
These contentions were overruled by the lower court which rendered judgment declaring the appellee to be the
owner of the land and ordering the appellants to deliver the same to him, without special pronouncement as to
costs. The appellants seek the reversal of this judgment.
ISSUE: WON there was novation by the mortgage executed by the appellants in favor of the appellee.
RULING:
YES. We concur in the theory that appellants liability under the judgment had been extinguished by the
settlement evidenced by the mortgage executed by them in favor of the appelle. Although said mortgage did not
expressly cancel the old obligation, this was impliedly novated by reason of incompatibly resulting from the fact
that, whereas the judgment was for P1,538.04 payable at one time, did not provide for attorney's fees, and was
not secured, the new obligation is or P1,200 payable in installments, stipulated for attorney's fees, and is secured
by a mortgage.
The appellee, however, argues that the later agreement merely extended the time of payment and did not take
away his concurrent right to have the judgment executed. This court not have been the purpose for executive
the mortgage, because it was therein recited that the appellants promised to pay P1,200 to the appellee as a
settlement of the judgment. Said judgment cannot be said to have been settled, unless it was extinguished.
JAL v. SIMANGAN
Novation
JAPAN AIRLINES v. JESUS SIMANGAN

GR NO. 170141 April 22, 2008
Considering that respondent was forced to get out of the plane and left behind against his will, he could not
have freely consented to be rebooked the next day. In short, he did not agree to the alleged novation. Since
novation implies a waiver of the right the creditor had before the novation, such waiver must be express.
FACTS:
Respondent Jesus Simangan decided to donate a kidney to his ailing cousin, Loreto Simangan, in U.S.A.
Respondent undertook a series of laboratory tests to verify whether his blood and tissue type are compatible
with Loreto's. Fortunately it is.
Respondent needed to go to the United States to complete his preliminary work-up and donation surgery. In due
time, respondent was issued an emergency U.S. visa.
Having obtained an emergency U.S. visa, respondent purchased a round trip plane ticket from petitioner JAL
and was issued the corresponding boarding pass. He was scheduled to a particular flight bound to Los Angeles,
California, U.S.A. via Narita, Japan.
On the date of his flight, respondent went to NAIA. He was allowed to check-in at JAL's counter. His plane ticket,
boarding pass, travel authority and personal articles were subjected to rigid immigration and security routines.
After passing through said immigration and security procedures, respondent was allowed by JAL to enter its
airplane.
While inside the airplane, JAL's airline crew suspected respondent of carrying a falsified travel document and
imputed that he would only use the trip to the United States as a pretext to stay and work in Japan. The
stewardess asked respondent to show his travel documents. Shortly after, the stewardess along with a Japanese
and a Filipino haughtily ordered him to stand up and leave the plane. Respondent protested, explaining that he
was issued a U.S. visa. Just to allow him to board the plane, he pleaded with JAL to closely monitor his
movements when the aircraft stops over in Narita. His pleas were ignored. He was then constrained to go out of
the plane. In a nutshell, respondent was bumped off the flight.
Respondent went to JAL's ground office and waited there for three hours. Meanwhile, the plane took off and he
was left behind. Afterwards, he was informed that his travel documents were, indeed, in order. Respondent was
refunded the cost of his plane ticket less the sum of US$500.00 which was deducted by JAL. Subsequently,
respondent's U.S. visa was cancelled.
Respondent filed an action for damages against JAL
JAL denied the material allegations of the complaint. It argued, among others, that its failure to allow respondent
to fly on his scheduled departure was due to "a need for his travel documents to be authenticated by the United
States Embassy" because no one from JAL's airport staff had encountered a parole visa before. It posited that
the authentication required additional time; that respondent was advised to take the flight the following day, July
30, 1992. JAL alleged that respondent agreed to be rebooked on July 30, 1992.
ISSUE: WON there was novation when appellee agreed that he will instead take appellant’s flight to Narita on
the following day Or WON appellant’s original obligation to carry appellee to Narita and Los Angeles on July 29,
1992 was extinguished by novation when appellant agreed to take the flight the following day.
RULING:
JAL v. SIMANGAN
Novation
NO. That respondent purchased a round trip plane ticket from JAL and was issued the corresponding boarding
pass is uncontroverted. His plane ticket, boarding pass, travel authority and personal articles were subjected to
rigid immigration and security procedure. After passing through said immigration and security procedure, he was
allowed by JAL to enter its airplane to fly to Los Angeles, California, U.S.A. via Narita, Japan. Concisely, there
was a contract of carriage between JAL and respondent.
Nevertheless, JAL made respondent get off the plane on his scheduled departure on July 29, 1992. He was not
allowed by JAL to fly. JAL thus failed to comply with its obligation under the contract of carriage.
JAL justifies its action by arguing that there was "a need to verify the authenticity of respondent's travel
document." It alleged that no one from its airport staff had encountered a parole visa before. It further contended
that respondent agreed to fly the next day so that it could first verify his travel document, hence, there was
novation. It maintained that it was not guilty of breach of contract of carriage as respondent was not able to travel
to the United States due to his own voluntary desistance.
We cannot agree. JAL did not allow respondent to fly. It informed respondent that there was a need to first check
the authenticity of his travel documents with the U.S. Embassy. As admitted by JAL, "the flight could not wait for
Mr. Simangan because it was ready to depart."
Since JAL definitely declared that the flight could not wait for respondent, it gave respondent no choice
but to be left behind. The latter was unceremoniously bumped off despite his protestations and valid travel
documents and notwithstanding his contract of carriage with JAL. Damage had already been done when
respondent was offered to fly the next day on July 30, 1992. Said offer did not cure JAL's default.
Considering that respondent was forced to get out of the plane and left behind against his will, he could
not have freely consented to be rebooked the next day. In short, he did not agree to the alleged novation.
Since novation implies a waiver of the right the creditor had before the novation, such waiver must be
express. It cannot be supposed, without clear proof, that respondent had willingly done away with his
right to fly on July 29, 1992.
SALAZAR V. J.Y. BROTHERS
Novation
ANAMER SALAZAR V. J.Y. BROTHERS MARKETING CORPORATION

