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PAYMENT OR PERFORMANCE
What is Payment or performance?
Not only pay money but also thru delivery
Perform broad enough to cover things to
do and not to do
Article 1232. Payment means not only the delivery of money but also
the performance, in any other manner, of an obligation. (n)
Requisites:
1. Debtor must be in good faith
2. There is a deficiency
3. Deficiency is insignifacnt or minimal
Eg: I ordered 1000 breast chickens; there
was a shortage of chickens; only delivered
900 chickens, can you compel me to accept?
Yes. IF substantial perfeomance would be
applicable
SIGNIFICANCE: would dpend on the
prestation
- cannot apply if there is SUBSTANTIAL
deficiency
1
Identity
no reservation or objections
no need good faith and
significance of deficiency
must be obvious when delivered;
must show that the creditor is
fully satisfied
Indivisibility
Exceptions:
1. Stipulated by the parties
2. Required by the law
3. Nature of the obligation
Who will make payment?
Effected by the person identified by the law
What if it is in accordance with the HOW but
not with the WHO, to whom may not accept
1. Debtors
2. Authorized representatives
3. 3rd person WHO HAS AN INTEREST in the
fulfillment of the obligation
Example: D, a girl, is indebted to C for 2 million
pesos. With a condo to secure the debt as real
estate mortgage. M is a suitor of D. When the
obligation became due, she can only pay 300,000
JTVS | Obligations & Contracts | 1M | Dean Ulan Sarmiento
2. Successor in interest
Article 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)
Assignment
Succession (heirs)
Heir only after the succession takes
place; when parents die, property
will go to the children; takes effect
AFTER successional rights
3. Any person authorized to receive
Agent
When at the time of the payment is
due, and not when it was constituted
rd
4. 3 party who is in possession of the credit
not only possession of the document
Checks: payable to bearer cash;
payable to order- person; there
exists a credit
EG: X acquires checks and presented
it to BPI; enchased to X, is the
obligation extinguished? IT
DEPENDS:
a. If in favor of creditor, even if gotten
by X, possess document of credit-
NO- liable BPI C may run after D
b. If check to CASH, and X encashed it
with BPI yes- justify- extinguished
payment in good faith of BPI. X
entitled to the benefit of the credit
rd
5. 3 party that redounds to the benefit of the
creditor.
EG: D owes 100,000 to C. C owes
100,000 to A. What if D pays A, can A
refuse the payment of D? Yes. D is a
3rd party without interest of the debt
of C
o If A accepts the payment of
D, obligation is extinguished,
there is a legal compensation.
C was benefited.
Where shall payment be made?
As to Effect
an obligation
Extinguishes
the obligation
to the extent of
the thing
delivered
To release the
debtor for the
net proceeds of
the thing ceded
; does not
extinguish the
entire
obligation
because it still
depends on the
proceeds of the
sale
Note: they are called special modes of payment
because they do not comply with the 3 Is but still
result to the extinguishment of the obligation.
Remedy in case of insolvency:
Article 1177. The creditors, after having pursued
the property in possession of the debtor to satisfy
their claims, may exercise all the rights and bring all
the actions of the latter for the same purpose, save
those which are inherent in his person; they may
also impugn the acts which the debtor may have
done to defraud them. (1111)
FOLLOW THESE STEPS STRICTLY
1. Enforcement in court
2. Payment by Cession ( sold at a public
auction; proceeds are applied to the debt)
3. Go to the other real properties also thru a
public auction
4. Accion Pauliana- right available to the
creditor by virtue of which he can secure the
rescission of any act of the debtor which is
in fraud and to the prejudice of his rights as
creditor
5. Accion Subrogatoria - right to exercise all of
the rights and bring all of the actions which
the debtor may have against third persons.
Application of Payment
Issue is where payment should be
applied
Requisites:
1. one debtor and one creditor only
not literally
2.
3.
4.
5.
Rules on the application of payment:
Supposing, D is indebted to C.
500K with 10% interest
1M with 10% interest
2M with 10% interst
3M with 10% interest
500k with 10% interst
TOTAL: 7.7 M
D pays only 3M. Kulang
How do you apply that 3M? apply in the
absences of pre-arranged agreement
Who has the right to choose? Law says DEBTOR
1. DEBTOR
Generally has right to choose and
compel debtor to accept it
Exceptions:
a. voluntarily relinquishes such right to
the creditor
b. he allows a 3rd party no need for
consent of creditor- unilateral
Limitations:
a. Interest muna
Before applying 3M to debt,
ALWAYS apply it to interest
first.
supposing 700,000 interest
whats left is 2.3 M
b. Indivisibility
apply to debts as a WHOLE
not partially otherwise it is
partial payment
c. If the obligation is with a term but
solely for the benefit of the creditor
It is demandable before
arrival due; C may enforce it
at any time
If 2M is subject to a term-
sole benefit of C all debts
due so far as debtor is
concerned; d may not choose
for the choice belongs to C
Issue: if delegated to C, will all limits be applicable?
