De La Salle University

CLR2
Modes of Extinguishment (Loss … to Novation)
[Follow the Outline]

Part One
Modified True or False.Consider the statement true only when it is absolutely true.
Explain ALL your answers.

1. It is presumed that the accessory obligation of pledge has been remitted when the thing
pledged, after its delivery to the creditor, is found in the possession of the debtor.

TRUE - Art. 1274. It is presumed that the accessory obligation of pledge has been remitted when
the thing pledged, after its delivery to the creditor, is found in the possession of the debtor, or of a
third person who owns the thing.

FALSE – not necessarily the debtor, may be a 3rd person. Debtor not necessarily the owner of the
thing. Even in the possession IF he is not the owner

2. Whenever the thing is lost in the possession of the debtor, it shall be presumed that the loss
was due to his fault.

FALSE - Art. 1265. Whenever the thing is lost in the possession of the debtor, it shall be pre-
sumed that the loss was due to his fault, unless there is proof to the contrary, and without preju-
dice to the provisions of article 1165. This presumption does not apply in case of earthquake,
flood, storm, or other natural calamity.

Art. 1165. When what is to be delivered is a determinate thing, the creditor, in addition to the
right granted him by Article 1170, may compel the debtor to make the delivery. If the thing is in-
determinate or generic, he may ask that the obligation be complied with at the expense of the
debtor.

If the obligor delays, or has promised to deliver the same thing to two or more persons who do
not have the same interest, he shall be responsible for any fortuitous event until he has effected
the delivery. (1096)

Presumption will not apply during or in the occasion of calamity.

Due to a calamity – no presumption
If incase of – presumption will apply

No presumption – balik lang sa rule that the cr has to dr that the dr is at fault because of the loss
of the thing.
Loss of the thing DURING the calamity
DELAY is not the issue

3. When the debt of a thing certain and determinate proceeds from a criminal offense, the
debtor shall not be exempted from the payment of its price, whatever may be the cause for
 the loss.

FALSE - Art. 1268. When the debt of a thing certain and determinate proceeds from a criminal
offense, the debtor shall not be exempted from the payment of its price, whatever may be the
cause for the loss, unless the thing having been offered by him to the person who should receive
it, the latter refused without justification to accept it. (1185)

Ex – stolen jewelry , if creditor refused to accept will he be exempt on the payment of the price? NO,
unjustified refusal -> fortuitous event – dr justified (here)

4. Whenever the private document in which the debt appears is found in the possession of the
debtor, it shall be disputably presumed that the creditor delivered it voluntarily. (then it pre-
supposes that there is payment when there is a receipt (evidence of payment) given. IF there is
none, a disputable presumption is given that there is condonation.)

FALSE - Art. 1272. Whenever the private document in which the debt appears is found in the
possession of the debtor, it shall be presumed that the creditor delivered it voluntarily, unless the
contrary is proved. (1189)

(disputable presumption)
Notary public…etc. disputable presumptio

5. If a person should have against him several debts which are susceptible of compensation,
the rules on the consignation shall apply to the order of the compensation.

FALSE - Art. 1289. If a person should have against him several debts which are susceptible of
compensation, the rules on the application of payments shall apply to the order of the compensa-
tion. (1201)

6. Legal compensation shall not be proper when one of the debts arises from a depositum.

TRUE - Art. 1287. Compensation shall not be proper when one of the debts arises from a deposi-
tum or from the obligations of a depositary or of a bailee in commodatum.

Neither can compensation be set up against a creditor who has a claim for support due by gratuitous title,
without prejudice to the provisions of paragraph 2 of Article 301.

(both must be simple contract of loan)

Legal compensation – no by operation of law

There is a word LEGAL, 1287 pertains to Legal Compensation (presumption)

Kinds of Convention
1. Legal – true kind of compensation, no need to state
2. conventional
 3. judicial
4. Facultative (1) (Whose consent is needed? Depositor/Bailor, -. Under the law. He can’t invoke
compensation)

In Article 1287, the provision is silent as to what kind of compensation it is but the law meant it to be
In fact, legal compensation is considered to be the true kind of compensation.

Some authors would consider that facultative is the 4th kind of compensation.

Uribe: I do not agree with this because I would like to consider that facultative compensation is a kind of
voluntary/conventional compensation. Voluntary compensation requires consent of both parties.
While in
facultative compensation, it requires only the consent of one of the parties.

The circumstances when facultative compensation exists are enumerated in Arts. 1287 and 1288.
1. One of the debts arises from a depositum
2. One of the debts is the civil liability of the bailee
in commodatum
3. One of the debts is an obligation to give support (gratuitous support v. contractual support; if beyond
the support can be subject to compensation)
4. One of the debts is the civil liability arising from crimes

7. In partial compensation, no obligation is totally extinguished.

FALSE. Only the balance remains obligatory / extinguished as to concurrent amount.

How many? As many as what can be covered

Why is this so important? This is important as to the liability to pay interest or as to whether or not
there can be valid foreclosure etc.

EXAMPLE: A obligation to B, B has obligation to A, A’s obligation is interest bearing, after com-
pensation can B still collect interest and A be held liable for interest? It will depend on the amount
involved, if B’s debt is smaller may be 50K, A’s debt is 100K, can B collect interest? Not anymore
because the debt will be totally extinguished, the 100K will be reduced by 50K to the concurrent
amount.

On the other hand what if the 100K is secured by a mortgage after compensation may A foreclose the
mortgage? Yes! because therewill still be a balance of 50K, a mortgage is an indivisible contract, un-
til the obligation is not extinguished the mortgage will remain in force. And therefore if B failed to
pay A the fifty thousand A can still foreclose the mortgage.