GR NO. 171998 October 20, 2010
Novation is done by the substitution or change of the obligation by a subsequent one which extinguishes the
first, either by changing the object or principal conditions, or by substituting the person of the debtor, or by
subrogating a third person in the rights of the creditor.
Extinctive novation is never presumed; there must be an express intention to novate; in cases where it is
implied, the acts of the parties must clearly demonstrate their intent to dissolve the old obligation as the moving
consideration for the emergence of the new one. Implied novation necessitates that the incompatibility between
the old and new obligation be total on every point such that the old obligation is completely superceded by the
new one. The test of incompatibility is whether they can stand together, each one having an independent
existence; if they cannot and are irreconcilable, the subsequent obligation would also extinguish the first.
Novation is merely modificatory where the change brought about by any subsequent agreement is merely
incidental to the main obligation (e.g., a change in interest rates or an extension of time to pay; in this instance,
the new agreement will not have the effect of extinguishing the first but would merely supplement it or supplant
some but not all of its provisions.)
FACTS:
J.Y. Bros. is a corporation engaged in the business of selling sugar, rice and other commodities. Anamer Salazar,
a freelance sales agent, was approached by Calleja and Kallos, if she knew a supplier of rice. Salazar
accompanied the two to J.Y. Bros. As a consequence, Salazar with Calleja and Kallos procured from J. Y. Bros.
300 cavans of rice in the amount of ₱214,000.00. As payment, Salazar negotiated and indorsed to J.Y. Bros.
Prudential Bank Check issued by Nena Jaucian Timario in the amount of ₱214,000.00 with the assurance that
the check is good as cash. On that assurance, J.Y. Bros. parted with 300 cavans of rice to Salazar. However,
upon presentment, the check was dishonored due to "closed account." Informed of the dishonor of the check,
Calleja, Kallos and Salazar delivered to J.Y. Bros. a replacement cross Solid Bank Check again issued by Nena
Jaucian Timario in the amount of ₱214,000.00 but which, just the same, bounced due to insufficient funds.
Salazar failed to settle the amount due J.Y. Bros., the latter charged Salazar and Timario with the crime of estafa.
The RTC ruled that after the Prudential Bank check was dishonored, it was replaced by a Solid Bank check
which, however, was also subsequently dishonored; that since the Solid Bank check was a crossed check, which
meant that such check was only for deposit in payee’s account, a condition that rendered such check non-
negotiable, the substitution of a non-negotiable Solid Bank check for a negotiable Prudential Bank check was an
essential change which had the effect of discharging from the obligation whoever may be the endorser of the
negotiable check. The RTC concluded that the absence of negotiability rendered nugatory the obligation arising
from the technical act of indorsing a check and, thus, had the effect of novation; and that the ultimate effect of
such substitution was to extinguish the obligation arising from the issuance of the Prudential Bank check. CA
Reversed the RTC.
ISSUE: WON the substitution of a non-negotiable instrument (Solid Bank check) for a negotiable instrument
(Prudential Bank check) had an effect of novation.
RULING:
No. The obligation to pay a sum of money is not novated by an instrument that expressly recognizes the old,
changes only the terms of payment, adds other obligations not incompatible with the old ones or the new contract
merely supplements the old one.
In this case, respondent’s acceptance of the Solid Bank check, which replaced the dishonored Prudential Bank
check, did not result to novation as there was no express agreement to establish that petitioner was already
discharged from his liability to pay respondent the amount of ₱214,000.00 as payment for the 300 bags of rice.
SALAZAR V. J.Y. BROTHERS
Novation
As we said, novation is never presumed, there must be an express intention to novate. In fact, when the Solid
Bank check was delivered to respondent, the same was also indorsed by petitioner which shows petitioner’s
recognition of the existing obligation to respondent to pay ₱214,000.00 subject of the replaced Prudential Bank
check.
Moreover, respondent’s acceptance of the Solid Bank check did not result to any incompatibility, since the two
checks − Prudential and Solid Bank checks − were precisely for the purpose of paying the amount of
₱214,000.00, i.e., the credit obtained from the purchase of the 300 bags of rice from respondent. Indeed, there
was no substantial change in the object or principal condition of the obligation of petitioner as the indorser of the
check to pay the amount of ₱214,000.00. It would appear that respondent accepted the Solid Bank check to give
petitioner the chance to pay her obligation.
Petitioner also contends that the acceptance of the Solid Bank check, a non-negotiable check being a crossed
check, which replaced the dishonored Prudential Bank check, a negotiable check, is a new obligation in lieu of
the old obligation arising from the issuance of the Prudential Bank check, since there was an essential change
in the circumstance of each check.
Such argument deserves scant consideration.Among the different types of checks issued by a drawer is the
crossed check. The Negotiable Instruments Law is silent with respect to crossed checks, although the Code of
Commerce makes reference to such instruments. We have taken judicial cognizance of the practice that a check
with two parallel lines in the upper left hand corner means that it could only be deposited and could not be
converted into cash. Thus, the effect of crossing a check relates to the mode of payment, meaning that the
drawer had intended the check for deposit only by the rightful person, i.e., the payee named therein. The change
in the mode of paying the obligation was not a change in any of the objects or principal condition of the contract
for novation to take place.
Considering that when the Solid Bank check, which replaced the Prudential Bank check, was presented for
payment, the same was again dishonored; thus, the obligation which was secured by the Prudential Bank check
was not extinguished and the Prudential Bank check was not discharged. Thus, we found no reversible error
committed by the CA in holding petitioner liable as an accommodation indorser for the payment of the dishonored
Prudential Bank check.
METROBANK V. RBG
Legal Subrogation
METROPOLITAN BANK AND TRUST COMPANY V. RURAL BANK OF GERONA

GR NO. 159097 July 5, 2010
RBG’s tacit approval came after payment had been made does not completely negate the legal subrogation
that had taken place.
FACTS:
In the 1970s, the Central Bank and the RBG entered into an agreement providing that RBG shall facilitate the
loan applications of farmers-borrowers under the Central Bank-International Bank for Reconstruction and
Development’s (IBRD’s) 4th Rural Credit Project. The agreement required RBG to open a separate bank account
where the IBRD loan proceeds shall be deposited. The RBG accordingly opened a special savings account with
Metrobank’s Tarlac Branch. As the depository bank of RBG, Metrobank was designated to receive the credit
advice released by the Central Bank representing the proceeds of the IBRD loan of the farmers-borrowers;
Metrobank, in turn, credited the proceeds to RBG’s special savings account for the latter’s release to the farmers-
borrowers.
On September 27, 1978, the Central Bank released a credit advice in Metrobank’s favor and accordingly credited
Metrobank’s demand deposit account in the amount of ₱178,652.00 and ₱189,052.00 for the account of RBG.
The amount, which was credited to RBG’s special savings account represented the approved loan application
of farmer-borrower Dominador de Jesus and Basilio Panopio, respectively. RBG withdrew the said amounts from
its account. On October 3, 1978, the same thing happened with Ponciano Lagman’s approved loan application
for ₱220,000.00. Of the ₱220,000.00, RBG only withdrew ₱75,375.00.
On November 3, 1978, the Central Bank issued debit advices, reversing all the approved IBRD loans. The
Central Bank implemented the reversal by debiting from Metrobank’s demand deposit account the amount
corresponding to all three IBRD loans.
Upon receipt of the debit advices, Metrobank, in turn, debited the following amounts from RBG’s special savings
account: ₱189,052.00, ₱115,000.00, and ₱8,000.41. Metrobank, however, claimed that these amounts were
insufficient to cover all the credit advices that were reversed by the Central Bank. It demanded payment from
RBG. As of October 17, 1979, Metrobank claimed that RBG had an outstanding balance of ₱334,220.00. To
collect this amount, it filed a complaint for collection of sum of money against RBG.
RTC ruled for Metrobank, finding that legal subrogation had ensued.
CA set aside the RTC decision
ISSUE: WON there is legal subrogation when the express or tacit approval of the debtor came after the
payment by the third person.
RULING:
A basic first step in resolving this case is to determine who the liable parties are on the IBRD loans that the
Central Bank extended. The Project Terms and Conditions executed by the Central Bank and the RBG shows
that the farmers-borrowers to whom credits have been extended, are primarily liable for the payment of the
borrowed amounts. The loans were extended through the RBG which also took care of the collection and of the
remittance of the collection to the Central Bank. RBG, however, was not a mere conduit and collector. While the
farmers-borrowers were the principal debtors, RBG assumed liability under the Project Terms and Conditions by
solidarily binding itself with the principal debtors to fulfill the obligation.
METROBANK V. RBG
Legal Subrogation
Based on these arrangements, the Central Bank’s immediate recourse, therefore should have been against the
farmers-borrowers and the RBG; thus, it erred when it deducted the amounts covered by the debit advices from
Metrobank’s demand deposit account. Under the Project Terms and Conditions, Metrobank had no responsibility
over the proceeds of the IBRD loans other than serving as a conduit for their transfer from the Central Bank to
the RBG once credit advice has been issued. Thus, we agree with the CA’s conclusion that the agreement
governed only the parties involved – the Central Bank and the RBG. Metrobank was simply an outsider to the
agreement
Art. 1302. It is presumed that there is legal subrogation:

