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OBLIGATIONS & CONTRACTS MIDTERM NOTES

February 13, 2019 2. unilateral waiver


3. remission I. Payment or Performance
E. Extinguishment of Obligation ii. agreement simultaneous to the constitution
of the obligation ART. 1232. Payment means not only the delivery of money
ART. 1231. Obligations are extinguished: 1. resolutory condition but also the performance, in any other manner, of an
(1) By payment or performance; 2. extinctive period obligation.
(2) By the loss of the thing due; 2. Involuntary
(3) By the condonation or remission of the debt; a. by reason of the subject Payment
(4) By the confusion or merger of the rights of creditor and i. confusion 1. delivery of money
debtor; ii. death of the contracting parties (personal 2. giving of a thing
(5) By compensation; obligations) 3. doing of an act
(6) By novation. b. by reason of the object 4. not doing of an act
Other causes of extinguishment of obligations, such as i. lost of the thing due/impossibility of 5. D pays damages or penalty (in lieu of fulfillment)
annulment, rescission, fulfillment of a resolutory condition, performance
and prescription, are governed elsewhere in this Code. c. by failure to exercise (right of action) NB: in law, payment and performance are synonymous.
i. extinctive prescription
Other causes Elements: Payment
1. Death of a party (in case of personal obligation) 1. persons (payor, payee)
2. Mutual desistance or withdrawal 2. thing or object
 principle: since mutual agreement can create 3. cause
a contract, mutual disagreement can cause its 4. mode or form
extinguishment 5. place and time
3. Arrival of RP 6. imputation of expenses
4. Compromise 7. special parts (which may modify the same and the
5. Impossibility of fulfillment effects they generally produce)
6. Happening of a FE
Burden of Proof: Payment
Classification: Modes of extinguishment  incumbent upon D to prove with legal certainty that the
1. Voluntary obligation has been discharged by payment
a. Performance  once D introduces evidence of payment, the burden
i. Payment shifts to C
ii. Consignation  best evidence: receipt (written, signed
b. Substitution acknowledgment that money/goods have been
i. dacion en pago (conveyance for payment) delivered)
ii. novation  disputable presumption: money paid is due to the other
c. by Release agreement
i. agreement subsequent to constitution of
obligation ART. 1233. A debt shall not be understood to have been
1. mutual waiver paid unless the thing or service in which the obligation

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OBLIGATIONS & CONTRACTS MIDTERM NOTES

consists has been completely delivered or rendered, as the Requisites for application of Art. 1235  3P is not subrogated to C’s rights (eg: rights
case may be. 1. C knows performance is incomplete/irregular on mortgage, guaranty, penalty)
2. C accepts the performance without protest/objection 2. made with D’s knowledge
When debt considered paid  3P has the right of reimbursement +
1. integrity of the prestation Accept subrogation
 prestation to be fulfilled completely  to take as satisfactory or sufficient
 GR: partial/irregular performance will not  to give assent to
produce the extinguishment of an obligation  to agree or accede ART. 1237. Whoever pays on behalf of the debtor without
2. identity of the prestation the knowledge or against the will of the latter, cannot
 very prestation due must be delivered or NB: mere receipt of partial payment is not equivalent to compel the creditor to subrogate him in his rights, such as
performed acceptance of performance within the purview of Article those arising from a mortgage, guaranty, or penalty.
1235 (therefore, does not extinguish whole obligation).
GR: Debt is not paid unless there is complete fulfillment. Subrogation vs. Reimbursement
EXC: ART. 1236. The creditor is not bound to accept payment or Subrogation Reimbursement
(1) ob is substantially performed in GF performance by a third person who has no interest in the  payor is put in the  only the bare right to
(2) C accepts the performance knowing it is fulfillment of the obligation, unless there is a stipulation to shoes of C be refunded
incomplete/irregular + no protests/objections the contrary.  reimburse + other  no right to guarantees,
rights (guaranty, securities
ART. 1234. If the obligation has been substantially Whoever pays for another may demand from the debtor mortgages)
performed in good faith, the obligor may recover as though what he has paid, except that if he paid without the
there had been a strict and complete fulfillment, less knowledge or against the will of the debtor, he can recover ART. 1238. Payment made by a third person who does not
damages suffered by the obligee. only insofar as the payment has been beneficial to the intend to be reimbursed by the debtor is deemed to be a
debtor. donation, which requires the debtor’s consent. But the
In case of substantial performance in GF payment is in any case valid as to the creditor who has
D may recover as though there had been a strict and Persons from whom C must accept PMT accepted it.
complete fulfillment LESS damage suffered by C. 1. D
2. person who has an interest in the OB (eg: G) Principle: no one should be compelled to accept the
Requisites for application of Art. 1234 3. 3P who has no interest in the OB when there is generosity of another.
1. substantial performance (case to case basis) stipulation that he can make payment
2. D in GF (presumed in the absence of contrary proof) 3P pays without intention to be reimbursed
NB: C is not compelled to accept payment from a stranger.  must be with D’s consent
ART. 1235. When the obligee accepts the performance,  if C accepts, valid as to C although D did not give
knowing its incompleteness or irregularity, and without Effect: PMT by 3P his consent
expressing any protest or objection, the obligation is 1. made without knowledge or against D’s will
deemed fully complied with.  3P can recover from D only in so far as PMT ART. 1239. In obligations to give, payment made by one
has been beneficial to D (up to amount of who does not have the free disposal of the thing due and
 founded on the principle of estoppel debt at time of payment) + the overpayment capacity to alienate it shall not be valid, without prejudice to
 considers as a waiver by C to C (defense only available to D) the provisions of Article 1427 under the Title on “Natural
 C is liable for interest in case of BF Obligations.’’

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Free disposal of thing due thing delivered, or insofar as the payment has been NB: if D pays the original C before having knowledge of
Thing to be delivered must not be subject to any claim or beneficial to him. assignment of credit to 3P, D shall be release from
lien or encumbrance of a third person. obligation.
Payment made to a third person shall also be valid insofar
Capacity to alienate as it has redounded to the benefit of the creditor. Such ART. 1242. Payment made in good faith to any person in
Person is not incapacitated to enter into contracts and for benefit to the creditor need not be proved in the following possession of the credit shall release the debtor.
that matter, to dispose of the thing due. cases:
Illustration
GR: In obligations to give, payment by one who does not (1) If after the payment, the third person acquires the D is indebted to C in the amount of P1,000.00 which
have the free disposition of the thing due or the capacity to creditor’s rights; indebtedness is evidenced by a promissory note signed by D
alienate it is NOT VALID. Therefore, thing paid can be (2) If the creditor ratifies the payment to the third in favor of C. C lost the promissory note which was later
recovered. person; found by X who demanded payment from D.
(3) If by the creditor’s conduct, the debtor has been
EXC: led to believe that the third person had authority Payment to X is not valid because X is the possessor merely
(1) minor between 18-21 (entered in contract without to receive the payment. of the document evidencing the credit and not of the credit
P/G’s consent) voluntarily pays sum of money or itself.
delivers fungible thing in fulfillment of obligation. GR: payment to person incapacitated to administer/manage
There shall be no right to recover the same from C property is NOT VALID If the promissory note is payable to bearer or holder
who has spent or consumed it in GF. (Negotiable Instruments Law [Act No. 2031], Sec. 9.) the
EXC: obligation will be extinguished if D pays X in good faith.
ART. 1240. Payment shall be made to the person in whose (1) such person kept the thing paid or delivered
favor the obligation has been constituted, or his successor (invested in some profitable venture) Similarly, if the promissory note was indorsed by C to X,
in interest, or any person authorized to receive it. (2) such was benefited by the payment under a private agreement that X would not collect from D,
payment by D in good faith to X will also extinguish the
To whom payment shall be made In the absence of benefit, D may be made to pay C’s debt. It is immaterial that X acted in bad faith. The right of
1. C or obligee (persom in whose favor ob has be guardian or C upon acquiring/recovery of capacity. C will be against X.
constituted)
 must be the C at time payment is made, not NB: Payment should be made to C’s legal representative, if ART. 1243. Payment made to the creditor by the debtor
at the constitution not possible, D may consign in court. after the latter has been judicially ordered to retain the debt
2. C’s successor in interest (eg: heir, assignee) shall not be valid.
3. any person authorized to receive it GR: payment to third person or wrong party is NOT VALID
 authorized by C or by law EXC: When payment to C not valid
 eg; guardian, executor/administrator or (1) redounded to C’s benefit Payment made by DS to D despite court order to retain the
estate, assignee or liquidator of debt during pendency of case is not valid if the C wins the
partnership/corp When D need not prove C’s benefit case.
 if to agent, prove existence of SPA 1. subrogation of payor in C’s rights
2. ratification by C NB: benefit granted by Article 1243 can only be invoked by
ART. 1241. Payment to a person who is incapacitated to 3. C is estopped (C made D believe 3P has authority) C who secures the order of retention.
administer his property shall be valid if he has kept the

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Garnishment Special forms of PMT NB: Dacion en pago requires delivery and transmission
A proceeding in rem for the purpose of subjecting D’s credit 1. dation in payment (dacion en pago) of ownership of a thing to C who accepts it as equivalent of
to payment of his debt to another. 2. application of payments payment of debt.
3. payment by cession
An attachment by means of which C seeks to subject to his 4. tender of payment and consignation
claim the property of D in the hands of DS or money owed ART. 1246. When the obligation consists in the delivery of
by such DS or garnishee to D. NB: strictly speaking, application of payment is not a an indeterminate or generic thing, whose quality and
special form of payment circumstances have not been stated, the creditor cannot
In the nature of an involuntary novation by substitution of demand a thing of superior quality. Neither can the debtor
one C for another. Dacion en pago deliver a thing of inferior quality. The purpose of the
 conveyance of ownership of D’s thing to C as an obligation and other circumstances shall be taken into
ART. 1244. The debtor of a thing cannot compel the accepted equivalent of performance of a monetary consideration.
creditor to receive a different one, although the latter may obligation
be of the same value as, or more valuable than that which  requisites Rule of medium quality (generic)
is due. o performance of prestation in lieu of payment Consider the purpose of the obligation and other
(animo solvendi) which may consist in delivery circumstances to determine the quality or kind.
In obligations to do or not to do, an act or forbearance of corporeal thing or real right or credit
cannot be substituted by another act or forbearance against against 3P NB:
the obligee’s will. o difference between prestation due and that (1) C may waive such benefit by accepting a thing of
which is given in substitution (aliud pro alio) inferior quality.
Very prestation due must be complied with o agreement between C and D that ob is (2) D may waive by delivering a thing of superior
 1st para: real obligation (specific) immediately extinguished quality.
o C cannot be compelled to receive a different
thing although same value or more valuable  partakes the nature of sale (ie: C buys D’s property) ART. 1247. Unless it is otherwise stipulated, the
 2nd para: personal obligation o essential elements of contract must be present extrajudicial expenses required by the payment shall be for
o act to be performed or prohibited cannot be the account of the debtor. With regard to judicial costs, the
substituted against obligee’s will Rules of Court shall govern.
Sale vs. Dacion en pago
Substitution of object Sale Dacion en pago GR: D shall pay for the extrajudicial expenses.
 if C consents, substitution can be made  no pre-existing credit  with pre-existing credit EXC:
 ob is created  ob is extinguished (1) parties made a stipulation as to who will bear
NB: Article 1244 will not apply in case of C’s waiver or if sub  cause = price (S)  extinguish ob (D) (2) expenses C incurred in going to D’s domicile to
is allowed by stipulation with C’s consent.  acquire thing (B)  acquire object in lieu of collect
credit (C)
ART. 1245. Dation in payment, whereby property is  more freedom in fixing  not as free Rationale: because D benefited from the extinguishment of
alienated to the creditor in satisfaction of a debt in money, price the obligation.
shall be governed by the law of sales.  B has to pay price  payment is already
received Judicial costs
 S&B  D&C