8. An obligation which consists in the delivery of a determinate thing shall be extinguished if it

should be lost or destroyed due to a fortuitous event.

FALSE - Art. 1262. An obligation which consists in the delivery of a determinate thing shall be
 extinguished if it should be lost or destroyed without the fault of the debtor, and before he has in-
curred in delay.

When by law or stipulation, the obligor is liable even for fortuitous events, the loss of the thing
does not extinguish the obligation, and he shall be responsible for damages. The same rule ap-
plies when the nature of the obligation requires the assumption of risk. (1182a)

interpretation of Prof. Deleon, Uribe agrees, if the thing is already lost nada, what will be deliv-
ered – wala na.
Whatever may be the cause of loss of thing – extinguished! Agreeing to De Leon

Question if he is liable

Loss due to fault of debtor – monetary nalang ,

Due to his fault – ofcourse

Civl obli to natural obli by prescription - converted

9. Compensation shall take place in reciprocal obligations.

FALSE - Art. 1278. Compensation shall take place when two persons, in their own right, are
creditors and debtors of each other. (1195)

(reciprocal debtors and creditors of each other is not the same as reciprocal obligations)

No legal compensation IF reciprocal obligation – when? If 2 persons are mutually debtor and
creditor. Not necessarily kasi na lagging receiprocal obligation

Reciprocal obligation – arose from same transaction even if different nature. There can never be
legal compensation because see requisites – because that the 2 debts must be in money

10. The guarantor may not set up compensation as regards what the creditor may owe the prin-
cipal debtor.

FALSE - Art. 1280. Notwithstanding the provisions of the preceding article, the guarantor may
set up compensation as regards what the creditor may owe the principal debtor. (1197)

Is it not true that one of the req of legal compensation – both parties must be principally bound
the guarantor is not principally bound. Guaranty is just an accessory contract. Guarantor is not
one of the parties in the main obligation. Therefore, if extinguished by legal comp, guaranty is
likewise extinguished. Therefore he is allowed by law to set up.

Part Two
Multiple Choice. Choose the best answer.
1. In three of the following cases, compensation shall not be proper. Which may be the exception?
a. Commodatum
b. Support (XPT: support in arrears)
c. Civil liability arising out of criminal offenses
d. Depositum

Can support be a subject of compensation?

It depends, if it is legal support it cannot because it is needed for a person’s survival. It should be gratu-
itous support and not contractual support. If gratuitous compensation can take place.

2. When two persons are debtors and creditors of each other, there will always be:
a. Confusion d. Novation
b. Compensation e. None of the above
c. Consignation

CONFUSION OR MERGER OF RIGHTS – this mode can easily be understood by just imagining
the merger of banks in the past few years. Now, it is common that before the merger, one of the banks
is indebted to the other banks and therefore instead of xxx the creditor may agree to just buy the
debtor bank. Obviously this is by agreement of the parties.

CONSIGNATION
Art. 1256. If the creditor to whom tender of payment has been made refuses without just cause to accept
it, the debtor shall be released from responsibility by the consignation of the thing or sum due.
Consignation alone shall produce the same effect in the following cases:
(1) When the creditor is absent or unknown, or does not appear at the place of payment;
(2) When he is incapacitated to receive the payment at the time it is due
(3) When, without just cause, he refuses to give a receipt;
(4) When two or more persons claim the same right to collect;
(5) When the title of the obligation has been lost. (1176a)

Valid consignation
1. There must be a debt to be extinguished
2. The consignation must be based on a ground provided by law
3. Notices required for consignation to be valid: AT LEAST TWO:

NOVATION- it is a peculiar mode of extinguishment because it creates an obligation. This is somewhat

the same as that of prescription, which the latter can extinguish civil obligations but can be converted into
natural obligation

3. When an obligation is extinguished because of the passage of time, this is:

a. Fulfillment of resolutory condition d. Rescission
b. Arrival of a resolutory period e. Dation in Payment
c. Novation
4. This is a requisite in order that an obligation shall be extinguished by loss or destruction of the
thing due:
a. That the thing is lost without the fault of the debtor
b. That the thing lost is generic
c. That the thing is lost before the debtor has incurred in delay
d. That the thing lost is specific

Best answer but IF NOT A REQUISITE – B. Generic. In relation to 1262 as discussed earlier.

5. Which of the following is not an element of legal compensation?

a. There is a controversy or adverse claim over any of the debts to be compensated
b. There are two or more debts of the same kind
c. There are two persons who are creditors and debtors of each other
d. Debts to be compensated are due and demandable

COMPENSATION
1. THEY MUST BE MUTUAL CREDITORS AND DEBTORS
2. BOTH DEBTS MUST BE IN SUMS OF MONEY OR IF THEY PERTAIN TO GOODS THEY
MUST BE OF THE SAME KIND AND QUALITY
3. BOTH PARTIES MUST BE PRINCIPALLY BOUND
4. THEY MUST BE CREDITORS AND DEBTORS OF EACH OTHER IN THEIR OWN RIGHT:
5. BOTH DEBTS MUST ALREADY BE DUE AND DEMANDABLE
6. THE DEBTS MUST BE LIQUIDATED AND DEMANDABLE
7. ONE OF THE DEBTS MUST NOT ARISE FROM Article 1287 AND Article 1288

6. In which of the examples given below may legal compensation take place?
a. A owes B P1,000 payable October 31, 2016. B owes A P5,000 due on October 31, 2016.
b. A owes B P1,000 with C as his guarantor. B owes C P1,000 (both must be principally bound,
guarantor is subsidiarily liable)
c. A owes B P1,000 payable May 31, 2016. B to deliver to A 2 piculs of sugar worth P1,000 on
May 31, 2016. (must be of the same kind)
d. A owes B P1,000 due on June 30, 2016. B owes A P1,000 due on June 30, 2016 but C has filed
an adverse claim against A.
e. None of the above

7. A owes solidary creditors XYZ P10,000. There is remission of the debts when:
a. X borrows P10,000 from A. (mode of extinguishment, when you borrow be a controcact of loan,
obligation will ARISE not extinguish)
b. X waives partially the obligation of P10,000 to A.
c. Z makes a will giving the P10,000 debt to A as legacy
d. Y tells A that instead of paying P10,000, A shall just deliver a ring to Y. (novation)

Dation in payment there must be delivery

Part Three
Give direct and concise but complete answers.
Cite authorities, if any.