To third persons? Will choice bind upon such limits?
YES(?)
2. CREDITOR
Opportunity to propose payment
It is not necessarily binding upon D unless
expressly or impliedly accepts
If C acknowledges a receipt designating
where payment was made and accepted by
C, deemed valid application of payment in
accordance with the creditr. Ergo, binding.
UNLESS,there is a ground to invalidate the
contract.
What contract does the code refer to?
Accessorry contracts; not principal;
impliedly entered into on how the payment
is applied
3.MOST ONEROUS DEBT
* always bawas interest first!!!
Article 1245. Dation in payment, whereby property is alienated to
the creditor in satisfaction of a debt in money, shall be governed by
the law of sales. (n)
PRINCIPAL AMOUNT IS NEVER CONSIDERED.
If the same age, do not consider 3M because it is
the biggest; also because equal debts, apply pro
rata
4. PRO RATA
Always bawas interest first
Divide the 2.3M equally to them; distribute
TENDER OF PAYMENT
Note:
1. Definition of Tender of Payment
Manifestation made by the debtor to
the creditor of his decision to comply
immediately with his obligation
Preparatory act
extrajudicial
2. Definition of Consignation
Deposit of the object of the
obligation in a competent court in
accordance with the rules prescribed
by law after refusal or inability of the
creditor to accept the tender of
payment
Principal act
Judicial
3. Requisites of Tender of Payment
4. Requisites of Consignation
a. There is a debt due
b. Consignation has been made either
because the creditor to whom
tender of payment was made
refused to accept the payment
without just cause or because of any
of the causes stated by the law for
effective consignation without
previous tender of payment exists
c. Previous notice of consignation had
been given to the persons interested
in the fulfillment of the obligation
No need for TOP(Art. 1256) :
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;
court.
Summons- consignation is approved by the court;
will extinguish obligation no final judgment for
damages needed
Art. 1249: Identity of the Currency in the
Obligation
LOST:
1. Perishes/ disappears
2. Cannot be found or determined may still
exist but impossible to retrieve
3. Goes out the commerce of man no longer
susceptible of private transactions; not
subject to obligations; EG: expropriations,
contraband NOW LOST
Note: the impossibility refers for TO DO
No cause of action for damages when there
is no fault on the part of the debtor; if with
fault, extinguish obligation but with
payment of damages
Art. 1264: Partial Loss
Article 1264. The courts shall determine whether, under the
circumstances, the partial loss of the object of the obligation is so
important as to extinguish the obligation. (n)
Article 1189. When the conditions have been imposed with the
intention of suspending the efficacy of an obligation to give, the
following rules shall be observed in case of the improvement, loss or
deterioration of the thing during the pendency of the condition:
(1) If the thing is lost without the fault of the debtor, the obligation
shall be extinguished;
(2) If the thing is lost through the fault of the debtor, he shall be
obliged to pay damages; it is understood that the thing is lost when it
perishes, or goes out of commerce, or disappears in such a way that
its existence is unknown or it cannot be recovered;
(3) When the thing deteriorates without the fault of the debtor, the
impairment is to be borne by the creditor;
(4) If it deteriorates through the fault of the debtor, the creditor may
choose between the rescission of the obligation and its fulfillment,
with indemnity for damages in either case;
(5) If the thing is improved by its nature, or by time, the
improvement shall inure to the benefit of the creditor;
(6) If it is improved at the expense of the debtor, he shall have no
other right than that granted to the usufructuary. (1122)
On obligations to do, it refers to impossibility.
Consider the time and moment when
impossibility occurs
Impossible BEFORE or at the TIME of the
constititution- it is a void contract; there is
no obligation ; prestation is impossible
thereore no obligation
Art. 1266: Impossibility Occurs After Constitution
2. Art. 1655: Contract of Lease
3. Art. 1717: Contracts for Piece of Work
Art. 1267: difficulty of performance
NOTE: If in reciprocal obligations, they do not fall
within the three exceptions, ALWAYS APPLY RES
PERIT CREDITORY.