(1) When a creditor pays another creditor who is preferred, even without the debtor’s knowledge;
(2) When a third person, not interested in the obligation, pays with the express or tacit approval of the
debtor;
(3) When, even without the knowledge of the debtor, a person interested in the fulfillment of the obligation
pays, without prejudice to the effects of confusion as to the latter’s share. [Emphasis supplied.]
As discussed, Metrobank was a third party to the Central Bank-RBG agreement, had no interest except as a
conduit, and was not legally answerable for the IBRD loans. Despite this, it was Metrobank’s demand deposit
account, instead of RBG’s, which the Central Bank proceeded against, on the assumption perhaps that this was
the most convenient means of recovering the cancelled loans. That Metrobank’s payment was involuntarily made
does not change the reality that it was Metrobank which effectively answered for RBG’s obligations.
Was there express or tacit approval by RBG of the payment enforced against Metrobank? After Metrobank
received the Central Bank’s debit advices in November 1978, it (Metrobank) accordingly debited the amounts it
could from RBG’s special savings account without any objection from RBG. RBG’s President and Manager, Dr.
Aquiles Abellar, even wrote Metrobank, on August 14, 1979, with proposals regarding possible means of settling
the amounts debited by Central Bank from Metrobank’s demand deposit account. These instances are all
indicative of RBG’s approval of Metrobank’s payment of the IBRD loans. That RBG’s tacit approval came after
payment had been made does not completely negate the legal subrogation that had taken place.
Article 1303 of the Civil Code states that subrogation transfers to the person subrogated the credit with all the
rights thereto appertaining, either against the debtor or against third persons. As the entity against which the
collection was enforced, Metrobank was subrogated to the rights of Central Bank and has a cause of action to
recover from RBG the amounts it paid to the Central Bank, plus 14% per annum interest.
ARCO PULP AND PAPER v. LIM
Arco Pulp and Paper Co., Inc, and Candida A. Santos, v. Dan T. Lim, doing business under the name
and style of Quality Papers & Plastic Products Enterprises
G.R. No. 206808 June 25, 2014
Novation must be stated in clear and unequivocal terms to extinguish an obligation. It cannot be presumed and
may be implied only if the old and new contracts are incompatible on every point.
FACTS:
Respondent Dan T. Lim, under the name Quality Paper and Plastic Products, Enterprises, supplied scrap papers,
cartons, and other materials to factories engaged in the paper mill business. From February to March 2007, Lim
delivered scrap papers worth P7,22,96.31 to petitioner Arco Pulp and Paper Company, Inc. (Arco Pulp and
Paper) through its Chief Executive Officer and President, Candida Santos. In their agreement, Arco Pulp and
Paper would either (1) pay Lim in the value of the raw materials, or (2) deliver to him their finished products of
equivalent value.
When Lim delivered raw materials to Arco Pulp and Paper, the petitioner issued a post-dated check dated April
18, 2007, in the amount of P1,487,766.68 as partial payment. When he deposited the check, it was dishonored
for being drawn against a closed account.
On April 18, 2007, meanwhile, Arco Pulp and Paper and Eric Sy executed a memorandum of agreement whereby
Arco Pulp and Paper bound themselves to deliver finished products to Eric Sy. According to the memorandum,
the raw material would be supplied by Lim through his company.
Lim sent a letter to Arco Pulp and Paper demanding payment, but not payment was made to him. Aggrieved,
Lim filed a complaint for collection of sum of money with prayer for attachment before the Regional Trial Court
(RTC Valenzuela). Arco Pulp and Paper filed its answer, but failed to have its representatives attend the pre-trial
hearing. Lim was allowed to present his evidence ex-parte.
The RTC rendered judgment in favor of Arco Pulp and Paper and dismissed the complaint. It held that when
Arco Pulp and Paper and Eric Sy entered into the memorandum of agreement, a novation took place which
extinguished Arco Pulp and Paper’s obligation to Lim.
Lim appealed with the Court of Appeals (CA), arguing that novation did not take place since the memorandum
of agreement between Arco Pulp and Paper and Eric Sy was an exclusive and private agreement between them.
His name in the memorandum of agreement was only mentioned for supplying the parties with scrap papers,
where his conformity through a separate contract was indispensable.
The CA reversed and set aside the judgment of the trial court, and ordered Arco Pulp and Paper to pay Lim the
amount of P7,22,968.31, with interest, moral damages, exemplary damages, and attorney’s fees.
The petitioners argue that the memorandum of agreement between Arco Pulp and Paper and Eric Sy constituted
a novation since Eric Sy became the new debtor of the respondent. The CA also erred in awarding moral and
exemplary damages without proof of entitlement to damages.
Lim argued that the CA was correct, that there was no proper novation in this case.
ISSUE: Whether or not there was novation that extinguished the obligation between the parties.
RULING:
ARCO PULP AND PAPER v. LIM
NO. There was no novation. The memorandum of agreement between Arco Pulp and Paper and Eric Sy did not
constitute a novation of the original contract. When Arco Pulp and Paper opted to deliver the finished products
to Eric Sy, it did not novate the original obligation between the parties.
Novation is a mode of extinguishing an obligation by changing its objects or principal obligations, by substituting
a new debtor in place of the old one, or by subrogating a third person to the rights of the creditor.
In general, there are two modes of substituting the person of the debtor: (1) expromision, and (2) delegacion. In
expromision, the initiative for the change does not come from — and may even be made without the knowledge
of — the debtor, since it consists of a third person’s assumption of the obligation. As such, it requires the consent
of the third person and the creditor.
In delegacion, the debtor offers, and the creditor accepts, a third person who consents to the substitution and
assumes the obligation; thus, the consent of these three persons are necessary. Both modes of substitution by
the debtor require the consent of the creditor.
Novation requires that it be clear and unequivocal, it is never presumed. There is nothing in the memorandum
of agreement that states that the obligation of Arco Pulp and Paper to Lim would be extinguished. It also did not
state that Eric Sy substituted Arco Pulp and Paper as the debtor.
The consent of the creditor must also be secured for the novation to be valid. Novation must be expressly
consented to. In this case, however, Lim was not privy to the memorandum of agreement. If the intention of the
memorandum was to novate the original agreement, Lim must have first agreed to the substitution.
Furthermore, Arco Pulp and Paper’s tendering of partial payment conflicted with their intention to pass the
obligation to Eric Sy. When Lim sent his letter of demand to Arco Pulp and Paper and not to Eric Sy, it showed
that Lim did not acknowledge nor consented to Sy as his new debtor. These facts, taken together, clearly showed
that novation did not take place. Since there was no novation, Arco Pulp and Paper’s obligation to Lim remained
valid and existing.
ADDN. NOTES:
Other Issues:
1. Whether or not Candida Santos was solidarily liable with Arco Pulp and Paper.
a. YES. Santos entered into a contract with Lim in her capacity as the President and Chief Executive
Officer of Arco Pulp and Paper. She also issued the check in partial payment. The Court held that
the corporate veil must be pierced on account of bad faith: for unjustifiably refusing to honor their
undertaking; for having the check issued be dishonored for being drawn against a closed account.
Finally, Santos contracted with Sy in an effort to shift Arco Pulp and Paper’s liability.
2. Whether or not Lim was entitled to moral and exemplary damages.
a. YES. Article 2220, moral damages may be awarded in case of breach of contract where the
breach is due to fraud or bad faith. (First req.) Lim suffered injuries in his business: the unpaid
P7,220,968 since 2007. (Second and third req.) Arco Pulp and Paper’s acts of issuing an
unfunded check and contracting a third party to avoid liability provide (Fourth req.) Article 2219,
in relation to Article 21, in violation of Article 1159, breach of contract becomes the basis of moral
damages.
b. Breach of contract must be palpably wanton, reckless, and malicious, in bad faith, oppressive, or
abusive.
c. Exemplary damages may also be awarded in this case to serve as a deterrent to those who use
fraudulent means to evade their liabilities.Business owners must always be forthright in their
dealings. They cannot be allowed to renege on their obligations, considering that these obligations
were freely entered into by them
MILLAR V. CA
Modes of Extinguishment of Contract
EUSEBIO S. MILLAR, petitioner, vs. THE HON. COURT OF APPEALS and ANTONIO P.
GABRIEL, respondents.
GR NO L-29981 April 30, 1971
The defense of implied novation requires clear and convincing proof of complete incompatibility between the
two obligations. The law requires no specific form for an effective novation by implication. The test is whether
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the two obligations can stand together. If they cannot, incompatibility arises, and the second obligation novates
the first. If they can stand together, no incompatibility results and novation does not take place.
FACTS:
• February 11, 1956, Eusebio S. Millar (hereinafter referred to as the petitioner) obtained a favorable
judgment from the Court of First Instance of Manila, in civil case 27116, condemning Antonio P. Gabriel
(hereinafter referred to as the respondent) to pay him the sum of P1,746.98 with interest at 12% per
annum from the date of the filing of the complaint
• respondent, however, pleaded with the petitioner to release the jeep under an arrangement whereby the
respondent, to secure the payment of the judgement debt, agreed to mortgage the vehicle in favor of the
petitioner -> petitioner agreed to the arrangement
• the parties, on February 22, 1957, executed a chattel mortgage on the jeep
• “This mortgage is given as security for the payment to the said EUSEBIO S. MILLAR,
mortgagee, of the judgment and other incidental expenses in Civil Case No. 27116 of the
Court of First Instance of Manila against Antonio P. Gabriel, MORTGAGOR, in the amount
of ONE THOUSAND SEVEN HUNDRED (P1,700.00) PESOS, Philippine currency, which
MORTGAGOR agrees to pay as follows:
March 31, 1957 — EIGHT HUNDRED FIFTY (P850) PESOS;
April 30, 1957 — EIGHT HUNDRED FIFTY (P850.00) PESOS.
• Respondent subsequently failed to pay the first installment
• On September 20, 1961, the petitioner obtained a fifth alias writ of execution. Pursuant to this last writ,
the sheriff levied on certain personal properties belonging to the respondent, and then scheduled them
for execution sale.
• However, on November 10, 1961, the respondent filed an urgent motion for the suspension of the
execution sale on the ground of payment of the judgment obligation.
• the Court of Appeals, which set aside the order of execution in a decision rendered on October 17, 1968,
holding that the subsequent agreement of the parties impliedly novated the judgment obligation
Resolution of the controversy posed by the petition at bar hinges entirely on a determination of whether or not
the subsequent agreement of the parties as embodied in the deed of chattel mortgage impliedly novated the
judgment obligation in civil case 27116
ISSUE: Whether or not the execution of a deed of chattel mortgage operates to impliedly novate the judgment
obligation to pay a sum of money [NO]
RULING:
No. The Court ruled in the negative.
The unmistakable terms of the deed of chattel mortgage reveal that the parties constituted the chattel mortgage
purposely to secure the satisfaction of the then existing liability of the respondent arising from the judgment
against him in civil case 27116. As a security for the payment of the judgment obligation, the chattel mortgage
agreement effectuated no substantial alteration in the liability of the respondent.
MILLAR V. CA
Modes of Extinguishment of Contract
Where the new obligation merely reiterates or ratifies the old obligation, although the former effects but minor
alterations or slight modifications with respect to the cause or object or conditions of the latter, such changes do
not effectuate any substantial incompatibility between the two obligations Only those essential and principal
changes introduced by the new obligation producing an alteration or modification of the essence of the old
obligation result in implied novation. In the case at bar, the mere reduction of the amount due in no sense
constitutes a sufficient indictum of incompatibility, especially in the light of (a) the explanation by the petitioner
that the reduced indebtedness was the result of the partial payments made by the respondent before the
execution of the chattel mortgage agreement and (b) the latter's admissions bearing thereon.
At best, the deed of chattel mortgage simply specified exactly how much the respondent still owed the petitioner
by virtue of the judgment in civil case 27116. The parties apparently in their desire to avoid any future confusion
as to the amounts already paid and as to the sum still due, decoded to state with specificity in the deed of chattel
mortgage only the balance of the judgment debt properly collectible from the respondent. All told, therefore, the
first circumstance fails to satisfy the test of substantial and complete incompatibility between the judgment debt
an the pecuniary liability of the respondent under the chattel mortgage agreement.
The defense of implied novation requires clear and convincing proof of complete incompatibility between the two
obligations. The law requires no specific form for an effective novation by implication. The test is whether the
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two obligations can stand together. If they cannot, incompatibility arises, and the second obligation novates the
first. If they can stand together, no incompatibility results and novation does not take place.
We see no substantial incompatibility between the mortgage obligation and the judgment liability of the
respondent sufficient to justify a conclusion of implied novation. The stipulation for the payment of the obligation
under the terms of the deed of chattel mortgage serves only to provide an express and specific method for its
extinguishment — payment in two equal installments. The chattel mortgage simply gave the respondent a
method and more time to enable him to fully satisfy the judgment indebtedness. The chattel mortgage agreement
1
in no manner introduced any substantial modification or alteration of the judgment. Instead of extinguishing the
obligation of the respondent arising from the judgment, the deed of chattel mortgage expressly ratified and
confirmed the existence of the same, amplifying only the mode and period for compliance by the respondent.
There is no substantial incompatibility between the two obligations as to warrant a finding of an implied novation.
Nor do we find satisfactory proof showing that the parties, by explicit terms, intended the full discharge of the
respondent's liability under the judgment by the obligation assumed under the terms of the deed of chattel
mortgage so as to justify a finding of express novation.
Moreover, the unmistakable terms of the deed of chattel mortgage reveal that the parties constituted the chattel
mortgage purposely to secure the satisfaction of the then existing liability of the respondent arising from the
judgment against him in civil case 27116. As a security for the payment of the judgment obligation, the chattel
mortgage agreement effectuated no substantial alteration in the liability of the respondent.
SANDICO v. PIGUING
Modes of Extinguishment of Obligation – Novation
CARLOS SANDICO, SR. and TEOPISTO P. TIMBOL vs. HON. MINERVA PIGUING
G.R No. L-26115 November 29, 1971
Novation results in two stipulations — one to extinguish an existing obligation, the other to substitute a new
one in its place. Fundamental it is that novation effects a substitution or modification of an obligation by another
or an extinguishment of one obligation by the creation of another.
FACTS:
Spouses Carlos Sandico and Enrica Timbol, and Teopisto P. Timbol, administrator of the estate of the late Sixta
Paras, obtained a judgment in their favor against Desiderio Paras in an action for easement and damages (Civil
Case 1554). On appeal, the Court of Appeals affirmed and modified the judgment, as follows:
"IN VIEW WHEREOF, judgment affirmed and modified; as a consequence, defendant is condemned to
recognize the easement which is held binding as to him; he is sentenced to pay plaintiffs the sums of
P5,000.00 actual, and P500.00 exemplary damages, and P500.00 attorney's fees; plus costs in both
instances."
Thereafter, upon remand to the court a quo of Civil case 1554, the Sandicos and Timbol moved for the issuance
of a writ of execution to enforce the appellate court's judgment. Acting upon the motion, the court a quo issued
a writ of execution.
Meanwhile Sandicos and Timbol and Paras reached a settlement, finally agreeing to the reduction of the money
judgment from P6,000 to P4,000. Thus, Paras paid the Sandioco and Timbol the sum of P3,000; he made
another payment in the amount of P1,000 as evidenced by a receipt issued by the petitioners' counsel.
"P1,000.00
"RECEIVED from Mr. Desiderio Paras the sum of ONE THOUSAND PESOS (P1,000.00), Philippine
Currency, in full satisfaction of the money judgment rendered against him in Civil Case No. 1554 of the
Court of First Instance of Pampanga, it being understood that the portion of the final judgment rendered
in the said case ordering him to reconstruct the irrigation canal in question shall be complied with by him
immediately.
Subsequently, the Sandico and Timbol sent the Paras a letter demanding compliance by the latter with the
portion of the judgment in civil case 1554 relative to the reconstruction and reopening of the irrigation canal.
Upon failure and refusal of the Paras to rebuild and reopen the irrigation canal, the petitioners, filed with Judge
Piguing a motion to declare Paras in contempt of court, pursuant to the provisions of section 9, Rule 39 of the
Rules of Court. Opposing the motion, the Paras alleged recognition by him of the existence of the easement and
compliance with the appellate court's judgment, stating that he had dug a canal in its former place, measuring
about one-and-a-half feet deep, for the petitioners' use. As a result, the Judge Piguing issued an order denying
the petitioners' motion to declare the respondent in contempt of court.
Thereafter, the petitioners moved for the issuance of an alias writ of execution to enforce the judgment of the
Court of Appeals and it was granted. Paras moved to set aside the said alias writ, alleging full satisfaction of the
money judgment per agreement of the parties when the petitioners received the sum of P4,000 as evidenced by
the receipt.
The respondent judge then issued an order directing the provincial sheriff to suspend the execution of the alias
writ. Thereafter, Judge Piguing issued an order stating that the agreement of the parties "novated" the money
judgment provided for in the decision of the Court of Appeals.
SANDICO v. PIGUING
Modes of Extinguishment of Obligation – Novation
ISSUE: Whether the payment by the respondent to the petitioners of the amount of P4,000 extinguished the
money judgment
RULING:
YES. The payment by Paras to Sandico and Timbol of the amount of P4,000 extinguished the money
judgment.
The payment by the respondent of the lesser amount of P4,000, accepted by the petitioners without any protest
or objection and acknowledged by them as "in full satisfaction of the money judgment" in civil case 1554,
completely extinguished the judgment debt and released the respondent from his pecuniary liability.
Novation results in two stipulations — one to extinguish an existing obligation, the other to substitute a new one
in its place. Fundamental it is that novation effects a substitution or modification of an obligation by another or
an extinguishment of one obligation by the creation of another. In the case at hand, the Court failed to see what
new or modified obligation arose out of the payment by the respondent of the reduced amount of P4,000 and
substituted the monetary liability for P6,000 of the said respondent under the appellate court's judgment.
Additionally, to sustain novation necessitates that the same be so declared in unequivocal terms — clearly and
unmistakably shown by the express agreement of the parties or by acts of equivalent import — or that there is
complete and substantial incompatibility between the two obligations.
Furthermore, the terms of the receipt were clear and definite. The receipt neither expressly nor impliedly declares
that the reduction of the money judgment was conditioned on the respondent's reconstruction and reopening of
the irrigation canal. The receipt merely embodies the recognition by the respondent of his obligation to
reconstruct the irrigation canal. And the receipt simply requires the respondent to comply with such obligation
"immediately." The obligation of the respondent remains as a portion of the Court of Appeals' judgment. In fact,
the petitioners themselves, in their letter dated November 5, 1964, sent to the respondent, demanding that the
latter reconstruct the irrigation canal immediately, referred to the same not as a condition but as "the portion of
the judgment" in civil case 1554.
NPC v. DAYRIT
Novation
NPC v. Dayrit
G.R. No. L - 62845-46 , November 25, 1983
It is elementary that novation is never presumed; it must be explicitly stated or there must be manifest
incompatibility between the old and new obligations in every aspect.
FACTS:
Private respondent Daniel E. Roxas, doing business under the name and style of United Veterans Security
Agency and Foreign Boats Watchmen, sued petitioner, National Power Corporation and two of its officers in
Iligan City. The purpose of the suit was to compel the NPC to restore the contract of Roxas for security services
which the former had terminated. The litigants entered into a Compromise Agreement on October 14, 1981, and
asked the court to approve it. On May 14, 1982, the NPC executed another contract for security services with
Josette L. Roxas whose relationship with Daniel Roxas is not shown. At any rate Daniel Roxas has owned the
contract. The NPC refused to implement the new contract for which reason Daniel filed a Motion for Execution.
The Motion for Execution was approved which the NPC assails on the ground that it directs execution of a contact
which had been novated by that of May 14, 1982. On the other hand, Roxas claims that said contract was
executed precisely to implement the compromise agreement for which reason there was no novation.
ISSUES: Whether there was a novation of the contract between parties (NEGATIVE)
RULING:
The Court ruled in favor of the respondent. It is elementary that novation is never presumed. It must be explicitly
stated or there must be manifest incompatibility between the old and new obligations in every aspect. Art. 1292
provides that In order that an obligation may be extinguished by another which substitutes the same, it is
imperative that it be so declared in unequivocal terms, or that the old and the new obligations be on every point
incompatible with each other.
In the case at bar, there is nothing in the May 14, 1982 agreement which supports the petitioner’s contention.
There is neither explicit novation nor incompatibility on every point between the old and new agreements.
INTEGRATED CONSTRCUTED V. RELOVA and MWSS
Novation
Integrated Construction v. Hon. Relova and MWSS
G.R. No. L - 41117 , December 29, 1986
While the tenor of the subsequent letter agreement in a sense novates the judgment award there being a
shortening of the period within which to pay, the failure of a party to comply with the suspensive and
conditional nature of the agreement, were remitted the parties to their original rights under the judgment award
FACTS:
Petitioners on July 17, 1970 sued the respondent Metropolitan Waterworks and Sewerage System (MWSS),
formerly the National Waterworks and Sewerage Authority (NAWASA), in the Court of First Instance of Manila
for breach of contract, docketed as Civil Case No. 80390 in that Court.
The parties submitted the case to arbitration. The Arbitration Board, after extensive hearings, rendered its
decision-award on August 11, 1972. Respondent Judge confirmed the Award on September 9, 1972 and the
same has long since become final and executory. The decision-award ordered MWSS to pay petitioners
P15,518,383.61-less P2,329,433.41, to be set aside as a trust fund to pay creditors of the joint venture in
connection with the projector a net award of P13,188,950.20 with interest thereon from the filing of the complaint
until fully paid.
Subsequently, however, petitioners agreed to give MWSS some discounts in consideration of an early payment
of the award. Thus, on September 21, 1972, MWSS adopted Board Resolution No. 132-72, embodying the terms
and conditions of their agreement.
On October 2, 1972, MWSS sent a letter-agreement to petitioners, quoting Board Resolution No. 13272, granting
MWSS some discounts from the amount payable under the decision award (consisting of certain reductions in
interests, in the net principal award and in the trust fund), provided that MWSS would pay the judgment, less the
said discounts, within fifteen days therefrom or up to October 17, 1972. MWSS, however, paid only on December
22, 1972, the amount stated in the decision but less the reductions provided for in the October 2, 1972 letter-
agreement. Three years thereafter, or in June, 1975, after the last balance of the trust fund had been released
and used to satisfy creditors' claims, the petitioners filed a motion for execution in said civil case against MWSS
for the balance due under the decision-award. Respondent MWSS opposed execution, setting forth the defenses
of payment and estoppel. On July 10, 1975, respondent judge denied the motion for execution on the ground
that the parties had novated the award by their subsequent letter-agreement.
ISSUES: Whether there is novation and whether it will render the initial judgement unenforceable (NEGATIVE)
RULING:
While the tenor of the subsequent letter-agreement in a sense novates the judgment award there being a
shortening of the period within which to pay (Kabangkalan Sugar Co. vs. Pacheco, 55 Phil. 555), the suspensive
and conditional nature of the said agreement (making the novation conditional) is expressly acknowledged and
stipulated in the 14th whereas clause of MWSS' Resolution No. 132-72, (p. 23, Rollo) which states:
WHEREAS, all the foregoing benefits and advantages secured by the MWSS out of said conferences
were accepted by the Joint Venture provided that the remaining net amount payable to the Joint Venture
will be paid by the MWSS within fifteen (15) days after the official release of this resolution and a written
CONFORME to be signed by the Joint Venture; (Emphasis supplied)
MWSS' failure to pay within the stipulated period removed the very cause and reason for the agreement,
rendering some ineffective. Petitioners, therefore, were remitted to their original rights under the judgment award.
COCHINGYAN JR. v. R&B SURETY AND INSURANCE
Novation
Cochingyan Jr. and Jose Villanueva v. R&B Surety and Insurance

