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    m UL {THE LAWON OBLIGATIONS AND CONTRACTS Problems Explain or state briefly the rule or reason for answer. 1. Aand B bind themselves to pay P10,000 on a certain date. Is the obligat indivisible?” 2. A,B, and C oblige themseives jointly to del to Da particular horse on a certain date. The agreenss among A, 8, and C which was made known to Dis thar will contribute the amount in buying the horse. The hee. was not delivered on the due date because of the failuea Bio, ave of the purch7s2 price. State the right: nd obligations ofthe parties 3. _D finds himself to pay his loan of P10,000 in fow equal monthly installments. Is th: i eel nentty ants, Is the obligation of D divisble —000— SECTION 6. — Obligations with @ Penal Clause ART. 1226. In obligations with a penal clause, the penalty shall substitute the indemnity for damages and ihe payment of interests in case of non-compliance, if there is no stipulation to the contrary. Nevertheless, damages shall be paid if the obligor refuses to pay the penalty or is guilty of vaud in the fulfillment of the obligation. The penalty may be enforced only when it is demandable in accordance with the provisions of this Code. (1152a) Meaning of principal and accessory obligations. (2) Principal obligation is one which can stand by itself and does not depen for its validity and existence upon another obligation. (2) Accessory obligation is one which is attached to a principal obligation and, therefore, cannot stand alone. Meaning of obligation with a penal clause An obligation with a penal clause is one which contains an accessory undertaking to pay a previously stipulated indemnity in case of breach of the principal prestation, intended primarily to induce its fulfillment, m {THE LAW ON OBLIGATIONS AND CONTRACTS pang Meaning of penal clause. ‘A penal clause is an accessory undertaking attached tg gy bligation to assume greater liability in case of breach, ie, gy obligation is not fulfilled, or is partly or irregularly complies wil Purposes of penal clause. They are: (1) to insure their performance by creating an effective deterrent against breach, making the consequences of such breach as onerous as it may be possible. (Yulo vs. Chan Pe, 10} 134) This is the general purpose of a penal clause; and (2) to substitute a penalty for the indemnity for damages and the payment of interests in case of non-compliance (Art 1226.};orto punish the debtor for the non-fulfillment or violation In the first case, the purpose i tion i matt Purpose is reparation; in the second, Penal clause and condition distinguished. There are notable differences between the two. 1) The first constitut i wile he ater does nat and Bat0R AtNOUEh acceso 2) Therefore, the form the former may become demandable in default of the unperformed obligation and. sometimes jointly with it, while the latter is never demandable. (8 Manresa 244.) Kinds of penal clause, They are: (1) AS t0its origin; @) Legal penal clause. — when ¥ is provided by law: () Conventional pena {ory stipulation of the paren s” When it is provided ties, DIFFERENT KINDS OF OBLIGATIONS 1% (2) As to its purpose: (a) Compensatory penal clause. — when the penalty takes the place of damages; and (b) Punitive penal clause, — when the penalty is imposed merely as punishment for breach. (3) As to its demandability or effect: (a) Subsidiary or alternative penal clause. — when only the penalty can be enforced; and (b) Joint or cumulative penal clause. — when both the principal obligation and the penal clause can be enforced. (8 Manresa 215.) Penalty substitutes for damages and interests. tion with a penal clause, the for damages and the payment of interests in case of non-compliance. (Art. 1226.) Proof of actual damages suffered by the creditor is not necessary in order that the penalty may be enforced (Art. 1228). The parties may stipulate that interest may be demanded in addition to the penalty. When creditor may recover damages. The creditor, in addition to the penalty, may recover damages and interests: (1) When so stipulated by the parties; (2). When the obligor refuses to pay the penal case the creditor may recover legal interest thereon; or (3) When the obligor is guilty of fraud in the fulfillment of the obligation (Art. 1226.), in which case the creditor may recover damages caused by such fraud. EXAMPLE, X promised to cons! ‘2 penal clause that in case of no! truct a house for ¥. The contract carried compliance, X would have to IGATIONS AND CONTRACTS. THELAW ON OBLI THELAW 1m ronaty of P100,000 X did not construct the house and, Las, baa Jamage in the amount of P40,099, consequence, Y sutfered di In this cae, the penalty of P100,000 shall be paid. Y cany recover move than P100,000, the penalty stipulated, even ify proves that the damages suffered by Y is only P40,000. 1 penalty substitutes the indemnity for the damage 40 000 unless there isa stipulation to the contrary, in which eas ges proved by him. Y may also recover the. X rofuses to pay the penalty, Y may recover legal interes thereon, the intrest representing new damages brought about y the non-payment of penalty fraud (not mere fault) in the’ fulfillment of able for the damages caused thereby in le 1171, Proof of the fraud and the Wher penalty may be enforced. The penalty may be enforced only when it is demandable i» accordance with the provisiuns of the Civil Code. (Ibid, pat 2) This means that the penalty, as a’stipulation in a contract is mandable only if there is a breach of the obligation and itis not contrary to law, morals, good custo1 R eae eee soa ms, public order, or public ; Thus, if the obligation cannot be fulfilled due to a fortuitous ‘vent, the penalty is not demandable. Under Article 1229, the Penalty may be reduced ifitis iniquitous or unconscionable orin ase there is partial or irregular fulfillment. ART. 1227, The debtor cannot exempt hi pt himself on eae of the obligation by paying oo Save in the case where this right has creditor dene ceserved for him. Neither can the ene cud the fulfillment of