1. A obliged himself to deliver a Toyota Altis to B. Before his obligation became due and de-
mandable, his Toyota Altis was totally destroyed. Was the obligation of A extinguished?

NO, the obligation of A to deliver the Toyota Altis is not extinguished.

Art. 1263. In an obligation to deliver a generic thing, the loss or destruction of anything of the
same kind does not extinguish the obligation. (n)

Delivery of a generic thing the obligation was not extinguished because in an obligation to deliv-
ery a generic thing, the destruction of the generic thing does not extinguish the obligation because
the thing can be replaced.

2. A obliged himself to deliver a Toyota Altis with Plate No. ABC123 to B. Before his obliga-
tion became due and demandable, the Toyota Altis was totally destroyed. Will A be liable to
B?

YES, A will still be liable to B but for damages.

Art. 1262. An obligation which consists in the delivery of a determinate thing shall be extin-
guished if it should be lost or destroyed without the fault of the debtor, and before he has incurred
in delay.

When by law or stipulation, the obligor is liable even for fortuitous events, the loss of the thing
does not extinguish the obligation, and he shall be responsible for damages. The same rule applies
when the nature of the obligation requires the assumption of risk. (1182a)

2 Views:
1. If with fault of the debtor, then the obligation is NOT extinguished. (Tolentino’s view)
2. Even with the fault of the debtor, the obligation is extinguished but without preju-
dice to the liability of the debtor. (Professor De Leon’s view) - Atty. Uribe agrees to
this view.

If the thing is already lost or totally destroyed, nothing is left to be delivered. Then it is already
impossible to perform, and therefore the obligation must already be extinguished, but without
prejudice to the liability of A because the loss was due to his fault. In other words, extinguish-
ment is not synonymous or is not exactly the same as liability for damages. Whether or not
there’s extinguishment, there may or may not be liability for damages.

Extinguished -> converted to monetary obligation

Three reasons under 1175 – he may be liable if it was stipulated

3. A obliged himself to deliver and transfer ownership over his house and lot to B. Before his
obligation became due and demandable, his house was totally destroyed. Was the obligation
of A extinguished?

It depends on the intent of the parties as to whether they would not have entered into this transac-
tion without the thing which was lost.

If the thing lost was so important that’s why they entered into that transaction in the first place,
then the loss of that thing would result into a total extinguishment. For example, maybe the house
was bought because of its historical value. Hence, if burned, no value anymore for the buyer of
the lot.

Therefore, despite partial loss in this case, it will result in the total extinguishment.

effect of partial loss; loss happened before delivery to the creditor

4. A obliged himself to construct the house of B. Before the completion of the house, A filed an
action for the court to change the terms and conditions of their agreement alleging that the
performance of the obligation became so difficult due to the continued increase in the prices
of the materials. Will the action prosper?

No, the action will not prosper because the continued increase in the price of the materials was
not due to fortuitous event.

Art. 1267. When the service has become so difficult as to be manifestly beyond the contemplation
of the parties, the obligor may also be released therefrom, in whole or in part. (n)

Occeña vs. Japson

Division of lots and houses, 60/40 then higher. Action did not prosper
The court said the only time the rule in 1267 will apply is when the performance of the obliga-
tion becomes so difficult due to an event which could not be foreseen by the parties . But
when one talks about price increase of materials, it’s not an event which could not have been
foreseen--alam na ng lahat na tuloy tuloy ang pagtaas ng presyo (ordinary inflation).

But the Supreme Court also said that even assuming for the sake of argument that the event is one
that could not have been foreseen by the parties, should the prayer of the plaintiff be granted to
change the sharing arrangement? It still may not be granted. The law only allows the Court, or
gives the Court power to release the debtor in whole or in part. The Court has no power to change
the terms and conditions of a contract, as provided under Art. 1267 .

What would be the effect, rights of the parties under the circumstances
Under 1267, the only right of the party of the party is to go to court to… see up (issue)

5. Is remission a form of donation? If it is, what would be the significance of such?

YES? Because it is essentially gratuitous. Thus the rules on donation will apply specifically the
debtor’s consent is needed. Also if If express condonation

Rules on Donation:
 1. Donor must have Capacity to make the donation
2. He must have donative Intent (animus donandi)
3. There must be Delivery
4. Donee must Accept or consent to the donation during the lifetime of the donor and of the
donee in case of donation inter vivos (Art. 746, NCC); whereas in case of donation mortis
causa, acceptance is made after donor’s death because they partake of a will (Art. 728,
NCC)

Condonation may also be known as donation of credit NOT donation of a debt

Condonation is also known as remission

Condonation/Remission is an act of liberality, by virtue of which, without receiving any equiva-

lent, the creditor renounces the enforcement of an obligation, which is extinguished in its entirety
or in that part or aspect of
the same to which the remission refers.