Impossibility
CASE: Julia Millan v. Rio y Olabarrieta [GR NO. L21087, FEBRUARY 23,1924]
Not prestation that has become impossible
but the act to be performed after, the
obligation is not extinguished
Sell a yacht for 5M pesos; 1M pesos of the
5M to use for the renovation of the yacht;
before renovation, it was anchored in Manila
Bay, stormed and ate the yacht; excused to
pay the yacht? NO. What could no longer be
done is AFTER the prestation has been
effected; not the prestation itself
o If the fortuitous event is
AFTER prestation, impossible
to do the act will not render
JTVS | Obligations & Contracts | 1M | Dean Ulan Sarmiento
Case: Naga Telephone Co. V. CA, February 24,1994
Difficulty not
only actual execution but the enforcement
EG: Bus A and Bus B have their own
respective bus stations; for a 20-year
period, they allow each other to use each
others bus stations. However, Bs bus
station is lost; to allow B to use As station
would be inequitable; no longer reciprocal
Art. 1268: Exemption to Fortuitous Event
CONDONATION
Just really means DONATION
Except in implied condonation
In all other cases, to be valid, must comply
with the requisites of DONATION= IN
WRITING.
Remission: an act of liberality by which the oblige,
without receiving any price or equivalent,
renounces the enforcement of the obligation, as a
result of which it is extinguished in its entirety or in
the part or aspect of the same to which the
remission refers
- it is a gratuitous abandonment by
the creditor of his right
As to form, it may be:
As to extent, it may be:
a. Total entire obligation is extinguished
b. Partial- it refers only to the principal or to
the accessory obligation or to an aspect
thereof which affects the debtor as for
instance solidarity
As to constitution, it may be:
a. Inter Vivos constituted by agreement of
the oblige or obligor
b. Mortis Causa last will and testament
*Provisions on Donation:
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Requisites of Condonation:
1. Gratuitous
2. Accepted by the Obligor
3. Obligation must be demandable
CONFUSION
Merger and consolidation
2 into 1 new
one eats the identity of the other;
swallowed
creditors and debtors of each other
BPI + RCBC = New Bank
Definition:
merger of the characters of creditor and
debtor in one and the same person by virtue
of which the obligation is extinguished
the meeting in one and the same person of
the qualities of the creditor and debtor with
respect to one and the same obligation
Requisites:
1. Merger of the characters of creditor and
debtor must be in the same person
2. It must take place in the person of either the
principal creditor or the principal debtor
3. It must be complete and definite
Article 1275. The obligation is extinguished from
the time the characters of creditor and debtor are
merged in the same person. (1192a)
Article 1276. Merger which takes place in the
person of the principal debtor or creditor benefits
the guarantors. Confusion which takes place in the
person of any of the latter does not extinguish the
obligation. (1193)
Article 1277. Confusion does not extinguish a joint
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Can there be compensation with depositor and
bank?
Ans: yes since they are creditors and debtors of
each other
CASE: Garcia v. Lim Chiu Sing, 59 Phil 562
Stockholders are not creditors of the
corporation
No creditor and debtor requirement
Stockholder is in fact an investor;
corporation is not obligated to pay him
NOVATION
Definition:
It is the substitution or change of an
obligation by another, resulting in its
extinguishment or modification, either by:
1. changing its object or principal
conditions
2. Substituting the person of the debtor
3. Subrogating a third person in the rights
of the creditor (Art. 1291)
Distinctive feature: although it extinguishes the
obligation, it also gives birth to another obligation.
It has a two-fold purpose:
1. extinguishment of an old obligation
2. giving birth to a new obligation to take the
place of the old
this is the only mode that results to a
SIMULTANEOUS CREATION of a NEW
OBLIGATION
old obligation is extinguished and replaced
by a new
modification of old obligation
TYPES OF NOVATION
1. REAL NOVATION / OBJECTIVE NOVATION
a. there is a change in the object
b. change in the principal obligation
c. change in the cause of the obligation
2. PERSONAL NOVATION / SUBJECTIVE
NOVATION
a. change of old debtor to a new one
b. subrogating a third person in the
rights of the creditor
3. MIXED NOVATION
- combination of objective and subjective
novations
Requisites of Novation:
1. Previous valid obligation
2. Agreement of parties to new obligation
3. Extinguishment of old obligation
4. Validity of new obligation
Defect: #3 is not a requisite; it is an event after the
fact; requisites should be before the effect. NO. 3 IS
AN EFFECT NOT A REQUISITE
*Novation is NEVER PRESUMED
NOTE: Castan- Proper enumeration:
1. Valid old obligation
2. Valid new obligation
3. Substantial difference of no. 1 and no. 2
4. Capacity of the parties
5. Animus novandi: Intent to extinguish old
obligation and make a new obligation
ART. 1292: REAL NOVATION
Article 1292. In order that an obligation may be extinguished by
another which substitute the same, it is imperative that it be so
declared in unequivocal terms, or that the old and the new