the obligation Pe ‘itsfaction ofthe penalty at the same time, Howover if after mes, been clearly granted him. un stter the creditor has decided to require Art 1227 DIFFERENT OF the fulfillment of the obligation, the performance thereof should become impossible without his fault, the penalty may be enforced. (1153a) Penalty not substitute for performance y the debtor canno! just pay the penaity performing the obligation, Precisely, the purpose of the pe to secure compliance wi to pay the penalty, this would in eff alternative one. (Art. 1199.) The debtor can exempt himself from the non-fulfillment of the obligation only when “this right has been expressly resecved for him. EXAMPLE: S is required to deliver to B certain products; other: shall pay a penalty in the amount of P10,000. Under the S cannot just yay the penalty as a substitute for noncompliance of the principal obligation except when he is expressly given the right by B to do so. Penal clause presumed subsidiary. Asa general rule, the creditor cannot demand the fulfillment of the obligation and the satisfaction of the penalty at the same time. The primary purpose of penalty is to urge the debtor to the performance of the main obligation (1) Where there is perform fulfilled, this purpose is attained and, therefore, for demanding the penalty. The exception arises when “this right has been clearly granted” the creditor. Under Article 1227, therefore, the general rule is that a penal clause is subsidiary and = Once the obligation is, ere is no need not joint. (2) Where there is’ no perfor compliance, the creditor may ask for the penalty or requires performance. ‘The remedies are alternative and not cumulative or successive, subject to the exception that the penalty may be nce, — In case of non- cific CONTRAK Pa {THELAW ON OBLIGATIONS AND CTS tag cided to require fulg ible without his fa the preceding example, iS delivered the prog after he ha incured in delay and B accepted the delivery penal cannot lobe demanded by B unless such rights eno im inthe cntractn which case the penal clauses et (2) 6S didnot comply with his obligation, B can hy between requiring fulliment of the principal obligation g Salsfacton ofthe penalty (2) If B has selected fulslment, he may agp subsequently demand the payment of the penal become impossible without hi the penalty, he may of the obligation them. However hy pay the penalty. he obligation both the stipulated (1) ‘The debtor has the right ight to nal formance oly when this right has been expres (supra) ratborrower cannot claim that he is no lon loan after paying the penalty. Otherwise, he 'on-performance if the amou: a Dieter KNOSOFooucarons ” ‘Obligations with a Penal Clause : than that of the loan. ART. 1228. Proof of actual damages suffered Penalty demandable without proof of actual damages. not necessary to adduce evidence to prove losses and damages suffered by the creditor or the extent of the same. Indeed, one of the reasons of fixing the penalty is to avoid such necessity and other difficulties involved in litigations. The creditor may enforce the penalty whether he suffered. damages or not, But he cannot recover more than the stipulated penalty even ifhe proves that the amount of his damages exceeds the penalty. Damages recoverable in addition to penalty must be proved. Article 1228 applies only where the penalty is fixed by the parties to substitute the indemnity for damages. In any of the three exceptions when damages may be recovered in addition to the penalty (Art. 1227), the creditor must prove the amount of such damages which he suffered resulting from the breach of the princi {THE LAW ON OBLIGATIONS AND CONTRACTS ART, 1229. The judge shal the penalty when the principal partly or irregularly complied Even if there has been no perform: may also be reduced by the courts or unconscionable. (1154a) When penaity may be reduced by the courts. The rule in Article 1229 is evident justice. The pen provided fon the penal clause may be reduced by the cou (0) When theres partial or irregular performance. — The ny refers to the extent of fulfillment, the latter, to the manner a general rule, an obligation is not deemed performed nice the thing or service in which it consists has been compoty delivered or rendered, as the case may be see Arts. 1233 tf 1235, 1248.); or (2) When the penalty agreed upon is iniquitous oF uncon cionable. — Here, the penalty may be reduced even if thee g no performance at all. Even if iniquitous or unconscionabie liquid damages whether intended as an inert ora Penalty, are not void, but subject merely to equitabl pena a uj ly to equitable reduction Whether the penalty iniquitou: e she creer the penalty iniquitous or resonable, depends EXAMPLES: Partial or irregular performance. — X agreed to constut in four months for PI,000,000 according of noncompliance es of P10000, Except for some finishing touches? cr # some finishing touches, X practicilly tlt the cnsructonf the houses ee he This is a case of partial performance ¥toexact the paymen Since ae Parmetf he ull amount contract: (see upply vs. Alba Electronics Corp,, 104 Phil 9 iregular performance is when X completed of the house but not in accordance with the specifications ofthe contract. S or unconscionable. — Suppose in the value of the house is only P100,000. It is every day of delay, X must pay a penalty of The court, in the exercise ofits sound discretion, may reduce the penalty where, as in this case, itis clearly excessive and ‘ionable. Contracts are enforced as they are read but this is ly when they are within the limitations of law and public (Gee Art, 1306.) of the principal obligation carries with it that of the penal clause. (1155) Effect of nullity of the penal clause. the accessory follows the principal If only the penal clause is void, the principal obligation remains valid and demandable. The penal clause is just disregarded. The injured party may recover indemnity for damages in case of non-performance of the obligation as if no penalty had been stipulated. (see Art. 1170.) EXAMPLE: merchandise to B. It