G.R. No. L - 47369 , June 30, 1987
Novation is the extinguishment of an obligation by the substitution or change of the obligation by a subsequent
one which terminates it, either by changing its object or principal conditions, or by substituting a new debtor in
place of the old one, or by subrogating a third person to the rights of the creditor.
FACTS:
Pacific Agricultural Suppliers, Inc. (PAGRICO) was granted an increase in its line of credit from P400,000 to
P800,000 with Philippine National Bank. To secure PNB's approval, PAGRICO had to give a bond in the amount
of P400,000.00 so PAGRICO submitted Surety Bond No. 4765 issued by respondent R&B Surety and Insurance
Co., Inc.
In consideration of R & B Surety's issuance of the Surety Bond, two Identical indemnity agreements were entered
into with R & B Surety: (a) one agreement executed by the Catholic Church Mart (CCM) and by petitioner Joseph
Cochingyan, Jr and (b) another agreement was executed by PAGRICO, Pacific Copra Export Inc. (PACOCO),
Jose K. Villanueva and Liu Tua Ben. Mr. Villanueva.
Under both indemnity agreements, the indemnitors bound themselves jointly and severally to R & B Surety to
pay an annual premium and for the faithful compliance of the terms and conditions set forth in said Surety Bond
until the same is cancelled and/or discharged. When PAGRICO failed to comply with its Principal Obligation to
the PNB, the PNB demanded payment from R & B Surety of the sum of P400,000.00. R & B Surety made a
series of payments to PNB by virtue of that demand.
R&B Surety in turn sent formal demand letters to petitioners for reimbursement of the payments made by it to
the PNB and for a discharge of its liability to the PNB under the Surety Bond. When petitioners failed to heed its
demands, R & B Surety brought suit against petitioner in the CFI of Manila. CFI ruled in favor of R&B Surety and
made petitioners jointly and severally liable for Surety Bond No. 4675 and interest.
ISSUE: Whether the Trust Agreement had extinguished, by novation, the obligation of R&B Surety to the PNB
under the Surety Bond which, in turn, extinguished the obligations of the petitioners under the Indemnity
Agreements.(NEGATIVE)
RULING:
Surety Bond was not novated by the Trust Agreement. Both agreements can co-exist. The Trust Agreement
merely furnished to PNB another party obligor to the Principal Obligation in addition to PAGRICO and R & B
Surety.
If objective novation is to take place, it is imperative that the new obligation expressly declare that the old
obligation is thereby extinguished, or that the new obligation be on every point incompatible with the old one.
Novation is never presumed: it must be established either by the discharge of the old debt by the express terms
of the new agreement, or by the acts of the parties whose intention to dissolve the old obligation as a
consideration of the emergence of the new one must be clearly discernible. If subjective novation by a change
in the person of the debtor is to occur, it is not enough that the juridical relation between the parties to the original
contract is extended to a third person. It is essential that the old debtor be released from the obligation, and the
third person or new debtor take his place in the new relation. Otherwise, no novation occurs and the third person
who has assumed the obligation of the debtor becomes merely a co-debtor or surety or a co-surety.
COCHINGYAN JR. v. R&B SURETY AND INSURANCE
Novation
In this case, the Trust Agreement does not expressly terminate the obligation of R&B Surety under the Surety
Bond. On the contrary, the Trust Agreement expressly provides for the continuing subsistence of that obligation
by stipulating that the Trust Agreement shall not in any manner release R & B Surety from its obligation under
the Surety Bond.
Neither can the petitioners anchor their defense on implied novation. Absent an unequivocal declaration of
extinguishment of a pre-existing obligation, a showing of complete incompatibility between the old and the new
obligation (and nothing else) would sustain a finding of novation by implication. However, in this case, the parties
to the new obligation expressly recognize the continuing existence and validity of the old one implied novation is
not reached at all. What the trust agreement did at most was merely to bring in another person/s -the Trustor[s]-
to assume the same obligation that R & B Surety was bound to perform under the Surety Bond. So far as the
PNB was concerned, the effect of the Trust Agreement was that where there had been only two, there would
now be three obligors directly and solidarily bound in favor of the PNB: PAGRICO, R & B Surety and the Trustor.
And the PNB could proceed against any of the three, in any order or sequence.
BALILA v. IAC
Novation
Spouses Balila v. Honorable Intermediate Appellate Court