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 statutory amounts allowed to a party to an action for  GF eg: D promised to deliver 10 bags of rice (2) P100 for P.01, P.05, P.10, P.25 coins
his expenses incurred in the action to C. D delivers 5 bags informing that (3) all coins and bills above P1 are valid for any
 RoC: paid by the losing party continuous deliveries will follow. C cannot, in amount
o court may, for special reasons, adjudge tjat GF, refuse to accept partial deliveries as long
either party shall pay or that same be divided. as the object is sufficient for his needs. Payment by means of instruments of credits
 GR: no costs allowed against Govt  C is not compelled to accept PNs, checks, BoE and
o unless provided by law ART. 1249. The payment of debts in money shall be made other commercial documents as they are not legal
in the currency stipulated, and if it is not possible to deliver tender (even though check is certified)
ART. 1248. Unless there is an express stipulation to that such currency, then in the currency which is legal tender in o C may accept them but acceptance does not
effect, the creditor cannot be compelled partially to receive the Philippines. produce the effect of payment. Only upon
the prestations in which the obligation consists. Neither may encashing/realizing the check or upon
the debtor be required to make partial payments. The delivery of promissory notes payable to order, or bills of impairment through fault of C is the debt paid.
exchange or other mercantile documents shall produce the
However, when the debt is in part liquidated and in part effect of payment only when they have been cashed, or  A redemption of property sold under execution is not
unliquidated, the creditor may demand and the debtor may when through the fault of the creditor they have been rendered invalid by reason of the fact that the payment
effect the payment of the former without waiting for the impaired. to the sheriff for the purpose of redemption is effected
liquidation of the latter. by means of a check for the amount due. (Mere tender
In the meantime, the action derived from the original of checks is sufficient to compel redemption)
NB: Article 1248 only applies where there is only 1C & 1D. obligation shall be held in abeyance.
GR: Payment by means of mercantile documents does not
GR: In order that PMT may extinguish obligation, complete NB: RA 8183 (June 11, 1996) repealed RA 529. There is no extinguish obligation.
performance is necessary. longer any legal impediment to having obligations or EXC:
transactions paid in a foreign currency as long as the parties (1) upon encashment (doc executed by D or 3P)
EXC: (ie: partial performance is allowed) agree to such arrangement. (2) if they have been impaired through C’s fault (doc
(1) with express stipulation executed by 3P)
(2) debt is in part liquidated (definitely determined or Payment by means of money (order)
determinable) and in part unliquidated 1. in currency stipulated ART. 1250. In case an extraordinary inflation or deflation
 eg: share of profit not yet liquidated or 2. if #1 not possible, in legal tender in PH of the currency stipulated should supervene, the value of
determined the currency at the time of the establishment of the
(3) different object in obligation are subject to Legal Tender obligation shall be the basis of payment, unless there is an
different terms or conditions Currency which D can legally compel C to accept in agreement to the contrary.
(4) parties know the obligation reasonably cannot be payment of a debt in money when tendered by D in the
expected to be performed completely at one time right amount. Inflation
(5) when there is abuse of right or if GF requires Sharp sudden increase of money or credit or both without a
acceptance in PH: all coins and notes issued by BSP corresponding increase in business transactions.
 there is abuse of right when it is exercised for
the only purpose of prejudicing or injuring NB: pursuant to BSP Circular no. 537 (July 18, 2006), Effect: drop in the value of money, rise of the general price
another maximum amount of coins to be considered legal is level.
(1) P1000 for P1, P5, P10 coins

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Deflation exchange market forces is a depreciation and not a


Reduction in volume and circulation of available money or devaluation. However, both are synonymous when used in
credit; opposite of inflation. a contract.

Effect: decline of general price level. ART. 1251. Payment shall be made in the place designated
in the obligation.
Requisites for application (the ff must be proven)
1. official declaration of extraordinary IF/DF by BSP There being no express stipulation and if the undertaking is
2. obligation is contractual in nature to deliver a determinate thing, the payment shall be made
3. parties expressly agreed to consider the effects of wherever the thing might be at the moment the obligation
extraordinary IF/DF was constituted.

Basis of payment in case of extraordinary IF/DF In any other case the place of payment shall be the
GR: Purchasing value of currency at time of domicile of the debtor.
establishment of obligation
EXC: If the debtor changes his domicile in bad faith or after he
(1) agreement of parties to the contrary (ie: pay the has incurred in delay, the additional expenses shall be
stipulated amount regardless of any extraordinary borne by him.
IF/DF)
These provisions are without prejudice to venue under the
Extraordinary IF/DF Rules of Court.
When neither party had reason to foresee such event
during the establishment of the obligation OR manifestly Places where obligation shall be paid (order)
beyond the contemplation of the parties. 1. place stipulated
2. if no stipulation
Devaluation vs. Depreciation a. thing is specific: at place where the thing was
Devaluation Depreciation at perfection of contract
 reduction in value of  downward change in b. thing is generic: D’s domicile (C bears
one currency from an the value of one expenses in going to D’s place)
official fixed level currency in terms of
imposed by monetary currencies of other Order is successive and exclusive.
authorities nations which occurs
as a result of market NB: this is without prejudice to venue under the Rules of
forces in the foreign Court (place where a court suit or action must be
exchange market filed/instituted).

NB: PH presently maintains a floating foreign exchange Domicile


rate system and not an officially fixed rate regime. So, any Place of a person’s habitual residence.
lowering of the value of the peso as a result of foreign

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February 20, 2019 Thus, Montecillo's payment to Cebu Ice Storage is not the W/N there was payment or performance
payment that would extinguish Montecillo's obligation to
CASES: Payment or Performance Reynes under the Deed of Sale. RULING: No.
There is not question that no payment had ever been made
1. Montecillo vs. Reynes, Sps Redemptor, SC further ruled that where the deed of sale states that the to Tan as the check was never delivered to him.
Abucay (2002) purchase price has been paid but in fact has never been
paid, the deed of sale is null and void ab initio for lack of Art. 1233 - a debt shall not be understood to have
FACTS: consideration. been paid unless the thing or service in which the obligation
 Reynes (R/S): owner of a subject lot (448 sqm) consists has been completely delivered or rendered, as the
o sold a portion (185 sqm) to Sps Abucay (R/B) 2. PNB vs. CA, Loreto Tan (1996) case may be.
 signed a deed of sale to Montecillo (P)
 P failed to pay FACTS: Burden of proof lies with D. In this case, neither the SPA
o Reynes revoked the sale  Tan (PR): owner of a parcel of land nor the check was ever presented in court. Thus, PNB was
o executed deed of sale transferring to Sps. o subject to expropriation ordered to pay Tan the sum + attorney’s fees.
Abucay the whole lot + confirm previous sale  Tan requested: release of expropriate price (P32 480)
of portion of lot o P (thru Asst Branch Manager) issued a 3. Pagsibigan vs. CA, Planters Development
 P claimed that manager’s check + deliver to Gonzaga without Bank (1993)
o consideration for sale was amount he paid to Tan’s knowledge, consent or authority
Cebu Ice Storage for mortgaged debt of Jayag o Gonzaga deposited in here account at Far East FACTS:
o release of mortgage was necessary since + withdrew same  Pagsibigan (P) through daughter (AIF) obtained an
mortgage constituted lien on the lot  Tan demanded agricultural loan (4.5k) from Planters (PR) secured by
 TC: sale to P null and void (lack of cause/consideration) o P refused; contended that they already mortgage over parcel of loan
o P never paid the PP delivered to Gonzaga by virtue of a SPA o fully paid
 CA: affirmed TC allegedly executed by Tan  obtained another loan
 Tan executed affidavit o secured by same land
ISSUE: o never executed any SPA o PN: payment every 6 mo + 18% int +
W/N there was payment or performance on P’s part o never authorized Mrs. Gonzaga acceleration clause
o signed a motion to release sum to him and  P paid
RULING: No. gave the same to Mr. Gonzaga but Engr. o only 4 of such payments were applied to loan
SC held that absent any showing that Reynes had agreed to Decena issued authority to release funds to o rest were “temporarily lodged to AP since
the payment of the PP to any other party, the payment to Mr. Gonzaga, not to Tan account was already past due”
be effective must be made to Reynes, the vendor in the  Hearing ensued  property was foreclosed
sale. o PNB failed to present the SPA  P contended
o claimed that Mrs. Gonzafa borrowed it with o bank no right to foreclose as there was full
Article 1240 - Payment shall be made to the the promise to return it payment; in fact, they overpaid
person in whose favor the obligation has been o SPA existence already proved by certification  bank contended
constituted, or his successor in interest, or any of FEB in encashing the check o computation not in consonance with PN
person authorized to receive it. o when P failed to pay 1st installment, the entire
ISSUE: ob became due and demandable

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ISSUE: property. Panganiban repurchased the property from the