is provided in their will deliver a prohibited drug Is valid but the failure of S to the creditor suffered dam | obligation is void, the penal clause the princi vate clause cannot stand alone witht js subordinated. he ation is due to ge debion, who acted in bad faith, by reason of wigt on equitable grounds, the Pevaly may be enforced. (see Arts. 10, 19, 20, 21.) EXAMPLE S agreed to deliver to B two (2) grams of prohibited ¢ ‘The contract carries a penal. clause to the effect that in a noncompliance with the obligation, $ would pay a penalty y Pio.000 ion carries with, that ofthe penal clause although iti itself valid eaiF otal STUDY GUIDE Definitions Define or give the meaning of the following: 1. obligation with a penal clause; 2. penal clause; 3. joint penal clause, Discussions 1. What clause to an ob! the purposes of incorporating a penal ion? In an obligation with a penal clause, may the damages and interests in addition to ipulated penalty? ul. DIFFERENT KINDS OF OBLIGATIONS co Obligations with Penal Cause 3. _In what cases may the debtor validly object to the enforcement of the stipulated penalty? Problems Explain or state briefly the rule or reason for your answer. 1. _X promises to deliver to Y a. specific horse Their contract contains a penal clause that in case of non- fulfillment, X shall pay a penalty of P10,000. X wants to just pay that penalty instead of delivering the horse. Has Y the right to refuse to accept the penalty in lieu of the horse? 2. _ In the same problem, X was able to show that Y did not suffer any damage by X's violation of his obligation. Can Y still enforce the penalty? 3. In the same problem, suppose X was guilty of negligence in the fulfillment of his obligation. Is X liable for damages in addition to the penalty? —000— Chapter 4 EXTINGUISHMENT OF OBLIGATIONS GENERAL PROVISIONS ART. 1231. Obligations are extinguished: (1) By payment or performance; (2) By the loss of the thing due; (3) By the condonation or remission of the ) By the confusion or merger of the rights for and debtor; (5) By compensation; (6) By novation. Other causes of extinguishment of obliga- tions, such as annulment, rescission, fulfillment of a resolutory condition, and prescription, are gov- erned elsewhere in this Code. (1156a) Causes of extinguishment of obligations, In addition to those enumerated in Article 1231, other causes are: (1) Death of a pa personal service (par. 1, A 1g for release, asked that the mortgage given by him as security be 184 ast 1231 EXTINGUISHMENT OF OBLIGATIONS a5 cancelled and the creditor (DBP) acceded thereto, 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 principie that since mutual agreement can create a contract, mutual disagreement by the parties can cause its extinguishment (see Saura Import & Export Co,, Inc. vs. Development Bank of the Phil,, 44 SCRA 445; see Art. 1308,); (3) Arrival of resolutory period (par, 2, Art. 1193, (4) Compromise (Art! 2028.); ©) y of fulfillment (Art. 1266,); and (6) Happening of a fortuitous event. (Art. 1174.) These causes as well as those enumerated in the second iph of Article 1231 are governed under other chapters of 1 Code. —000— SECTION 1.— Payment or Performance ‘ART, 1232. Payment means not only the delivery of money but also the performance, in any other manner, of an obligation. (n) ing of payment. ) In ordinary parlance, payment refers only to the delivery of money. (2) Asa legal mode of extinguishing an obligation, it has ‘a much wider meaning. Payment may consist of not only in the delivery of money but also the giving of a thing (other than money) the doing of an act, or not doing of an act. When a debtor pays damages or penalty in liew of the fulfillment of an obligation (see Art. 1226,), there is also payment in the sense used in Article 1232. Inlaw, payment and (specific) performance are synonymous. (see Art. 1191.) ART, 1233. A debt shall not be understood to have been paid unl which the obligation con: delivered or rendered, When debt is considered pz Adebt may refer to an ob! a thing (other than money), to ation to deliver money, to deliver lo an act, or not to do an act. aa ttsrty of prestation. —A debt to deliver a thing luding money) or to render service is not understood 0 196 act 1234 have been paid unless the thing or service has been completel delivered or rendered, as the case may be. Partial or. pion 4 performance will not produce theextinguishmentof an obliga as a general rule. EXAMPLES: (1) obliged himself to deliver 100 sacks of rice to B. $ delivered only 90 sacks. dels Under the law, there is no payment b py sci er prey 2) Dpromised to pay C P1000 an refuse to accept P9,000 because the giving only P9,000.C iment is not complete. (3) X agreed to paint the house of Y for P100,000. X did not paint the Kitchen anymore and instead asked Y to pay him P100,000 less the cost of painting the kitchen, Y can refuse to pay X because the debt of ¥ (to deliver mo will arise only after the debt of X to paint the house) is complete rendered, (see Art. 1191) (2) Identity of the prestation. — This second requisite means that the very prestation due must be delivered or performed. (see Art. 1244.) Burden of proving payment. When the existence of a debt is admitted by the debtor or established by the evidence of the creditor, the burden of proving extinguishment by payment devolves upon the debtor who claims payment. ‘Only when the debtor introduces evidence that his obligation has been paid or extinguished does the burden shift to the creditor. : ART. 1234. If the obligation has been subs- tantially performed in good faith, the obligor may as though there had been a strict and iment, less damages suffered by the oblige. (n) THRLAWENOALGATIONS AND CONTRACTS 1s Recovery allowed in case of substantial performance in good faith. Article 1234 i the fist exception tothe rule laid doy jg Article 1233. The reason for the exception given by the Cog? | Commission is as follows: “The above rule (Art. 1234) is adopted fing, | American Law Its fairness is evident. In case of substangg) complete fulfillment