G.R. No. L - 68477 , October 29, 1987
A lower court decision can be novated by the subsequent agreement of the parties. Implicit in this Court's
ruling is that such a plea would merit approval if indeed that was what the parties intended.
FACTS:
The petition at bar began as an amicable settlement between petitioners and private respondents as defendants
and plaintiffs in Civil Case No. U-3501, which was approved by the trial court and made as the basis of its
Decision dated December 11, 1980 ordering the parties to comply strictly with the terms and conditions embodied
in said amicable settlement. The salient points therein show that defendants admitted "having sold under a pacto
de retro sale the parcels of land described in the complaint in the amount of P84,000.00" and that they "hereby
promise to pay the said amount within the period of four (4) months but not later than May 15, 1981."On
December 30, 1981 or more than seven months after the last day for making payments, defendants redeemed
from plaintiff Guadalupe (one of the private respondents herein) Lot No. 52 with an area of 294 sq.m. covered
by TCT 101352 which was one of the three parcels of land described in the complaint by paying the amount of
P20,000.00.
On August 4, 1982, plaintiff filed a motion for a hearing on the consolidation of title over the remaining two (2)
parcels of land namely Lot 965 and Lot 16 alleging that the court's decision dated December 11, 1980 remained
unenforced for non-payment of the total obligation due from defendants. Defendants opposed said motion
alleging that they had made partial payments of their obligation through plaintiffs attorney in fact and son, Waldo
del Castillo, as well as to the Sheriff. On April 26, 1983, the lower court issued the questioned order affirming
consolidation.
On June 8, 1983, while the Order of the lower court had not yet been enforced, defendants paid plaintiff
Guadalupe Vda. de del Castillo by tendering the amount of P28,800.00 to her son Waldo del Castillo (one of the
private respondents herein) thus leaving an unpaid balance of P35,200.00. A Certification dated June 8, 1983,
and signed by Waldo shows that defendants were given a period of 45 days from date or up to July 23, 1983
within which to pay the balance. Said Certification supported defendants' motion for reconsideration and
supplemental motion for reconsideration of the Order reconsolidation of title, which motions were both denied by
the lower court, prompting defendants to file a petition for certiorari, prohibition and mandamus with preliminary
injunction with the Intermediate Appellate Court seeking to annul and set aside the assailed Order dated April
26, 1983 and the Order denying their motion for reconsideration.
Petitioners contend that despite the rendition of the said decision by the appellate court, private respondent
Guadaiupe Vda. de del Castillo, represented by her son Waldo del Castillo as her attorney-in-fact, accepted
payments from petitioners and gave petitioners several extensions of time to pay their remaining obligations.
Petitioners likewise allege that private respondents Guadalupe Vda. de del Castillo and son Waldo, were
nowhere to be found on December 30, 1984, the last day for petitioners to pay their balance of P10,000.00 and
for private respondents to reconvey the lands in question (Lots 965 and 16) in favor of petitioners and to deliver
TCT Nos. 146360 and 146361 already in the name of private respondent Guadalupe Vda. de del Castillo,
covering said lots respectively. This incident compelled petitioners to deposit said amount with the Regional Trial
Court as per receipt OR No. 9764172 accompanied by a motion to deposit which motion was granted as per
Order dated January 9, 1985. The aforementioned titles over the two parcels of lands are subject to Notice of
Lis Pendens dated August 15, 1983.
ISSUE: Whether the Order approving the amicable settlement novated upon subsequent mutual agreements of
the parties. (AFFIRMATIVE)
BALILA v. IAC
Novation
RULING:
The Supreme Court found that the judgment by compromise rendered by the lower court was indeed novated
by the subsequent mutual agreements of the parties involving the partial payments.
The fact therefore remains that the amount of P84,000.00 payable on or before May 15, 1981 decreed by the
trial court in its judgment by compromise was novated and amended by the subsequent mutual agreements and
actions of petitioners and private respondents. Petitioners paid the aforestated amount on an installment basis
and they were given by private respondents no less than eight extensions of time to pay their obligation. These
transactions took place during the pendency of the motion for reconsideration of the Order of the trial court dated
April 26, 1983 in Civil Case No. U-3501, during the pendency of the petition for certiorari in AC-G.R. SP-01307
before the Intermediate Appellate Court and after the filing of the petition before Us. This answers the claim of
the respondents on the failure of the petitioners to present evidence or proof of payment in the lower court and
the appellate court.
The Court cannot refuse to issue a writ of execution upon a final and executory judgment, or quash it, or order
its stay, for, as a general rule, parties will not be allowed, after final judgment, to object to the execution by raising
new issues of fact or of law, except when there had been a change in the situation of the parties which makes
such execution inequitable; or when it appears that the controversy has never been submitted to the judgment
of the court, or when it appears that the writ of execution has been improvidently issued, or that it is defective in
substance, or issued against the wrong party or that judgment debt has been paid or otherwise satisfied; or
when the writ has been issued without authority.
PEOPLE’S BANK v. SYVEL
People’s Bank v. Syvel’s
G.R NO. L-29280, August 11, 1988
Novation takes place when the object or principal condition of an obligation is changed or altered. It is
elementary that novation is never presumed; it must be explicitly stated or there must be manifest
incompatibility bs etween the old and the new obligations in every aspect
FACTS:
This is an action for foreclosure of chattel mortgage executed in favor of the plaintiff by the defendant Syvel's
Incorporated on its stocks of goods, personal properties and other materials owned by it and located at its stores
or warehouses at Escolta, Manila, Rizal Avenue, Manila, Cartimar Avenue, Pasay City, and Morayta, Manila.
The Appellant Antonio executed a real property mortgage in the case at bar in favor of the appellee
The trial Court rendered its judgment in favor of the appellee to which an appeal was made.
The Appellant contends that there was a novation by the subsequent execution of the real estate mortgage as
additional collateral to the original obligation which is secured by the chattel mortage.
ISSUE: Whether or not the obligation to pay the credit line was novated through the execution of the subsequent
real estate mortgage
RULING:
No. The Court held that Novation takes place when the object or principal condition of an obligation is
changed or altered. It is elementary that novation is never presumed; it must be explicitly stated or there
must be manifest incompatibility between the old and the new obligations in every aspect.
In the case at bar, there is nothing in the Real Estate Mortgage which supports appellants'submission. The
contract on its face does not show the existence of an explicit novation nor incompatibility on every point between
the "old and the "new" agreements as the second contract evidently indicates that the same was executed as
new additional security to the chattel mortgage previously entered into by the parties
It is clear, therefore, that a novation was not intended. The real estate mortgage was evidently taken as
additional security for the performance of the contract
In the determination of the legality of the writ of attachment by the Court of First Instance of Manila, it is
a well-established rule that the grant or denial of a writ of attachment rests upon the sound discretion of
the court. Records are bereft of any evidence that grave abuse of discretion was committed by
respondent judge in the issuance of the writ of attachment.
RODRIGUEZ v. REYES
ESTRELLA BENIPAYO RODRIGUEZ, MANUEL D. BENIPAYO, DONATO BENIPAYO, JR., JAIME D.