Gratuitous: If not gratuitous, it will be considered:

1. Dation in payment – when the creditor receives a thing different from that stipulated;
2. Novation – when the subject or principal conditions of the obligation should be changed;
3. Compromise – when the matter renounced is in litigation or dispute and in exchange of
some concession which the creditor receives.

If the creditor orally condoned the obligation of debtor to pay a sum of money, was the obli-
gation extinguished?
NOT necessarily. Movable property must comply with the form prescribed under Art. 748.

Art. 748. The donation of a movable may be made orally or in writing.

An oral donation requires the simultaneous delivery of the thing or of the document representing
the right donated.

If the value of the personal property donated exceeds five thousand pesos, the donation and the
acceptance shall be made in writing, otherwise, the donation shall be void. (632a)

Merger of… it wil

6. May there be partial extinguishment of an obligation by confusion?

YES, there will be there will be an extinguishment but only partial or as to the share of that
debtor.

Art. 1277. Confusion does not extinguish a joint obligation except as regards the share corre-
sponding to the creditor or debtor in whom the two characters concur. (1194)

NOTE: If this is a solidary obligation, even if there is a merger of characters as to only one of the
debtors, the entire obligation is extinguished
 7. If one of the debts which are the subject of compensation is interest bearing, will there still
be an obligation to pay interest if compensation is total? Would your answer be the same if
compensation is partial?

TOTAL COMPENSATION – There would be no obligation to pay interest because the obliga-
tion is fully extinguished. All the debts is extinguished

PARTIAL COMPENSATION -
NO, the remaining unpaid obligation will still incur interest

It depends on the amount involved. If B’s loan is smaller

A -> B: 100k with interest
B -> A: 50K
Not anymore - the 100K will be reduced by 50K to the concurrent amount

It depends on the amounts involved. Applying the example, if the one claiming interest is liable
for a smaller amount (ex. 50k vs. 100k sa example mo), di na siya pwede magcollect interest cos
totally extinguished na.

8. For legal compensation to take place, monetary obligations must arise from contracts?
NO, it is not in the requisites. There are some that can arise from law
Example: support in arrears, must be due and demandable
Parang may tax case nga na hindi lang subject to comp kasi pending pa yung refund case. Imply-
ing na pwede magcomp basta both due and demandable na (basta di commodatum
depositum support tsaka arising from offense haha)

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 prin-
cipal 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; (EVEN NOT AT THE SAME TIME)
4. That they be liquidated and demandable;
5. That over neither of them there be any retention or controversy, commenced by third per-
sons and communicated in due time to the debtor. (1196)

A borrowed money, the other one bought on credit, so they are debtors and creditors of each
other, however, they say that there can be no legal compensation because the obligations do not
pertain to sums of money, one is money the other one car.
HERE THE OBLIGATION OF THE BUYER IS TO PAY THE PRICE SO IT IS ALSO MONE-
TARY LEGAL COMPENSATION WILL TAKE PLAC

Mindanao Portland Case – attorney’s fees arise from contract but not from law
Gantion v. CA - Case

A –debtor, B –creditor; if A is a minor and he paid B, may that amount be recovered from B? YES, be-
cause one of the requisites is that there must be capacity to pay and the minor being a minor doesn’t have
the capacity to alienate his property and cannot therefore be considered as a valid payment. A is a minor –
may a minor have a valid obligation? YES. What could be the source of the obligation? Common is: in
Quasi-delict or if there is a law which requires a minor to pay a sum of money, say, to PAY TAX
and also from Delict (12-14 years old) = criminal liability.

9. In PNB v. Ong Acero, was there legal compensation? Why or Why not?

NO, THEY MUST BE MUTUAL CREDITORS AND DEBTORS

There is no compensation where the parties are not creditors and debtors of each other.

Savings account of ISABELA Construction and Wood Development Corporation with the PNB of P2M is
subject of 2 conflicting claims
1. that of the Aceros, as judgment creditor of ISABELA
2. that of PNB as creditor of the depositor due to a loan or credit agreement by ISABELA with PNB
the deposit being the collateral. IAC decided against PNB.

PNB: 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 in-
debted to it on account of ISABELA's breach of the terms of the Credit Agreement of October 13, 1977,
and therefore ISABELA and PNB became at the same time creditors and debtors - Art. 1278 of the
NCC
(More specifically, the P2M owed by PNB to ISABELA was automatically applied in payment and extin-
guishment of PNB's own credit against ISABELA)

Article 1278 of the Civil Code does indeed provide that "Compensation shall take 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.
1. PNB's cause not proven by competent evidence that it is a creditor of ISABELA.
The only evidence presented by PNB towards this end consists of 2 documents marked in its behalf.
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 cov-
ered were in fact shipped, and received by ISABELA.

No mutuality, not debtor or creditor

PNB did not prove that Isabela avail of the credit line

10.

In Francia v. IAC, was there legal compensation? Why or Why not?

 NO. BOTH DEBTS MUST BE IN SUMS OF MONEY OR IF THEY PERTAIN TO GOODS THEY
MUST BE OF THE SAME KIND AND QUALITY
"claim for taxes is not such a debt, demand, contract or judgment as is allowed to be set-off” Here,
both debts are in money, does it mean that all debts in money can be subject of legal compensation? – NO
Certain monetary obligations cannot be subject of legal compensation like payment of taxes, customs du-
ties, tariff etc.

Part of Francia’s lot and 2 storey house was expropriated by the RP with just compensation at its assessed
value. 1963-1977 Francia did not pay RPT. Sold in public auction due to tax delinquency

Francia: complaint to annul the auction sale stating that 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. .

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 (Art. 1278, Civil
Code). The circumstances of the case
do not satisfy the requirements provided by Article 1279, to wit:
(1) that each one of the obligors be bound principally and that he be at the same time
a principal creditor of the other;
(3) that the two debts be due.