less damages suffered by the oblige This last condition affords a just compensation for the relative breach committed by the obligor.” (Report of te ‘Code Commission, p. 131.) Requisites for the application of Article 1234. The requisites are: There must be substantial performance; and The obligor must be in good faith. Article 1234 embodies the doctrine of substantial performance Theres substantial performance when the important or essential part of the contract has been performed and only a small ot minor part thereof has not been carried out. Article 1234 allows only a proportionate reduction in the amount recoverable by the obligor. It must be distinguished from partial performance treated in Article 1233. Under Artic to rescission or cancellation (see A Good faith is always presumed the contrary. EXAMPLE: 5 obliged himself to de certain pice. However, esp able to deliver ch note that S wa ee oar cn ‘An. 235 a entire 500 bags but he could not re t do so for reasons beyond his control le 1234, S can recover as though there had been less the price of the 50 bags. S must show, that he attempted in good faith to comply with his ART. 1235. When the obligee accepts the performance, knowing its incompleteness or irre- gularity, and without expressing any protest or is deemed fully. complied. Recovery allowed when incomplete or irregular performance is waived. The above provision is the other exception to Article 1233. It is founded on the principle of estoppel. The requisites are: The obligee knows that the performance is incomplete and (2) He accepts the performance without expressing any protest or objection. EXAMPLE: _THE LAW ON OBLIGATIONS AND CONTRACTS Article 1234, where there is substantial pe able for damages that may be suffered by re performance is considered complete or ry. 'ART. 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 without the knowledge or against the will of the debtor, he can recover only insofar as the payment has been beneficial to the debtor. (1158) Persons from whom the creditor must accept payment. ‘The creditor is bound to accept payment or performance from the following: ‘The-debtor; a guarantor); or (3) A third person who has no interest in the obligation when there is stipulation that he can make payment. (par. 1.) Greditor may refuse payment by a third person. “Under the old should have a right x: Moreover, the creditor should not be compelled to accept ‘payment from a third person whom he may d Zhe creditor may not, for personal reasons, desire to have aty usiness dealings with a third perso: have confidence in the honesty of the deliver a defective thing or pay with a honored.” (Report of the Code Commiss (2) Any person who has an interest in the obligation (lke anos EXTINGUISHMENT OF OBLIGATIONS ™ ’ayment of Peformance “Or he might be the creditor's bitter enemy. Or suppose the contract is to sell a horse, or a car of a certain make, or 4 trac! Can a total stranger compel the creditor to accept the horse, or the car, or the tractor that he (former) is delivering to him? How could the creditor be absolutely sure that the thing delivered is in accordance with the contract?” (Memorandum of the Code Commission, supra, p. 8.) Effect of payment by a third person, The second paragraph of Article 1236 recognizes that payment or performance may be made by any person not incapacitated, even without the knowledge or against the will of the debtor, and although he has absolutely no interest in the obligation. (1) If made without the knowledge or aga debtor. — The payer can recover from the debtor only insofar as the payment has been beneficial to the latter. (par. 2.) In other words, the recovery is only up to the extent or amount of the debt at the time of payment. (2) If made with the knouwledge of the debtor. — The payer shall have the rights of reimbursement and subrogation, that is, to recover what he has paid (not necessarily the amount of the debt) and to acquire all the rights of the creditor. (par. 2, Arts. 1236; 1237, 1302, 1303.) EXAMPLES: D owes C the sum of P1000 1F5, a stranger to the offers to pay C, the latter may or may not accept payment. Suppose C accepts, the right of § to recov Gepends upon whether the payment is with or without the knowledge or consent of D. nowledge or against the will of D. ~ If ss is P1,000 and S paid PI,000, he can ask if P400 had already been paid by sed only for the amount of P600 1at D has been benefited. § can rie LAW ON OBLIGATIONS AND CONTRACTS said UFC acted in ba faith, hei able also for interest in gg damages. (2) With te knowledge of. — In either ca, ifthe payin of P,000 was made with the knowledge or consent of D, Sg recover fom D P1,000 with all the rights of subrogation to ye ‘accessory obligations such as mortgage, guaranty, or (Ant 1237) = ART. 1237. Whoever pays on: behalf of the debtor without the knowledge or against the will of the latter cannot compel the creditor to subrogate him in his rights, such as those arising from a mortgage, guaranty, or penalty. (1159a) Right of third person to subrogation. Whoever pays on behalf of the debtor is entitled tp subrogation (see Art 1300.) if the payment is with the consent of the latter. (Arts. 1237, 1304 If the payment is without the knoyledge or against the will of the debtor, the third person cannot compel the creditor to subrogate him in the latter's accessory rights of mortgage, guaranty, or penalty. May there be subrogation, if the creditor willingly permits the payor to be subrogated in his rights? Since the provision of Article 1237 is for the benefit of the debtor, the subrogation can only take place with his consent. The third person who without necessity paid under such condition is amply protected by his right to reimbursement; (see 8 Manresa 271-273.) Legal subrogation by operation of law is presumed in ‘certain cases. (see Art. 1302.) distinguished. }) In subrogation, the person who pays for the debtor is shoes of the creditor. The payor acquires not only Fah hee felmbursed for he has paid but also all other 'zhs which the creditor