BENIPAYO, MAXIMA BENIPAYO MORALES, AURORA BENIPAYO DE LEON, FRANCISCO D.
BENIPAYO, ALEJANDRO D. BENIPAYO, TERESITA BENIPAYO DE LOS SANTOS, LYDIA BENIPAYO
CLEMENTE, and JULIA C. MERCADO vs. HON. JUAN O. REYES, in his capacity as Presiding Judge of
the Manila Court of First Instance, Branch XXI, ALBERTO D. BENIPAYO, DR. JOSE N. DUALAN and
VICENTE SAYSON, JR.
G.R. No. L-22958 January 30, 1971
The reason is plain: the mortgage is merely an encumbrance on the property, entitling the mortgagee to have
the property foreclosed, i.e., sold, in case the principal obligor does not pay the mortgage debt, and apply the
proceeds of the sale to the satisfaction of his credit. Mortgage is merely an accessory undertaking for the
convenience and security of the mortgage creditor, and exists independently of the obligation to pay the debt
secured by it. The mortgagee, if he is so minded, can waive the mortgage security and proceed to collect the
principal debt by personal action against the original mortgagor.
FACTS:
On 13 November 1962, Rodriguez and other petitioners filed a complaint against their brother, Alberto Benipayo,
or the paron o the properties from their late parents. Afterr Alberto had answered the complaint, the parties
agreed to have the properes in litgation and sold at public auction to the highest bidder. The papers submitted
to the court the properties to be sold i.e., some lots in Albay, and parcels of land, with their improvements. The
improvements and two lots are mortgaged with the DBP or PhP50,000.00.
Lots located in Albay, the two Manila lots and improvements were sold at public auction. The real properties are
mortgaged with DBP, with outstanding balance of PhP37,121.76. But petitioners moved or its postponement but
the sale was held as scheduled.
Jose N. Dualan, successully bid at the auction sale the sum o P235,000.0 or Lot No. 6-B-2, while Vicente
Sayson's bid o P173,000.00 or Lot No. 6-A o Block No. 2124
With the approval o the sale the, Alberto and Jose Dualan suggested that:
(1) the payment o the mortgage debt o PhP37,121.96 rom the proceeds o the aucon sale in avor o the DBP;
(2) the issuance by the sheri o a cerfcate o sale in avor o Dualan o the property sold to him ree rom all liens and
encumbrances; and
(3) the payment to respondent Benipayo o 1/12 o the proceeds o the sale aer deducng thererom the payment to
the DBP.
The judge asked whether there had been a meeting o minds on the question of who was to discharge the
mortgage obligation in favor of the DBP and suggested another bidding with a clear-cut understanding that the
12 heirs shall assume all obligaons and that they should not be paid by the buyers. The suggeson was not
accepted by the buyers.
On 28 April 1964 the ollowing condions were arrived at:
a) That the vendors or the owners o the properes sold shall clear said properes o all encumbrances that were
incurred in them long beore the aucon sales.
b) That since the taxes on said real estates are not encumbrances incurred by the owners o the properes, but
are proper charges aached and against the properes themselves, the real estate taxes shall be borne by the
owner or owners o the said properes on the date when said taxes become due or payment.
RODRIGUEZ v. REYES
The petitioners, jointly with Sayson and Alberto, cancelled the sale to Sayson upon the consideration that the
amount paid by Sayson be returned. Leaving only Jose Dualan, purchaser o the property, as party respondent.
The petitioners seek to apply the doctrine of caveat emptor to Dualan, and contend that having purchased the
property with knowledge of the encumbrance he should assume payment o the indebtedness secured by it.
ISSUE: Whether or not the purchasers should be the ones to pay for the mortgage given that they
purchased the property at their own peril with knowledge of the encumbrance (caveat emptor)
RULING:
NO. We find the stand of petitioners-appellants to be unmeritorious and untenable. The maxim "caveat emptor"
applies only to execution sales, and this was not one such.
The mere fact that the purchaser of an immovable has notice that the required realty is encumbered with a
mortgage does not render him liable for the payment of the debt guaranteed by the mortgage, in the absence of
stipulation or condition that he is to assume payment of the mortgage debt. The reason is plain: the mortgage is
merely an encumbrance on the property, entitling the mortgagee to have the property foreclosed, i.e., sold, in
case the principal obligor does not pay the mortgage debt, and apply the proceeds of the sale to the satisfaction
of his credit. Mortgage is merely an accessory undertaking for the convenience and security of the mortgage
creditor, and exists independently of the obligation to pay the debt secured by it. The mortgagee, if he is so
minded, can waive the mortgage security and proceed to collect the principal debt by personal action against
the original mortgagor.
By buying the property covered by TCT No. 48979 with notice that it was mortgaged, respondent Dualan only
undertook either to pay or else allow the land's being sold if the mortgage creditor could not or did no obtain
payment from the principal debtor when the debt matured. 6 Nothing else. Certainly the buyer did not obligate
himself to replace the debtor in the principal obligation, and he could not do so in law without the creditor's
consent. Our Civil Code, Article 1293, explicitly provides:
ART. 1293. Novation which consists in substituting a new debtor in the place of the original one, may be
made even with out the knowledge or against the will of the latter, but not without the consent of the
creditor. Payment by the new debtor gives him the rights mentioned in articles 1236 and 1237.
The obligation to discharge the mortgage indebtedness, therefore, remained on the shoulders of the original
debtors and their heirs, petitioners herein, since the record is devoid of any evidence of contrary intent.
Upon the other hand, the orders complained of, in so far as they require the vendors-heirs to clear the title to the
land sold to respondent Dualan, when the latter bid for it with full knowledge that the same was subject to a valid
and subsisting mortgage, is plainly erroneous. In submitting his bid, Dualan is presumed to know, and in fact did
know, that the property was subject to a mortgage lien; that such encumbrance would make him, as purchaser,
eventually liable to discharge mortgage by paying or settling with the mortgage creditor, should the original
mortgagors fail to satisfy the debt.
Normally, therefore, he would have taken this eventuality into account in making his bid, and offer a lower amount
for the lot than if it were not encumbered. If he intended his bid to be understood as conditioned upon the property
being conveyed to him free from encumbrance, it was his duty to have so stated in his bid, or at least before
depositing the purchase price. He did not do so, and the bid must be understood and taken to conform to the
normal practice of the buyer's taking the mortgaged property subject to the mortgage. Consequently, he may not
demand that the vendors should discharge the encumbrance aforesaid.
FOR THE FOREGOING REASONS, the petition for certiorari is hereby granted and the orders complained
of are reversed and set aside in so far as they require petitioners to clear the property sold from the mortgage
in favor of the Development Bank. The writ of preliminary injunction heretofore issued is made permanent.
ODIAMAR v. ODMIAMAR VALENCIA
Odiamar v. Odiamar Valencia
G.R NO. 213582, June 28, 2017
Novation is never presumed, and the animus novandi, whether totally or partially, must appear by express
agreement of the parties, or by their acts that are too clear and unequivocal to be mistaken.
To constitute novation by substitution of debtor, the former debtor must be expressly released from the
obligation and the third person or new debtor must assume the former's place in the contractual relations
FACTS:
Respondent filed a complaint for sum of money and damages against petitioner, alleging that the latter owed her
P2,100,000.00. Petitioner purportedly issued China Bank Check No. GH
The check for the said amount to guarantee the payment of the debt, but upon presentment, the same was
dishonored.
Respondent lamented that petitioner refused to pay despite repeated demands, and that had she invested the
money loaned to petitioner or deposited the same in a bank, it would have earned interest at the rate of 36% per
annum or three percent (3%) per month
Petitioner sought the dismissal on the ground that it was her deceased parents who owed respondent money.
Petitioner averred that respondent had, in fact, participated in the settlement proceedings and had issued a
certification stating that it was petitioner's deceased parents who were indebted to respondent for P2,000,000.00.
Respondent countered that petitioner personally borrowed almost half of the P2, 100,000.00 from her, as
evidenced by the check which she issued after agreeing to settle the same in installments and made several
installment payments from December 29, 2000 until May 31, 2003 to which the petitioner failed to make
succeeding payments
ISSUE: Whether or not the petitioner Odiamar should be liable to the respondent for the entire debt in the amount
of Php 2,100,000
RULING:
No. The Court held that it does not aver the liability of petitioner to the respondent which is well-established as
petitioner admitted that she obtained loans from respondent without showing that the same had already been
paid or otherwise extinguished, petitioner cannot now aver otherwise. It is settled that judicial admissions made
by the parties in the pleadings or in the course of the trial or other proceedings in the same case are conclusive
and do not require further evidence to prove them which legally binds the parties except when it is made through
palpable mistake.
However, the petitioner’s debt only amounts to Php 1,400,000 and not Php 2,100,000. Respondent only remains
liable to petitioner for such amount. Considering that petitioner had already paid ₱389,951.00 in installments as
evidenced by the receipts submitted by petitioner - the genuineness and due execution of which were not put in
issue - the unpaid balance of petitioner's ₱l,400,000.00 debt to respondent stands at ₱l,010,049.00. On the other
hand, the remaining ₱700,000.00 of the total ₱2,100,000.00 debt to respondent is properly for the account of
the estates of petitioner's deceased parents and, hence, should be claimed in the relevant proceeding therefor.
The Court finds it apt to correct the mistaken notions that: (a) novation by substitution of the debtor took
place so as to release the estates of the petitioner's deceased parents from their obligation, which, thus,
rendered petitioner solely liable for the entire ₱2,100,000.00 debt; and (b) the ₱100,000.00 of the
₱2,100,000.00 debt was in the nature of accrued monetary interests.
ODIAMAR v. ODMIAMAR VALENCIA
On the first matter, while it is observed that petitioner had indeed admitted that she agreed to settle her
late parents' debt, which was supposedly evinced by (a) the ₱2,100,000.00 check she issued therefor,
and (b) several installment payments she made to respondent from December 29, 2000 to May 31, 2003,
there was no allegation, much less any proof to show, that the estates of her deceased parents were
released from liability thereby
To constitute novation by substitution of debtor, the former debtor must be expressly released from the
obligation and the third person or new debtor must assume the former's place in the contractual relations
FOOD FEST v. SIAPNO
Food Fest Land v. Siapno