In the case of Republic v. Mambulao Lumber Co.

A claim for taxes is not such a debt, demand, contract or judgment as is allowed to be set-off under the
statutes of set-off, which are construed uniformly, in the light of public policy, to exclude the remedy in an
action or any indebtedness of the state or municipality to one who is liable to the state or municipality for
taxes.

In the case of Corders v. Gonda (18 SCRA 331) where we stated

that: "... 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 Int’l. Corporate Bank v. IAC, was there legal compensation? Why or Why not?
NO. THE DEBTS MUST BE LIQUIDATED AND DEMANDABLE

Fajardo borrowed money from ICB 50M the bank released only 20M to secure this obligation, Fajardo
mortgaged properties amounting to 110M, thereafter she also delivered 1M to the bank for money market
investment, so just like any other investments it matured, so she demanded for the return of the 1M,

Bank: claimed that she has nothing to recover from the bank because as to her loan which she failed to
pay, when the foreclosed the mortgage she still has deficiency of 6M, so
compensation took place, however Fajardo questioned the mortgage the

SC HELD: there can be no legal compensation because one of the claims is still being litigated.

In Union Bank v. DBP, was there legal compensation? Why or Why not?
NO. The obligation of DBP is not yet due, demandable, and liquidated.

Food Masters is indebted both to Union Bank and DBP. Now, to extinguish its obligation,
Food Masters delivered its property (or dacion) to DBP, but they executed a lease contract so that Food
Masters would remain in possession as lessee.

Union Bank did not agree to that arrangement without anything that would happen to its credit. In order
for the lease transaction to pursue, DBP had an assumption agreement with Union Bank.
“The agreement says that with the dacion en pago DBP will assume the debts of Food Masters with Union
Bank, and DBP will pay those debts.”

DBP was not able to pay. Union Bank filed a case against DBP,was able to garnish
DBP’s money

SC said that the garnishment was improper. Ordered that Union Bank must return the money to DBP. At
this point, Union Bank has a debt to DBP.

DBP: now Union Bank must return the money to DBP.

Union Bank: invoked legal compensation.
It turns out that DBP was not able to pay Union Bank because in the assumption agreement with Union
Bank, it was stipulated that what would be paid to Union Bank would be 30% of the rentals that Food
Masters would pay. Unfortunately, Food Masters did not pay. Thus, DBP has nothing to pay to Union
Bank.

The ground for that finding is the fact that Food Masters has not yet paid the rentals. When payment is
made, that is the only time DBP would have the obligation to pay Union Bank.

Pag nagbayad na sila saka lang magkakaroon ng obligation ang DBP na iremit ang 30% ng payment. Until
then, walang obligation ang DBP. May nagkamali dito, mga abogado ng Unionbank dahil yung phraseol-
ogy ng agreement obviously medyo nagfavor sa DBP.

11. Samantha sold all her business interest in a sole proprietorship to Sergio for the amount of
PhP 1 million. Under the sale agreement, Samantha was supposed to pay for all prior un-
paid utility bills incurred by the sole proprietorship. A month after the Contract to Sell
was executed, Samantha still had not paid the PhP 50,000 electricity bills incurred
prior to the sale. Since Sergio could not operate the business without electricity and the
utility company refused to restore electricity services unless the unpaid bills were settled in
full, Sergio had to pay the unpaid electricity bills. When the date for payment arrived, Ser-
gio only tendered PhP 950,000 representing the full purchase price, less the amount he paid
for the unpaid utility bills. Samantha refused to accept the tender on the ground that she
was the one supposed to pay the bills and Sergio did not have authorization to pay on her
behalf.
 a. What is the effect of payment made by Sergio without the knowledge and consent of
Samantha? (2.5%)

Si Sergio has an interest in the fulfillment of the obligation, which is to pay the electricity bill.
1. extinguish the obligation
2. subrogated in the rights of the credit (bec payment was made by a person who has interest in per-
son)

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 bene-
ficial to the debtor. (1158a)

Article 1237. Whoever pays on behalf of the debtor without the knowledge or against the will of the lat-
ter, cannot compel the creditor to subrogate him in his rights, such as those arising from a mortgage, guar-
anty, or penalty. (1159a

Article 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 obliga-
tion pays, without prejudice to the effects of confusion as to the latter's share. (1210a)

Here, Sergio is an interested person since he was the business successor-in-interest of the Samantha and
he cannot conduct his business without paying the debtor of Samantha. Since there is legal subrogation,
Sergio stepped into the shoes of the utility company as the new creditor to the P50,000 credit; thus there
can be valid partially legal compensation of the two credits between him and Samantha who are princi-
pally debtors and creditors. of each other up to the concurrent amount of P50,000 (Art. 1279, NCC).

Q: Is it possible for a creditor to transfer his credit without consent of the debtor?
A: Yes. But this is not novation but an assignment of rights under Article 1624.

b. Is Samantha guilty of mor aaccipiendi? (2.5%)

YES, Samantha is guilty of mora accipiendi.

The requisites for mora accipiendi are:
1. offer of performance by the debtor;
2. offer must be to comply with prestation as it should be performed; and
3. the creditor refuses to accept the performance without just cause.

In this case, Sergio validly made an offer to comply with the prestation of payment, even if for P950,000
only. Sergio’s offer is justified based on the concept of partial legal compensation up to the amount of
P50,000, since Sergio and Samantha are in their own right principal debtors and creditors of each other.