could have exercised pertaining to the EXTINGUISHMENT OF OBLIGATIONS 19 1238 be Payment or Performance credit either against the debtor or against third persons, be they guarantors or possessor of mortgages. (Art. 1303.) (2) Inreimbursement, the third perso of payment has merely the bare right io be refunded provided in the second paragraph of A right to the guarantees and securities ofthe original obligation. In subrogation, however, there is no real extinction of the obligation, but only a change of creditor. EXAMPLE: D borrowed from C P10,000. G is the guarantor. Without the knowledge or consent of D, S paid © P10,000 In this case, $ can claim reiinburservent from D for the wasmuch as D vas benefited up to that whole amount of P! amount. (Art, 1236.) ‘was with the express or tacit approval of DS would be entitled not merely to full reimbursement but aiso to subrogation. Suppose the obligation of D is secured by a mortgage of a land owned by D. Paymer ie knowledgeor against the will of D cannot give 0 subrogation. § can recover only insofar as the payment has been beneficial to D. ART, 1238. Payment made by a third person who does not intend to be reimbursed by the debtor is deemed to bea donation, which requires the debtor's consent, But the payment Is in any case valid as to the creditor who has accepted It. (n) Payment by a third person who does not intend to be reimbursed. 5 no one should be Article 1238 “embodies the idea that no on ther” (Report of the compelled to accept the generosity of ano! Code Commission, p. 132) If the paying third person does not {THB LAW ON OBLIGATIONS AND CONTRACTS dns yment is da dor be reimbursed, the payment is deemed a donation copuies the debtor's consent to be valid. (see Art. 725, _ if the creditor accepts the payment, it shall bp Sohn land the payor although the debtor did not give his consent to the donation. EXAMPLE D owes C P10,000. Without the intention of being reim. pursed, § paid D’s obligation. D had previously accepted S's gea, erosty In this case, D is not liable to $ and his obligation ig extinguished. But if D did not consent to the donation, $ may fecover from D since there has been no donation, althou; originally 5 did not intend to be reimbursed. Nevertheless, obligation of D to Cis extinguished because the payment is valid 1s to C who has accepted it. ‘Can legally refuse to pay Sand instead insist on paying C? No. (see par. 2, Arts. 1236; 1237.) ART. 1239, In obligations to give, payment made by one whe does not have the free disposal of the thing due and capacity to alienate it shall not be valid, without prejudice to the provisions of Article 1427 under the Title on “Natural Obligations.” (1160a) Meaning of “free disposal of thing due” and “capacity to alienate.” (1) Free disposal of the thing due means that the thing to be ivered must not be subject to any claim or lien or encumbrance » mortgage, pledge) of a third person, __ (2) Capacity to alienate means that the person is not incapacitated to enter into contracts (Arts. 1327, 1329.) and for that matter, to make a disposition of the thing due. Free disposal of thing due to allenate req i id. icles As a general rule, in obligati in obligations to give, payment by ome who does not have the free disposition of the thing, due ard EXTINGUISHMENT OF OBLIGATIONS 195 m0 as Payment or Performance capacity to alienate itis not valid." This means that the thing paid canbe recovered. The exception is provided in Article 1427. The creditor cannot be compelled to accept payment where the person paying has no capacity to make it. EXAMPLES: (1) Sagreed to sell to Ba television set. Ifthe television set delivered to B by S belongs to C, the same can be recovered by C because the payment is not valid. $ does not have free disposal of the television set. ‘The same right of recovery exists although the television set belongs to S if he is a minor and, therefore, has no capacity to alienate it. (2) Under Article 1427, if $ is a minor between 18 and 21 years, and he voluntarily pays a sum of money or delivers a fungible thing ( his obligation, there shall be no right to recover the same from B in case the latter has spent or consumed it in good faith. ART. 1240. Payment shall be made to the person in whose favor the obligation has been constituted, or his successor in interest, or any person authorized to receive it. (1162a) Person to whom payment ‘shall be made. Payment shall be made to: (1). the creditor or obligee (person in whose favor obliga- tion has been constituted); (2). his successor in interest (like an heir or assignee); or (3). any person authorized to receiv ial but the TS th matgagor oe pedo of property mortgaged or pledged right othe bayer oceserally suber to Ure morgage pledge. ‘THE LAW ON OBLIGATIONS AND The creditor referred to must be the cred! payment is tobe made,not at the constitution Frence, if a person is subrogated to the right o| payment should be made o the new creditor. EXAMPLE: Dowes C 10,000. authorized by C or in case of his. death, his heirs or any person authorized by law. Payment to any other person is not vai ‘except as provided in paragraph 2, Article 1241 ‘That D acted in good faith in paying to the wrong pany is not an excuse. Meaning of “any person authorized to receive ‘As used in Article 1240, it means not only a person autho. rized by the creditor, but also a person authorized by law to re. ceive the payment, such as a guardian, executo ator of the estate of a deceased, and assignee or liquidator of a part nership or corporation as well as any other person who may be authorized to do so by law. (Haw Pia vs. China Banking Corpo- ration, 80 Phil. 604.) Under Article 1242, payment in good faith to any personin possession of the credit is valid although such person may notbe authorized to receive the payment. ART. 1241. Pay ent to a person who is incapacitated to administer his property shall be _ Payment made to a third person shal valid insofar as it has redounded to the benefit of the creditor. Such benefit to the creditor need not be proved in the