obligations be on every point incompatible with each other. (1204)
Objective novation
There is a change in:
1. Object prestation
o To give then now to do
o If novation takes place, no cause of
action for the old obligation
2. Cause source of obligation
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JTVS | Obligations & Contracts | 1M | Dean Ulan Sarmiento
CHANGE IN THE TERM (either extend or shorten)
1. SC: Ynchausti & Co v. Yulo , 34 Phil 978
o Extension on the period
o It is NOT NOVATION; not extinctive
novation
2. SC: Kongkaya v. Ararata (not sure with the
name)
o Extension is coupled with imposition
of the accessory obligation
o Additional burden
o New accessory obligation that is
burdensome to the debtor =
novation
o Eg: loan of one year to two years but
agree to pay interest = NOVATION
3. SC: Garcia JR v. CA
o Change in accessory obligation which
was extinguished in the old
o Whether to increase or decrease,
there is no novation; only a change
in the rate of the existing interest
4. Kabangkalan Sugar Co. v. Pacheco, 55 Phil
555
o Reduction of the term or period
would result to a NOVATION
Rules:
If new one is more burdensome to the old,
there is novation
Not make a new obligation that is
burdensome, only modification; not
extinctive novation
Art. 1293: Personal Novation
Article 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)
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Case: Hodges v. Rey 111 Phil 219
Alleged that there is novation
SC: no novation; even if consent but what
actually transpired is a contract of agency
where P authorized PNB to pay in his own
behalf
Example:
X sued Y for estafa, pending court; while the case is
pending, Y entered into a contract with X where Y
promised to pay X in installment of what was
embezzled; when contract was consummated-
Court refused to recognize it and proceeded with
the action; ruled that Y is guilty. The defense that
there is no cause of action for estafa because its
basis no longer existed because of the installment IS
UNTENABLE
SC: no cannot be. Conviction is upheld. Ys theory
may apply prior to the filing of the criminal case.
Trust relation may be convertent into
another tie
Offended party may no longer ask
prosecution to divert authority
Effective if only for civil liability
Art. 1294/1295: INSOLVENCY
Article 1294. If the substitution is without the knowledge or against
the will of the debtor, the new debtor's insolvency or non- fulfillment
of the obligations shall not give rise to any liability on the part of the
original debtor. (n)
Article 1295. The insolvency of the new debtor, who has been
proposed by the original debtor and accepted by the creditor, shall
not revive the action of the latter against the original obligor, except
when said insolvency was already existing and of public knowledge,
or known to the debtor, when the delegated his debt. (1206a)
Extinguishment on principal obligation by
novation will also extinguish the accessory
obligations
Exceptions:
1. Parties agree to be bound by the same
accessory obligation with the new obligation
2. Accessory obligation consists of surety or
guaranty and they agree to still continue
with the same in regard to the new
obligation
3. Accessory obligation extends to a third party
o Stipulated to benefit a 3rd party
o Must be with consent of the
beneficiary
o If did not give consent to extinguish
the obligation, not extinguished.
Art. 1297: Effect of Validity
Article 1297. If the new obligation is void, the original one shall
subsist, unless the parties intended that the former relation should
be extinguished in any event. (n)
TEST: If in the facts that novation is that of a new
obligation, voidable old and took place, not change
the object and cause but PERSONAL change,
novation take place?
- expromision initiative of the 3rd
party
- delegacion- initiated by the
debtor and did not object to the
novation acceded to the defect
Art. 1299: Effect of Novation of the Condition
Article 1299. If the original obligation was subject to a suspensive or
resolutory condition, the new obligation shall be under the same
condition, unless it is otherwise stipulated. (n)
15
the debtor;
(3) When, even without the knowledge of the debtor, a person
interested in the fulfillment of the obligation pays, without prejudice
to the effects of confusion as to the latter's share. (1210a)
Article 1303. Subrogation transfers to the persons subrogated the
credit with all the rights thereto appertaining, either against the
debtor or against third person, be they guarantors or possessors of
mortgages, subject to stipulation in a conventional subrogation.
(1212a)
Article 1304. A creditor, to whom partial payment has been made,
may exercise his right for the remainder, and he shall be preferred to
the person who has been subrogated in his place in virtue of the
partial payment of the same credit. (1213)
Types of Subrogation:
1. Legal Subrogation
By law
a. if payment by a third party with
interest in the obligation need not
with or without consent of debtor;
right of subrogator is right of debtor
Eg: credit transactions, taxes,
employees, Assignment of credits. P.
809 of Jurado notes, no. 197
b. 3rd party without interest-
suborgation is only valid with
knowledge and consent of debtor
2. Conventional Subrogation
a. Stipulated by the parties
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