Samantha’s refusal was without just cause as she cannot be permitted to benefit or use as a defense her
own failure to fulfill her part of the obligation to pay the electricity bills.
2018 BAR Q – issues here: 3rd party payment, delay and compensation
Why refusal without just cause? Because Sergio refuses without just cause.
Discussion on legal compensation, when serg paid the utility, Sergio having paid

12. What is expromision?

What is delegacion?

These are two kinds of passive subjective novation:

· Expromission – substitution was without the knowledge of against the will of the origi-
nal debtor
· Delegacion – substitution was consented to by the debtor

13. In delegacion, what will be the effects of payment by the new debtor?

If the substitution was by way of delegacion then he can seek reimbursment as to the amount ac-
tually paid and X can run after the guarantors because upon payment, he was subrogated in the
rights of the creditor.

14. In delegacion, can the original debtor be compelled to pay if the new debtor was insolvent
when the creditor made the demand?

YES, if at the time of the substitution, X knew X or even he does not know, if the insolvency of
X is publicly known then he can be held liable.

GR: Not anymore since there was already a novation and therefore the obligation of A had al-
ready been extinguished.
XPT: ONLY one scenario where A may be held liable because of X is insolvent: That is when A
was the one who initiated the substitution knowing fully well that X is insolvent / publicly known
to be insolvent.

The principle behind that liability is BAD FAITH.

In other words, kung expromission ang scenario, substitution was without the knowledge,
can B still run after A?
No since substitution was without the knowledge or against the will of A.

But in case of delegacion, is A always liable? Not always.

Even if it’s delegacion, pero hindi naman siya ang nag initiate. Baka ito ang nag initiate. Or siya
nga ang nag initiate pero at the time of the substitution, hindi pa siya insolvent. OR siya nga nag
initiate, insolvent na siya pero di naman niya alam na insolvent and it was not publicly known. So
there’s no bad faith. B cannot hold A liable even if the new debtor is insolvent.

15. A van owned by Orlando and driven by Diego, while negotiating a downhill slope of a city
road, suddenly gained speed, obviously beyond the authorized limit in the area, and
bumped a car in front of it, causing severed damage to the car and serious injuries to its
passengers. Orlando was not in the car at the time of the incident. The car owner and the
injured passengers sued Orlando and Diego for damages caused by Diego’s negligence. In
 their defense, Diego claims that the downhill slope caused the van to gain speed and that, as
he stepped on the brakes to check the acceleration, the brakes locked, causing the van to go
even faster and eventually to hit the car in front of it. Orlando and Diego contend that the
sudden malfunction of the van’s brake system is a fortuitous event and that, therefore, they
are exempt from any liability.

Is this contention tenable? Explain.

2002 BAR Q
No. Mechanical defects of a motor vehicle do not constitute fortuitous event, since the presence of such
defects would have been readily detected by diligent maintenance check.

The failure to maintain the vehicle in safe running condition constitutes negligence.

Sweet Lines, Inc. v. CA

Yes, whenever it appears that the defect would have been discovered by the carrier if it had exercised the
degree of care which under the circumstances was incumbent upon it, with regard to inspection and appli-
cation of the necessary tests. The manufacturer is considered as being in law the agent or servant of the
carrier, as far as regards the work of constructing the appliance. The good repute of the manufacturer will
not relieve the carrier from liability. The rationale of the carrier's liability is the fact that the passenger has
neither choice nor control over the carrier in the selection and use of the equipment and appliances in use
by the carrier. Having no privity whatever with the manufacturer or vendor of the defective equipment,
the passenger has no remedy against him, while the carrier usually has. It is but logical, therefore, that the
carrier, while not in insurer of the safety of his passengers, should nevertheless be held to answer for the
flaws of his equipment if such flaws were at all discoverable

tHERMOCHEM INCORPORATED and JEROME O. CASTRO v.

LEONORA NAVAL and THE COURT OF APPEALS
Malfunction or loss of brake is not a fortuitous event. Between the owner and his driver, on the one hand,
and third parties such as commuters, drivers and pedestrians, on the other, the former is presumed
to know about the conditions of his vehicle and is duty bound to take care thereof with the diligence
of a good father of the family.

A mechanically defective vehicle should avoid the streets. As petitioner's vehicle was moving downhill,
the driver should have slowed down since a downhill drive would naturally cause the vehicle to acceler-
ate. Moreover, the record shows that the Nissan Pathfinder was on the wrong lane when the collision oc-
curred. This was a disregard of traffic safety rules. The law considers what would be reckless, blamewor-
thy or negligent in a man of ordinary diligence and prudence and determines liability by that. Even as-
suming arguendo that loss of brakes is an act of God, by reason of their negligence, the fortuitous event
became humanized, rendering the Nissan driver liable for the ensuing damages.

16. X, who has a savings deposit with Y Bank in the sum of P1,000,000.00, incurs a loan obliga-
tion with the said Bank in the sum of P800,000.00 which has become due. When X tries to
withdraw his deposit, Y Bank allows only P200,000.00 to be withdrawn, less service charges,
claiming that compensation has extinguished its obligation under the savings account to the
concurrent amount of X’s debt. X contends that compensation is improper when one of the
debts, as here, arises from a contract of deposit. Assuming that the promissory note signed
by X to evidence the loan does not provide for compensation between said loan and his sav-
 ings deposit, who is correct?

The bank was correct because a savings account deposit is not a deposit it is a contract of loan,
that is why 1287 (compensation will not be proper if one of the obligations arises from deposi-
tum) will not apply. (So if both are simple loan there can be compensation.)

The contention of X that “compensation is improper when one of the debts, as here, arises from
contract of deposit.” If you remove “as here”, that is correct that is Article 1287.

But X said that this rule is applicable here (“as here”) but that is not true. There is no contract of
deposit here. X thought that the saving deposit is a contract of deposit but the other contract is a
loan.