following cases: If after the payment, the thi acquires the creditor's ais oo Po is case, D must pay Cor any persgy | ane BRTINGUSHIMENT OF OnLGATIONS ad ayment or Performance (2) If the creditor ratifies th third person; '@ payment to the (3) If by the creditors conduct, the debtor has been led to believe that the third person had authority to receive the payment. (1163a) Effect of payment to an incapacitated person. Payment to a person incapacitated to admi his property is not valid unless such incapaé the thing paid or delivered (so that necessary tha should have been invested in some profitable venture), or was " benefited by the payment. In the absence of this benefit, the debtor may be again by the creditor’s guardian or by the incapacitated person himself when he acquires or recovers his capacity. Proof of such benefit is incumbent upon the debtor who paid. EXAMPLE: D delivers P1,000 to C, a minor under guardianship, in payment of a debt. Closes P700 of the money in gambling, or due to negligence or ignorance. In this case, the payment should be considered as made only to the extent of P300. On the other hand, if C kept the money paid or spent it for purposes useful to him. the payment shall be valid; otherwise, C Would unduly enrich himself at the expense of D. Effect of payment to a third person. Payment toa third person or wrong party is not valid except insofar as it has redounded to the benefit of the cteditor. ‘That the creditor was benefited by the payment the debtor to a third person is not presumed and must, therefore, be satisfactorily established by the person interested in prov this fact. In the absence of such proof, the payment thereof ii de by 38 + TELAWONOBLIGATIONS AND CONTRACTS 1 deprive the creditor of his 7 Phil. 477) error and in good faith will not Tigh to demand payment. (Panganiban vs. Cuevas, ihe When benefit to creditor need not be proved by debtor. Butthe debtorisrelieved from proving benefit tothe cre, in case of: (1) subrogation of the payer in the creditor's rights; (2) ratification by the creditor; or (@)_ estoppel on the part of the creditor. (par. 2.) In such cases, the benefit to the creditor is to be presumed Through estoppel, an admission or representation is rendered conclusive upon the person making it and carnnot be denied gr disproved as against the person relying thereon. (Art, 1431.) EXAMPLE: Dis indebted to C in the amount of P10,000. On the date of the maturity of the obligation, payment was made by D toa third person. if, after payment, T acquired C’s right against subsequently consented to the payment to, or if before payment D has been led to believe by C’s conduct or fault that T hud authority t receive the payment even if Thad, in fact, no sch veal 1242. Payment made in good faith to any in possession of the cred coer credit shall release the Payment to third person in ora possession This article gives another i is vali payment oath ee aretetintance when there i vail It must be observed that the “possession” referred to under the above provision is possession of the credit itself and not merely of the document or instrument evidencing the credit. Hence, mere possession instrument (unless transferable by delivery) does not entitle the holder to payment nor does payment release the debtor. Furthermore, the payer must act in good faith, that is, in the honest belief that he is making a val payment and that the owner of the credit. Good faith is presumed. EXAMPLE: D iis indebted to C in the amount of P1,000 which indebtedness is evidenced by a promissory note signed by D in favor of C. C lost the promissory note which was later found by T who demanded payment from D. - Payment to T is not valid because T is the possessor merely of the document evidencing the credit and not ofthe credit itself. romissory note is payable to bearer or holder the promissory note was indorsed by C to that T would not collect from D, in good faith to T will also extinguish t be against T. right of C ART. 1243. Payment made to the creditor by the debtor after the latter has been judicially ordered to retain the debt shall not be valid. (1165) When payment to creditor not valid In an action against the debtor whois the creditor of anoth the latter anger), during the pendency of the cas may be ordered by the court (or by any competent authority eto retain the debt until the right of tigation is resolved. made subsequently by the debtor-stranger shall ‘wins the case and cannot collect from A JBLIGATIONS AND CONTRACTS, oy THE LAWON 01 na the debtor to whom the payment is made. Such paymeng;, considered as made in bad faith. EXAMPLE: Dowes CPIO,000 £, in turn owes D P10,000 In an actionty against D, , upon petition of C, may be ordered by the cous not to pay D and to retain the debt in the meantime. In this case the debt of Eis said to be “garnished” or is subjected to paymen | toc, Any payment made by Eto D is considered invalid under this. ier words, C may sti hold E liable for the debt. Of course, should E be made to pay ¢ ‘a quasi-contractual obligation on the part of D is created, whichis to return the amount he had received from E, The payment by E toC shall extinguish the obligation of D to C. But the payment by E to D shall be valid if made afer the order of retention but before it is known to him. If D is also indebted to F, the latter has no right to question the payment by E in violation of the order of retention. ART. 1244, The debtor of a thing cannot compel the creditor to receive a different one, although the latter may be of the same value as, or more valuable is due. ions to do or not to do, an act or forbearance cannot be subs! Very prestation due must be complied with, (1) The first paragraph refers to a real obli a specifi thing. A thing different from that due cannot be offered oxeeninded against the will of the creditor or debtor, as the ca® and ht, Sond paragraph refers to personal (posite prohibited canner ean. The act t6 be performed or the at ‘Art 1167) n°" De substituted against the obligee’s wi ete EXTINGUISHMENT OF OBLIGATIONS 21 