W/N there was payment or performance RULING: Yes. army but the army was not the owner.
SC held that act of the co-vendor in paying PVB is construed
RULING: Yes. to be a ploy that “prematurely prevented plaintiff from SC held that payment made to a third person, even through
Respondent bank has the right to foreclose the mortgage paying the installment fully,” thus constitutes error and in good faith, shall not release the debtor of the
upon default but the records show that P did not default constructive fulfillment. obligation to pay and will not deprive the creditor of his
payment. The court held that there is, at the very least, right to demand payment.
substantial performance, and the law provides that: Further, the acts of Ps in accepting the payments even
beyond the periods agreed upon without expressing any If it becomes impossible to recover what was unduly paid,
Article 1234. If the obligation has been protest or objection was perceived as tantamount to any loss resulting therefrom shall be borne by the deceived
substantially performed in good faith, the obligor faithful performance of obligation. PR also consigned an debtor, who is the only one responsible for his own acts
may recover as though there had been a strict and amount sufficient to offset the remaining balance. unless there is a stipulation for the wrongful payment.
complete fulfillment, less damages suffered by the
obligee. 5. Panganiban vs. Cuevas Article 1240. Payment shall be made to the person in whose
favor the obligation has been constituted, or his successors-
Further, when bank received P’s payment (2m3d delayed) FACTS: in interest, or any person authorized to receive it
and applied it to P + int + penalty, it waived its right  Panganiban (P) owner of Camarin and lot
under the acceleration clause. The bank computed the o sold same to Gonzales (1.3k)
penalty based on the defaulted amortization payment o stipulation: S has right to repurchase within
instead of the entire amount, which would have been due 6mo
and demandable by virtue of the acceleration clause. o if S fails to do so, B will pay P200 + become
absolute owner
Lastly, for more than 4 years, the bank made P believe that  Gonzales sold property to Cuevas (R)
it was applying her payments on the loan and the interest. o stip: Panganiban has right to repurchase
It is bound by estoppel to apply the same.  Cuevas asked judicial possession of property (granted)
o action of ejectment filed against Panganiban
4. Tayag, Galicia vs. CA, Leyva (1993)  P contended that
o he sought to repurchase property but could
FACTS: not locate Gonzales due to the revolutionary
 P: heirs of Galicia, Sr., who executed a deed of war
conveyance in favor of R involving a piece of land  Rev Govt seized land from Gonzales
o terms: portion of payment represents S’s o Panganiban redeemed property from Rev Govt
indebtedness with PVB which is assumed by B
 Suit for specific performance was filed by R for failure ISSUE:
of P to execute final deed of sale W/N there was payment or performance.
 P argued that remaining balance was not paid by R
RULING: No.
ISSUE: The property was seized by the army not confiscated, and a
W/N there was payment or performance seizure just prohibits the owner from enjoying his/her

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payment of a loan is a privilege, a right of set-off which the ISSUE:


6. BPI (as successor-in-interest of CBTC) vs. bank has the option to exercise. W/N the deed of assignment constituted as dacion en pago
CA, Eastern Plywood Corp, Benigno Lim
(1994) ISSUE #2: RULING: No.
W/N BPI is still liable to Eastern and Lim on the account SC held that the deed of assignment executed is not a
FACTS: withdrawn by the heirs of Velasco dacion en pago and did not totally extinguish R’s obligation.
 Eastern and Lim (as officer and stockholder) had at
least 1 joint bank account with CBTC RULING: Yes. Dacion en pago does not necessarily mean total
 Velasco + Lim opened a joint account with funds The account was proven to belong to Eastern even if it was extinguishment of obligation. The obligation is totally
withdrawn from Eastern/Lim account in the names of Lim and Velasco. BPI was the D and extinguish only when the parties, by agreement, express or
o various D/W Eastern was the C. As the real creditor of the bank, Eastern implied, or by their silence, consider the thing as
o money placed in money market has the right to withdraw it or demand payment thereof. equivalent to the obligation, which is not present in the
 Velasco died case.
o Lim transferred ½ to bank accounts of Eastern BPI cannot be relieved of its duty to pay Eastern simply
 Eastern obtained loan (payable on demand + 14% because it already allowed the heirs of Velasco to withdraw 8. FEBTC vs. Diaz Realty Inc. (2001)
interest) the whole balance of the account. Payment made by D to
o Eastern issued unsecured negotiable PN the wrong party does not extinguish the obligation FACTS:
signed by Lim as P and GM as to the creditor who is without fault or negligence.  Diaz (R) obtained a loan from Pacific Bank (720k)
 Later, Eastern, Lim and CBTC signed another document o secured by REM of 2 parcels of land
stating Lim/Velasco as security for loan upon finality of  Allied Bank rented an office on the mortgaged
judicial action or settlement (holdout agreement) 7. Caltex cs. IAC, Asia Pacific Airways, Inc. properties
 in settlement proceeding of Velasco’s estate, the whole (1992) o monthly rentals to be applied on lessor’s
joint account was claimed as part of Velasco’s estate account with Pacific Bank
o heirs filed to withdraw the amount and divide FACTS:  CB closed Pacific Bank + placed it under receivership
among themselves  Asia Pacific (PR) entered into agreement with Caltex (P)  Far East purchased the credit of Diaz in favor of Pacific
 BPI (after it merged with CBTC) filed complaint o P to supply aviation fuel for 2 years but it was only later that Diaz was informed
demanding payment of PN  PR had an outstanding balance to P (4M+)  Diaz tendered an interbank check bearing the
o RTC & CA: PN not subject to holdout o PR executed deed of assignment: receivables remaining obligation as full payment
agreement or refunds from National Treasury of PH o Far East did not accept it as payment
(5M+) to be applied as payment o instead asked Diaz to deposit it
ISSUE #1:  upon learning that the amount exceeded, PR asked P
W/N there was payment or performance for a refund ISSUE
o P made the refund W/N there was payment or performance
RULING: No.  PR believed it was entitled to a larger amount,
The bank cannot be compelled to retain and apply the demanded again RULING: Yes.
deposit in Lim/Velasco’s joint account to the payment of the o P informed that amount not returned SC held that the tender was made by R for the purpose of
loan. What the agreement conferred on CBTC was a power, represented % + service charges for overdue settling its obligation. Thus, by accepting the tendered
not duty. Generally, a bank is under no duty or obligation account check and converting it into money, P is presumed to
to make the application. To apply the deposit to the  PR filed complaint

Ericka Caballes 9
OBLIGATIONS & CONTRACTS MIDTERM NOTES

have accepted it as payment. To hold otherwise would be a. must indicate at time of payment which ART. 1254. When the payment cannot be applied in
inequitable and unfair to the obligor. particular debt is being paid accordance with the preceding rules, or if application cannot
b. D cannot later on claim that it should be be inferred from other circumstances, the debt which is
a) Application of Payments applied to another debt unless there is a cause most onerous to the debtor, among those due, shall be
for invalidating (eg: fraud, mistake) deemed to have been satisfied.
ART. 1252. He who has various debts of the same kind in
favor of one and the same creditor, may declare at the time 2. right to make application once exercised is If the debts due are of the same nature and burden, the
of making the payment, to which of them the same must be irrevocable payment shall be applied to all of them proportionately.
applied. Unless the parties so stipulate, or when the a. unless C consents to change
application of payment is made by the party for whose SC Ruling of what is more onerous
benefit the term has been constituted, application shall not 3. D’s right to apply payment: merely directory 1. interest-bearing debt > NIB
be made as to debts which are not yet due. a. if D does not apply, C has subsidiary right to 2. sole debt > solidary debtor
make the designation (with D’s consent) 3. older debts > newer debts
If the debtor accepts from the creditor a receipt in which an through specifying in the receipt which debt is 4. secured debts > unsecure debts
application of the payment is made, the former cannot being paid 5. higher interest rate > lower interest rate
complain of the same, unless there is a cause for 6. with a penal clause > without penal clause
invalidating the contract. 4. if no designation by both or if application is invalid:
apply to debt most onerous to D NB: if debts are subject to different burdens, apply to them
Application of Payments proportionately.
Designation of the debt to which the payment should be 5. if debt are of the same nature and burden: apply
applied where D has various debts of the same kind in favor payment proportionately
of one and the same C.
6. if neither party designated and there is disagreement
Requisites as to application: courts will apply payment according
1. 1D and 1C to the justice and equity of the case
2. 2 or more debts
3. debts: same kind ART. 1253. If the debt produces interest, payment of the
4. debts (to which payment has been applied) must be principal shall not be deemed to have been made until the
due interests have been covered.
5. payment not sufficient to cover all debts due
NB: Rule is mandatory.
GR: payment cannot be applied to debts not yet due
EXC: GR: Payment must be applied first to the interest and
(1) with stipulation that D may so apply whatever balance is left, must be credited to the principal.
(2) it is made by D or C for whose benefit the period
has been constituted EXC:
(1) agreement between parties
Rules on Application of Payments (2) waiver by C
1. D has the 1st choice

10 Ericka Caballes
OBLIGATIONS & CONTRACTS MIDTERM NOTES

CASES: Application of Payments the unpaid rentals, P’s cause of action for ejectment The Tans also never alleged compensation when they
survives. received the demand letter, during preliminary
9. Espina vs. CA, Diaz (2000) investigation, or before trial.
10. Tan vs. Mendez Jr. (2002)
FACTS: Moreover, if indeed there was a payment by compensation,
 Espina (P) sold a condo unit to Diaz (R); R used to FACTS: Tans should have redeemed the checks back in the ordinary
lease such unit  Steve and Marciano Tan (Ps): owners of Master Tours course of business.
o Jan 15: 400k and Travel + operators of PH Lawin Bus
o Feb 1: 200k  Mendez (R): owner of 3 gasoline stations
o Feb 22: 200k  Ps opened a credit line for fuel consumption
o Mar 14: 200k o drivers purchase on credit fuel & oil thru
o Apr 4 200k withdrawal slips
o Apr 25: 200k o periodic payments to Mendez thru issuance of
 Diaz informed Espina that check account has been checks
closed and opened a new checking account with same  R remitted the proceeds + remittance of ticket sales
bank from Baao Booking managed separately by another
o PDCs issued shall be replaced with new ones agent
 because of the closed account, the six installments o P’s checks were dishonored for insufficiency of
bounced funds
o R continued to occupy the unit but failed to  R demanded but no reply
pay the rentals due o hence, case for violation of BP 22
 P gave R notice to vacate + pay back rentals  Marciano contended
 However, Diaz (thru wife) partially paid o he cannot be held liable for BP 22 because
o Espina sent a notice of cancellation of sale check has already been extinguished by offset
o yet Espina still accepted payment + encashed or compensation against collection from ticket
the check sale
 R contends
o P acceptance of such payment withdrew the ISSUE:
cancellation of the sale W/N Tan brothers can claim compensation

ISSUE: RULING: No.