Is this a contract of deposit?

NO. When a person opens a saving deposit or a current deposit or a time deposit, what will gov-
ern are the rules on simple loans.

This is not a contract of deposit under Art. 1287 where legal compensation shall not be proper.
Thus, the bank is correct in invoking compensation because there is no prohibition. Both of
the contracts are contract of loans.

Art. 1287. Compensation shall not be proper when one of the debts arises from a depositum or
from the obligations of a depositary or of a bailee in commodatum.

Neither can compensation be set up against a creditor who has a claim for support due by gratu-
itous title, without prejudice to the provisions of paragraph 2 of Article 301.

17. Baldomero leased his house with a telephone to Jose. The lease contract provided that Jose
shall pay for all electricity, water and telephone services in the leased premises during the
period of the lease. Six months later, Jose surreptitiously vacated the premises. He left be-
hind unpaid telephone bills for overseas telephone calls amounting to over P20,000.00. Bal-
domero refused to pay the said bill on the ground that Jose had already substituted him as
the customer of the telephone company. The latter maintained that Baldomero remained,
as his customer as far as their service contract was concerned, notwithstanding the lease
contract between Baldomero and Jose.
Who is correct, Baldomero or the telephone company? Explain.

Of course, the telephone company is correct.

There can never be a substitution of the person of the debtor without the consent of the creditor.
That is expresly provided in Art. 1293.

Otherwise, kung pwede pala mangyari yun, wala na pala akong obligation sa mundong ito mag-
dadala ako ng mga taong grasa sa mga banking ito, introducing the new debtors. Kaso hindi
pwede without the consent of the creditor, there can be no valid substitution.

Art. 1293. Novation which consists in substituting a new debtor in the place of the original one,
may be made even without the knowledge or against the will of the latter, but not without the
 consent of the creditor. Payment by the new debtor gives him the rights mentioned in Articles
1236 and 1237. (1205a)

18. Upon the proposal of a third person, a new debtor substituted the original debtor without
the latter’s consent. The creditor accepted the substitution. Later, however, the new debtor
became insolvent and defaulted in his obligation. What is the effect of the new debtor’s de-
fault upon the original debtor?

Expromission – substitution was without the knowledge of against the will of the original debtor

The original debtor will not be liable upon default of the new debtor because the new debtor be-
came insolvent after he has accepted the substitution.

GR: Not anymore since there was already a novation and therefore the obligation of original
debtor had already been extinguished.

XPT: ONLY one scenario where old debtor may be held liable because of X is insolvent: That is
when old debror was the one who initiated the substitution knowing fully well that X is
insolvent / publicly known to be insolvent.

In this case, new became insolvent after he has accepted the substitution therefore, the old there-
fore shall not be liable

19. In the case of JAL v. Simangan, was there novation?

NO. IT REQUIRES THE CONSENT OF THE CREDITOR

· Simangan needed to go to the US to donate his kidney to his ailing cousin.

· He was scheduled to a flight bound for LA via Japan. On the date of his flight, respondent passed
through rigid immigration and security routines before being allowed to board a JAL plane.
· While inside the plane, respondent was asked to show his travel documents. After which he was
ordered by the crew to leave the plane, imputing that respondent is carrying falsified travel
documents. Plane left.
· Simangan was refunded with the cost of his ticket minus 500 USD, when JAL found out eventu-
ally that his travel documents were not falsified and in order. Respondent filed an action for dam-
ages against JAL.

Arguments of JAL
· that JAL's original obligation to carry Simangan to Narita and Los Angeles on July 29, 1992 was
extinguished by novation when JAL and Simangan agreed that Simangan will instead take JAL's
flight to Narita on the following day, July 30, 1992
· that it was not guilty of breach of contract of carriage because it due to his own voluntary desis-
tance. Di sumakay

NO NOVATION
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. – bumped off. 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.
In short, he did not agree to the alleged novation (NO CHOICE). 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.

Uribe: Simangan was already inside the plane when he was asked by the flight attendants to deplane. On
the pretext that his immigration papers are insufficient or
lacking. On its face, walang karapatan magpa deplane ang flight attendants kasi flight attendants lang sila.
Dapat immigration officers ang may trabaho nito. At any rate,
may theory ako dito, ang visa niya dito at parol visa. So iguro natakot yung mga flight attendants kasi
baka criminal ito. Ngayon, nung kinasuhan ni Simangan ang
JAL, JAL raised the defense that there was a novation kasi rescheduled yung flight nya for the next day
pero di sya sumakay.

There was no novation since novation requires the consent of the creditor. The obligation of JAL here
is to transport Simangan (creditor) safely to his destination.
Thus without Simangan’s consent, bawal baguhin yung obligation.
Meron argument dito na dahil kinabukasan ito, hindi ito principal condition. Yung nag aargue nito hindi
pa nadelay ang flight. Pero yung araw mismo ng flight mo ay principal condition kaya it cannot be
changed without the consent
of the passenger (creditor).
 20.

In Arco Pulp v. Lim, was there novation?

NO NOVATION. It must be in unequivocal terms

Lim delivered scrap papers to Arco Pulp through its CEO and President, Santos. The parties allegedly
agreed that Arco Pulp would either pay Lim the value of the raw materials or deliver to him their finished
products of equivalent value. Lim alleged that when he delivered the raw materials, Arco Pulp already is-
sued a post-dated check as partial payment. When he deposited the check, it was dishonored for being
drawn against a closed account. On the same day, Arco Pulp and Sy executed a memorandum of agree-
ment (MoA) where Arco Pulp bound themselves to deliver their finished products to Sy, for his account.
According to the MoA, the raw materials would be supplied by Lim. Since no payment was paid, Lim
filed a complaint for collection of sum of money. Arco Pulp’s raised the defense of novation.