Payment or Performance EXAMPLE: D obliged himself to deliver to C a specific horse. D cannot require C to accept another horse although it commands a higher price; neither can C require D to deliver another horse belonging to D although it can be sold only at a much lower price. When prestation may be substituted. Of course, substitution can be made if the obligee consents. In facultative ob , the debtor is given the right to render another prestation in substitution. (Art. 1206.) Article 1244 will not also apply in case of waiver by the creditor or substitution is allowed by stipulation with the consent of the creditor. (see Arts. 1245, 1291[1].) ART. 1245, Dation in payment whereby pro- perty is alienated to the creditor in satisfaction of a debt in money, shall be governed by the law of sales. (n) Special forms of payment. ‘There are four (4) special forms of payment under the Civil Code, namel (2). dation in payment (Art. 1245 application of payment payment by cession (Art. 1255.); and tender of payment and consignation. (Arts. speaking, application of payments is not a special 1253) 1256-1261.) form of payment. Meaning of dation in payment. Dation in paymer conveyance of owner: performance. (8 Manresa 314.) It is a special form of payment way of extinguishing an obligation. nor dacion en pago) is the ing as an accepted equivalent of because it is not the ordinary ‘An existing debt in money secre egeee ect ea m “THE LAW ON OBLIGATIONS AND CONTRACTS ang js satisfied, not by payment of money (Art. 1244.) but by the alienation of property. EXAMPLE: D owes C 30,000. To consent of C, delivers a piano. If the piano, however, is worth less than P30,000, the conveyance must be deemed to extinguish the obligation to the ‘extent only of the value agreed upon unless the parties by their agreement have considered the piano as full payment, in which case, the obligation is totally extinguished, the obligation, D with the The conveyance in effect; a novation of the contract. see Governing law. The law of sales governs because dation in payment may be considered a specie of sale in which the amount of the money debt becomes the price of the thing alienated. (see Art. 1619.) ART. 1246. When the jation consists in the delivery of an indeterminate or generic thing, whose qual circumstances have not been /. Neither can the debtor deliver 2 thing of inferior quality. The purpose of the obligation and other circumstai into consideration. (1167a) sete in the delivery of a specific thing, a ie (ust be delivered, (Art, 1244.) Howevet fon and it iver a generic thing, the purpose o! re po r circumstances shall be taken into delivered. ‘termine the quality or kind of thing to be Article 12¢ in eases where haope eiple of equity in that it supplies justice "eis lack of precise declaration inte obigatio™ t nner EXTINGUISHMENT OF OBLIGATION: Payment ot Performance " ore Itis always hard to find one thing thats exactly similar to another. If there is disagreement between the parties, the law steps in and determines whether the contract has been complied with or not according to the circumstances. (see 8 Manzesa 280-281.) The benefit of this article may be waived by the creditor or by accepting a thing of inferior quality, and by the debtor by delivering a thing of superior quality. 4 EXAMPLES: S promised to deliver to B a horse. B cannot compel $ to deliver a price-winning race horse. Neither can S require B to accept an old sickly horse. If B owns a stable of race horses and horse-racing is sion in life, which fact is known to 5, and the price agreed upon is the reasonable price of a race horse, then § must deliver a race horse. (2) IfBhappens to bea calesa driver and B agreed to pay S for the horse an amount which is the reasonable price of a horse for calesa, then that kind of horse may be delivered. (3) If B is a veterinary doctor and his only purpose in buying a horse is to examine its organs in connection with his work, this and other relevant circumstances show. that the old sickly horse was intended by the parties to be delivered, ART. 1247. Unless it is otherwise stipulated, the extrajudicial expenses required by the payment shall be for the account of the debtor. With regard costs, the Rules of Court shall govern. Debtor pays for extrajudicial expenses. 1s of payment are for the account of The extrajudicial expe the debtor. The reason is that the obligation is: ‘extinguished when the debtor who is primarily payment is made and it is, therefore, benefited. If the parties have made a s expenses, then their stipulation shall be followed. “THE LAW ON OBLIGATIONS AND CONTRACTS hag ® Article 1247 does not apply to expenses incutred by jy creditor in going to the debtor's domicile to collect, (Art. 135] Losing party generally pays judicial costs. Judicial costs are the statutory amounts allowed to a party | anaction for his expenses incurred in the action. Under the Ru} of Court (Sec. 1, Rule 142.) the costs of an action shall, as a rus be paid by the losing party. The court may, however, for special reasons, adjudge that either party shall pay the costs or that the same be divided as may be equitable. No costs are allowed against the Government otherwise provided by law. om ART, 1248. Unless there’ is an express stipulation to that effect, the creditor cannot be compelled partially to receive thé prestations in which the obligation consists. Neither may the debtor be required to make partial payments. However, when the debt is in part liquidated and in part unliquidated, the creditor may demand and the debtor may effect the payment of the former without waiting for the liquidati Sse 9 e liquidation of the Performance of obligation should be complete, ion contemplates obligations where ther: ind only one debtor. Joint and solidary wed by Articles 1207 to 1222. Payment may extinguish igati necessary th iuish an obligatior (art 1233) Teer Berforinaice tthe preston to accept partial ‘may accept but he cannot be compel obligations are govern In order that ane EXTINGUISHMENT OF OBLIGATIONS 205 Payment or Performance