What is the application of the payment No compensation can take place as Mendez is not a debtor
of the Tans insofar as the checks representing ticket sales
RULING: are concerned. Mendez only acted as an intermediary in
Unless the application of payment is expressly indicated, the remitting the Baao ticket sales and thus, is not a debtor of
payment shall be applied to the obligation most the Tans.
onerous to D. In this case, the unpaid rentals constituted
the more onerous obligation. As payment did not fully settle

Ericka Caballes 11
OBLIGATIONS & CONTRACTS MIDTERM NOTES

b) Payment by Cession  not all properties  all properties ISSUE:


 C becomes owner of  C only acquires the Whether there was a pledge or dacion en pago between
ART. 1255. The debtor may cede or assign his property to the thing right to sell the thing + Lopez and Philamgen.
his creditors in payment of his debts. This cession, unless apply proceeds to
there is stipulation to the contrary, shall only release the credits pro rata Ruling: Pledge.
debtor from responsibility for the net proceeds of the thing  act of novation  not act of novation SC held that the assignment of stock is not a dation in
assigned. The agreements which, on the effect of the payment since the obligation of the petitioner towards the
cession, are made between the debtor and his creditors NB: Both dacion and cession are governed by the law on surety has not matured at the time the same was executed.
shall be governed by special laws. sales.
There was no novation of the obligation by substitution of
Payment by Cession CASE: Payment by Cession debtor since it was not established nor shown that P would
Special form of payment wherein D assigns or abandons all be released from responsibility.
his properties for the benefit of Cs in order that they may 11. Lopez vs. CA, Philippine American General
sell the same and apply the proceeds thereof to the Insurance Co., Inc. (1982) Further, in case of doubt as to whether a transaction is
satisfaction of their credits. pledge or a dation in payment, the presumption is in favor
FACTS: of pledge, the latter being the lesser transmission of rights
Requisites  Lopez (P) obtained loan (20k) from Prudential Bank and interests.
1. 2 or more Cs o P posted a surety bond with Philamgen (R) as
2. D must be (partially) insolvent surety
3. assignment must include all properties o in return, P executed an indemnity agreement
4. cession must be accepted by all Cs (contractual or and deed of assignment of 4k shares of stock
voluntary assignment) in favor of R
a. if legal/judicial assignment: Insolvency Law o the assignment of shares was made due to a
commitment made by determinate 3Ps to the
NB: Assignment does not make Cs the owners of the surety that in case P defaults in payment said
property. 3Ps would buy the shares from the surety and
the proceeds will be paid to the bank
GR: D is released from his obligation only up to the net  P defaulted
proceeds of the sale of the property assigned. (D is still o R paid the loan
liable for balance) o R sued P for reimbursement after R cancelled
P’s name in the stock certificates + executed
EXC: stipulation to the contrary. one under R’s name
 P argued that
o transfer of shares was a dacion en pago
Dacion en pago vs. Cession o there was novation of the indemnity contract
Dacion en pago Cession when the surety and the determinate 3Ps
 one C  several Cs agreed that the latter would buy the shares of
 does not presuppose  D is insolvent at time of stock
insolvency assignment

12 Ericka Caballes
OBLIGATIONS & CONTRACTS MIDTERM NOTES

February 23, 2019  for failure to consign, D may become liable for
damages and/or interest The consignation shall be ineffectual if it is not made strictly
c) Tender of Payment and Consignation  such failure is not tantamount to a breach in consonance with the provisions which regulate payment.
where by the fact of tendering payment, he
ART. 1256. If the creditor to whom tender of payment has was willing and able to comply the obligation Prior notice to persons interested is REQUIRED.
been made refuses without just cause to accept it, the
debtor shall be released from responsibility by the Requisites: Valid Consignation Persons interested
consignation of the thing or sum due. 1. valid debt is due 1. Guarantors
2. D tenders payment and C refuses to accept without 2. Mortgagees
Consignation alone shall produce the same effect in the fol justifiable reason 3. Solidary Ds
lowing cases: 3. previous notice of consignation to persons interested in 4. Solidary Cs
the fulfillment
(1) When the creditor is absent or unknown, or does 4. consignation of thing/sum due Purpose of Notice
not appear at the place of payment; 5. subsequent notice of consignation to interested parties To give C a chance to reflect on his previous refusal to
(2) When he is incapacitated to receive the payment accept payment considering that consignation expenses
at the time it is due; NB: absent any requisite is ground to render consignation shall be charged against him + in case of loss of thing
(3) When, without just cause, he refuses to give a ineffective. consigned, C shall bear the risk.
receipt;
(4) When two or more persons claim the same right to Requirements: Valid Tender of Payment Content of Notice
collect; 1. must comply with the rules on payment 1. Warning of deposit of thing tendered
(5) When the title of the obligation has been lost. 2. must be unconditional and for the whole amount 2. Date and hour of consignation
3. must be actually made 3. Name of court
Tender of Payment
D’s act of offering to C the thing or amount due. Proof of tender of payment NB: ToP and notice of consignation may be done in the
An act preparatory to consignation.  must be proved by D same act.
 if tender is not required: prove prior notice to
Consignation interested persons ART. 1258. Consignation shall be made by depositing the
Act of depositing the thing or amount due with the proper things due at the disposal of judicial authority, before whom
court when C does not desire, or refuses to accept payment ToP not required (D can consign immediately) the tender of payment shall be proved, in a proper case,
or cannot receive it, after complying with the formalities 1. C is absent or unknown or does not appear at place of and the announcement of the consignation in other cases.
required by law. payment
2. C incapacitated to accept payment when it is due The consignation having been made, the interested parties
Tender of payment: extra-judicial 3. C refuse (without just cause) to give a receipt shall also be notified thereof.
Consignation: judicial 4. 2 or more Cs claim the same right
5. title of obligation has been lost Effective consignation (summary: 1258)
Rationale for consignation  must be with proper judicial authority
1. a facultative remedy ART. 1257. In order that the consignation of the thing due o GR: court
 a remedy D may or may not avail may release the obligor, it must first be announced to the o EXC: prescribed by special law
2. avoidance of greater liability persons interested in the fulfillment of the obligation.  notify interested parties of consignation made

Ericka Caballes 13
OBLIGATIONS & CONTRACTS MIDTERM NOTES

o thru service of summons + copy of complaint sum deposited, allowing the obligation to remain in force. CASES: Tender of Payment and Consignation
o purpose: to withdraw the thing/sum consigned
or take possession in case C accepts the When all requisites of consignation are observed 1. Eternal Gardens Park Memorial vs. CA (1997)
consignation  operates as valid payment
 consignation applicable only to payment of debt  D can ask the courts to cancel the obligation FACTS:
o not applicable if no obligation to pay like
exercise of a right or privilege D may withdraw the thing/sum deposited
a) before C accepts
NB: Property deposited in the court is exempt from b) before a judicial declaration that the consignation
attachment and not subject to execution (except with has been properly made
express order of the court).
In both cases, D is still the owner of thing/sum.
ART. 1259. The expenses of consignation, when properly
made, shall be charged against the creditor. Risk of loss
 without D’s fault; before acceptance/judicial approval
If consignation properly made: costs against C o C bears the risk
If consignation not properly made: costs against D  without D’s fault; no valid consignation
o D bears the risk
When consignation deemed properly made
1. when C accepts the thing/sum deposited as payment of ART. 1261. If, the consignation having been made, the
obligation (without objection) creditor should authorize the debtor to withdraw the same,
2. when C questions the validity of the consignation and he shall lose every preference which he may have over the
the court (after hearing) declares that it has been thing. The co-debtors, guarantors and sureties shall be
properly made released.
3. when C neither accepts nor questions the validity of the
consignation, and the court (after hearing) orders the C consents to withdrawal after acceptance/judicial approval
cancellation of the obligation  obligation subsists
 C shall lose every preference over the thing
NB: C may accept the consignation with reservation or  co-SDs, guarantors, and sureties shall be released
qualification; therefore, he is not barred from raising the
claims he reserved against D. NB: co-solidary debtor is only released from solidary
liability, not from his share of the obligation.
ART. 1260. Once the consignation has been duly made,
the debtor may ask the judge to order the cancellation of
the obligation.

Before the creditor has accepted the consignation, or before


a judicial declaration that the consignation has been
properly made, the debtor may withdraw the thing or the

14 Ericka Caballes
OBLIGATIONS & CONTRACTS MIDTERM NOTES

2. Rayos vs. Reyes (2003) RULING: No. 3. Badayos vs. CA, Sps Lisondra, Gabisan
There is no evidence to prove that the Ps paid at any time (1992)
FACTS: the repurchase price except for the deposit of P724 which
 3 parcels of land owned by spouses tazal fell short of all the acts necessary for a valid consignation FACTS:
o sold to Mamerto Reyes (predecessor-in- and discharge of their obligations to respondent.  P: seller
interest of Rs)  R: buyers
o with a right to repurchase after 2 years. In order that consignation may be effective the debtor must  P executed in favor of Rs a deed of sale with right to
 without availing of right to repurchase, Tazal sold 2 of show that (a) there was a debt due; (b) the consignation repurchase (undivided half portion of lot in Talisay
the 3 lands to Rayos (P) of the obligation had been made because the creditor Cebu for P7400)
 right to repurchase expired without it being exercised refused to accept it without just cause; (c) previous o stipulation: Badayos (S) has the right to
 after expiration, Tazal (seller) attempted to repurchase notice of the consignation had been given to the person repurchase after 2 years from and after
the properties from Reyes arguing that interested in the performance of the obligation; (d) the execution of contract for the same amount
o the contract was actually en equitable amount due was placed at the disposal of the court; (7400)
mortgage + offered P724 as payment as and, (e) after the consignation had been made the person  R filed with CFI (now RTC) to consolidate ownership
payment for alleged debt interested was notified thereof. over property, alleging that
 Reyes refused the tender of payment claiming that o P never repurchased the said property
o the agreement was not an EM but a sale with In this case, Ps failed to offer a valid and unconditional  P answer that
a right to repurchase and the right has expired tender of payment; second, to notify the respondents of the o document in question is actually an equitable
intention to deposit the amount in court; and third, to show mortgage intended to secure her loan of
(note: equitable mortgage is where the contract of the that there is acceptance by the creditor of consignation or a P4000
parties purports to be a sale with a right to repurchase but judicial declaration that a valid consignation has been made. o she was granted an extension by Rs as she
the actual intention of the parties is a contract of loan with Thus, the consignation is ineffective for failing to comply was waiting for approval of loan of her
mortgage of property to secure the debt) with the requirements. daughter
o she owns the property + enjoys the fruits +
 Tazal filed a complaint and deposited the P724 with the Further, the tender of payment of P724 was conditional and pays the taxes
court as the supposed payment for the debt. therefore void. It was tendered upon the argument that he o Rs are only lessees paying rentals annually
 Tazal again sold the 3rd parcel of land to petitioner was paying a debt as a consequence of the contract of  P further claimed that
Spouses Rayos. The 2 other parcel of land was bought equitable mortgage and not a sale with a right to o she consigned her payment of the obligation
by the spouses from Blas Rayos. repurchase. Thus, Mamerto Reyes was within his right to and/or her payment for the repurchase price;
 TC: not an EM; Tazal can still repurchase within 30 refuse the tender. thus, the case has become moot and
days from finality of judgment academic and should be dismissed
 P Rayos did nothing to repurchase the land within 30 Therefore, deposit of P724 cannot perfect the repurchase
days believing that the consignation of P724 had for it was neither approved by the court nor accepted by ISSUE:
perfected the repurchase. Mamerto or his heirs. W/N the consignation is valid

ISSUE: RULING: Yes.