Q: Was there novation of the debtor?

A: No. Under Art. 1292 of the Civil Code, in order that an obligation may be extinguished by an-
other which substitute the same, it is imperative that it be so declared in unequivocal terms.

In this case, there is nothing in the MOA that states that, with its execution, the obligation of Arco to
Lim would be extinguished.

Whether Arco Pulp can still compel Lim to accept the finished products rather than cash as pay-
ment for the raw materials. NO. The obligation between the parties was an alternative obligation.

When Arco Pulp tendered a check to Lim in partial payment for the scrap papers, they exercised their op-
tion to pay the price. Lim’s receipt of the check and his subsequent act of depositing it constituted his no-
tice of petitioner Arco Pulp and Paper’s option to pay. This choice was also shown by the terms of the
MoA which was executed on the same day. It declared in clear terms that the delivery of Arco Pulp’s fin-
ished products would be to a third person, thereby extinguishing the option to deliver the finished products
of equivalent value to respondent. ‘

In an alternative obligation, there is more than one object, and the fulfillment of one is sufficient, deter-
mined by the choice of the debtor who generally has the right of election. The right of election is extin-
guished when the party who may exercise that option categorically and unequivocally makes his or
her choice known.
The choice of the debtor must also be communicated to the creditor who must receive notice of it since:
The object of this notice is to give the creditor opportunity to express his consent, or to impugn the elec-
tion made by the debtor, and only after said notice shall the election take legal effect when consented by
the creditor, or if impugned by the latter, when declared proper by a competent court.
 In the case of Millar v. CA, was there novation?
No. Only those essential and principal changes introduced by the new obligation producing an alter-
ation or modification of the essence of the old obligation result in implied novation.
Minor alterations with respect to the cause or object or conditions do not effectuate any substantial incom-
patibility between the two obligations.

On this point, there is no substantial incompatibility between the judgment liability and the mortgage
agreement to justify a conclusion of implied novation. The stipulation for the payment of the mortgage
serves only to provide a method for its extinguishment.

. Gabriel did not pay the first installment due on a chattel mortgage on a Willy’s jeep he had executed with
Millar.
· [Background] The CFI of Manila issued a writ of execution ordering Gabriel to return a Willy’s
Ford jeep to Millar.
· Gabriel pleaded with Millar to release the jeep under an arrangement whereby he was to mort-
gage the jeep in order to pay the judgment debt in favor of the latter. Gabriel executed a chattel
mortgage on the jeep.
o Gabriel was to pay a total of PHP 1700 in two installments at PHP 850 each.
2. Gabriel failed to pay the first installment.
3. Millar then obtained a writ of execution but even after the lapse of the entire chattel mortgage period, it
was returned unsatisfied.
· After five unsatisfied writs of execution, the sheriff levied on certain personal properties belong-
ing to Gabriel and scheduled them for execution sale.
· Respondent Gabriel: Filed an urgent motion for suspension of execution sale on the ground of
payment of the judgment debt.
4. The lower court ordered the suspension of the execution sale and ruled that novation had taken
place and that the parties had executed the chattel mortgage only “to secure or get better security
for the judgment.”
· CA held that there the chattel mortgage agreement impliedly novated the CFI judgment.
· CA held that the following circumstances demonstrated the incompatibility between the judg-
ment debt and the deed of chattel mortgage:

Judgment Debt Chattel Mortgage

Orders Gabriel to pay PHP 1746.98 with interest at 12% per annum from the filing of complaint plus PHP
400 in attorney’s fees and the costs of suit Only PHP 1700
No specific mode of payment Payment of the sum of PHP 1700 in two equal installments
No mention of damages Obligates Gabriel to pay liquidated damages in the amount of PHP 300 in case of
default
Unsecured Jeep may be foreclosed extrajudicially in case of default

Issue/s
WON the deed of chattel mortgage novated the judgment of the CFI.

Ratio Decidendi
No novation shall be implied, unless there is clear and convincing proof of complete incompatibility be-
tween the two obligations.
Reasoning
1. NO. There was no clear and convincing proof that there was an implied novation in the execution of the
Chattel Mortgage Agreement.
· On the first circumstance: Only modifications that alter the essence of the old obligation result
in implied novation.
o The mere reduction of the amount due does not constitute a sufficient indicium of in-
compatibility especially in the light of Millar and Gabriel’s admission that the reduced
amount was due to partial payments made by the latter before the execution of the chattel
mortgage agreement.
· The deed of chattel mortgage was a mere specification of how much exactly Gabriel owed to
Millar in order to avoid confusion.
On the second circumstance: The chattel mortgage simply gave Gabriel an express and spe-
cific method of payment and more time to enable him to satisfy the judgment indebtedness.
It did not constitute any substantial modification of the judgment.
o
· On the third circumstance: Discrepancy between the PHP 400 and PHP 300 fixed as attorney’s
fees and damages in the judgment and the deed respectively explained:
o Partial payments made by Gabriel before the execution of the chattel mortgage agreement
were applied in satisfaction of part of the judgment debt and of part of the attorney’s fees
fixed in the judgment, thereby reducing both amounts. (I don’t understand the reasoning
here)
o There was no clear and convincing evidence that the PHP 300 in attorney’s fees stipulated
in the deed of chattel mortgage intended the same as an obligation for payment of liqui-
dated damages in case of default.
· On the fourth circumstance: The debt security in the form of the jeep was stipulated to secure the
satisfaction of the liability. It effectuated no substantial alteration in Gabriel’s liability.