When partial performance allowed. ‘Thété Ake Cases, however, when partial performance may be either required of insisted Among these cases are: (1},..when there is an express stipulation to that effect (par. 1); ‘ (2), when. the debt is,in, part liquidated (definitely and determined or computed) and in part unliquidated (par. 2.); and (3) when the different prestations in which the obligation ions which ations which consists are subject to different terms or co: affect some of them, (8 Manresa 288.) In ob! ‘debt in inst executed simultaneously but each successive execution thereof must be complete. EXAMPLES: { a) idebted to C for P5,000 due today, D cannot compel C to receive P4,000 in partial payment of the obligation and neither can C require D to pay only P4,000 unless there is an agreement tothe contrary. ¢ (@) 1D owes C P5,000 plus the share of C from the profit of'a business which, however, has not yet been liquidated or determined, C may demand and D may effect the payment of the 5,000, which is already known. 4,000 of the debt of D is due today and P1,000 tomorrow, the obligation can be complied with partially. Similarly, performance may be effected in case the payment of the {s subject to the fulfilment of a condition. ) the construction site of a bui (of 5,000 bags informing B that continuous deliveries In this case, B cannot, in good faith refuse to accept deliveries a long as they are sufficient for his construction needs. ART. 1249. The payment of debts in money shall be made in the currency stipulated, not possible to deliver such currency, currency which is legal tender in the P ‘THE LAW ON OBLIGATIONS AND CONTRACTS sane The delivery of promissory notes payaby to order, or 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. (1170) Meaning of legal tender. Legal tender is that currency which if offered by the debtorig the right amount, the creditor must accept in payment of a dey in money. Legal tender in the Ph Debts in money shall be paid in the currency stipulated, [f it is not possible to deliver such currency or in the absence of any stipulation to make payment in a foreign currency, then the Payment shall be made in the currency which is legal tender in the Phil In the Philippines, all coins and notes issued by the Bangko Sentral ng Pilipinas (BSP) constitute legal tender for all debts, both public or private. Unless otherwise fixed by the Monetary Board of the BSP. coins are legal tender for amounts not exceeding P50.00 for denominations of P0.25 and above, and in those of amounts not exceeding P20.00 for denominations of P0.10 or less. All coins and bills above P1,00 are, therefore, valid legal tenders for any amount. Payment by means of instruments of credits, (1) | Right of creditor to refuse or ace “ept. — Promissory notes, checks, bills of exchange and other commercial documents aft (yea tender and, therefore, the creditor cannot be compelled accept them. This is true even though the check is certified i Fino EXTINGLISHMENT OF OBLIGATIONS 27 ayment or Performance (see Negotiable Instruments Law [Act No. 2031], Sec. 189.), or is amanager’s check. : (@) The creditor, however, if he chooses, may accept them, without the acceptance producing the effect of * payment. In the meantime, the demandability ofthe original obligation is suspended. (b) The creditor must cash the instrument, and it is only when it is dishonored that he can bring an action for non-payment of the debt. (par. 3.) (2) Effect om obligation. — Payment by means of mercantile documents does not extinguish the obligation: (a). until they have been cashed; (©) unless they have been impaired through the fault of the creditor. (par. 2.) EXAMPLE: D owes CP10,000 which is due today. Here, payment in cash and in legal tender is implied. C can legally refuse to accept a check from D and insist on payment in cash. He has the legal right to treat their contract as breached unless D complies. If C accepts, there is no been cashed or when through when he has delayed in presenting the check for payment for an unreasonable length of time and the check has lost its value by reason of the insolvency of the bank. The t by check is considered to be a conditional ao ie sleased until the check has been T. 1250. In case an extraordinary inflation or defation ‘of the currency stipulated should supervene, the value of the currency at the time of the establishment of the ob! tion shall be the basis of payment, unless there is an agreement to the contrary. (n) JLIGATIONS AND CONTRACTS ms ‘THELAW ON OBI rags Meaning of inflation and deflation. (1) fl sharp sudden increase of money or credit, both without a corresponding increase in business transaction, (Websters Dictionary) Inflation causes a drop inthe value money, resulting in the rise of the general price level, (2). Deflation is the reduction in volume and circilation the available money or credit, resulting in a decline of the gener price lev the opposite of inflation. Basis of payment in case of extraordinary inflation or deflation. Under Article 1250, the purchasing, value of the currency s the time of the establishment of the obligation shall be the basis of payment, in case of any extraordinary increase or decrease in the purchasing power of the currency which the parties could not have reasonably foreseen. This is, however, subject to the agreement ofthe parties to the contrary. EXAMPLE: D borrowed from C P5,000 payable after five years. On the maturity ofthe obligation, the value of P5,000 dropped to P25 because of inflation or increased to P10,000 because of deflation) In this case (assuming there is extraordinary inflation ot ) Risle subject to agreement or waiver. — The rule is subject, = ae et between the parties, or to waiver by however, to any agreemel the creditor. In this sense, Article 1253 is merely directory. 6 ND CONTRACTS er “THE LAW ON OBLIGATIONS A\ CIs Pe EXAMPLE: D owes C 71,000 with PI000 a8 accrued interest. D pay P10,000. $ ‘The P10,000 will first be applied to the interest earned b

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