W/N the consignation was valid and can be considered to SC held that P’s consignation operated as a valid offer or
have perfected the right of repurchase tender of the redemption price. It must be emphasized that

Ericka Caballes 15
OBLIGATIONS & CONTRACTS MIDTERM NOTES

consignation was not necessary for the reason that the


relationship that existed was not one of D-C. P was 4. Adelfa Properties, Inc. vs. CA (1995) 5. De Mesa vs. CA, OSSA House Inc., DBP
exercising a right, not discharging an obligation, hence a (1999)
mere tender of payment is sufficient to preserve the right of FACTS:
a vendor a retro. FACTS:
 De Mesa (P) owns several parcels of land which were
MAIN RULING: mortgaged to DBP as security for loan
P is able to repurchase the property in question because the  P failed to pay all mortgage debts
stipulation clearly states that the redemption shall be made o all properties were foreclosed
AFTER TWOYEARS FROM AND AFTER THE o in all auction sales, DBP was the winning
EXECUTION OF THE CONTRACT, not within 2 years. bidder
Thus, repurchase shall only be after March 1975 (execution  P requested DBP to repurchase said properties
date: March 1973).  P sold said properties to OSSA House Ince (R) unde
“Deed of Sale with Assumption of Mortgage” she be
allowed to repurchase her foreclosed properties under
condition that the OSSA would assume the payment of
the mortgage on installment basis
 DBP granted request
 after OSSA paid the 8th installment, P notified OSSA
that she was rescinding the “Deed of Sale with
Assumption of Mortgage” on the ground that OSSA
failed to comply with terms of agreement
o OSSA offered to pay the difference between
PP and mortgage obligation to DBP but P
refused to accept
 because of this, OSSA filed for consignment against P
and specific performance against DBP

ISSUE: W/N the consignation was valid

Ruling: Yes.
SC held the consignation is valid only as far as Petitioner De
Mesa is concerned and ordered de Mesa to receive the said
amount consigned with the court and pay DBP the said
amount.

16 Ericka Caballes
OBLIGATIONS & CONTRACTS MIDTERM NOTES

II. Loss of Thing Due Kinds of impossibility


Rationale: genus nunquam perit or genus never perishes. 1. Physical
ART. 1262. An obligation which consists in the delivery of 2. Legal
a determinate thing shall be extinguished if it should be lost ART. 1264. The courts shall determine whether, under the
or destroyed without the fault of the debtor, and before he circumstances, the partial loss of the object of the Natural impossibility vs. Impossibility in fact
has incurred in delay. obligation is so important as to extinguish the obligation.  natural – inability of party to do because of the nature
of the thing to be done; contract VOID
When by law or stipulation, the obligor is liable even for Effect: partial loss of specific thing  impossibility in fact – absence of inherent impossibility,
fortuitous events, the loss of the thing does not extinguish  in case of disagreement, court has the discretion to only improbable or out of the power of D; VALID
the obligation, and he shall be responsible for damages. determine if the partial loss is so important as to
The same rule applies when the nature of the obligation extinguish the obligation ART. 1267. When the service has become so difficult as to
requires the assumption of risk. be manifestly beyond the contemplation of the parties, the
NB: partial loss of specific thing = difficulty of performance obligor may also be released therefrom, in whole or in part.
Thing is considered lost in obligations to do.
 when it perishes Performance of the obligation has become so difficult as to
 goes out of commerce ART. 1265. Whenever the thing is lost in the possession of be manifestly beyond the contemplation of both
 disappears in such a way that its existence is unknown the debtor, it shall be presumed that the loss was due to his parties
or cannot be recovered fault, unless there is proof to the contrary, and without  court is authorized to release D in whole or in part
prejudice to the provisions of Article 1165. This presumption
NB: Loss of determinate thing is equivalent of impossibility does not apply in case of earthquake, flood, storm or other NB: Court is only authorized (under 1267) to release or not
of performance is obligations to do. natural calamity. release D from the obligation, not modify or revise the
terms and conditions.
Requisites: loss of thing will extinguish ob to give GR: loss of thing in D’s possession is presumed to through
1. ob: deliver a specific or determinate thing D’s fault. ART. 1268. When the debt of a thing certain and
2. loss of thing occurs without D’s fault determinate proceeds from a criminal offense, the debtor
3. D is not guilty of delay EXC: shall not be exempted from the payment of its price,
(1) proof to the contrary whatever may be the cause for the loss, unless the thing
Loss of thing will NOT extinguish ob (2) natural calamities (flood, earthquake, storm) having been offered by him to the person who should
1. when law so provides receive it, the latter refused without justification to accept
2. by stipulation NB: D has the burden to prove. it.
3. nature of obligation requires assumption of risk
4. ob to deliver a specific thing arises from a crime ART. 1266. The debtor in obligations to do shall also be FE does not exempt D from liability where ob proceeds from
released when the prestation becomes legally or physically a criminal offense.
ART. 1263. In an obligation to deliver a generic thing, the impossible without the fault of the obligor.
loss or destruction of anything of the same kind does not ART. 1269. The obligation having been extinguished by
extinguish the obligation. NB: The impossibility must take place after constitution of the loss of the thing, the creditor shall have all the rights of
the obligation; OW void if impossible from the very action which the debtor may have against third person by
Effect: loss of generic thing beginning. reason of the loss.
Obligation subsists, even if due to FE.

Ericka Caballes 17
OBLIGATIONS & CONTRACTS MIDTERM NOTES

The moment the ob is extinguished, D’s rights are III. Condonation or Remission of Debt
transferred to C by operation of law. 7. Labayen vs. Talisay-Silay Milling Co.
ART. 1270. Condonation or remission is essentially
Therefore, C is given the right to proceed against 3P gratuitous, and requires the acceptance by the obligor.
responsible for the loss. It may be made expressly or impliedly.

CASES: Loss of Thing Due One and the other kind shall be subject to the rules which
govern inofficious donations. Express condonation shall,
6. Yu Tek Co vs. Gonzales furthermore, comply with the forms of donation.

FACTS: Condonation/Remission
Gratuitous renunciation by C of his right against D resulting
in extinguishment of D’s obligation in its entirety or in part.

A form of donation; therefore, must be with D’s acceptance.

Requisites: Condonation
1. gratuitous
2. accepted by D
3. parties must have capacity
4. must not be inofficious
5. if express, must comply with forms of donation

If remission not gratuitous


a) dation in payment – if thing is received instead of
amount
b) cession – if assignment of property for Cs’ benefit
c) novation – if object/circumstance is changed
d) compromise – if what is renounced is a doubtful or
litigious right in exchange of other concessions

Kinds of remission
1. As to extent
a. Complete – covers entire ob
b. Partial – does not cover entire ob

2. As to form
a. Express – made verbally or in writing
b. Implied – can only be inferred from conduct

18 Ericka Caballes
OBLIGATIONS & CONTRACTS MIDTERM NOTES

o when it is know that there is no payment,


3. As to date of effectivity presumed remitted 9. Lopez vs. Tambunting
a. Inter vivos – during lifetime of donor
b. Mortis causa – upon death of donor
i. must comply with the formalities of a ART. 1274. It is presumed that the accessory obligation of
will pledge has been remitted when the thing pledged, after its
delivery to the creditor, is found in the possession of the
NB: Testamentary dispositions which impair the legitime debtor, or of a third person who owns the thing.
shall be reduced on petition of the heirs insofar as they are
inofficious or excessive. if thing pledged is found in D’s or 3P owner’s hands
 only accessory ob of pledge is presumed to be
ART. 1271. The delivery of a private document evidencing remitted (not the principal ob)
a credit, made voluntarily by the creditor to the debtor,
implies the renunciation of the action which the former had CASES: Condonation or Remission of Debt
against the latter.
8. Velasco vs. Masa
If in order to nullify this waiver it should be claimed to be
inofficious, the debtor and his heirs may uphold it by
proving that the delivery of the document was made in
virtue of payment of the debt.

if C voluntarily delivers private document to D


 implied remission (disputable presumption)
 if joint, applies only to the share of D who is in
possession
 if solidary, total obligation

NB: applies only to private document because a public doc


can easily be obtained being a public record

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.

if private document found to be in D’s possession


 presumed to be voluntarily delivered by C
o presumed paid

Ericka Caballes 19
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February 27, 2019 if mortgagee becomes the owner of the mortgaged property ISSUE: W/N R shall be liable
 mortgage extinguished
IV. Confusion or Remission of the Debt  principal obligation subsists RULING: Yes.
The surviving spouse is obliged upon the death of the other
ART. 1275. The obligation is extinguished from the time Art. 1276. Merger which takes place in the person of the to settle the conjugal partnership. In this case, the widower
the characters of creditor and debtor are merged in the principal debtor or creditor benefits the guarantors. is liable for the expenses incurred for the W’s subsistence.
same person. Confusion which takes place in the person of any of the
latter does not extinguish the obligation. ISSUE: W/N there is confusion or merger of rights
Confusion/Merger
Meeting in one person of the qualities of C and D with Effect of Merger on Guarantors RULING: Yes. (in the person of Sochayseng)
respect to same obligation. Guaranty is ALSO extinguished. As the matter involved pertains to settlement of an intestate
“Accessory follows the principal.” estate in which there is only one interested party of legal
Rationale age (P herein); and the demand for the part of the
If D becomes his own C, enforcement of obligation becomes Art. 1277. Confusion does not extinguish a joint obligation community property to which the deceased was entitled,
absurd. Further, when there is confusion of rights, purpose except as regards the share corresponding to the creditor or and for her paraphernal property, being a matter which
of obligation is deemed realized. debtor in whom the two characters concur. properly pertains to an action for the settlement of the legal
conjugal partnership property, apparently such demand is
Requisites Merger: Joint Obligations not allowable and it must be held that the estate of the
1. must take place between principal D & C Share corresponding to merged D/C shall be extinguished. deceased Marcela Yatco is entitled to P659, as community
a. in case C and G merge, only accessory property, and P875, as paraphernal property, or to the total
obligation of guaranty is extinguished CASES: Confusion or Merger of Rights sum of P1,534. From this must be deducted the other part
2. must be clear, complete and definite of the credit demanded, to wit, P320, for the funeral
3. must be same/identical obligation 1. Sochayseng vs. Trujillo (1915) expenses of the said deceased, which must be paid, not by
the husband, but by the heir.
NB: If heir is D and deceased is C, merger does NOT FACTS:
necessarily follow as other Cs may be prejudiced.  Paulina (P) filed complaint, alleging that Dispositive:
o Andres (R) is the widower of P’s daughter Trujillo should pay Sochayseng a total of P1,944:
Extinction of real rights by confusion (Marcela) • P875 – paraphernal property of Marcela
 Real rights like usufruct, mortgage, pledge, right of o Marcela died without any legitimate heir other • P659 – Marcela’s ½ of the community property
repurchase, lease record, servitude may be than R • P410 – debt owed by him as the legal
extinguished by merger when right is merged with o P paid for all expenses (medical + burial) administrator of the community property for the cost of the
ownership o only estate is conjugal property P1000 subsistence of Marcela
 aka: consolidation of ownership o R has not paid P
o thru: assignment, subrogation, sale of  R admitted all facts except that Sochayseng will collect:
inheritance o W left house without his knowledge or consent • P410 – under her right as a creditor of Marcela
o he asked W to return but P opposed • P1,534 – her share as legitimate heir of Marcela
Revocability of Merger o he sent support (P12/mo)
If reason for confusion ceases, obligation is REVIVED.  R prayed for dismissal of case