G.R NO. 226088, February 27, 2019
To effect a subjective novation by a change in the person of the debtor it is necessary that the old debtor be
released expressly from the obligation, and the third person or new debtor assumes his place in the relation.
There is no novation without such release as the third person who has assumed the debtor's obligation
becomes merely a co-debtor or surety.
FACTS:
Respondents Siapno are owners of a 521 square-meter parcel of land in Dagupan.
Respondents entered into a Contract of Lease involving the subject land with petitioner Food Fest Land Inc who
wanted to use such land as the site of a fast food restaurant.
The Contract of Lease featured a non-waiver clause which provides that
No waiver by the parties of any of their rights under this Contract of Lease shall be deemed to have been
made unless expressed in writing and signed by the party concerned
For the first year to the fifth, Food Fest paid the rent at monthly rate as prescribed by the Contract of Lease to
which the rental escalation clause of 10% was observed from the second to the fifth year. However, it was not
observed from the sixth to the tenth year to which the respondents called the attention of petitioners at the start
of the eleventh year regarding its intent to enforce the rental escalation clause for the said year. Respondents
informed Food Fest and Joyfoods that the rent for the eleventh year of the lease shall be P113,867.89
per month, unless such amount is renegotiated
Food Fest acknowledged the applicable rate of rent following the Contract but proposed that the same be
reduced to Php 80,000 per month to which it was rejected by the respondents.
ISSUE: Whether or not Food Fest and Joyfoods cannot be held liable for the said balance in light of Food Fest’s
assignment of its rights and obligations under the Contract of Lease
RULING:
No. The Court held in the negative and provided that Food Fest and Joyfoods' plea is, in substance, an invocation
of the concept of novation - particularly, novation of an obligation by the substitution of the person of the debtor.
Their basic assertion is that the assignment by Food Fest of its rights and obligations under the Contract of
Lease to Tucky Foods, and the assignment by Tucky Foods of the same rights and obligations to Joyfoods,
ought to have resulted in Food Fest's release from its obligations under the Contract of Lease and its substitution
therein by Joyfoods.
Novation is the extinguishment of an obligation by its modification and replacement by a subsequent