20 Ericka Caballes
OBLIGATIONS & CONTRACTS MIDTERM NOTES

V. Compensation
2. Yek Ton Lin Fire & Marine Insurance Co. vs. Therefore, obligations are extinguished by the merger of
Yusingco (DF), Madrigal (appellant) the rights of the creditor and debtor. Art. 1278. Compensation shall take place when two
persons, in their own right, are creditors and debtors of
FACTS: each other.
 Yusingco (DF) – owner of steamship
 Madrigal (Apt) – guarantor Compensation
 Yek Ton Lin (PF) – insurance co. Extinguishment in the concurrent amount of obligations
 DF executed power of attorney in favor of Yu Seguioc of those persons who are reciprocally Ds and Cs of each
to administer, lease, mortgage, and sell his properties, other.
including his vessels or steamship
o Yu (as AIF) mortgaged to PF the steamship to A specie of abbreviated or simplified payment because
answer amount P might pay on account of PN two debts are extinguished without the need to transfer
45k loan from CB + on account of guaranty money or property.
P20k in favor of CB
 ship needed some repairs Cum Ponder – “to weigh together”
o repairs made upon guaranty of Madrigal
 Yusingco defaulted pmt for repeairs Advantages
o Madrigal had to pay amt + interest 1. facility of payment
 after Madrigal had already paid, Iron works assigned its 2. guaranty for effectiveness of credit
credit against Yusingco to Madrigal  because if one party pays the other without
 when Madrigal found that he cannot be reimbursed, he waiting for the other to pay, former can easily
filed an action against Yusingco be made a victim of fraud or insolvency
o ship was sold at public auction to execute
judgment NB: in banking operations, a ‘clearing house’ takes care of
o bought by PF (Insurance Co.) compensation in banking accounts.

ISSUE: Compensation Payment


W/N there was confusion or merger of rights  partial extinguishment  must be complete and
is permitted indivisible
RULING: Yes.  true/legal compensation  involves action or
After steamship had been sold by virtue of writ issued for takes place by delivery
execution of judgment rendered in favor of Madrigal, the operation of law
only right left to PF was to collect its mortgage credit from
purchaser at public auction but its so happens that IT Compensation Merger
CANNOT TAKE SUCH STEPS NOW because it was the  two persons  only one in whom
purchaser of the steamship at the public auction, and it was qualities of D/C are
so with full knowledge that it had a mortgage credit on said merged
vessel.
 2 obligations  1 obligation

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OBLIGATIONS & CONTRACTS MIDTERM NOTES

or controversy, commenced by third persons and GR: PD and PC can set up compensation
Compensation Counterclaim or Set-off communicated in due time to the debtor. EXC:
 takes place by mere  must be pleaded to be (1) G may set up compensation with respect to
operation of law effectual Requisites: Legal Compensation principal debt (because it will also extinguish his
  judicial compensation 1. PD and PC obligation as guarantor)
(Rules of Court) 2. 2 debts due
3. both debt: money, or same kind if consumable or Art. 1281. Compensation may be total or partial. When the
Kinds of Compensation fungible, or same quality if stated two debts are of the same amount, there is a total
1. as to effect or extent 4. liquidated and demandable compensation.
a. TOTAL – same or requal a 5. no retention or controversy commenced by 3P and
b. PARTIAL – a balance remains (one is larger communicated in due time to D Applies to all kinds of compensation.
than the other)  eg: claim is subject of court litigation
2. as to origin or cause Art. 1282. The parties may agree upon the compensation
a. LEGAL – takes place by operation of law (no Negative Requirements for LC of debts which are not yet due.
need to be pleaded) 1. no controversy
b. VOLUNTARY or CONVENTIONAL – due to 2. no waiver of compensation Applies to conventional or voluntary compensation.
agreement of parties; requires mutual consent 3. debts must not be prohibited by law
c. JUDICIAL – aka set-off; must be pleaded; can a. debts from depositum Art. 1283. If one of the parties to a suit over an obligation
only be effective upon order from court b. debts from obligations of depository has a claim for damages against the other, the former may
d. FACULTATIVE – one party has the choice of c. debts arising from ob of bailee in set it off by proving his right to said damages and the
claiming the compensation or not commodatum (eg: borrow of bike) amount thereof.
d. from claim for future support due by
Compensation cannot exist gratuitous title GR: court jurisdiction depends upon the totality of
 D of corp cannot compensate debt with his share of e. consisting in civil liability arising from penal demand in all causes of action, irrespective of whether the
stock in the corp (because corp is not considered his D) offense plural cases arose out of the same or different transactions.
f. damages suffered by Pship thru fault of
Art. 1279. In order that compensation may be proper, it is partner – cannot be compensation with profits EXC:
necessary: and benefits which he may have earned for (1) claim joined under the same complaint are
the partnerships separately owed by, or due to, different parties, in
(1) That each one of the obligors be bound principally, which case each separate claim furnishes the
and that he be at the same time a principal Requisites: Voluntary Compensation jurisdictional test
creditor of the other; 1. agreement be voluntarily and validly entered into (2) where not all the causes of action joined are
(2) That both debts consist in a sum of money, or if 2. agreement or contract is valid demands or claims for money
the things due are consumable, they be of the 3. parties have legal capacity + feely give their consent
same kind, and also of the same quality if the NB: consequential damages and attorney’s fees, when
latter has been stated; Art. 1280. Notwithstanding the provisions of the preceding properly claimed and recoverable as an item of damage, are
(3) That the two debts be due; article, the guarantor may set up compensation as regards not excluded from the jurisdictional amount.
(4) That they be liquidated and demandable; what the creditor may owe the principal debtor.
(5) That over neither of them there be any retention Art. 1284. When one or both debts are rescissible or

22 Ericka Caballes
OBLIGATIONS & CONTRACTS MIDTERM NOTES

voidable, they may be compensated against each other Effect: Assignment on compensation
before they are judicially rescinded or avoided. 1. with D’s consent No legal compensation
 no compensation (exc: when D reserves right) 1. debt arises from depositum
In case: rescissible or voidable debts  applies whether assignment done BEFORE or  purpose: to prevent breach of trust and
Valid until rescinded or voided; hence, compensation is AFTER debts became compensable confidence
allowed.  depositary cannot claim compensation,
2. no consent but with knowledge (or against D’s will) depositor is allowed
To prevent unfairness if rescission/annulment is later on  compensation can be set up on debts maturing
decreed by court, it is as if NO compensation ever took BEFORE assignment 2. debt arises from obligations of a depositary
place.  depositor has right to claim compensation
3. without D’s knowledge
IOW, decree acts retroactively.  compensation can be set up for all debts maturing 3. debt arises from obligations of a bailee in
BEFORE his knowledge commodatum
Art. 1285. The debtor who has consented to the  crucial time: time of knowledge  lender may; borrower cannot
assignment of rights made by a creditor in favor of a third
person, cannot set up against the assignee the Rationale: to prevent fraudulent deprivation of the benefits 4. debt arises from claim for support due to gratuitous
compensation which would pertain to him against the of total and partial compensation. title
assignor, unless the assignor was notified by the debtor  support in arrears MAY be compensated but
at the time he gave his consent, that he reserved his NOT future support (bec vital to life of
right to the compensation. Art. 1286. Compensation takes place by operation of law, recipient).
even though the debts may be payable at different places,
If the creditor communicated the cession to him but the but there shall be an indemnity for expenses of exchange or NB: First 3 are examples of facultative compensation.
debtor did not consent thereto, the latter may set up the transportation to the place of payment.
compensation of debts previous to the cession, but not of Obligations: Depositary
subsequent ones. Compensation by operation of law 1. keep the thing safe + return it when
 indemnity for depositor/heirs/successors/persons designated in
If the assignment is made without the knowledge of the o expenses of transpo of goods or object contract require
debtor, he may set up the compensation of all credits prior o expenses of monetary exchange 2. cannot deposit with 3P (unless with stipulation)
to the same and also later ones until he had knowledge of 3. if deposit with 3P allowed, depositary liable for loss if
the assignment. Whoever claims compensation must pay for the exchange 3P is manifestly careless or unfit
rate. 4. responsible for negligence of employees
GR: Assignment to 3P of debt already extinguished by 5. cannot make use of the thing deposited (unless with
compensation (legal) is useless as there is no more debt to Art. 1287. Compensation shall not be proper when one of EXPRESS permission of depositor
assign. the debts arises from a depositum or from the obligations of  OW: liable for damages
a depository or of a bailee in commodatum.  however, if preservation of thing requires its
EXC: use, it must be used but for that purpose only
(1) when D gives his consent to the assignment Neither can compensation be set up against a creditor who
- operates as a waiver of rights to compensation has claim for support due by gratuitous title, without Art. 1288. Neither shall there be compensation if one of
prejudice to the provisions of paragraph 2 of Article 301. the debts consists in civil liability arising from a penal

Ericka Caballes 23
OBLIGATIONS & CONTRACTS MIDTERM NOTES

offense. 5. if debt are of the same nature and burden: apply


payment proportionately ISSUE:
If liability arising from penal offense W/N P is entitled to compensation
 no compensation 6. if neither party designated and there is disagreement
as to application: courts will apply payment according RULING: No.
Rationale: satisfaction of obligation is IMPERATIVE. to the justice and equity of the case SC held that P’s counterclaim contained nothing to show PR
obligated himself to set-off or compensate P’s outstanding
NB: victim MAY claim compensation; another instance of Art. 1290. When all the requisites mentioned in Article accounts with the alleged unrealized commission.
facultative compensation. 1279 are present, compensation takes effect by operation
of law, and extinguishes both debts to the concurrent SC further listed the requirements for compensation
Art. 1289. If a person should have against him several amount, even though the creditors and debtors are not (1) parties bound principally
debts which are susceptible of compensation, the rules on aware of the compensation. (2) both debts: sum of money, or same kind of
the application of payments shall apply to the order of the consumable, or same quality if stated
compensation. GR: When all requisites are present, compensation is (3) both debts due
AUTOMATIC. (4) debts liquidated and demandable
if several debts susceptible of compensation (5) no controversy nor retention commenced by 3Ps +
 rules on application of payments EXC: valid waiver communicated in due time to D

Application of Payments CASES: Compensation 4. BPI, Romero vs. CA, Reyes


1. D has the 1st choice
a. must indicate at time of payment which 3. Silahis Mktg. Corp. vs. IAC, De Leon (Mark FACTS:
particular debt is being paid Industrial Sales) (1989)  Reyes (PR) opened joint savings account with wife at
b. D cannot later on claim that it should be BPI + joint SA with grandmother at same branch
applied to another debt unless there is a cause FACTS: o regularly deposited US treasury warrants
for invalidating (eg: fraud, mistake)  in various dates, De Leon (PR) under the name Mark  GM died but US kept sending US treasury warrant
Industrial Sales sold & delivered to Silahis Mktg Corp  PR closed GM account
2. right to make application once exercised is (P) merchandise payable within 30 days from invoice o transferred to W account
irrevocable date  TW was dishonored as issuance was 3 days prior to
a. unless C consents to change  P defaulted despite repeated demands death
o PR filed a complaint for collection + interest o US Treasury requested BPI for refund
3. D’s right to apply payment: merely directory  P contended that o this is also the 1st time BPI knew of GM’s
a. if D does not apply, C has subsidiary right to o there was a debit memo as a supposed death
make the designation (with D’s consent) commission that P should have received  bank called PR
through specifying in the receipt which debt is o P is entitled to return of defective steel + have o PR promised to drop by
being paid corresponding account with PR cancelled o also verbally authorized them to debit his W
 TC: confirmed P’s liab + ordered partial offset joint
4. if no designation by both or if application is invalid:  CA: dismissed P’s counterclaim thereby setting aside o bank proceeded to debit
apply to debt most onerous to D the offset (reason: lack of factual or legal basis; no  PR demand restitution for debited amount, claimed that
written or verbal agreement) o failed to WD money when he needed them

24 Ericka Caballes
OBLIGATIONS & CONTRACTS MIDTERM NOTES

o filed for damages No compensation can take place between petitioners and
5. Tan vs. Mendez Jr (2002) respondent as the latter is not a debtor of petitioners
ISSUE: insofar as the two checks representing collections from the
W/N BPI can claim compensation against PR’s savings FACTS: Baao ticket sales are concerned.
account for outstanding obligation to BPI  Tan (Ps): owners of travel corp + opertors of Lawin
Bus Article 1278 of the Civil Code requires, as a prerequisite for
RULING: Yes.  Mendez (PR): owner of gas station compensation, that the parties be mutually and principally
Compensation shall take place when 2 persons are creditors  P opened credit line with PR bound as creditors and debtors. If they were not mutually
and debtors of each other. Legal compensation operates o PR also designated by P as booking and creditors and debtors of each other, the law on
even against the will and consent of the parties. ticketing agent of Bus Co. compensation would not apply.
o P drivers purchased on credit fuel, oil with
In the case at bar, all elements of legal compensation are periodic payments thru check In this case, the memorandum shows that some
present. The obligors bound principally are at the same time o PR remit proceeds of ticket sales to P thru unencashed checks returned to respondent to allegedly
creditors of each other. Petitioner bank stands as a debtor check + remit ticket sles in Baao Booking offset the dishonored check were from the Baao ticket
of the private respondent, a depositor. At the same time, office managed separately and independently sales which are separate from the ticket sales of
said bank is the creditor of the private respondent with by another agent respondent. Respondent only acted as an intermediary in
respect to the dishonored U.S. Treasury Warrant which the  Ps’ check dishonored (insufficient funds) remitting the Baao ticket sales and, thus, is not a debtor of
latter illegally transferred to his joint account. The debts o PR filed BP 22 petitioners.
involved consist of a sum of money. They are due,  P argued that
liquidated, and demandable. They are not claimed by 3P. o not violated BP 22 bec amount has already
been extinguished by compensation against
Further, to frustrate the application of legal compensation collection from ticket sales
on the ground that parties are not all mutually obligated  R contended that
would result in unjust enrichment on PR’s part. o could not have offset
o provided that it did, it should have been
applied to an earlier obligation

ISSUE:
W/N there was compensation

RULING: No.
The alleged compensation is not supported by clear and
positive evidence. No application of payment was also made
as to which check was to be paid. Petitioners’ defense of
compensation is unavailing because they did not clearly
specify in the memorandum which dishonored check is
being offset.

Ericka Caballes 25
OBLIGATIONS & CONTRACTS MIDTERM NOTES

March 2, 2019 b. personal or subjective – changing the perosns  eg: if debt with condition is made
i. expromision or delegacion (D) without one; reduction of period
VI. Novation ii. legal or conventional subrogation (c) originally stipulated
c. mixed - both
Art. 1291. Obligations may be modified by: 2. form of constitution NOTE: Never presumed. Clear proof must be given.
(1) Changing their object or principal conditions; a. express – declared in unequivocal terms
(2) Substituting the person of the debtor; b. implied – 2 obligations are essentially Art. 1293. Novation which consists in substituting a new
(3) Subrogating a third person in the right of the incompatible with each other debtor in the place of the original one, may be made even
creditor. 3. extent or effect without the knowledge or against the will of the latter, but
a. total or extinctive – complete ext. not without the consent of the creditor. Payment by the
Novation b. partial or modificatory or imperfect or improper new debtor gives him the rights mentioned in Articles 1236
Substitution or change of an obligation by another, which – merely modified and 1237.
extinguishes or modifies the first
NOTE: IOD, presume PARTIAL because extinctive novation Personal or Subjective Novation
Modes is never presumed. 1. passive – change in D
1. change the object or principal conditions 2. active – change in C
 include change in period (partial novation bec Requisites
merely affects performance, not creation of 1. valid old obligation NOTE: A sub of D without C’s consent is binding upon the
obligation) 2. intent to extinguish or modify the old obligation by a parties to the sub but not on C.
2. change D substantial difference
3. subrogate C’s right 3. capacity and consent of all the parties Passive novation
 EXC: expromision, where old D does not 1. expromision – 3P initiative
Civil vs. Common Law Novation participate 2. delegacion – D’s initiative; all three parties must agree
No difference. Under both systems, the extinguishment 4. valid new obligation (old D, new D, C)
must be made to clearly appear.
Art. 1292. In order that an obligation may be extinguished Expromision
Function: novation by another which substitutes the same, it is imperative that 1. initiative from 3P
Juridical act of dual function in that at the time it it be so declared in unequivocal terms, or that the old and 2. essential: agreement that old D be RELEASED from
extinguishes an obligation, it creates a new one in lieu of the new obligation be on every point incompatible with each obligation
the old. other. 3. new D and C must consent

NOTE: true/proper novation extinguishes; partial, Implied Novation Delegacion


modificatory, or imperfect novation merely modifies  done by making SUBSTANTIAL CHANGES – 1. initiative from old D
(relative extinction). o in object or subject matter 2. all parties must consent or agree
 eg: car instead of ring
Kinds o in cause or consideration Rights: New D
1. object or purpose  eg: increase in price (bec decrease is Payment by new D gives him the rights mentioned in
a. real or object – changing the object or principal remission) Articles 1236 & 1237 namely, (1) beneficial reimbursement,
conditions o in principal terms or conditions if PMT was made without knowledge or will of old D, and

26 Ericka Caballes
OBLIGATIONS & CONTRACTS MIDTERM NOTES

(2) reimbursement and subrogation, if made with old D’s (1) 2P was only agent, messenger employee of D
consent. (2) 3P acting only as G or S GR: if new obligation is void, old obligation will SUBSIST.
(3) new D merely agreed to make himself solidarily liable EXC:
Art. 1294. If the substitution is without the knowledge or (4) new D merely agreed to make himself jointly or partly (1) parties intended for the old obligation to be
against the will of the debtor, the new debtor’s insolvency responsible for the obligation extinguished in any event
or non-fulfillment of the obligation shall not give rise to any
liability on the part of the original debtor. Art. 1296. When the principal obligation is extinguished in if new ob is subject to condition, said condition does not
consequence of a novation, accessory obligations may materialize
insolvency or non-fulfillment by new D in expromision subsist only insofar as they may benefit third persons who  old ob SUBSIST
 old D not liable did not give their consent.
if new ob is merely voidable
Rationale: novation was brought about without his initiative. NOTE: Art. 1296 does not apply in cases of novation by  old ob is novated bec a voidable ob is VALID until
subrogation of C. annulled
Art. 1295. The insolvency of the new debtor, who has  if new ob is annulled, old ob SUBSISTS
been proposed by the original debtor and accepted by the Q: if novation is merely modificatory, are GUARANTORS and
creditor, shall not revive the action of the latter against the SURETIES released if novation is made WITHOUT their Art. 1298. The novation is void if the original obligation
original obligor, except when said insolvency was already consent? was void, except when annulment may be claimed only by
existing and of public knowledge, or known to the debtor, the debtor, or when ratification validates acts which are
when he delegated his debt. A: if modified obligation is MORE ONEROUS voidable.
 liable for original
NOTE: only on insolvency; in other causes of non-fulfilment, Effect: Old obligation is VOID
old D is not liable. if modified obligation is LESS ONEROUS 1. no valid novation
 G & S still responsible 2. if old ob is voidable and already annulled, no more
insolvency by new D in delegacion obligation. novation is void.
 old D not liable NOTE: parties may agree that despite extinguishment of old
obligation, accessory obligations shall remain PROVIDED Old obligation is voidable
new D’s insolvency is already existing AND of public that G/M/S give their consent. Q: if old obligation is VOIDABLE and has NOT been
knowledge at time of delegation annulled, may there be a valid novation?
 old D LIABLE Stipulation pour autrui
GR: Stipulations made in favor of 3Ps remain. A: YES, provided that
new D’s insolvency already existing AND known to D at time EXC: (1) only D may claim annulment, or
of delegation (1) 3Ps gave their consent to the novation. (2) when ratification validates acts which are voidable
 old D LIABLE
Rationale: their rights to the accessory obligations should Old obligation is extinguished by loss
new D’s insolvency after delegation not be prejudiced without their consent. Q: may it be novated?
 old D not liable A: it depends.
Art. 1297. If the new obligation is void, the original one (1) if loss purely by FE, novation is VOID bec no
NOTE: Article 1295 does not apply if there was no shall subsist, unless the parties intended that the former obligation to novate
extinctive novation, such as relation should be extinguished in any event.