one. It takes place when an obligation is modified in any of the following ways: (a) by changing its object
or principal conditions, (b) by substituting the person of the debtor, or (c) by subrogating a third person
in the rights of the creditor.
Novation of an obligation by substituting the person of the debtor, as the term suggests, entails the replacement
of the debtor by a third person. When validly made, it releases the debtor from the obligation which is then
assumed by the third person as the new debtor. To validly effect such kind of novation, however, it is not enough
for the debtor to merely assign his debt to a third person, or for the latter to assume the debt of the former; the
consent of the creditor to the substitution of the debtor is essential and must be had.
FOOD FEST v. SIAPNO
The consent of the creditor to the substitution of a debtor, as a rule, may be given expressly or impliedly. As can
be observed, the law does not require that the creditor's consent to the substitution to come at a particular time
or in a particular form. What it only demands is that the consent of the creditor be given one way or another. This
notwithstanding, there is also nothing that precludes the parties in an obligation, pursuant to
their freedom to contract, to agree to a specific form by which the creditor's consent to any potential
novation should be expressed.

G. Modes of Extinguishment of Obligations Case Digests 2

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G. Modes of Extinguishment of Obligations Case Digests 2

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CITIZENS SURETY v.

Yes, mutual disagreement of parties can cause the extinguishment of contract.

NATIONAL POWER CORPORATION v. LUCMAN M. IBRAHIM

LAND BANK OF THE PHILIPPINES v. ALFREDO ONG

Furthermore, Art. 1293 of the Civil Code states:

J. M. TUASON & Co. INC., Plaintiff-Appellant, v. LIGAYA JAVIER, Defendant-Appellee.

ISSUE: Whether petitioner may avail of the remedy of rescission

OCTAVIO A. KALALO, plaintiff-appellee, vs. ALFREDO J. LUZ, defendant-appellant

Included in the promissory notes were stipulations stating:

Yes. The Court ruled in the affirmative.

Section 63 of the Central Bank Act:

Article 1249 of the New Civil Code:

ROMAN CATHOLIC BISHOP OF MALOLOS, INC. vs. IAC

TC: ruled in favor of Petitioner. Declared the subject contract as cancelled.

Cashier's Check P262,750.00

LEONARDO BOGNOT v RRI LENDING CORPORATION

Novation is a mode of extinguishing an obligation by changing its objects or principal obligations, by

No, the obligation of Bognot was not extinguished by payment or novation.

PEDRO J. VELASCO v. MANILA ELECTRIC Co., et al.

No. Article 1250 of the Civil Code states:

COMMISSIONER OF PUBLIC HIGHWAYS v. HON. FRANCISCO BURGOS

Article 1250 of the Civil Code provides:

Paragraph 14 of said contract of lease provides:

BDO Unibank v. Pua

FILINVEST CREDIT CORPORATIONvs. PHILIPPINE ACETYLENE, CO., INC.

1) Exact fulfillment of the obligation, should the vendee fail to pay;

LAURO IMMACULATA v. HON. PEDRO C. NAVARRO and HEIRS OF JUANITO VICTORIA

DEL CARMEN v. SPOUSES SABORDO

CASES CITED BY PETITIONER

LAGUNA TAYABAS BUS COMPANY and BATANGAS TRANSPORTATION COMPANY vs.

GAN TION, v. COURT OF APPEALS

An award for attorney's fees is a proper subject of legal compensation.

PNB. v. ONG ACERO

ENGRACIO FRANCIA vs. INTERMEDIATE APPELLATE COURT

ISSUE: Whether or not tax delinquency can be extinguished by legal compensation

REPUBLIC v. DE LOS ANGELES

The trial court denied both motions for reconsideration.

COMPAÑIA MARITIMA vs.COURT OF APPEALS and PAN ORIENTAL SHIPPING CO

ACCORDINGLY, the judgment appealed from is hereby affirmed. No costs.

No, there cannot be legal compensation in this case.

MINDANAO PORTLAND CEMENT CORPORATION v. COURT OF APPEALS

The right of set-off was explained in Associated Bank v. Tan:

UNION BANK OF THE PHILIPPINES, Petitioner, vs. DEVELOPMENT BANK OF THE

RTC: Denied the motion.

Art. 1279. In order that compensation may be proper, it is necessary:

FUA CAM LU vs. YAP FAUCO and YAP SINGCO

JAPAN AIRLINES v. JESUS SIMANGAN

Respondent filed an action for damages against JAL

ANAMER SALAZAR V. J.Y. BROTHERS MARKETING CORPORATION

METROPOLITAN BANK AND TRUST COMPANY V. RURAL BANK OF GERONA

CA set aside the RTC decision

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

No. The Court ruled in the negative.

Cochingyan Jr. and Jose Villanueva v. R&B Surety and Insurance

Spouses Balila v. Honorable Intermediate Appellate Court

ESTRELLA BENIPAYO RODRIGUEZ, MANUEL D. BENIPAYO, DONATO BENIPAYO, JR., JAIME D.

G.R. No. L-22958 January 30, 1971

On 28 April 1964 the ollowing condions were arrived at:

Food Fest Land v. Siapno

Respondents Siapno are owners of a 521 square-meter parcel of land in Dagupan.

The Contract of Lease featured a non-waiver clause which provides that

Novation is the extinguishment of an obligation by its modification and replacement by a subsequent

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