Ericka Caballes 27
OBLIGATIONS & CONTRACTS MIDTERM NOTES

(2) if loss is with D’s fault, there is still an existing confusion as to the latter’s share.
monetary obligation that may be the subject of 2. extent
novation. a. total Legal Subrogation
b. partial – 2 or more Cs 1. when C pays preferred C with or without D’s knowledge
Old obligation has prescribed 2. when stranger pays with express or tacit approval of D
Q: may it be novated? Art. 1301. Conventional subrogation of a third person 3. when interested party pays with or without D’s
A: Yes, bec unless defense of prescription is set up by D, ob requires the consent of the original parties and of the third knowledge, without prejudice to effects of confusion
continues, since this failure amounts to a waiver. person. a. G, owner of property mortgaged

Art. 1299. If the original obligation was subject to a Conventional or Voluntary Subrogation Art. 1303. Subrogation transfers to the person subrogated
suspensive or resolutory condition, the new obligation shall ALL PARTIES’ consent is required. the credit with all the rights thereto appertaining, either
be under the same condition, unless it is otherwise 1. D: bec liable for new ob against the debtor or against third persons, be they
stipulated. 2. old C: credit is affected guarantors or possessors of mortgages, subject to
3. new C: bec becomes party to obligation stipulation in a conventional subrogation.
GR: conditions attached to old ob are also attached to new
ob. Effects of Subrogation
EXC: contrary stipulation. Conventional Assignment of Credit Transfer all credit and appurtenant rights (against D or
Subrogation 3P)
Rationale: if condition is not fulfilled, old obligation never - extinguish old ob, creates - mere transfer of SAME
arose; therefore, nothing to novate. new right or credit Art. 1304. A creditor, to whom partial payment has been
- requires D’s consent - does not require D’s made, may exercise his right for the remainder, and he shall
Art. 1300. Subrogation of a third person in the rights of consent; mere notification be preferred to the person who has been subrogated in his
the creditor is either legal or conventional. The former is not sufficient place in virtue of the partial payment of the same credit.
presumed, except in cases expressly mentioned in this - defect of old ob may be - defect is not cured simply
Code; the latter must be clearly established in order that it cured; no right to present by assigning; D generally old C to whom partial payment has been made is
may take effect. against new C any defense still has the right to present PREFERRED to new C.
which D could have set up against new C any defense
Subrogation against old C available against old C
Transfer to 3P of all rights appertaining to C, including right
to proceed against G, or possessors of mortgages, subject
to any legal provision or any modification that may be Art. 1302. It is presumed that there is legal subrogation:
agreed upon. (1) When a creditor pays another creditor who is
preferred, even without the debtor’s knowledge;
Kinds (2) When a third person, not interested in the
1. cause or origin obligation, pays with the express or tacit approval
a. conventional or voluntary – agreement and of the debtor;
consent of original parties and of C; must be (3) When, even without the knowledge of the debtor,
clearly established a per- son interested in the fulfillment of the
b. legal – by operation of law; never presumed. obligation pays, without prejudice to the effects of

28 Ericka Caballes
OBLIGATIONS & CONTRACTS MIDTERM NOTES

CASES: Novation o that bec of incompatibility bet last check 2. Sandico, Sr., Timbol vs. Hon. Piguing, Paras
and partial payment and written (1971)
1. Diongzon vs. CA, People of the Philippines undertaking, there was a novation so that
(1999) any crim liab which he might have had FACTS:
under the former ob was thereby avoided  Sps Sandico, Enrica Timbol & Teopisto Timbol (as
FACTS admin of Paras estate) won an action for easement and
 Diongzon: sales supervisor of Filipro (now Nestle) ISSUE: damages against Paras (PR)
& had authority to W/N there was a valid novation. o Ps moved to enforce judgment
o allow withdrawal of Filipro products from o CA issued writ of execution
warehouse for delivery to dealers or RULING: No.  Ps & PRs reached a settlement to reduce money
customers The requisites of, particularly the third (ext. of old ob), were judgment from 6k to 4k
o receive payment not proven in this case. o PRs paid 3k
o remit same to Filipro tro depository bank o another pmt of 1k as evidence by receipt
 acctg dept found that some del orders signed by P This obligation was not extinguished when the check was issued by Ps’ counsel
seemed questionable dishonored and a new agreement was reached by the two  Ps demanded to PR regarding the reconstruction and
o qty were unusually big and abnormal parties to pay in cash its value. reopening of the irrigation canal as part of the civil case
 Palisco (area sales mgr) was authorized to conduct o PRs refused
an investigation The change in the mode of paying the obligation was not a  Ps filed motion to declare PRs in contempt of court
 findings: change in any of the objects or principal conditions of the o judge piguing dismissed the motion
o P offered assistance to Garibay (sales rep) contract. Neither acceptance of partial payment nor change  Ps accused judge: abuse of discretion
in collection of pmts of place or manner of payment involves novation. For  P argued that
o next day, P presented to Garibay 3 checks novation cannot be presumed but must be expressly o agreement in reducing amount due constitutes
issued by dealers which was dishonored intended by the parties. NEITHER waiver of claim of 2k nor novation of
by the bank money judgment
o dealers claimed they did not issue the Further, SC held that novation is not a mode of o agreement in reducing amt of money
checks nor receive the goods extinguishing criminal liability. judgment was subject to condition that PRs
 when confronted, P acknowledged responsibility + reopen & reconstruct irrigation canal
promised to settle the same Novation may prevent the rise of criminal liability as long as  R contended that
 P promised to pay 10% of amount and balance to it occurs prior to the filing of the criminal information in o pmt of 4k was received and acknowledged
be rolled over for 90 days but P failed to comply court. In other words, novation does not extinguish criminal thereby extinguishing monetary liab
with promise; hence, the case. liability but may only prevent its rise. o judge believed R is required merely to
 P: guilty of BP 22 recognize easement without doing any
 CA: P raised the defense that issuance of 3rd check DISPOSITIVE: Pis found guilty of violating BP Blg. 22 with positive act of reconstruction
was replacement for 2nd check, which constituted modification that subsidiary imprisonment be imposed in
as novation thereby extinguishing his obligation case of insolvency to pay the fine of P80,647.75. ISSUE:
o that novation took place as a result of W/N the agreement in reducing the money judgment
partial payment he made and the written constitutes novation
undertaking he had executed to pay the
bal of the check RULING: No.

Ericka Caballes 29
OBLIGATIONS & CONTRACTS MIDTERM NOTES

Novation results in two stipulations — one to extinguish an 3. People’s Bank and Trust Company vs. Syvel’s evidently indicates that the same was executed as new
existing obligation, the other to substitute a new one in its Corp, Syyap (1988) additional security to the chattel mortgage previously
place. Fundamental it is that novation effects a substitution entered into by the parties.
or modification of an obligation by another or an FACTS:
extinguishment of one obligation by the creation of another.  action for foreclosure of CM in favor of PF by DF on its Moreover, records show that in the real estate mortgage,
stock of goods, persona properties and other materials defendants agreed that the chattel mortgage "shall
In the case at hand, we fail to see what new or modified o CM in connection with credit commercial line remain in full force and shall not be impaired by this (real
obligation arose out of the payment by the PRs of the (900k) granted to said DF estate) mortgage."
reduced amount of P4,000 and substituted the monetary o sps syyap agreed to guarantee absolutely and
liability for P6,000 of the said respondent under the unconditionally and without benefit of It is clear, therefore, that a novation was not intended. The
appellate court's judgment. excussion the full and prompt payment real estate mortgage was evidently taken as additional
 in view of corp’s default, bank started to foreclose security for the performance of the contract.
Additionally, to sustain novation necessitates that the same extrajudicially the CM by virtue of credit agreement
be so declared in unequivocal terms — clearly and o however not pushed thru bec of an attempt to
unmistakably shown by the express agreement of the settle
parties or by acts of equivalent import — or that there is o but no payment so case was filed in court
complete and substantial incompatibility between the two  bank found out DFs had been disposing their properties
obligations. with intent to defraud their Cs, particularly the bank
 Mr. Syyap proposed to have the case settled and
offered to execute a REM on his property

ISSUE:
W/N the obligation secured by the CM was novated by the
subsequent execution of a REM as additional collateral for
the said obligation.

RULING: No.
Novation takes place when the object or principal condition
of an obligation is changed or altered.

It is elementary that novation is never presumed; it must be


explicitly stated or there must be manifest incompatibility
between the old and the new obligations in every aspect

In the case at bar, there is nothing in the Real Estate


Mortgage which supports defendants' submission. The
contract on its face does not show the existence of an
explicit novation nor incompatibility on every point between
the "old and the "new" agreements as the second contract

30 Ericka Caballes
OBLIGATIONS & CONTRACTS MIDTERM NOTES

4. Cruz vs. CA, Sps. Eliseo, Malolos (1998) The Court disagrees with Ps contention that the MOA 5. Quinto vs. People of the Philippines (1999)
novated the DPP into making them co-owners of the
FACTS: properties. Given the requisites of novation, the MOA FACTS:
 Delfin cruz died leaving wife and 4 children (one of cannot have novated the DPP because:  Leonida (P) received in trust several pieces of jewelry
them is Nerissa Cruz-Tamayo) (1) It does not express a clear intent to dissolve the from Aurelia (36k)
 W & children executed a notarized deed of partial old obligation as a consideration for the emergence o purpose: sell on a commission basis with
partition of the new one express obligation to turn over proceeds or
o grant each a share of several parcels of land (2) Petitioners fail to show that the DPP and MOA are return jewelry within 5 days if not sold
 next day, W & children executed MOA materially and substantially incompatible with each  PP: Leonida asked for more time to sell but failed to
o parties shall receive equal shares from other conclude any sake. after 6 mos, Cariaga demanded for
proceeds of sale of any of lots allotted to and return of items but Leonida failed
adjudicated in their individual names by virtue The DPP grants title to the lots in question to the co-owner  DF: buy & sell of jewelry; used to buy from Mrs. Ilagan
of DPP to whom they were assigned while the MOA created an who introduced her to Aurelia & started to transact
 Sps Eliseo (PRs) filed civil case against Sps Tamayo obligation on the part of such owner to share with the business with her
(one of children) for sum of money (126k+) others the proceeds of the sale of such parcels o the last transaction Leonida had was with Mrs.
o writ of execution was enforced upon parcel of Camacho who left a balance (13k)
land in question o Leonida brought Mrs. Camacho to Aurelia who
o sold to highest bidder: Sps Eliseo and Malolos agreed to allow Mrs. Camacho to pay in
(PRs) installments
 Nerissa failed to exercise her right of redemption within  Leonida claimed that contract bet herself and Aurelia is
period so final deed of sale was executed novated when the latter agreed to accept payment in
 Malolos asked for the owner’s duplicate but Nerissa installments directly from buyers
refused
o other siblings filed a motion for leave to ISSUE:
intervene and oppose alleging that they are W/N such agreement constitutes a valid novation/
co-owners of lands in question
 CA rule: DPP was not materially and substantially RULING: No.
incompatible with MOA Novation is never presumed, and the animus novandi,
o DPP: conferred ownership of parcels of land whether totally or partially, must appear by express
on Nerissa agreement of the parties, or by their acts that are too clear
o MOA: created an obligation on her part to and unequivocal to be mistaken.
share with others the proceeds of the sale of
such properties There are 2 ways which could indicate the presence of
novation and thereby produce the effect of extinguishing an
ISSUE: obligation by another which substitutes the same. These
W/N the MOA novated the DPP? are:
(1) When novation has been explicitly stated and
RULING: No. declared in unequivocal terms.

Ericka Caballes 31
OBLIGATIONS & CONTRACTS MIDTERM NOTES

(2) When the old and the new obligations are


incompatible on every point.

The test of incompatibility is whether or not the two


obligations can stand together, each one having its
independent existence. If they cannot, they are
incompatible and the latter obligation novates the first.

The incompatibility must take place in any of the essential


elements of the obligation, such as its object, cause or
principal conditions thereof; otherwise, the change would
be merely modificatory in nature and insufficient to
extinguish the original obligation

The changes alluded to by petitioner consists only in the


manner of payment. There was really no substitution of
debtors since private complainant merely acquiesced to
the payment but did not give her consent to enter into a
new contract.

32 Ericka Caballes